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Saturday, February 2, 2013

Facebook's Fatal Flaw: Mobile Ad Revenue?

As the largest of the social-media companies, Facebook has gone into uncharted waters. Adding to Wall Street’s analytical headache, the company’s strategy at least since its IPO has been to be oriented more to the long term than is customary on Wall Street. Put another way, estimating Facebook’s long-term viability has been notoriously difficult, particularly for Wall Streeters who apply their traditional criteria nonetheless. Looking beyond Wall Street’s lenses, there is indeed reason to regard investments in the company as very risky.
                Social connections are notoriously fluid. The networks themselves are so as well. This puts Facebook in a highly uncertain place.       Washington Post.

The full essay is at "Taking the Face Off Facebook."

Friday, February 1, 2013

Excessive Standardization Pushed by the European Commission?

The E.U.’s internal market is not typically construed in terms of federalism. Whereas the market connotes homogeneity or at least easy transfers across state lines, a union of states wherein both are semi-sovereign implies diversity within certain commonalities. The economic and political systems are not mutually exclusive, or inert, however. Put another way, too much economic standardization begins to run up against the heterogeneity that is inherent in an empire-level union of republics.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon. 

Thursday, January 31, 2013

Bank of America Exploits the E.U.

In 2012, the corporate income tax rate was reduced from 26% to 24 percent. With the comparable rate in Germany at 29% and France at 33 percent, Britain stood to reap the revenue-benefits of a significantly lower tax rate within the European Union. That the 24% rate would be pared down to 21% in 2014 suggests that everything else equal, the state of Britain was set to reap a sustainable competitive advantage over other states with respect to attracting business, and thus jobs. The move is not without risks, however.
The move by the British could trigger reduced rates in other states, resulting in a “race to the bottom” wherein corporations get away with less tax and the governments have to cut back on basic services due to insufficient revenue in the coffers. In early 2013, for example, Bank of America moved billions of pounds of complex financial transactions through London from Dublin in order to apply the loss carry-forwards on the underlying investments to the state with the higher tax rate. At the time, the corporate tax rate in Ireland was only 12% so the loss deductions could benefit the bank more if applied against profit in Britain. As a result, Britain would collect less in tax from the bank and the bank would pay less in tax, due to the rate differential between Ireland and Britain.
In short, a bank that had made horrible acquisitions in 2008 was able to “play the rates” to get some kind of “silver-lining” benefit at the expense of the E.U.’s state governments. Because of the disproportionate fiscal role of those governments in the E.U., business could effectively play them off against each other. Were there a federal corporate income tax, the benefits of shifting carry-forward losses from Dublin to London would be mitigated because the more of the tax bill in Europe would be unaffected. Therefore, in addition to forestalling more of a fiscal balance within the E.U. to the benefit of the euro, the reliance on state tax in the E.U. can be exploited by corporations such that less tax revenue is collected.
In terms of business, Bank of America’s taking advantage of differential tax rates illustrates a sort of “operating at the margins” that misses the point that the bank had “missed the big picture” in acquiring Merrill Lynch and Countrywide in 2008. That is to say, any cleverness in minimizing the tax bill within the E.U. does not make up for the colossal blunders at the hand of Ken Lewis and the board in 2008. That the bank is too big to fail, meaning that there is systemic risk should it collapse, is thus a particularly dangerous risk for the global financial system. Simply stated, expertise in reducing the tax it pays in Europe does not make up for the greater ineptitude at the bank, so there is a significant possibility that the bank will go under.
Putting these thoughts together, the E.U. is vulnerable fiscally due to its reliance on the states for tax revenue, and the global financial system is vulnerable in terms of systemic risk at least in part because banks like Bank of America can exploit the E.U.’s weakness and thus give policy-makers the impression that the systemic risk is tolerable.


Jill Treanor, “Bank of America Makes Derivatives Switch from Dublin to London,” The Guardian, 28 January 2013.
Dan Milmo, “Corporation Tax Rate Cut to 21% in Autumn Statement,” The Guardian, 5 December 2012.

