26 results back to index
Investment: A History by Norton Reamer, Jesse Downing
Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, moral hazard, mortgage debt, Network effects, new economy, Nick Leeson, Own Your Own Home, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve
Despite this lackluster performance record as compared to the broad equities market, record amounts of capital continue to ﬂow into the hedge fund industry. In recent years, the private equity industry compensation vehicle of carried interest (the proﬁt share paid to the manager for performance) has also been the subject of much scrutiny. As a complex tax issue, carried interest has often been described as the primary means by which asset managers—including both private equity managers and hedge fund portfolio managers—rake in large amounts of compensation.27 Because carried interest and performance fees represent the majority of the large sums earned by the top-performing independent asset managers, the taxation of carried interest has become a controversial political issue. Currently in the United States, carried interest has been deﬁned as a capital gain for individuals receiving these payments, and as such it has been subject to materially lower capital gains tax rates.
Currently in the United States, carried interest has been deﬁned as a capital gain for individuals receiving these payments, and as such it has been subject to materially lower capital gains tax rates. Supporters of characterizing carried interest as a capital gain argue that this policy encourages productive investment and economic growth. Detractors point to relative tax burdens and the undermining of a progressive taxation system. Whatever the relative merits of these positions, it is indisputable that carried interest and its capital gains treatment are certainly contributing to the rise and continued ﬁnancial success of this new elite. THE COMPENSATION STRUCTURE AND ITS NUANCES The Problem of Bundling Beta and Alpha Performance fees are almost always paid on return, not alpha. Alpha is the amount of risk-adjusted value, relative to the appropriate benchmark, that a manager has added through investment management talent—that is, through some combination of security selection, timing, sizing investments, or risk management.
Third, there are incentive arrangements that pay off to the stewards of capital when investors Conclusion 327 earn a return. In public environments, these incentives are sometimes structured as stock options for management teams to earn money when the stock performs well. In private equity environments, these incentives are structured as carried interest, a portion of the proﬁts of the partnership that goes to the manager. However, the future of investment must contemplate how some of these arrangements can distort behavior. Might the carried-interest feature cause certain stewards to treat it like a call option and invest in circumstances that are “heads I win, tails you lose”? Might there be opportunities for making corporate boards more shareholder friendly and reducing some cases of corporate abuses? Certainly, activist investors to some degree are pursuing such enhanced governance structures, but there is work that remains to be done.
King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey; John E. Morris; John Morris
asset allocation, banking crisis, Bonfire of the Vanities, carried interest, collateralized debt obligation, corporate governance, credit crunch, diversification, diversified portfolio, fixed income, Gordon Gekko, margin call, Menlo Park, mortgage debt, new economy, Northern Rock, risk tolerance, Rod Stewart played at Stephen Schwarzman birthday party, Sand Hill Road, sealed-bid auction, Silicon Valley, sovereign wealth fund, The Predators' Ball, éminence grise
Off and on over the previous year, various senators and congressmen had brought up the idea of altering the treatment of carried interest for private equity and hedge fund managers. The press was filled with stories of hedge fund gurus who made more than $1 billion in 2006, and Fortress had revealed during its IPO that its three founders, Wesley Edens, Peter Briger Jr., and Michael Novogratz, and two other senior managers had received $1.7 billion from their firm shortly before Fortress’s IPO. The capital gains advantage was not unique to private equity or hedge funds. It stemmed from general principles of tax and partnership law and the gaping differential between the tax rates on ordinary income and capital gains. Carried interest by definition consists of investment profits, which are capital gains for tax purposes, and partnership law allows profits to be allocated to different classes of partners as the partnership chooses.
(The investors, who become limited partners in a partnership, don’t write a check for their full commitment at the outset; they merely promise to deliver their money whenever the general partner issues a demand, known as a capital call, when it needs money for a new investment. Even so, the general partner collects the full 1.5 percent from the limited partners every year no matter how much of the money has been put to work. When the funds themselves begin to wind down after five or six years, the management fee is substantially reduced.) Richer yet was the potential bonanza Blackstone stood to make in “carried interest.” By the conventions of the business, private equity firms take 20 percent of any gains on the investments when they are sold. If Blackstone raised the hoped-for $1 billion and the fund averaged $250 million in profits a year (a 25 percent return) for five years running—a not impossible mark—Blackstone would be entitled to $50 million a year, or $250 million over five years. On top of that, the companies Blackstone bought would reimburse Blackstone for the costs it ran up analyzing them before it invested and for its banking and legal fees.
Its companies would also pay advisory fees to Blackstone for the privilege of being owned by it. A more lucrative compensation scheme was hard to imagine. The fee structure ensured that if the fund was big enough, the financiers would become millionaires even if they never made a dime for their investors. The management fees alone guaranteed that with a large fund. If they made good investments and collected their 20 percent carried interest, they stood to make a lot more. While the individual partners at a successful midsized firm such as Gibbons, Green, or van Amerongen might earn $2 million in a good year, the industry’s kingpins, Henry Kravis and George Roberts, overseeing multibillion-dollar funds, each took home upward of $25 million in 1985. This was several times more than what the CEOs of Wall Street’s most prestigious investment banks made at the time, and it dwarfed what Peterson had earned as CEO of Lehman.
Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland
Albert Einstein, algorithmic trading, banking crisis, barriers to entry, Basel III, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, call centre, carried interest, Cass Sunstein, Clayton Christensen, collapse of Lehman Brothers, conceptual framework, corporate governance, credit crunch, Credit Default Swap, crony capitalism, Deng Xiaoping, don't be evil, double helix, energy security, estate planning, experimental subject, financial deregulation, financial innovation, Flash crash, Frank Gehry, Gini coefficient, global village, Goldman Sachs: Vampire Squid, Gordon Gekko, Guggenheim Bilbao, haute couture, high net worth, income inequality, invention of the steam engine, job automation, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, linear programming, London Whale, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, NetJets, new economy, Occupy movement, open economy, Peter Thiel, place-making, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, postindustrial economy, Potemkin village, profit motive, purchasing power parity, race to the bottom, rent-seeking, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, self-driving car, short selling, Silicon Valley, Silicon Valley startup, Simon Kuznets, Solar eclipse in 1919, sovereign wealth fund, stem cell, Steve Jobs, The Spirit Level, The Wealth of Nations by Adam Smith, Tony Hsieh, too big to fail, trade route, trickle-down economics, Tyler Cowen: Great Stagnation, wage slave, Washington Consensus, winner-take-all economy
Bloomberg is, of course, himself both a plutocrat and one of the country’s most prominent financial entrepreneurs. As New York’s mayor, he has defended Wall Street with the hometown zeal of a Detroit politician supporting the carmakers or a prairie leader backing farmers. Nonetheless, here was Bloomberg on carried interest: “Since fair is fair, tax loopholes in the financial industry that are outdated should be closed, too, such as taxing carried interest at ordinary income rates. And I say this even though many of the people who would be affected are my constituents—so I assume I will get some phone calls later this afternoon.” GALT’S GULCH Carried interest is a very specific issue that touches a very specific group of people. The rise of Occupy Wall Street has brought a broader critique of the 1 percent to the fore, and in doing so has spurred some of the plutocrats to mount a more general self-defense.
