Given this crazy world let me propose some possible future headlines (in chronological order)

1. Liddy says take this job and shove it—I don’t need 1$ this bad
2. Frank becomes CEO of AIG—AIG quits
3. TARP banks triple base salaries
4. Congress cuts salaries at TARP banks 80%
5. CT, NJ and NY default on their debt
6. Violence breaks out at rally lead by bankers on Wall St.
7. Cuomo publishes list of comp of anyone making more than 250k
8. Cuomo’s list becomes hit list—rich folks being killed
9. Cuomo assassinated
10. Civil unrest reigns witch hunts lead to paper closing with final words –this is the way the world ends, not with a bang but a whimper



STOP ACTING LIKE CHILDREN CONGRESS—GET TO WORK GET SOMETHING DONE AND END THE WITCH HUNTS—U2 COMO SHOW ME THE PROBATIVE VALUE IN PUBLISHING INDIVIDUALS COMPENSATION—THE COUNTRY IS IN CRISIS FORGET POLITICS AND GET DOWN TO THE HARD UNPOPULAR WORK OF HELPING REBUILD THIS GREAT COUNTRY

Shame on US

Warning—I haven’t blogged in awhile and my dander is UP


1. The financial crisis-depression and Fair

I tell my kids over and over again life isn’t fair. My kids are 5 and 2 and they are starting to get the message. Now Mr. Krugman- all op ed writers at the NYTs, WSJ etc and all members of congress and most citizens of the world let me say the same thing to you.

LIFE IS NOT FAIR

And trying to build a plan to help the economy built on fairness (if reduced to the absurd which is what I do on this blog) is communism-socialism at a whole new level. Every family gets one car (same car same color same features). Every sports team has the same payroll and the same level of players. KC playing the BOSOX isn’t fair. Brad Pitt looking so good isn’t fair, lets put some battery acid on his and Angie’s face to keep the beauty quotient fair.

Think of it like this. You’ve got 3 books and 1 kid. That’s great one kid has 3 books. Then you have a second child. It’s not fair for one child to have 2 books and the other 1 book so you pitch 1 book. Then you have another child and since you only have 2 books and 3 kids you have to pitch the other 2 books because they can’t be divided up fairly. Obviously the household was better off with 3 books but the requirement that they be divided up fairly results in a worse off household with no books (but it is fair; none of the kids have more or less books than the other).

Is it fair that banks get lots of bailout money when they where so important in contributing to financial excess and the employees so well paid. NO. The mortgage tax deduction also contributed to an over consumption of home equity. How do you feel about giving up your mortgage tax deduction????? But back to the banks—should we let them all fail. Well we could, but realize that all of your savings would most likely be wiped out and we would be reduced to barter for a means of commerce. I didn’t really like Mad Max the movie that much that I would want to live in it.

2. Buy America
Are you fucking kidding me. Let me make sure I got this right. America is in debt up to its eyeballs. We are going to have to borrow a lot more and we are going to tell the guys who loan us money to continue to loan us money (at next to zero interest rates) but we won’t buy your stuff. Humm that’s gonna go over like a fart in church. And even worse the buy American provision is focused not on services where we are more cost competitive but on materials where we are not. So we get less bang for our buck, overpay and wind up employing fewer people because we overpay for materials for the stimulus. By the way did any of these guys study the great depression?

3. There is no magic pill

It seems like most of America is on some kind of pill, and we think that if you could just get the right smart people in a room for a couple of days they could figure out THE ANSWER to the economic challenges the planet faces. Sorry guys. No magic pill for this one. It more like cancer where you don’t know what’s gonna work. Nothing might work. And at times the cure is gonna feel worse than the disease. It’s easy for Frank and Shelby to sit by and complain and find problems with various proposals but while they piss and moan the patient is bleeding out. And while doing something may not work well doing nothing can be much much worse –i.e. letting Lehman fail. And if your gonna do nothing at least have the courage of making it be a conscious and explicit decision. I want to see the GOP say we don’t think we need a stimulus package. At least that is a position. We don’t like some parts and some aspects of your plan (what we want tax cuts to be 45% not 33% of the plan) is not a position it is politics, and the time for politics is past.

