Thursday, December 22, 2016

A bad day for North Carolina and a cynical maneuver: HB2

A bad day for North Carolina and a cynical maneuver:  HB2

Our legislature failed to muster the necessary votes to repeal HB2 (the bathroom bill) after Charlotte repealed its anti-discrimination ordinance.  That’s the headline on most news-related media sites.[1]  Realizing they could not muster the votes to repeal HB2, the Republican majority resorted to maneuver that required Democrats to vote against the repeal of HB2.  I’m relating this legislative detail because it illustrates how broken and cynical our politics are in North Carolina.

First, a bit of background.  In North Carolina both houses of the General Assembly have Republican supermajorities, so it’s clear that Republicans have the ability to pass anything they want to enact.  However, they could not muster enough Republican votes to repeal HB2 without Democratic support.  The House never debated, introduced a bill or voted on anything except adjournment.  Senate Republicans refused to propose a straightforward repeal of HB2.  Rather they included an extra section placing a six-month moratorium on the enactment of any local ordinance regarding discrimination in employment, public accommodations or bathrooms.[2]  Democrats opposed the bill because the repeal of HB2 was accompanied by a moratorium, and as it turned out a majority of Republicans senators couldn’t support the bill either.  That should have been the end of the special session.

Instead, Senate Republicans resorted to an obscure rule that allows a bill to be split in two parts.  If both parts pass, the bill’s two sections are reunited and the legislation passes.  In other words, there is never a vote on the whole bill, just its pieces.  This maneuver created the appearance of a straight up or down vote on HB2.  As a result, Democrats were forced to go on the record as voting against the repeal of HB2, which they did!  As expected, the straight repeal component failed, which eliminated the need to vote on the moratorium.   The Democrats had little choice but to vote against the first part because the Republicans would have then passed the moratorium on a party line vote, allowing a bill to pass that Democrats opposed.  As soon as the Republicans had pulled off this political slight-of-hand, they adjourned.

The rights of our transgender community, the wellbeing of our economy, or the reputation of our state be damned.  This is just plain ugly.  Merry Christmas Democrats, the Republicans forced you to vote against the repeal of HB2.

[2] Senator Majority Leader amended the six-month moratorium provision to make the moratorium run for 30-days beyond the end of the next legislative session.

Sunday, December 11, 2016

The mindset of the Trump Administration: Amorality

The mindset of the Trump Administration: Amorality

Pundits on the left and right of the political spectrum have taken to analyzing the direction of the Trump Administration through the lens of progressive or conservative perspectives.  In my view, they are missing the most important characteristic of the President-election and his economic appointees:  they are amoral thinkers.

Two weeks after starting Meditations on Money Management, I wrote a post called, “The particular problem of money management[1]” in which I described the dangerous flaw at the heart of the business:

“[T]he core function of money management, investing in financial markets, is an amoral pursuit.  It is not about right or wrong.  Rather it is a game of building collections of securities based on one’s predictions of corporate profits (stocks) or interest rates (fixed income).  It’s about deciding when to buy and sell those securities.  Democrats, Republicans, liberals, conservatives, believers, and atheists can be equally good or bad at the game as their personal views are irrelevant when it comes time to invest. 

President-elect Trump has spent his entire career in the amoral pursuit of amassing an ever-larger fortune for himself, and he will become the first President steeped in this corrosive way of thinking.  Moreover, he is building a cabinet filled with amoral thinkers who have benefited greatly from their years in and around the money management business.  I’ve previously written about Wilbur Ross, and Steve Mnuchin, who will soon be Commerce and Treasury secretaries.  The President has also nominated Andrew Puzder to head the Labor Department and Gary Cohn to chair the National Economic Council.  Puzder’s association with two private equity firms is largely responsible for generating his wealth, although he has been the CEO of CKE Enterprises (Carl Jr. and Hardees).  Mr. Cohn is the President and COO of Goldman Sachs.

Our government will be a ship without a moral rudder, which is very dangerous in the world of politics.   In a conventional administration, the public interest has often been sacrificed to benefit special interests and especially Wall Street.  However, in the Trump Administration, the public interest will play no role because amoral thinking does not allow for such a concept.    Conflicts of interest, which would be a concern of a conventional administration, will be completely acceptable in the Trump Administration.  Money management is a business infused with conflicts of interest.  Money managers don’t eliminate them; rather they force their clients to accept them.  Mr. Trump and his associates will try to force us to accept the many conflicts between their roles in government and their business interests.

All that will matter to Mr. Trump and his economic cabinet is furthering the image and brand of Mr. Trump and setting policies that pave the way for Wall Street and money managers to make a lot more money.  You may think that the public will quickly reject this direction.  However, money managers tend to be great marketers, so they will be able to disguise their amoral outlook in rhetoric, images, and deals that give the appearance that they are pursing the greater good.