Two other former Obama backers on Wall Street—both claim to have been on Rahm Emanuel’s speed dial list—recently told me that the president is “antibusiness”; one went so far as to worry that Obama is “a socialist.” In some cases, this sense of siege is almost literal. In the summer of 2010, for example, Blackstone’s Schwarzman caused an uproar when he said an Obama proposal to raise taxes on private equity firm compensation—by treating carried interest as ordinary income—was “like when Hitler invaded Poland in 1939.” However histrionic his metaphors, Schwarzman (who later apologized for the remark) is a Republican, so his antipathy for the current administration is no surprise. What is perhaps more surprising is the degree to which even former Obama supporters in the financial industry have turned against the president and his party. A private equity manager who is a passionate Democrat and served in the Clinton administration proudly recounted to me his bitter exchange with a Democratic leader in Congress, who was involved in the tax reform effort.
A private equity manager who is a passionate Democrat and served in the Clinton administration proudly recounted to me his bitter exchange with a Democratic leader in Congress, who was involved in the tax reform effort. “Screw you,” he told the lawmaker. “Even if you change the legislation the government won’t get a single penny more from me in taxes. I’ll put my money into my foundation and spend it on good causes. My money isn’t going to be wasted in your deficit sinkhole.” Indeed, within the private equity fraternity, which would be hardest hit by a change in the tax treatment of carried interest, this is very much the majority view. When I met him in his boathouse on Martha’s Vineyard, the cofounder of a private equity firm warned that raising the taxes on his industry would “kill” investment in this country and drive the money overseas. He also said it was morally unjust because private equity professionals like himself put their own money at risk and so did not deserve to have their profits taxed like regular income.
The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank
carbon footprint, carried interest, Cass Sunstein, clean water, congestion charging, corporate governance, deliberate practice, full employment, income inequality, invisible hand, Plutocrats, plutocrats, positional goods, profit motive, Ralph Nader, rent control, Richard Thaler, Ronald Coase, Ronald Reagan, sealed-bid auction, smart grid, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, trickle-down economics, ultimatum game, winner-take-all economy
A year later, hedge fund manager John Paulson earned some $4 billion. These managers also enjoy remarkably favorable tax treatment, for reasons that no one can seem to explain with a straight face. For example, even though “carried interest”—mainly their 20 percent commission on portfolio gains—has the look and feel of ordinary income, it’s taxed at the 15 percent capital gains rate rather than the 35 percent top rate for ordinary income. That provision alone saved Mr. Paulson some $800 million dollars in taxes in 2007. Congress periodically considers proposals to tax carried interest as ordinary income. To no one’s surprise, financial industry lobbyists are always quick to insist that doing so would kill the geese that lay the golden eggs. The deals brokered by their clients often create enormous value, to be sure.
The deals brokered by their clients often create enormous value, to be sure. Yet the proposed legislation would not block a single transaction worth doing. The same deal that currently augments a hedge fund manager’s after-tax income by $1 million would augment it by $765,000 if carried interest were taxed as ordinary income. Can anyone credibly claim that this would make him abandon the deal? Economic analysis suggests that higher taxes on hedge fund managers would actually boost production in other sectors of the economy by alleviating wasteful overcrowding in the market for aspiring portfolio managers. This market is a prime example of a winner-take-all market—essentially a tournament in which a handful of winners are selected from a much larger field of initial contestants. Such markets tend to attract too many contestants for two reasons. One is an information bias.
See Civil Aeronautics Board California: pollution from cars in, 113; Proposition 13 in, 48–49; starve-the-beast strategy in, 47–50 229 230 INDEX campaign finance: government waste reduction through reform of, 51; perception of corruption in, 57 Canada, lack of corruption in, 56 cap-and-trade system, 181 capital gains tax rate, 163 capitalism: assumption of greed in, 33; labormanaged firms in, 32–34; task specialization in, 43 car(s): congestion fees for, 113–14, 182–83; context in evaluation of speed, 26; gasoline prices’ effect on design of, 181; need for corporations in industry, 90; pollution regulations for, 113; taxing by weight, 183–84 carbon dioxide tax, 179–82; cap-and-trade system as, 181; and climate change, 4, 179–82, 215; pace of implementation of, 4, 180–81 carried interest, 163 Carter, Jimmy, 112 cash-on-the-table metaphor, 31, 32, 35–36, 43 CEOs: before-tax versus after-tax incomes of, 154–55; competition in hiring of, 153–54; decision leverage of, 151–52; income growth of, 1, 61, 149–55; relationship between pay and ability of, 149–55; spending by, 60, 78 Cervantes, Miguel de, 215 Chicago Board of Trade, 177 children: helmet rules for, 187–89. See also schools Citizens United v.
Portfolio Design: A Modern Approach to Asset Allocation by R. Marston
asset allocation, Bretton Woods, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, diversification, diversified portfolio, equity premium, Eugene Fama: efficient market hypothesis, family office, financial innovation, fixed income, German hyperinflation, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, Long Term Capital Management, mortgage debt, passive investing, purchasing power parity, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, superstar cities, transaction costs, Vanguard fund
So if the limited partners have committed $100 million in capital, payouts from the investments must rise above $100 million before the general partners begin to receive carried interest. Thereafter, the GPs will be paid 20 percent of any returns. So if the fund eventually closes out with $200 million in exit proceeds, the GPs will earn $20 million (i.e., 20 percent of $200 million - $100 million). But some firms base their carry on the difference between the exit proceeds and the investment capital rather than committed capital. The investment capital is the committed capital less the management fee, so this variation on the carry results in a larger payout to the GPs. To complicate matters, private equity funds often have hurdle rates that must be earned by the limited partners before carried interest is paid to the general partners. Metrick and Yasuda (2010) show that the most common hurdle rate for both VC and buyout funds is 8 percent.
