Chronicle of the Conspiracy
TRENT WAS RIGHT
Trent Lott said yesterday that the Senate would pass an AMT relief bill with no tax increase offsets: "I can guaran-damn-double-dog, you know, guarantee you that." And he was right. That's just what the Senate did last night. Bravo!
Join us as we discover, document, expose and challenge the bad people, the bad institutions and the bad ideas that stand in the way of wealth creation -- and show you how to fight back!
Posted by Donald L. Luskin at 9:14 AM |
LOTTS LAST STAND
We always gave Trend Lott a hard time, but we're going to miss him when he's gone (he's retiring from the Senate after this session). My DC-insider pal "Mick Danger" is an intimate of Lott, and celebrates his achievements and his style in this dispatch concerning his last great battle -- to get another year of AMT relief without offsets.
So what would happen if the House sent the Senate back a tax bill with offsets? Lott says, "They’re going to have to eat this. Get over it. Now, Nancy can dictate to all the Democrats she wants to. She ain’t dictating this. If they want the AMT, there ain’t going to be no offsets. Write that in granite. I can guaran-damn-double-dog, you know, guarantee you that."
"Offsets" is just another word for taxes.
Let’s all pause, shall we, and recall that the Congress once passed a tax called the Alternative Minimum Tax, originally conceived to ensnare only the tippy-top of the top 1% of taxpayers. On this enemies list were 155 Americans whose investments in congressionally created tax-advantaged investments were so large that they (ahem) offset their income tax obligations. Not only was this all legal, it was all happening as intended. Just a lot more than expected.
Congress was embarrassed when this news first broke. Look closer, though, and you’ll see that the news didn’t so much “break” as it was planted by a small cadre inside a highly secretive White House. Something had to be done! Something to somebody other than them! Something to soothe the populist hordes! (Well, actually, there were no actual populist hordes just a gaggle of politicians ginning up press stories in order to look populist.) There’s big money to be fleeced!
The history of the AMT is a fascinating walk back into time, featuring that thunderstorm of a president, Lyndon Baines Johnson, the dark and devious Richard Nixon and the always twisted Jimmy Carter. The list goes on to include such tax-lovers as Bob Dole, Dan Rostenkowski and numerous others.
One of the many factors which made the AMT virus grow to its now gargantuan size is the systemic weakness of most people in government throughout its roughly 38 year life. “Go Along, Get Along.”
Too few are willing to block a bad idea. It is a very bad idea indeed to raise new taxes to offset the application of the AMT to tens of millions of Americans who were never intended to be subject to it. The whole damn thing should be repealed – or perhaps reset to 10%.
As Trent Lott once said about another bad tax bill, “The time to kill a snake is before it comes out of the hole.” In Lott’s last weeks as a Senator, he is blocking new AMT taxes, the excessively large S-CHIP bill, billions in energy taxes and a proposal to raise taxes on capital gains by 135%. The sad news is that no one seems ready or able to take up his whack-a-mole duties next year.
Now see this, from today’s Congressional Quarterly:
“I’ve been through a lot of end-of-sessions, and I’ve been involved in them very closely, and I’ve been the solution and I’ve been the problem,” said Senate Minority Whip Trent Lott, R-Miss., who is leaving Congress at the end of the session. “This is the most bizarre situation and atmosphere I’ve ever seen. Nobody has any idea how to do anything or how in the world we’re going to get out of here, or when.”
Posted by Donald L. Luskin at 12:15 PM |
SO THIS IS WHY THE LEFT HATES ME
Now I understand. It's because I have my own "wing." I hope it's vast. Scott Lemieux opines,
[Mike Huckabee] may not be the first choice of the powerful Donald Luskin wing of the GOP, but he's not a liberal in any sense.
Posted by Donald L. Luskin at 6:03 AM |
GETTING A JUNK YIELD FROM CITI
So the story goes that Citigroup had to pay a "junk" yield of 11% to attract a capital infusion from the Abu Dhabi Investment Authority. Not so, according to this clever feature in Barron's:
...Abu Dhabi got that fat yield only because it agreed to forego some upside potential in its investment in a Citigroup equity-derivative security. Citi doesn't offer such securities publicly, but investors can create similar ones using Citigroup common stock and options.Thanks to Brian McCarthy for the link.