In Iowa recently, Mr. Trump said, “I want people that made a fortune!”  Clearly, he’s looking for people to serve in his Administration who know how to set aside the concept of right and wrong in the pursuit of vast sums of money.  Fortunately we have a rich and diverse country that has survived greater challenges than Mr. Trump.  However, his amorality is going to inflict some real damage, especially on the most vulnerable among us.

Saturday, December 3, 2016

On an Unrelated Topic: Holiday Print Sale 20% Off

Looking for a non-investment holiday gift, check out Andrew Silton Gallery of Prints where I'm offering a 20% discount for the holidays.  You'll find one PE related print called Redacted Pool (original sold).

You'll also find a write-up in the Carolina Alumni Magazine in the November/December Issue
Redacted Pool (2015)

Thursday, December 1, 2016

Dark pools in charge of economic policy: Mnuchin and Ross

Dark pools in charge of economic policy: Mnuchin and Ross

According to conventional political analysis, Donald Trump owes his election to some combination of white, less educated, lower middle class voters and will therefore pursue programs and policies to benefit this group.  Another theory holds that Donald Trump will alter some of his views, disappointing his so-called base, and make his policies appeal to a broader swath of the middle class.  Both theories are wrong.

Donald Trump’s agenda is clear, and it has nothing to do with helping white, black, or brown Americans.  His core loyalists are the financial managers of dark pools.  What are dark pools?  They are unregulated or lightly regulated pools of capital known as hedge funds and private equity.   Dark pools have grown enormously in the last eight years as capital fled from the regulated banking sector.  In past administrations, Presidents drew talent from and rewarded banks and investment banks.  Don Regan, Nicholas Brady Robert Rubin and Henry Paulsen served Ronald Reagan, George H. W. Bush, Bill Clinton, and George W. Bush respectively.  These men led financial institutions and came to Washington to pursue tax and regulatory policies that served Wall Street. 

The President-elect is ushering in a new era.  Rather than hiring managers from financial institutions, Mr. Trump is hiring dealmakers who operate at the edges of the regulatory system.[1]   Wilbur Ross, Commerce Secretary-designate, and Steve Mnuchin, Treasury Secretary-designate, are fine examples.  When you look at their resumes, ignore their stints at Rothschild and Goldman Sachs.  Their fortunes were made doing deals and running hedge funds and private equity firms. 

Mr. Mnuchin put together an investor group that included George Soros and John Paulsen to buy the assets of Indymac (a mortgage lender) from the US Treasury in 2009.  His group sold the asset to C.I.T.  During his tenure, the bank known as One West had a number of regulatory run-ins due to its mortgage servicing practices. In the end all that mattered was that Mr. Mnuchin made lots of money.

Mr. Ross is known as a “turn around specialist” because he has bought steel, coal, automotive, and textile assets out of bankruptcy.    If there’s been a turn around, it’s because the bankruptcy proceeding did the ugly work of stripping out the pension, health care, and union obligations weighing on the businesses.   Undoubtedly Mr. Ross’s investment made money in the short-run, but there’s scant evidence that he reversed the course of these businesses.   His major success came over ten years ago when he assembled a collection of bankrupt steel assets and quickly sold them to Mittal.  He parlayed that success into a series of private equity funds that generated huge fees.  Being a shrewd investor, he sold his fund business to Invesco but stayed on to run the investment business.  His subsequent funds and investments haven’t measured up to his early success, and the SEC has sanctioned his firm for improperly collecting fees from his investors.

In other words, Mnuchin and Ross didn’t build or manage businesses; they flipped assets as quickly as possible, hiring other people to operate the businesses.  Moreover, Ross and Mnuchin took every possible advantage of the tax code and bankruptcy law to enrich themselves.  While their rhetoric will often extol the broader economic or social values of their deals, the public interest has never had a place in their hearts.   

Despite his opposition to Mr. Trump during the campaign, Mitt Romney would fit in easily in the new administration.  His fortune was built the same way as those of Ross and Mnuchin.  In the world of dark pools, real loyalty and disloyalty are measured in money, not rhetoric.

Won’t Mr. Trump’s core supporters rebel when they discover that the government’s policies are aimed at protecting and enhancing vast dark pools of capital?  Mr. Trump is far too savvy to leave them disappointed.  He won’t improve their lives or prospects.  Instead he’ll keep them satisfied with a steady stream of tweets about flag burning, images of undocumented immigrants being rounded up, and the occasional deal that keeps a plant or mine open.

By the time his core supporters realize that their prospects have not improved, Mr. Trump and his hedge fund colleagues will have remade the tax code and government regulation so that they can reap even larger fortunes.   Just like a hedge fund manager, the President-elect only needs to keep his investors happy for four years.  Promises and distractions are more than sufficient to keep sophisticated investors happy long enough for hedge fund managers to reap large rewards for themselves.  The same tactic should work on Mr. Trump’s core supporters.   By the time his supporters catch wind of Mr. Trump’s game, the President-elect and his cabinet will be back on the dark side making even more money. This is a deeply cynical view, but the people joining the new administration are deeply cynical people.