Cambridge Associates, an institutional investment consulting firm, provides an index of returns net of fees as reported to the limited partners that CA has as clients. Since CA has a large share of the institutional market, its index covers upward of 80 percent of all VC funds in existence. The index begins in 1981. Metrick (2007, Chapter 3) provides an analysis of the biases in each index. The returns on SHE are actually lower than those on CA despite the fact that the latter nets out management fees and carried interest. He uses a rough estimate of management fees and carried interest to adjust the SHE returns to a net basis. This results in a 7.5 percent gap between the CA and SHE indexes.6 Metrick argues that the CA index has survivorship bias due to the fact that many VC firms attract institutional money only after they have had successful VC funds. He suggests treating the CA index as an upper bound for estimates of true VC returns. All VC returns are plagued by stale pricing.
The limited partners agree to commit a certain amount of capital, and the general partners draw down this amount as they invest in enterprises. The drawdown period typically takes several years, so the investors must keep the capital in liquid form in the meantime. Capital is typically committed for 10 years with limited extensions at the discretion of the general partners. Fees generally take two forms, a management fee levied on the committed capital and an incentive fee (termed carried interest or carry) based on performance. A typical fee structure involves a 2 percent management fee and a 20 percent incentive fee. The 2 percent management fee is levied on the committed capital from the beginning of the fund regardless of how much has been drawn down. So if there is a $100 million fund with capital committed for 10 years, then the total management fee will be $20 million over the 10-year period ($2 million per year).2 The incentive fee kicks in after the limited partners have recovered their committed capital.
affirmative action, Affordable Care Act / Obamacare, anti-communist, Bakken shale, bank run, battle of ideas, Berlin Wall, Capital in the Twenty-First Century by Thomas Piketty, carried interest, centre right, clean water, Climategate, Climatic Research Unit, collective bargaining, crony capitalism, David Brooks, desegregation, diversified portfolio, Donald Trump, energy security, estate planning, Fall of the Berlin Wall, George Gilder, housing crisis, hydraulic fracturing, income inequality, invisible hand, job automation, low skilled workers, market fundamentalism, Mont Pelerin Society, More Guns, Less Crime, Nate Silver, New Journalism, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, oil shock, Plutocrats, plutocrats, Ralph Nader, Renaissance Technologies, road to serfdom, Ronald Reagan, school choice, school vouchers, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, the scientific method, University of East Anglia, Unsafe at Any Speed, War on Poverty, working poor
As Chrystia Freeland writes in her book Plutocrats, the June 21, 2007, initial public offering of stock in Blackstone, his phenomenally successful private equity company, “marked the date when America’s plutocracy had its coming-out party.” By the end of the day, Schwarzman had made $677 million from selling shares, and he retained additional shares then valued at $7.8 billion. Schwarzman’s stunning payday made a huge and not entirely favorable impression in Washington. Soon after, Democrats began criticizing the carried-interest tax loophole and other accounting gimmicks that helped financiers amass so much wealth. In the wake of the 2008 market crash, as Obama and the Democrats began talking increasingly about Wall Street reforms, financiers like Schwarzman, Cohen, and Singer who flocked to the Koch seminars had much to lose. The hedge fund run by another of the Kochs’ major investors, Robert Mercer, an eccentric computer scientist who made a fortune using sophisticated mathematical algorithms to trade stocks, also seemed a possible government target.
He described McCarthy as a “serial offender” who had played “a pretty big part in lowering the bar on what is acceptable in American politics.” — Shortly before the Kochs held their second summit of the year, a June get-together at the St. Regis Resort in Aspen, they got a break that enormously increased their network’s financial clout when House Democrats passed a bill, backed by President Obama, to eliminate the so-called carried-interest loophole. The idea of eliminating the special tax break enjoyed by private equity and hedge fund managers struck fear in the finance industry. Obama had won the support of a surprisingly large share of New York’s finance titans in 2008, but his stance on the tax—which would never make it through the Senate—enraged many of its heaviest hitters. Stephen Schwarzman, the chairman and CEO of the enormously lucrative private equity firm the Blackstone Group, whose personal fortune Forbes then estimated at $6.5 billion, would call the administration’s efforts to close the loophole “a war,” claiming it was “like when Hitler invaded Poland in 1939.”
Financiers resented being blamed for the collapse of the economy in 2008, they took extreme umbrage when Obama had chastised them as “fat cats,” and they claimed that his administration was run by college professors who knew nothing about business. But Schwarzman and a number of other financiers regarded this as a new level of affront and flocked to the June Koch summit with their checkbooks in hand, determined to prevent his reelection. Ironically, it was probably Schwarzman’s own excesses that had brought the carried-interest loophole to critics’ attention. In 2006, when he decided to transform Blackstone from a private partnership into a public company, he had been required to disclose his earnings for the first time. The numbers stunned both Wall Street and Washington. He made $398.3 million in 2006, which was nine times more than the CEO of Goldman Sachs. On top of this, his shares in Blackstone were valued at more than $7 billion.
Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker
accounting loophole / creative accounting, affirmative action, asset allocation, barriers to entry, Bonfire of the Vanities, business climate, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, full employment, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Ralph Nader, Ronald Reagan, shareholder value, Silicon Valley, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce
In 2007, the top twenty-five hedge fund managers earned nearly $900 million on average.9 Despite their awe-inspiring incomes, some of these financiers have been able to exploit features of tax law that predate the rise of hedge funds to pay only a 15 percent federal tax rate. Yes, 15 percent. “Carried interest” provisions allow fund managers to treat some of the spectacular fees investors pay them as capital gains—a favorable treatment supposedly reserved for those who are putting their own investments at risk. Warren Buffett used to say that it was outrageous that he and his secretary paid the same tax rate. Those benefitting from the “carried interest” loophole can do him one better. They pay a dramatically lower rate than their secretaries. As egregious as this loophole is, the defense game of Wall Street supporters like Schumer kept it firmly in place. Adopting the Scarlett O’Hara defense, he insisted that he supported reform but wanted to get it right—something that, hopefully, would happen tomorrow.
About the only area where audits have gone up is among poorer taxpayers who claim the Earned Income Tax Credit.12 Another way public officials have cut the taxes of upper-income filers without passing new laws is by leaving in place loopholes through which rich Americans and their accountants shovel lightly taxed cash. Take one of the more egregious examples: the ability of private equity and hedge fund managers to treat much of their extraordinary incomes as capital gains, subject only to a 15 percent tax rate. (In 2006, the top twenty-five hedge fund managers earned nearly $600 million on average, with the richest, James Simons, taking in $1.7 billion.)13 The “carried interest” provision that allows this sweetheart deal is a bug in the tax code that predates the rise of hedge funds. But while this loophole is almost universally viewed as indefensible (and may finally be closed a bit in 2010), it has been protected for years by the fierce lobbying of its deep-pocketed beneficiaries and the strong backing of Wall Street supporters like Senator Chuck Schumer, Democrat of New York.