4. We are not going regain our prior living standard any time soon (if ever)

America was living beyond its means. With no savings and lots of spending. Spending is going to go down and saving is going to have to go up. People are going to live in smaller houses, with fewer cars and less stuff. It will suck getting used to this. BUT there is no magic pill that will bring us back to where we where. It was driven by unsustainable consumption with no savings. So don’t expect the government to get us back to where we where. We have just got to hope they keep us from civil unrest, wiping out our savings, and returning to barter. Judge the success or failure of their plans based on the grimmest scenario you can think of, not a return to the artificial halcyon days of the past.

5. The road to hell is paved with good intentions
a. Buy America (see above)
b. Regulate the heck out of hedge funds and force them to cut fees ---well that is expensive which means they will have to be bigger, and of course the bigger they are the more likely a failure might be systemic so then you have to bail em out, and the harder it is to spot risky behavior (try managing 50 portfolio mangers as opposed to 1 or 2)
c. Bonuses for regulators (paid for by those they regulate like FDIC) the wife came up with this one ---how do you quantify a bonus for a cost that hasn’t happened
d. Tax returns of over 30% at 95%---that sure eliminates the incentive to take more risk above a certain level, but it also eliminates the desire to take risk and is open to all kinds of earnings management

The long and the short of it is complexity in and of itself is a financial cost. I have written enough sales plans to know that the more targeted behavior you try to promote the more crazy unintended consequences you get. Just look at the US tax code. How much money is wasted spent trying to be tax efficient. How much energy is spent trying to make income look like long term capital gains. Our tax code already kills too many trees, and is economically inefficient. And now we have an 800+ page stimulus package to add on top. Bad economics.

So a proposal.

Stimulus package as follows

250 billion for tax relief (payroll tax relief) for 2009 and 2019
250 billion for states and city welfare and unemployment
400 billion for fiscal stimulus (education, green technology roads etc.)

And while we I am at it

Tax code
Income (short and long term capital gains included) tax
0-25 k 0.00%
25k-50k 10%
50k-100k 16%
100k-200k 22%
200k-500k 30%
500k+ 35%

Deductions
Charitable deductions can be taken dollar for dollar against income.

That’s it.

I have not run the numbers but I am guessing that is going to be close to revenue neutral. And even if the rates need to be adjusted just a bit you get the point about simple (with no energy wasted trying to make income look like long term capital gains).

How you know its cold (Chicago)

There is frost on your doors hinges (on the inside of your house)
Your mail slot is covered with frost (again on the inside of your house)
Putting salt down doesn’t melt anything
Your dog steps in her pee and gets frozen in place

You start to think the XLF should be the govt bail out ETF

Given the weather and the markets I am starting to think the cubs might just win the world series

Finger lenght--Mr. simple sense destined for success

A new study indicates that traders with the lowest 2D:4D ratios where the most successful traders (i.e. index finger: ring finger ratio http://www.ft.com/cms/s/0/6c933c86-e0af-11dd-b0e8-000077b07658.html?nclick_check=1) A quick gander at Mr. Simple Sense’s right hand shows a ring finger which is quite a bit longer than his index finger. I guess that all due diligence from now on will be based on a handshake and examination of my hand which I will pass with flying colors.

The crazy thing is people want simple answers to solve problems. And life just isn’t like that. A checklist will not tease out the truth or predict the future. We desire a rule that can be put in place to avoid financial crises, recessions, fraud and give long life. Eating well may help society live longer at the margin, but it is no guarantee to long life for the individual. Sadly my freakishly long ring finger is no guarantee to profitability. And there is no RULE we can put in place that will eliminate manias and depressions, and all the animal spirits which drive the business cycle.

Hedge Fund Regulation and other thoughts

Full disclosure. I run a hedge fund. I am not evil, and I do think I offer value for my investors. I will admit that there are many in the alternative investment universe that are just an embarrassment.

Much of the commentary I see around hedge funds these days includes the need for greater regulation, lower fees, and smaller funds. Often in the same breadth. This will not end well. Regulation is expensive, and with lower fees and less funds under management, something will have to give. Maybe the fund under staffs on execution, or administration, or research, but the management fees that a fund accrues is a limited and shrinking pie. If you increase the size of the slice going to regulation, less will go to other areas. And that will have an impact.

