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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.
In its proposal, Single Market Act I (2011), the European Commission stresses the need for further standardization so as to enhance economic growth, given the negative impact of the debt crisis in a few E.U. states. “Standardization is a primary tool for the free movement of goods whilst ensuring product interoperability, safety and quality.” Interoperability is one thing, however, whereas product quality can be expected to differ according to whether a given company is pursuing a premium or low-cost strategy. To demand standardized quality for a given product sold by Wal-Mart and Macy’s, for example, ignores the role of market segmentation in business. Other things equal, consumers would be left without low-price alternatives as Wal-Mart’s costs in meeting the standardization requirements would translate into higher prices.
 
                                       Standardization is even in the exterior of the Commission's building. Even the repetition of the E.U. flag implies standardization.
 
The application of greater standardization becomes even murkier in the Commission’s treatment of business services. “In order to avoid the emergence of new barriers and to facilitate the cross-border provision of services, particularly business-to-business services, . . . services standardization should be developed at (the E.U.) level, taking full account of market needs.” That market needs may differ by state or even region (of the E.U.) may follow from the diversity sustained by the on-going federal system. Put another way, the service sector can be expected to resist full standardization  throughout the Union.
Additionally, the Commission refers to its “performance checks” applied to standardization in the service sector. Given the expertise required in certain business-to-business services, such as managerial consulting, it is difficult to contemplate the bureaucrats as being able to assess whether more standardization is warranted or even possible. Consulting is so client-specific that standardization other than on the requisite training of consultants could be counter-productive. The Commission would be on firmer ground going with its proposed “skill passport” and training standards rather than trying to standardize such services. This is particularly true of professionals—CPAs, physicians and lawyers.
To be sure, standardization in the transport, energy and electronic-communications networks sectors is vital given the salience of interstate usage. In its proposal, the Commission does not differentiate between these sectors and the service sector.  It has already been noted above that interoperability, safety and quality are also being treated as equally subject to standardization. It is as if the Commission was in love with the concept itself, spraying it on everything it could touch.
By implication, it can be surmised that officials in the executive branch of the Union are inclined to shirk federalism. In particular, one could predict a proclivity to understate the utility at the union level of recognizing and accommodating culturally-based differences between the states. Whereas federalism protects such differences that are completely natural in an empire-scale union, excessive zeal for business standardization can undermine that particular virtue of federalism. All is not lost, however. That virtue is consistent with targeted applications of standardization in accord with criteria relevant to business, but not with the Commission’s blanket approach.  What is needed is for the Commission to come up with such criteria that permit differentiation in applying standardization variously to different sectors (e.g., transport vs. services) and product attributes (e.g., interoperability and quality).

 Source:
Proposal for Single Market Act I, The European Commission.

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.

Sources:

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.

Source:

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.
I suspect that the lesson has been lost on many Americans, who have not bothered to study their own history. As for Europeans, whom I as an American so much admire, I suspect that the problem is a mix of denial as to the E.U. being a federal system rather than a mere alliance or common market. Europeans thus leave themselves vulnerable to informal political dynamics, such as informal pressure from a large state on smaller ones, exacerbating the stress points in federalism. After all, no political design is perfect. Lest federalism be presumed to be tantamount to a central government dominating those of the states, the divisions of competencies can be made, on parchment at least, such that the state governments retain most (but not all!) of the governmental sovereignty in the federal system.  However, as the case of the U.S. in the twentieth century demonstrates, de facto political consolidation is a danger even if the parchment is said to guard against it. Even so, this danger does not justify the denial that leaves Europe so vulnerable as it steers its Union ahead almost purblind among icebergs.
 Denial is not limited to political systems. Particularly in the U.S., awareness of a warming planet has had to contend with the salience of corporate America in shaping the public discourse. Indeed, the naïve assumption that what is good for General Motors is good for America leaves the public good susceptible as citizens unwittingly defend the interests of large corporations even against the interests of the individuals themselves and the common long-term good of America and even the planet.
In Europe, global warming has had more currency. Even so, corporations have compromised the European approach. Additionally, Angela Merkel’s effective veto in reforming the strategy enervates the path ahead as well as sets a bad precedent for the European Union itself as 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 E.U.’s carbon market was at least by 2013 the world’s largest. Yet the price of a carbon allowance had fallen perilously low due a weak economy and a related glut of allowances. Even though part of the fault lies in not having tied the total number of allowances in the market to the GDP of the E.U. in a given year, companies were sitting on so many extra allowances because most of them were given for free. This points to a conflict of interest in the regulated having too much influence on the regulators and thus the regulatory system itself. One might thus predict that the E.U. would have great difficulty deciding to remove allowances from the market in order to raise the market price. Such a reform would not be in the interests of the regulated.
The rejection by the European Parliament’s industry committee of a stopgap plan to prop up the market by temporarily removing 900 million allowances in early 2013 was thus hardly a surprise. Less transparent was the impact of the division within the German government as an impediment to even a stopgap measure. Peter Altmaier, the environment minister, supported an E.U.-led intervention, but Philipp Rösler, the state’s economics minister, “flatly ruled it out,” according to the Financial Times. With Angela Merkel standing on the sidelines, there was insufficient political impetus in the European Parliament to push through the measure.
The Financial Times observed at the time that “Germany’s seeming paralysis over even a short-term remedy has raised doubts about the EU’s ability to agree on the more fundamental changes that many believe are necessary to correct an oversupply of allowances.” That is, the de facto requirement of the leader of the largest state renders the E.U. too weak to take on even fundamental reforms that are necessary to the continued viability of the Union. “Angela Merkel needs to step in,” says Bas Eickhout, a representative in the European Parliament from the Netherlands. “She holds the key.” It is no wonder that David Cameron had just announced a future referendum in Britain on whether that state should secede from the Union.
According to the Financial Times, moreover, through the three years of a debt crisis that threatened the very existence of the euro, one thing became evident: “no meaningful action—be it a multibillion-euro bailout or new fiscal rules—can go forward without the consent of Angela Merkel, Germany’s chancellor.” This ought to be a wake-up call even to those who deny the basic federal infrastructure of the Union. A union of states needing the consent of its largest state is not viable. Indeed, the de facto consent violates a basic sense of fairness. The continuance of this violation therefore subtly undermines the very legitimacy of the Union—hence making it vulnerable to external shocks such as a financial crisis.
It could not have been missed by the business lobby that Angela Merkel’s consent was necessary for the market-based system of carbon-allowances to be fixed. The easiest strategy of the business sector would be to make a deal with her, rather than having to lobby in other state capitals or in Brussels. At the time, Merkel was up for re-election so there was fodder for a deal friendly to the regulated. Lest it be concluded that the problem was merely excessive influence of the regulated, a basic flaw in the E.U. itself can also be blamed.
The de jure checks against the domination of a large state were insufficient to thwart de facto vetoes from Germany. It could be that informal power relations, such as a club mentality, play too great a role in Europe. Even though Slovakia could veto increasing the bailout funds, for instance, it did not take much for the real players in Western Europe to put the eastern state in its place. Yet if Germany or France wants to veto a proposal, the obstruction stands. Such a double-standard renders the E.U. vulnerable in the long-term. At the very least, peripheral state governments could become indifferent to the club, for nobody relishes being a second-class citizen.

Source:

Joshua Chaffin and Pilita Clark, “EU’s Carbon Trading Hopes Rest on Germany,” The Financial Times, January 28, 2013.

 

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.

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