., 17, 34, 41, 53, 105, 152, 157, 183, 186, 192, 193, 195, 200, 201, 210, 213, 214, 216, 217, 219, 221, 222, 223, 230, 233, 234, 236, 238–39, 245, 250–51, 253, 254–55, 258, 264, 265, 266, 271, 280, 293–94, 304 business: anti-labor agenda of, 55, 121–24, 127–32, 135, 219, 303 conservative support for, 122–23 Democrats supported by, 53, 86, 127, 129–32, 140, 174–88, 220–21, 223–52 economic reforms opposed by, 79–80, 86, 87–88, 130–32 financial resources of, 74, 121–22, 131, 170–72, 179–80, 209 “grassroots” campaigns by, 66, 89, 114, 119–27, 131, 144, 179–80, 274 inside vs. outside strategies of, 121 large, 119–27, 128, 129–32, 179–80, 205–6, 231, 275–78, 279 lobbyists for, 89, 117, 118, 124–26, 135–36, 144, 183–84, 198, 205–7, 218, 238–39, 275–77 organizations for, 88, 104–7, 116–36, 144, 160, 179–80, 205–6, 231, 275–78, 279, 291; see also specific organizations political influence of, 65–66, 74, 79, 84–85, 104–7, 110–12, 116–36, 150–51, 160, 169, 170–72, 179–80, 183–84, 197–98, 207, 230–31, 242–43, 271–75, 282, 292–93, 304 Powell memorandum on, 117–18, 119, 125 regulation of, 55–56, 116–36, 179–80, 187, 205–6, 219–21, 246–47, 273–77 Republicans supported by, 34, 49, 53, 65, 86, 121–26, 129–32, 140, 157, 170, 174–88, 189, 194–222, 230–31, 244–46, 267 small, 119–20, 129–30, 131, 205–6, 243 tax reform opposed by, 47, 49, 50, 64, 106–7, 124–25, 132–34, 177, 179–80, 187, 312n see also corporations business cycles, 17–18 Business-Industry Political Action Committee, 122 Business Roundtable, 120, 121, 125, 126–27, 129–30, 205–6, 231 Byrd, Robert, 130–31 cable networks, 106, 156–57, 158 California, 84, 176, 240, 247, 300 Campaigns and Elections, 203 campaign spending, 66, 118, 121–22, 150–51, 163–64, 166, 167, 169, 170–84, 197–98, 203, 207, 209–10, 219, 223–52, 258–59, 271–75, 276, 304 Campbell, Anne, 176 Canada, 29, 31, 38–39, 52, 58, 60, 68 Cao, Joseph, 337n capital gains, 14, 16, 18, 39, 46, 50–51, 99–100, 133–34, 151, 214, 228–30, 312n Carlson, Tucker, 147 Carlton Group, 133–34 “carried interest” provision, 51, 228–29 Carter, Jimmy, 98–100, 116, 126–27, 130, 131, 132–33, 134, 137, 141, 152, 172–73, 175, 184, 186, 202, 255 Carville, James, 5 Cato Institute, 209 Census Bureau, U.S., 13, 311n Center for American Progress, 266 Center for Responsive Politics, 207, 227 Chafee, Lincoln, 265 Chamber of Commerce, 119, 127, 128, 129–30, 205–6, 231, 275–78, 279 Cheney, Dick, 189–90, 217 chief executive officers (CEOs): autonomy of, 231, 292–93 conflicts of interest of, 55, 66 incomes of, 1, 16, 56, 62, 66–67, 154–55, 198 international comparison of, 62–65 organizations for, 119–21 pay packages for (executive compensation), 2, 57, 61–66, 70, 198, 219–21, 246–47, 279, 319n, 320n, 335n political influence of, 117–19 retirement benefits of, 64 Chiles, Lawton, 131, 181 Christian Coalition, 203 Christian Conservatives; see Religious Right Christian Right, 139, 146–49, 160, 201–4, 205, 234–35 Church, Frank, 175 Citigroup, 71, 226, 249–50, 254, 261 Citizens United case, 293 Civic Culture, The (Almond and Verba), 144 civic groups, 107–12, 139, 143–45, 147, 155, 156, 158 civil rights movement, 95, 138, 139, 190, 202, 235, 275 class divisions, 29, 75–77, 131–32, 148, 151–55 see also specific classes Class War?
Paper Promises by Philip Coggan
accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, joint-stock company, Kenneth Rogoff, labour market flexibility, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce
If the process is unsuccessful, the equity will prove worthless and some of the lenders may take a hit. The general partners (those who run the fund) will earn their cut in two ways. First, they will take an annual management fee, which may be as much as 2 per cent of the funds invested. This fee is designed to cover the managers’ running costs. Secondly, they will take a performance fee, known as ‘carried interest’, when the assets are sold, often 20 per cent of all profits after an agreed hurdle return has been reached. It is this carried interest that has made private equity fund managers rich. And it has also aroused plenty of controversy, given that it is taxed in many jurisdictions as a capital gain, rather than as income. Since capital gains usually bear a lower tax rate, this results in the anomalous situation where private equity managers are taxed at a lower rate than their office cleaners, as one financier memorably described it.