Also, I really don’t think you can honestly be sure that the hedge fund industry in particular, or the financial services industry in general needs more and new rules. What does need to happen is more vigorous application of the rules already on the books, and the enforcement agencies need both more and better staff.

For example, take a stretch of highway where there are a lot of accidents and lots of speeders, but no traffic cops enforcing the speed limit. Does this stretch of highway need new rules requiring the use of helmets and 3 point seatbelts to reduce highway fatalities or should we first try enforcing the speed limit? First put a bunch of police who are knowledgeable about enforcing the speed limit and see what happens.

And putting new rules in place can have horrible unintended consequences. In the above example, new seat belts are expensive but the helmets reduce visibility. New regulations will create many unknowns which are likely to be very expensive to explore. Investors and managers do tend to learn from the past (sometimes they give way too much weight to the recent past), but regardless I doubt we will see the same type of mistakes that allowed Madoff to run wild, and banks to pay huge bonuses for assets still held on their books. But new rules, will create new troubles which we can’t anticipate.

Does anyone else find it ironic that the institutions that seem to have gotten into the most trouble are those that are the most heavily regulated? In reality this regulation was a lot of rules, but not a lot of knowledgeable enforcement. Being Mr. Simple Sense I would bet that fewer simpler rules might even result in better enforcement, and a safer investment environment.

But since new rules seem to be coming I will grudgingly makes a couple of suggestions (which I would rather see as best practices than rules).

1. Match up investor liquidity with asset liquidity. If you invest in highly liquid instruments then provide monthly liquidity to your investors (like I do). If you invest in illiquid instruments use the private equity model of raising money for a fund, invest it and then 3-10 years down the road you liquidate it with no fund raising or redemptions allowed in between. And Fund of funds (if they survive) should also match the liquidity they provide investors with the liquidity the managers provide them—across the board.

2. Change the fee structure of hedge funds so that everyone in a fund pays the same fees and those fees are adjusted as the AUM change. Specifically management fees start high (like 2%), and performance fees are a bit lower (like 15%) and as the AUM grows the management fee everyone pays goes down and the performance fee goes up. This will allow smaller or newer managers to generate enough management fees to properly resource their business, and will encourage larger managers to focus more on performance and less on growing and retaining assets. Since newer-smaller managers know performance will drive AUM growth, the lower performance fee at the start should not prove to be a disincentive. This should help to optimize fund AUM for both investors and managers.


Please post your comments (esp. on the fee structure—I am dying to hear your thoughts).

Hedge Funds, Health Care and Investment Advice

Investment Advice
1. If it looks to good to be true it is (the Madoff law)
2. Ask your manager how they lose money
3. If you are invested in a hedge fund remember the high water mark has value—if you go to cash and then go back in to the same strategy you have given up 20%

Hedge Funds
1. In the future hedge funds will be (or should be) smaller and focused on single strategies
2. As funds get smaller and regulation increases maintaining a reasonable management fee will be vital to support a viable well run business, but ironically downward pressure on fees will increase
3. Hedge funds should either be invested in highly liquid products and provide high liquidity to their investors at all times or should be locked up like private equity with a start date and an end date when all funds are returned. There should be no middle ground—the mismatch is a not well rewarded risk
4. The FOF (fund of funds) business model will die

And back to Health Care

The business of health care is all wrong (I am coming at this from an economic point of view). Pricing is both too high and too complex.

Why do I insist that pricing is too high? If there was no health insurance and everyone had to pay the full list price for procedures not more than 1% of the population could afford it. And comparison shopping forgetaboutit.

Let me provide an example which illustrates both points. I recently had shoulder surgery to relieve chronic pain. The procedure was subacromial decompression (SAD) and labrum debrement, and included a hospital stay of longer 6 hours. The total list price including 7PT visits and doctor follow up was about $25k. That is close to the equivalent of the after tax median income of a fulltime male worker in the US. If people had to pay full list price for all procedures almost no could afford the current pricing. In short averaged American if you want to get rid of that pain in your shoulder give us your total after tax comp for the year. You are not going to sell a lot of SADs at that price.

