Sunday, July 31, 2011

Regulatory Costs: Good for Mr Soros, What About Us?

From WJS: (HT D. Haarmeyer)

Regarding your editorial "Soros's Regulatory Hedge" (July 27): I wish my partners and I could give back a mere 4% of capital under management as George Soros is doing and be free of the new SEC requirement to register as an investment adviser. Instead, our small firm will be forced to create a compliance department and incur substantial costs to track and report various aspects of our business because the Dodd-Frank Act defines us as a systemic risk to financial markets.

We must make 44-page quarterly filings, and even longer annual filings require vast disclosure on personnel, partnership agreements and underlying investments—companies that have nothing in common except that we are a shareholder. Like most private equity firms, we use no leverage at the fund level. Our contract with investors limits us to a tightly defined list of permitted investments. Each of the companies we invest in produces audited financial statements. These audits are the basis for our own audits, which are provided to investors and used in fundraising activities already highly regulated by the SEC.

Contrast this to Mr. Soros's "family office," which will be free to invest billions of dollars in anything, anywhere, anytime with or without leverage and with little or no disclosure to anyone. The family-office exemption exists because Congress determined that requiring these private capital pools to register would not reduce systemic risk, though they may manage many times the capital our firm does. There is absolutely no credible reason to treat private firms managing third-party capital for sophisticated investors differently than family offices—except to create sound bites and score political points.

Brian P. Simmons



Monday, July 25, 2011

Dom Post claims to have found the “free lunch”

This comes in the form of the “Free Store” started in Wellington and now replicated in Waitakere – a grocery shop where offerings are given away while local artists exhibit their works.  Instant claims of a free lunch were made.

Far from being a “free lunch” the  huge popularity of the Free Shop and the joy it no doubt brings to both needy “shoppers” and generous volunteers, the idea, its execution and its popularity demonstrates numerous economic principles and underlines the value of market processes.

We see that:

  • people do derive benefit from from helping others, are more than willing to expend energy and ingenuity doing just that and the return to them can take many forms – satisfaction, a sense of communing with their fellows and, let’s hope, some artwork sold.
  • produce comes from local businesses donating leftover and other produce. So it seems not all the business world is full of the vicious, spiteful and mean capitalist classes. The business’s reputations and their own desire to feel they are doing something useful turns out to, in fact, be useful.

And on the other side – some economic problems never go away.

  • The shop is so popular the managers have to “ration” how many people are allowed in at once. Scarce resources – free groceries in this case, do, it seems have to be rationed even when the high minded are running the place.
  • There has also been some criticism of consumers of the Free Shop offering. What? These “shoppers” are likely to be needy and poor. But envy and fear of competition is also a classic feature of success.

So free lunch it is not. Worthy example of capitalism it is – and as in “conventional” capitalism those who bring nothing but envy to the party are welcome to leave.


Demonising the source of improved social welfare

By 1934, the Depression's banking crisis had been resolved, "yet full recovery was still seven years away," (Nobel winner Robert Lucas)  said in the Milliman lecture. GDP stayed more than 10% below trend.

"Why?" The answer, he says, was growth-suppressing policies, such as the Smoot-Hawley tariff, cartelization, unionization and, "most important but hardest to measure, FDR's demonization of business."

The last point (the inverse of Bourgeois Dignity – for those who have been listening) is critical in N.Z. We are awash with demonising business, fearing gnomes of Zurich, believing that co-op free lunches (AMI ownership structure for instance) abound, fear of Yellow Peril, the belief that trade leads to invasion, hatred of phone companies…. et al.

All good fun, low effort news stories and no doubt cute… also dumb and deadly.

Full article on the Brent Wheeler Group site.


Wednesday, July 20, 2011

For those believing NZ debt is not an issue…

“Yields on 2-year Greek govt debt shot up more than 3 pct -pts to 39.02% today (JPMorgan) That is not a typo.” (HT David Wessel)


Sunday, July 17, 2011

Regulating to produce immoral behaviour

"Mr Grant (Jim Grant – WSJ 16 July, Newsletter columnist) is also a critic—albeit with caveats—of today's great bankers, whom he says in one respect don't hold a candle to their gilded forebears. "When you take away the downside, you take away the virtue. You take away the moral foundation of markets. You always have envy but now the envy is a little better grounded in objective facts. Taxpayers get the downside. Modern-day Wall Street gets the upside."

What I like about this is that it provides a sound economic explanation for behaviour which is usually explained with a whole lot of “moral stuff” about bankers or whoever being “bad people” – as many a decent economist has pointed out – there are no good or bad people – just human beings responding to incentives.

The regulator, the politician, the media, and indeed those who support all of these have constructed a regulatory structure which transfers risk to the population at large – all in the fond belief that they can banish risk and penalise those of whom they are envious. In doing so what they have banished is the one mechanism which might deliver their dreams – the market.