Index AAA Status of US Adams, Douglas Adams, John Addison, Lord Adenauer, Konrad adjustable rate mortgages adulterating coins affluent society Afghanistan ageing populations agrarian revolution Ahamed, Liaquat AIG air miles Alaska Amazon.com Angell, Norman Anglo Irish Bank annuities Argentina Aristophanes Arkansas Asian crisis of 1997 – 8 asset prices assignats Athens Austen, Jane austerity Austria Austrian school Austro-Hungarian empire Aztecs B&Q baby boomers Babylon Bagehot, Walter bailouts balanced budget Baldwin II, King of Jerusalem Balfour, Arthur Bancor Bank for International Settlements bank notes Bank of England bank reserves bank runs bankruptcy codes Banque Generale Barclays Capital Baring, Peter Baring Brothers Barnes & Noble barter Basle Accords Bastiat, Frederic BCA Research BCCI bear markets Bear Stearns Beaverbrook, Lord Belgium Belloc, Hillaire Benn, Tony Benn, William Wedgwood Bernanke, Ben Bernholz, Peter bezant Big Bang Big Mac index bills of exchange bimetallism biofuels Bismarck, Otto von Black Death Black Monday black swan Blackstone Blair, Tony Blum, Léon BMW Bodencreditanstalt Bohemia Bolsheviks Bonnet, Georges Bootle, Roger Brady, Nicholas Brady bonds Brazil Bretton Woods system Brodsky, Paul Brooke, Rupert Brown, Gordon Bruning, Heinrich Brutus Bryan, William Jennings bubbles budget deficits budget surplus building societies Buiter, Willem Bundesbank Burns, Arthur Bush, George W. Business Week Butler, Eamonn Calder, Lendol California Callaghan, Jim Calvin, John Canada Canadian Tar Sands capital controls capital economics capital flows capital ratios carried interest carry trade Carville, James Cassano, Joseph Cato Institute Cayne, Jimmy CDU Party ‘Celtic tiger’ central bank reserves Cesarino, Filippo ‘Chapter’ Charlemagne Charles I, King of England cheques/checks chief executive pay Chile China Churchill, Winston civil war (English) civil war (US) Citigroup clearing union Clientilism Clinton, Bill CNBC collateralized debt obligations commerical banks commercial property commodity prices Compagnie D’Occident comparative advantage conduits confederacy Congdon, Tim Congress, US Connally, John Conservative Party Consols Constantine, Emperor of Rome consumer price inflation continental bonds convergence trade convertibility of gold suspended Coolidge, Calvin copper Cottarelli, Carlo Council of Nicea Cowen, Brian cowrie shells Credit Anstalt credit cards credit crisis of 2007 – 8 credit crunch credit default swaps ‘cross of gold’ speech Cunliffe committee Currency Board currency wars Dante Alighieri David Copperfield Davies, Glyn debasing the currency debit cards debt ceiling debt clock debt deflation spiral debt trap debtors vs creditors, battle defaults defined contribution pension deflation Defoe, Daniel Delors, Jacques Democratic convention of 1896 Democratic Party Democratic Republic of Congo demographics denarii Denmark deposit insurance depreciation of currencies derivatives Deutsche Bank Deutschmark devaluation Dickens, Charles Dionysius of Syracuse Dodd – Frank bill dollar, US Dow Jones Industrial Average drachma Duke, Elizabeth Dumas, Charles Duncan, Richard Durst, Seymour Dutch Republic East Germany East Indies companies Economist Edward III, King of England Edwards, Albert efficient-market theory Egypt Eichengreen, Barry electronic money embedded energy energy efficiency estate agents Estates General Ethelred the Unready euro eurobonds eurodollar market European Central Bank European Commission European Financial Stability Facility European Monetary System European Union eurozone Exchange Rate Mechanism, European exorbitant privilege farmers Federal Reserve Federal Reserve Bank of Philadelphia Federalist party fertility rate ‘fiat money’ Fiji final salary pension Financial Services Authority Financial Times Finland First Bank of the United States First World War fiscal policy fiscal union Fisher, Irving fixed exchange rates floating currencies florin Florio, Jim Ford, Gerald Ford, Henry Ford Motor Company Foreign & Colonial Trust foreign direct investment foreign exchange reserves Forni, Lorenzo Forsyte Saga France Francis I, King of France Franco-Prussian War Franklin, Benjamin French Revolution Friedman, Milton Fuld, Dick futures markets Galbraith, John Kenneth Galsworthy, John GATT Gaulle, Charles de Geithner, Tim General Electric General Motors general strike of 1926 Genghis Khan Genoa conference George V, King of England Germany gilts Gladstone, William Glass – Steagall Act Gleneagles summit Glorious Revolution GMO Gokhale, Jagadeesh gold gold exchange standard gold pool gold standard Goldman Sachs goldsmiths Goodhart, Charles Goodhart’s Law Goschen, George Gottschalk, Jan government bonds government debt Graham, Frank Granada Grantham, Jeremy Great Compression Great Depression Great Moderation Great Society Greece Greenspan, Alan Gresham, Sir Thomas Gresham’s Law Gross, Bill G7 nations G20 meeting Guinea Habsburgs Haiti Haldane, Andrew Hamilton, Alexander Hammurabi of Babylon Havenstein, Rudolf von Hayek, Friedrich Heavily Indebted Poor Countries initiative hedge funds Henderson, Arthur Henry VIII, King of England Hien Tsung, Chinese emperor Hitler, Adolf Hoar, George Frisbie Hohenzollern monarchy Holy Roman Empire Homer, Sydney Hoover, Herbert House of Representatives houses Hume, David Hussein, Saddam Hutchinson, Thomas Hyde, H.
American Society of Civil Engineers: Report Card, Bernie Madoff, Bernie Sanders, call centre, carried interest, citizen journalism, clean water, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, extreme commuting, Exxon Valdez, full employment, greed is good, housing crisis, immigration reform, invisible hand, knowledge economy, laissez-faire capitalism, late fees, market bubble, market fundamentalism, Martin Wolf, medical bankruptcy, microcredit, new economy, New Journalism, offshore financial centre, Ponzi scheme, Report Card for America’s Infrastructure, Richard Florida, Ronald Reagan, Rosa Parks, single-payer health, smart grid, The Wealth of Nations by Adam Smith, too big to fail, transcontinental railway, trickle-down economics, winner-take-all economy, working poor, Works Progress Administration
There were plenty—it’s just that almost all of them were either voted down or taken out and never even put up for a vote. Even something as simple and sensible as putting a cap on credit card interest rates. Senator Sheldon Whitehouse’s amendment to do just that was voted down 60 to 35.51 So much for “financial stability.” Though I suppose it depends on whose financial stability you care about—the banks’ or the taxpayers’. Or how about payday lending—the largely unregulated advances on a paycheck that can carry interest rates in the triple digits? In Missouri, for example, rates can top 600 percent.52 Yes, you read that right. Not exactly a recipe for “financial stability.” North Carolina’s Kay Hagan offered an amendment that would have clamped down on the $40 billion industry. It was killed without a vote.53 Then there is the Merkley-Levin amendment that would have prohibited banks from making risky proprietary trades—a version of the Volcker Rule.54 It also never even made it to a vote.
Treasury.45 And they wouldn’t ban companies using offshore tax havens from receiving government contracts, which is stunning given the hard times we are in and the populist groundswell against the way average Americans are getting the short end of the stick. But the bills would end one of the more egregious examples of the tax policy double standard, finally forcing hedge-fund managers to pay taxes at the same rate as everybody else. As the law stands now, their income is considered “carried interest,” and is accordingly taxed at the capital gains rate of 15 percent.46 According to former labor secretary Robert Reich, in 2009 “the 25 most successful hedge-fund managers earned a billion dollars each.”47 The top earner clocked in at $4 billion. Closing this outrageous loophole would bring in close to $20 billion in revenue—money desperately needed at a time when teachers and nurses and firemen are being laid off all around the country.48 But the two sets of rules—and the clout of corporate lobbyists—leave even commonsense, who-could-argue-with-that proposals in doubt, and leave the middle class shouldering an unfair share of a very taxing burden.