Let’s say you wanted to shop around and compare to try to find a less costly place to have the procedure performed. You would need to call different surgeons and ask them how much they charge (I can tell you my doctor had no clue but he made a guess which was 66% too low). Then you would have to get the same information from the various different hospitals, anesthesiologists, and laboratories. Honestly without being a patient of the other prospective doctors I don’t think it would be possible to get the information to compare pricing. But even if you could, it would take hours over many days to dig up all the different prices.

And of course one of the reasons my surgeon didn’t know how much the procedure cost was because there is no transparency in pricing. There is the list price which you only pay if you don’t have health insurance (in the case of my anesthesiologist 72% higher than what my health insurance company had negotiated—does anyone think it makes good economic sense to charge the most to those who are least likely to be able to pay) then there is the multiple negotiated rates that doctors have agreed too. It is quite possible that the same doctor performing the same procedure could get paid more than 10 different rates. This is bad business. Consumers can’t make informed smart decisions. Billing is complex, complicated and convoluted. And bad business results in a more costly and less efficient health care system.

How to improve the health care system in our country in 2 easy steps:

1. Separate health care from employment and make everyone part of the pool

2. Require doctors to set one price for procedures—that doesn’t mean all doctors agree to the same price, just that my pediatrician agrees to get paid $125 dollars for my 5 year old son’s annual check up, not $250 if you self insure, $175 if you have Humana plan a, $150 if you have Blue Cross, $120 if you have United, $90 if you have Medicare etc.

Pretty simple ain’t it?

Love to hear your comments.

Observations on health insurance

Why would I enter this horrific hell hole? Why would I blog about such a thing?

First I think folks often become so wrapped up or blinded by details they lose sight of some over arching problems.

Second I fear that folks don’t realize how common and the problems are so I will share a bit of my own personal health insurance hell (in a couple of days—I’ve got to work up to it).

Mr. Simple Sense asks the question—Why is health insurance tied to our employment? The answer is that it snuck in as part of benefits packages post the Great War and then the tax code started to provide incentives around employers providing it and next thing you know the only way to get health insurance is through your employer. What started out as one or two companies searching for a competitive advantage (both in terms of hiring and in terms of cost), became imbedded via the tax code and now has become the only realistic way to get health insurance.

Just cause that’s the way it is doesn’t mean it’s a good idea. In fact it’s a horrible idea.

Employment decisions should revolve around how well your skills fit, how well the job pays, how well you fit into the culture, job security, etc. How good the health insurance plan is, how well it is funded, how it is structured, etc should not be part of that decision matrix.

It also makes our businesses less competitive. Part of the reason the BIG 3 are in so much trouble is the costs of employee benefits and one main reason they are getting bailed out is because they provide benefits to millions of people. But at the end of the day US employment costs are going to be much higher than in other countries where employers are not providers of health insurance. Also this practice means that small businesses don’t provide health insurance and independent contractors or self employed people don’t have health insurance.

Tying the two together just makes no sense. It’s like linking your housing choice to the clothes you get to wear. If you live on 2nd street you have to wear pink clothes, if you live on 3rd street you have to wear black clothes. IF you want to wear pink clothes you better find a house on 2nd street. And if you live on 1st street you get no clothes. (To change that back, if you work for company 2 you get HMO insurance, if you work for company 3 you get to choose between HMO and PPO, and if you work for small business company 1 you get no health insurance).

Mr. Simple Sense thinks this is stupid. It results in bad economics and limited to no choice in health insurance, and has the potential to create a nasty negative feedback loop. When is the worst time to lose your health insurance (or any type of insurance for that matter)? When you lose your job, of course. And low and behold that’s exactly what happens when you get your health insurance via your employer. And of course the worse it is the worse it is. If you get laid off but your employer survives well you got a shot a COBRA—it can be very expensive but at least you have the right to buy health insurance. And you might get some severance when you get laid off. If you company goes bankrupt, well all bets are off. No severance, no benefits, no right to buy into health insurance. And just like that you become uninsured and uninsurable.

More tomorrow.