THE ABU DHABI SECURITY, called a DECS, is an equity-like instrument that must be converted into Citigroup common stock in 2010 or 2011, with a possible extension to 2012. At maturity, Abu Dhabi will get 201.4 million to 235.6 million Citigroup shares, depending on the stock's price at the time. The higher it goes, the fewer the number of shares.
The economics of the transaction are such that Abu Dhabi doesn't benefit from any appreciation in Citigroup stock from $31.83 to $37.24 a share -- the so-called dead zone. Citigroup, whose shares rallied $1.60 to $33.30 last week, apparently was trading around $32 when Abu Dhabi agreed to make its investment.
The little nation's 11% yield on its securities is sharply higher than the 6.5% dividend yield on Citigroup common. The additional yield is the result of giving up the right to participate in the first 5.41 points of upside in Citigroup common ($37.24 less $31.83).
HERE'S HOW TO CREATE a similar investment:
Buy 100 shares of Citigroup common for $33.30 and then sell a Citigroup 35-40 call-option spread maturing in January
2010. A call gives its owner the right to buy a stock at a certain price through a specified period.
By selling the call spread -- created when you sell a call option and buy another with a higher strike price and the same expiration date -- you give up appreciation in Citigroup between 35 and 40. But you benefit if the stock tops 40. You also benefit from any gain in Citigroup between $33.30 and $35 a share.
The January 2010 Citigroup 35 call was trading Friday for about $6.50; the January 2010 Citigroup 40 was fetching $4.50. Selling that spread -- involving a sale of the 35 call and purchase of the 40 call -- results in a payment to the investor of $2 ($6.50 less $4.50) per contract, or $200 (each option contract involves 100 shares of stock).
Citigroup now pays an annual dividend of $2.16 a share. By selling the call spread, the investor takes in $2 per share, or roughly $1 annually since the options expire in early 2010. This essentially increases the dividend to $3.16 a share for the next two years, creating a 9.6% yield, based on Citigroup's current price.
WE'RE USING A 35-40 CALL SPREAD because both options are traded on an exchange.
An institutional investor can get a custom-made option comparable to the Abu Dhabi strike prices.
One warning: Citigroup's common dividend could be cut, although the banking giant has said it won't be. The dividend on Abu Dhabi's security is more secure because it is senior to Citigroup's common stock. If Citi's stock falls sharply, both Abu Dhabi and a holder of Citigroup common would suffer.
One fine point is that Abu Dhabi gets appreciation on only 85% of its investment above $37.24 a share. To recreate this wrinkle, an investor would buy 85 of the 40 call options for every 100 of the 35 call options sold, increasing the yield on the strategy to almost 11%, comparable to the rate on the Abu Dhabi security.
This investment involving Citigroup stock and a call spread obviously isn't for everyone. But it allows individuals to do as Abu Dhabi did.
Posted by Donald L. Luskin at 8:22 PM |
TRY TO REMEMBER, PAUL
Paul Krugman can't quite remember just what could occur to him. Responding to Ben Stein's critique of Goldman Sachs' ultra-bearish economic forecst, Krugman writes today,
Maybe I don’t have what it takes to be a serious columnist. I mean, it would never have occurred to me to suggest that the only way to explain an economic forecast I don’t agree with is to say that it must be part of an evil plot...But this is exactly what Krugman does all the time. If he disagrees with you, you are either a liar or you are on the take. As but one of a million examples, here, in a 2005 column, he calls those who support private accounts in Social Security shills for the investment industry:
...a very high return on stocks over bonds is essential in privatization schemes; otherwise private accounts created with borrowed money won't earn enough to compensate for their risks. And if we take into account realistic estimates of the fees that mutual funds will charge - remember, in Britain those fees reduce workers' nest eggs by 20 to 30 percent - privatization turns into a lose-lose proposition. But then again Krugman should understand such motivations all too well. Remember when he was a consultant to Enron, and he wrote this puff piece for Fortune about the corrupt corporation hailing it as a model for modern business
Sometimes I do find myself puzzled: why don't privatizers understand that their schemes rest on the peculiar belief that there is a giant free lunch there for the taking? But then I remember what Upton Sinclair wrote: "It is difficult to get a man to understand something when his salary depends on his not understanding it."