Liars and Outliers: How Security Holds Society Together by Bruce Schneier
airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Nash: game theory, joint-stock company, Julian Assange, meta analysis, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K
Feige and Richard Cebula (2011), “America's Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S.,” Munich Personal RePEc Archive, MPRA Paper No. 29672 (Jan 2011). blamed income inequality Kim M. Bloomquist (2003), “Tax Evasion, Income Inequality and Opportunity Costs of Compliance,” Paper presented at the 96th Annual Conference of the National Tax Association. carried-interest tax Nicholas Kristof (6 Jul 2011), “Taxes and Billionaires,” New York Times. Laura Saunders (6 Aug 2011), “'Carried Interest' in the Cross Hairs,” Wall Street Journal. investment tax credit Don MacKenzie, Louise Bedsworth, and David Friedman (2005), “Fuel Economy Fraud: Closing the Loopholes That Increase U.S. Oil Dependence,” Union of Concerned Scientists. Jim Hopkins (10 Feb 2004), “SUV Sales Climb on Tax Loophole,” USA Today. lost federal revenue Scott Horsley (30 Jun 2011), “What Tax ‘Loopholes’ Does Obama Want to Close?”
There are a lot of creative companies figuring out ways to follow the letter of the tax law while completely ignoring the spirit. This is how companies can make billions in profits yet pay little in taxes. And make no mistake, industries, professions, and groups of wealthy people deliberately manipulate the legislative system by lobbying Congress to get special tax exemptions to benefit themselves. One example is the carried-interest tax loophole: the taxation of private equity fund and hedge fund manager compensation at the 15% long-term capital gains tax rate rather than as regular income. Another is the investment tax credit, intended to help building contractors, that people used to subsidize expensive SUVs. There's also tax flight—companies moving profits out of the country to reduce taxes. Estimates of lost federal revenue due to legal tax avoidance and tax flight are about $1 trillion.
Twilight of the Elites: America After Meritocracy by Chris Hayes
affirmative action, Affordable Care Act / Obamacare, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, carried interest, Climategate, Climatic Research Unit, collapse of Lehman Brothers, collective bargaining, Credit Default Swap, dark matter, David Brooks, David Graeber, deindustrialization, Fall of the Berlin Wall, financial deregulation, fixed income, full employment, George Akerlof, hiring and firing, income inequality, Jane Jacobs, jimmy wales, Julian Assange, Mark Zuckerberg, mass affluent, means of production, meta analysis, meta-analysis, moral hazard, Naomi Klein, Nate Silver, peak oil, Plutocrats, plutocrats, Ponzi scheme, Ralph Waldo Emerson, rolodex, The Spirit Level, too big to fail, University of East Anglia, We are the 99%, WikiLeaks, women in the workforce
Over the last decade, the political arm of the income defense industry has been wildly successful. The tax cuts passed by Bush and extended by Obama represent a total of $81.5 billion transferred from the state into the hands of the richest 1 percent. Meanwhile, hedge fund managers and their surrogates have deployed millions of dollars to lobbyists to maintain the so-called carried interest loophole, a provision of tax law that allows fund managers to classify much of their income drawn from investing gains as “carried interest” so that it is taxed at the low capital gains rate of 15 percent, rather than the marginal income rate, which would in most cases be more than twice that. It was this wrinkle in the law that helped Mitt Romney, a man worth an estimated quarter of a billion dollars, pay an effective tax rate of just under 14 percent in 2010.
2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, banking crisis, carried interest, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, full employment, Home mortgage interest deduction, job automation, Mahatma Gandhi, minimum wage unemployment, new economy, Occupy movement, offshore financial centre, Plutocrats, plutocrats, Ponzi scheme, race to the bottom, Ronald Reagan, single-payer health, special drawing rights, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, trickle-down economics, women in the workforce, working poor
Mitt Romney paid less than 14 percent on income in excess of $20 million, in both 2010 and 2011. That’s because so much of the income of the super-rich is classified as capital gains, which, at 15 percent, creates a loophole large enough for the super-rich to drive their Ferraris through. Well-heeled tax lawyers and accountants are kept busy year-round figuring out how to make the earnings of their clients look like capital gains. Congress still hasn’t closed the “carried interest” loophole that allows mutual-fund and private-equity managers to treat their incomes as capital gains. Great wealth creates opportunities for ever greater tax loopholes. In 2010, eighteen thousand American households earning more than half a million dollars paid no income taxes at all. The estate tax (which affects only the top 2 percent) has also been slashed. As recently as 2000 it was 55 percent and kicked in after $1 million.
The Little Book of Hedge Funds by Anthony Scaramucci
Andrei Shleifer, asset allocation, Bernie Madoff, business process, carried interest, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, fixed income, follow your passion, Gordon Gekko, high net worth, index fund, Long Term Capital Management, mail merge, margin call, merger arbitrage, NetJets, Ponzi scheme, profit motive, quantitative trading / quantitative ﬁnance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, Silicon Valley, too big to fail, transaction costs, Vanguard fund, Y2K, Yogi Berra
And through it all, hedge funds will remain the alternative investment that not only makes money, but perhaps more important, rationalizes the irrational market by flattening out the kinks in the global market. In the Words of a Hedge Fund Legend . . . Barton M. Biggs, Managing Partner, Traxis Partners 1. How would you define a hedge fund? A hedge fund is a pool of money run by a small number of cocky, arrogant souls who charge outrageous fees including a carried interest and expect to shoot the lights out. 2. How or why did you get started in the industry? I began running a fund for Alfred Jones and the first hedge fund A.W. Jones & Co. back in 1964 when I was an analyst at E.F. Hutton & Co. 3. What hedge fund strategies do you use? I am a macro hedge fund manager and am inclined to concentrate on financial assets which I consider to be my circle of competence, in other words I don’t dabble in commodities and currencies. 4.