Tuesday, January 29, 2013

Raises at Bailed-Out U.S. Companies: Approved by Treasury

In early 2013, the Special Inspector General for Troubled Asset Relief Program reported that the U.S. Treasury Department disregarded its own guidelines in order to allow large pay increases for executives at three major companies that had received bailouts during the financial crisis. In particular, eighteen raises for executives at American International Group (AIG), General Motors, and Ally Financial were approved. Fourteen were for $100,000 or more. A raise for the CEO of a division of AIG was $1 million. Treasury approved these raises even though they exceeded the pay limits set in Treasury’s own guidelines.
                                                    Was Treasury Secretary Tim Geithner smirking because his friends were happy?     NYT
In assessing Treasury’s approval of the raises, one must weigh the argument that they were needed to retain expertise needed to restore the companies to financial health (and thus be able to pay back the bailouts) against the argument that bailouts should come with strings such that the funds are not used opportunistically. At the very least, executives associated with the companies’ failures should not be rewarded. However, what about new-hires brought in to restore the companies?  If the restoration is successful, shouldn’t those managers be compensated?  Even if the raises were not necessary to retaining talent, managers who had not been part of the problem should be compensated for effective work. At the same time, it is proper and fitting that companies being bailed out be subject to strings, and thus neither the companies nor their employees should be able to benefit inordinately.
That Treasury disregarded its own guidelines can be read as an indication that the officials were concerned that vital talent would be lost had the guidelines been followed. The bailouts in the E.U. contained limits on executive compensation without any apparent hindrance to the viability of the banks. In other words, the argument that the raises were necessary to retain talent could have been a ruse. An alternative interpretation consistent with this scenario is that the business sector had too much influence over Treasury officials. In addition to lobbying influence and connections between Treasury officials and former colleagues on Wall Street, it is possible that pro-business officials had adopted the business line that government should not interfere with business—even companies being bailed out.
Put another way, contrasting the lack (or ignoring) of strings at Treasury with the salience of strings in the case of the E.U.’s bailouts may illustrate a cultural difference between Americans and Europeans generally with respect to pro-business ideology. Had executives at the three bailed out companies above enjoyed inordinate influence within Treasury, the conflict of interest for the government officials could have been enabled by a shared ideology: namely, what is good for GM is good for America.


Marcy Gordon, “Treasury Disregarded Own Guidelines, Allowed Executive Raises At Bailed-Out GM, AIG,” The Huffington Post, January 28, 2013.

Monday, January 28, 2013

Carbon Allowances: Merkel's E.U.?

Fundamentally, a union of states is in trouble when any federal action is predicated on consent from the governor of the largest state. The U.S. Senate was proposed precisely to give the smaller states a means to thwart the domination of a few large ones in legislating at the federal level. The European Council’s qualified majority vote mechanism and the unanimity requirement on “big ticket items” such as taxation permit a supermajority of states to reject the proposal of a few large ones. The U.S. House of Representatives and the European Parliament offer no such avenue for small states because those chambers are based solely on population. California and New York, and France and Germany, can through their peoples’ representatives have great clout in those bodies. Therefore, bicameral (i.e., two chambers) legislatures are distinctly advantageous at the federal level of a union of states.

                            Jose Barosso, President of the European Commission, conferring with Angela Merkel, chancellor of the state of Germany. Was she giving Barosso his marching orders? Vielleicht, ich glaube.  
The full essay is at "Essays on the E.U. Political Economy," available at Amazon. 

Sunday, January 27, 2013

Obama’s “Recess” Appointments As Invalid

The U.S. President cannot determine the U.S. Senate is on recess in order to make recess appointments. This is the ruling of the federal court of appeals in Washington, D.C., on a case involving the appointment of three members of the National Labor Relations Board. A three-judge panel of the court ruled that the appointments “were constitutionally invalid” because the U.S. Senate was not in recess on January 4, 2012 when Obama made the recess appointments. If the president were free “to decide when the Senate is in recess,” it “would demolish the checks and balances inherent in the advice-and-consent requirement, giving the President free rein to appoint his desired nominees at any time he pleases,” the court opinion reads. Of course, the Senate could also abuse its privilege by declaring itself in session when it is de facto in recess in order to prevent recess appointments. The balance in “checks and balances” implies that neither side is able to render the other impotent to act.
For its part, the White House viewed the ruling as applying only to the three NLRB appointments in the suit, rather than extending to Obama’s appointment of Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB). That appointment too was made on January 4, 2012.
Because the court ruled that the U.S. Senate was not in recess, it stands to reason that any recess appointment made by the president on January 4th is invalid. Even so, White House spokesman Jay Carney said that Obama’s appointment of Richard Cordray was not affected by the court’s decision. “The decision that was put forward today had to do with one case, one company, one court,” Carney said. “It has no bearing on Richard Cordray.” I contend that it does. The ruling states that no recess appointment can be made by the president when the U.S. Senate is not in recess. Even if the Obama administration disagrees with the ruling, to narrow it dogmatically to just three of the appointments made when the U.S. Senate was not on recess (as determined by the court) is nonsensical. Besides offending reason itself, the “reasoning” evinces a tendency in the White House to evade the very notion of constraint. This is the “red flag” in this particular case study. In other words, it is the aspect that could easily be missed but should alarm us all. It may portend future scandal in the Obama White House with respect to the rule of law.

Tom Curry, “White House Sees No Impact of Court Ruling on Finance Protection Agency,” NBC News, January 25,