Posted by Donald L. Luskin at 2:32 PM |
TIMES COLUMNIST TAKES ON TIMES SOURCE
I loathe Ben Stein's populism and his role in the lynching of Michael Milken (and the fact that he writes for the New York Times). But I have to say his Sunday columns for the Times lately have been a consistent beacon of reason in a time of panic. Here's a snip from yesterday's, in which he takes on an "expert" so often quoted by the Times itself in constructing its familiar economic doomsday scenarios:
...a highly placed economist at Goldman Sachs named Jan Hatzius...recently wrote a detailed paper about how he thought the subprime mess would get worse and worse. It would get so bad, he hypothesized, that it would affect aggregate lending extremely adversely and slow down growth.Thanks to "Irrational Exuberance" for the link.
Dr. Hatzius...used a combination of theory, data, guesswork, extrapolation and what he recalls as history to reach the point that when highly leveraged institutions like banks lost money on subprime, they would cut back on lending to keep their capital ratios sound — and this would slow the economy.
This would occur, he said, if the value of the assets that banks hold plunges so steeply that they have to consume their own capital to patch up losses. With those funds used to plug holes, banks’ reserves drop further. To keep reserves in accordance with regulatory requirements, banks then have to rein in lending. What all of this means — or so the argument goes — is that losses in subprime and elsewhere that are taken at banks ultimately boomerang back, in a highly multiplied and negative way, onto our economy...
So I started an e-mail correspondence with Dr. Hatzius, pointing out what I believed were a few flaws in his paper. Among them were his hypothesis that home prices would fall an average of 15 percent nationwide (an event that has never happened since the Depression, although we surely could be headed in that direction), and that this would lead to a drastic increase in defaults and losses by lenders.
This, as I see it, is a conclusion that is an estimation based upon a guess. I found especially puzzling the omission of the highly likely truth that the Fed would step in to replenish financial institutions’ liquidity if necessary. In a crisis like that outlined by the good Dr. Hatzius, the Fed — any postwar Fed except perhaps that of a fool — would pump cash into the system to keep lending on track.
I mentioned this via e-mail to Dr. Hatzius. He generously agreed that there was some slight merit to my arguments and that he was merely pointing out tendencies and possibilities (if I understand him correctly).
BUT forecasting is tricky, and I have a hard time believing that financial events to come will be qualitatively different from those that have already happened.
I do want to emphasize Dr. Hatzius’s gentlemanliness and intelligence. But I also want to emphasize that, as I see it, his document was mostly about selling fear. A spokesman for Goldman Sachs categorically denies this point and says that the firm’s economic research is held to the highest levels of objectivity and that its economists’ views are completely independent.
As I interpret it, Dr. Hatzius was saying that the financial system would possibly not be able to adjust to a level of financial losses that are large on an absolute scale but small compared with aggregate credit or the gross domestic product. He is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter — an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.
In other words, with the greatest possible respect to Dr. Hatzius, his paper is not really what I would call a serious overview of the situation. It is more a call to be afraid and cautious based on general principles that he embraces and not on the lessons of history... In this respect, he is much like many economic journalists and commentators who sell newsprint by selling fear...
Goldman Sachs was one of the top 10 sellers of C.M.O.’s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.
Is it possible that Dr. Hatzius’s paper was a device to help along the goal of success at bearish trades in this sector and in the market generally? His firm says his paper, like all of its economists’ work, was not written to support any larger short-trading strategy. But economists, like accountants, are artists. They have a tendency to paint what their patrons, who pay them, want to see.
Posted by Donald L. Luskin at 7:40 AM |
THE BATTLE IS JOINED
Rudy in this morning's Wall Street Journal:
...the Democratic presidential candidates all seem determined to impose an unprecedented $3 trillion tax hike on the American people.
Republicans have a clearer understanding of how our economy works. This summer, I unveiled my tax plan, which committed to making the 2001 and 2003 tax cuts permanent, while aiming for still-lower marginal rates. We'll give the death tax the death penalty, index the Alternative Minimum Tax for inflation as a step toward eliminating it entirely, expand tax-free savings accounts, and expand health-care choice through tax reform. We also need to reduce the corporate tax rate -- which is currently the second highest in the industrialized world, behind Japan -- to at least the average of the other Organization for Economic Cooperation and Development nations, or 28%. These actions will protect American jobs, empowering us to compete and win in the global economy...
Returning to principles of fiscal conservatism is not an end to itself. We believe these ideas ultimately help government work better for all Americans. Cutting taxes and controlling spending creates a government that is smaller and smarter, more efficient and more effective. It can help balance the budget and reduce the deficit. Most of all, a healthy combination of pro-growth policies and fiscal discipline unleashes the genius of America's free-market economy -- empowering not government, but the citizens it exists to serve.