Success and Luck: Good Fortune and the Myth of Meritocracy by Robert H. Frank
2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, attribution theory, availability heuristic, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, carried interest, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, en.wikipedia.org, endowment effect, experimental subject, framing effect, full employment, hindsight bias, If something cannot go on forever, it will stop, income inequality, invisible hand, labor-force participation, labour mobility, lake wobegon effect, loss aversion, minimum wage unemployment, Network effects, Report Card for America’s Infrastructure, Richard Thaler, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Rory Sutherland, side project, sovereign wealth fund, Steve Jobs, The Wealth of Nations by Adam Smith, Tim Cook: Apple, ultimatum game, Vincenzo Peruggia: Mona Lisa, winner-take-all economy
You wouldn’t think he’d have much to complain about. But, to hear him tell it, he’s beset by a meddlesome, tax-happy government and a whiny, envious populace. He recently grumbled that the U.S. middle class has taken to “blaming wealthy people” for its problems. Previously, he has said that it might be good to raise income taxes on the poor so they had “skin in the game,” and that proposals to repeal the carried-interest tax loophole—from which he personally benefits—were akin to the German invasion of Poland.19 Surowiecki went on to note that other wealthy executives have been voicing similar complaints. The venture capitalist Tom Perkins and the Home Depot cofounder Kenneth Langone, for example, each recently likened populist criticism of the wealthy to the Nazis’ attacks on the Jews. Schwarzman and others have also been channeling vast sums to political action committees that lobby for still lower top tax rates and even less strict business regulation.
Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider
Asian financial crisis, banking crisis, Bretton Woods, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K
It also makes sense to insist that firms receiving aid issue senior debt to the government with rights over all other bonds, etc., they have outstanding. That’s to make sure some money comes back right from the start and that managements cannot keep all the earnings for themselves by reducing accounting profits and paying themselves more. To recapture some of the broader market gains flowing from the injection of public money, one could place a modest new tax on interest, dividends, capital gains. “Carried interest,” the ludicrous special tax break for private equity and hedge funds that not only Republicans but Senator Schumer and other Democratic Congressional leaders continue to defend, should go as part of any political deal on a bailout. It is beyond crazy to ask American workers to subsidize firms that will soon be back trying to break up their firms and throw their rescuers out of work. And finally, obviously, it is necessary to re-regulate.
Affordable Care Act / Obamacare, Bernie Madoff, big data - Walmart - Pop Tarts, call centre, carried interest, cloud computing, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Emanuel Derman, housing crisis, illegal immigration, Internet of things, late fees, medical bankruptcy, Moneyball by Michael Lewis explains big data, new economy, obamacare, Occupy movement, offshore financial centre, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price discrimination, quantitative hedge fund, Ralph Nader, RAND corporation, recommendation engine, Sharpe ratio, statistical model, Tim Cook: Apple, too big to fail, Unsafe at Any Speed, Upton Sinclair, Watson beat the top human players on Jeopardy!, working poor
Credit card defaults leapt to record highs. The human suffering, which had been hidden from view behind numbers, spreadsheets, and risk scores, became palpable. The chatter at Shaw was nervous. After the fall of Lehman Brothers in September of 2008, people discussed the political fallout. Barack Obama looked likely to win the election in November. Would he hammer the industry with new regulations? Raise taxes on carried interest? These people weren’t losing their houses or maxing out their credit cards just to stay afloat. But they found plenty to worry about, just the same. The only choice was to wait it out, let the lobbyists do their work, and see if we’d be allowed to continue as usual. By 2009, it was clear that the lessons of the market collapse had brought no new direction to the world of finance and had instilled no new values.
For the Love of Money: A Memoir by Sam Polk
Maybe what I’d thought was talent was simply being in the right place at the right time. Wall Street started to look less like a bunch of smartest-guys-in-the-room and more like a group of men who’d secured a seat in a ring of chairs surrounding a huge pile of money, a pile that was growing not because of their skill, but because that’s what money did. The system was structured—through monetary policy, carried interest deductions, corporate tax breaks, and industry lobbyists—to ensure it. That might not sound like a crushing realization, but for me it was. I knew Wall Street wasn’t about doing something meaningful with your life, but I had seen it as a great coliseum for my young ambitions. Now it looked less like a meritocracy than an oligarchy. People were referred to not by their accomplishments but by the size of their bank accounts.
The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian
Airbnb, balance sheet recession, bank run, barriers to entry, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve
This is not just about revisiting approaches and mindsets that result in excessive rigidity and austerity, and do so by chronically underestimating the size of the negative fiscal multipliers and the need for greater policy responsiveness—that is, the extent to which fiscal cuts unleash a dynamic that causes a disproportionately large reduction in overall aggregate demand. It is also about using tax and expenditure measures more actively to improve the quality of spending without unduly impacting the incentives that fuel innovation and entrepreneurship. In the United States, for example, this would include—going from the least to the most controversial—closing tax loopholes and cascading exemptions, increasing the taxation of carried interest earned by private equity firms and hedge funds, reforming inheritance taxation, streamlining home mortgage subsidies, and a higher marginal tax rate for the highest-income earners. It would also involve decisive steps to modernize a system of corporate taxation that is littered with anomalies, distortions, and misaligned incentives that undermine rather than promote economic growth—including by encouraging firms to spend a lot of money on “inversions,” that is, the purchase of foreign entities in order to geographically shift and reduce tax burdens while keeping productive operations as is.
Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano
banking crisis, banks create money, barriers to entry, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, floating exchange rates, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, open economy, pension reform, price stability, rent-seeking, school vouchers, seigniorage, trade liberalization, women in the workforce
Ecuador: Quarterly Performance of the Main Components of the Current Account of the Balance of Payments (US$ million), 1998.1–2001.4 US$ million 113 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 –200 –400 –600 –800 –1,000 –1,200 –1,400 –1,600 –1,800 Dollarization announcement 1 2 3 4 1998 1 2 3 4 1 2 1999 3 4 2000 Quarterly, 1998–2001 Oil exports Other merchandise exports Other current-account items Source: Central Bank of Ecuador. Merchandise imports Interest due 1 2 3 2001 4 114 CRISIS AND DOLLARIZATION IN ECUADOR new commercial-bank loans). Moreover, in November 2000 the banking authorities eliminated a ceiling on fees that banks could change borrowers in lieu of interest, and removed a requirement that banks make provisions on loans carrying interest rates higher than 18 percent. In December 2000 the government transferred US$137 million to the Deposit Insurance Agency to enable it to make payments to insured depositors. In January 2001 the Central Government on-lent funds from the CAF to augment the resources of the bank liquidity fund, and made the Central Bank’s liquidity recycling facility fully operational. These changes persuaded the banks to increase lending in early 2001, contributing to the recovery.