Posted by Donald L. Luskin at 7:31 AM |
NOW THIS IS NEGATIVE SENTIMENT!
We read today of a place of "perpetual gloom" where "the sun does not rise at all," a "link" in a "chain of misery." No, it's not the headquarters of the New York Times. Instead, this story in the Times concerns Narvik, a Norwegian town in the Artic Circle, that has lost $64 million in investments tied to subprime mortgages. No wonder the Times has had to announce a hiring freeze -- the reporter who covered this story is probably already frozen. But if sending reporters to the Arctic Circle to prove that people have lost money speculating in markets is their idea of financial news coverage, no wonder the Times Company is going broke.
Posted by Donald L. Luskin at 1:17 PM |
WHY DO THEY HATE US?
Out of the blue, with no provocation or other apparent reason,
DeLong has decided to smear me on his blog -- and the best he can do is
reprint his claim that I "denied the existence of the entire discipline of
statistics" in something I wrote two years ago. He doesn't provide a way for readers to judge for themselves what I
really said, because he provides no link --
here it is, if you are curious. I merely questioned whether a particular
statistical inference was valid, given its small sample size and the
intertemporal complexity of the measurement challenge involved. Why that implies
that I am denying the existence of statistics is utterly beyond me.
Is DeLong himself denying the existence of statistics when he disputes that
the Department of Labor's "household employment survey is as good a guide
to short-term labor market trends as the establishment survey"? He permits
himself to criticize particular applications of statistics? But when I do, then
for some reason I am denying their very existence or meaning. So DeLong goes on
for hundreds of words talking about the nature of the discipline of statistics,
as though the more he says on the topic the stupider I am for denying its
existence. His lecture begins, "The whole science of statistics exists because
Luskin is wrong." I guess I should be flattered that something I did brought to
life an entire field of science.
Why does DeLong have it in for me? I really can't imagine. All I've ever done
is expose his
flagrant abuse of copyrights, exposed
faked on-line CV, exposed
his disastrous testimony in support of Al Gore in the disputed
Florida election of 2000, and exposed
the career-ending error (of a statistical nature, by the way) in a paper he
once wrote with Larry Summers. And then I supposes there are all the fat
jokes -- of which he himself is the crowning instance. But other than that, I
really can't understand his animus.
Update [12/3/2007]...Reader Mike Soja tells us,
I followed all the links in your posting and investigated the Panel Study of Income Dynamics website a little bit, and ended up on Perfessor DeLong's blog and left this comment:
Update 2... Here's the radical Left smear machine in action. Now blogger Matthew Yglasius picks up on DeLong's ridiculous critique, and states (in shock and horror),
Is it Professor DeLong's contention that the Panel Study of Income Dynamics (PSID) database is suitable for drawing conclusions about
*recent* economic mobility? If I am not incorrect, the PSID can only tell us about the income mobility of the general population from which the PSID population was drawn, which was the population of 1968. Whether or not the draw from the 1968 population effected a truly random sample or not, there is no reason to suppose that those same people (and their offspring) are representative of the current general population. Also, indeed, common sense suggests that the subjects of the PSID study, many of them tracked for more than three decades, have had all the education and income mobility, etc., that they are ever likely to have, and that if one wished to make comparisons with regard to them, one would, as Mr. Luskin importunes, need a new sample and a following study. Hence, Professor DeLong's simplistic and tedious referral to the more than adequate sample size of one study misses completely the point that Mr. Luskin was trying to make.
That stood for about fifteen minutes until it was deleted, probably never to be seen again. If even criticism so mild as that is too much for the old boy, I dunno.
But you, sir, keep up the good work.
Yes, that's right, Donald Luskin, contributing editor to NRO Financial, doesn't believe in the validity of statistical sampling. Can you believe the rhetorical silliness of this locution? "Yes, that's right." In other words, "We know this will shock you -- it's nearly unbelievable -- but it's true! He is an unbeliever in statisical sampling! An infidel! Death to infidels!"
Let me make one thing perfectly clear. I do believe in statistical sampling. Let me prove it. From this one sample from Matthew Yglasius' blog, I conclude with probability one that he is a partisan hack, and with 95% confidence that he is an a**hole.
Posted by Donald L. Luskin at 1:17 PM |