affirmative action, Affordable Care Act / Obamacare, Bernie Sanders, Bretton Woods, carried interest, clean water, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, moral hazard, mortgage debt, obamacare, passive investing, Ponzi scheme, prediction markets, quantitative easing, reserve currency, Ronald Reagan, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War
The thinking here was that in the early eighties, with so many baby boomers now in their prime earning years, the Reagan administration would hike payments to build up a surplus that could in twenty or thirty years be used to pay out benefits when those same baby boomers reached retirement age. The administration accepted those proposals, and the Social Security tax rate went from 9.35 percent in 1981 to 15.3 percent by 1990. Two things about this. One, Social Security taxes are very regressive, among other things because they only apply to wage income (if you’re a hedge fund manager or a Wall Street investor and you make all your money in carried interest or capital gains, you don’t pay) and they are also capped, at this writing at around $106,000, meaning that wages above a certain level are not taxed at all. That means that a married couple earning $100,000 total will pay roughly the same amount of Social Security taxes that Lloyd Blankfein or Bill Gates will (if not more, depending on how the latter two structure their compensation). So if you ignore the notion that Social Security taxes come back as benefits later on, and just think of them as a revenue source for the government, it’s a way for the state to take money from working- and middle-class taxpayers at a highly disproportional rate.
The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein
asset allocation, Bretton Woods, British Empire, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, German hyperinflation, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Harrison: Longitude, Long Term Capital Management, loss aversion, market bubble, mental accounting, mortgage debt, new economy, pattern recognition, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, transaction costs, Vanguard fund, yield curve
Treasuries can be bought at auction directly from the government without a fee, allowing you to manufacture your own “Treasury Fund” at no expense. (You can reach Treasury Direct at 1-800-722-2678 and www.publicdebt.treas.gov/sec/sectrdir.htm.) Even if you are purchasing a Treasury at auction through a brokerage firm, the fee is nominal—typically about $25. For a five-year note worth $10,000, this equals an annual expense of 0.05%. • High-quality corporate bonds and commercial paper. Corporates not only carry interest rate risk, but also credit risk. Even the highest-rated companies occasionally default. How often does this happen? Very rarely. According to bond-rating service Moody’s, since 1920 the rate of default for the highest-rated AAA bonds was zero, 0.04% per year for AA-rated, 0.09% for A-rated, and 0.25% for BBB-rated. BBB is the lowest of the four “investment-grade” categories. These categories are a tad deceptive, since, for example, it is highly unlikely that an AAA-rated bond would suddenly default—it would likely undergo successive downgradings first.
Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It by Lawrence Lessig
asset-backed security, banking crisis, carried interest, cognitive dissonance, corporate personhood, correlation does not imply causation, crony capitalism, David Brooks, Edward Glaeser, Filter Bubble, financial deregulation, financial innovation, financial intermediation, invisible hand, jimmy wales, Martin Wolf, meta analysis, meta-analysis, Mikhail Gorbachev, moral hazard, place-making, profit maximization, Ralph Nader, regulatory arbitrage, rent-seeking, Ronald Reagan, Silicon Valley, single-payer health, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, WikiLeaks, Zipcar
People working within this system can thus believe—and do believe—that they’re doing nothing wrong by going along with how things work. Sometimes this going-along produces benefits that seem venally corrupt. Because of a loophole in the tax system (one that has existed since the 1960s), managers of hedge funds don’t pay ordinary income tax on the money they earn from hedge funds. Instead, their “carried interest” gets taxed at 15 percent.32 Thus, though the top ten hedge fund managers in 2009 made, on average, $1.87 billion, they paid a lower tax rate on that income than their secretaries.33 Obama promised to change this. But that change was blocked. Its very hard not to understand the very richest in our society enjoying the same tax rate as individuals earning between $8,000 and $34,000 as anything other than a kind of venal corruption.
3D printing, accounting loophole / creative accounting, additive manufacturing, Airbnb, algorithmic trading, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, interest rate derivative, interest rate swap, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative ﬁnance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund
Income that you earn by actually doing a job is taxed at a much higher rate than income you earn from your investments. Warren Buffett famously took on this issue in 2011 in a New York Times piece, noting that while the taxes he paid the previous year amounted to 17.4 percent of his income—or $6,938,744 total—the tax burden on other people in his office averaged 36 percent.32 (For his assistant Debbie Bosanek it was 35.8 percent.)33 That’s because Buffett makes money from things like “carried interest” on investments, capital gains from selling stocks, and so on. Like most billionaires and many millionaires, he declares very little “earned” income but a lot of asset wealth gains. As Buffett says, “these and other blessings are showered upon us [meaning, the rich] much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.”34 Most of us, however, make money from the pay we get working day jobs, which is taxed at a far higher rate (most middle-class people fall into a 15–25 percent income tax bracket and then pay high payroll taxes to boot).
Debt: The First 5,000 Years by David Graeber
Admiral Zheng, anti-communist, back-to-the-land, banks create money, Bretton Woods, British Empire, carried interest, cashless society, central bank independence, colonial rule, corporate governance, David Graeber, delayed gratification, dematerialisation, double entry bookkeeping, financial innovation, full employment, George Gilder, informal economy, invention of writing, invisible hand, Isaac Newton, joint-stock company, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, oil shock, payday loans, place-making, Ponzi scheme, price stability, profit motive, reserve currency, Ronald Reagan, seigniorage, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transatlantic slave trade, transatlantic slave trade, tulip mania, upwardly mobile, urban decay, working poor
He argued that the fact that Deuteronomy allows usury under any circumstances demonstrates that this could not have been a universal “spiritual law,” but was a political law created for the specific ancient Israeli situation, and therefore, that it could be considered irrelevant in different ones. 29. And in fact, this is what “capital” originally meant. The term itself goes back to Latin capitale, which meant “funds, stock of merchandise, sum of money, or money carrying interest” (Braudel 1992:232). It appears in English in the mid–sixteenth century largely as a term borrowed from Italian bookkeeping techniques (Cannan 1921, Richard 1926) for what remained when one squared property, credits, and debts; though until the nineteenth century, English sources generally preferred the word “stock”—in part, one suspects, because “capital” was so closely associated with usury. 30.
Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das
affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative ﬁnance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond
Managers used privileged access to information about a company’s activities to lower the price, paving the way for a LBO that might benefit them. Where they were part of the LBO, existing management claimed to know how to fix or improve the business—but only if given a large equity interest. It was legal blackmail. Buyout firms collected a fee, typically 1 percent of each purchase. In addition, the buyout firm charged an annual management fee, around 1–2 percent, on the investors’ funds, managed plus 20 percent carried interest, receiving a share of any investment gains on disposition. They charged annual monitoring and director’s fees. During negotiations, Gerald Saltarelli, chairman of Houdaille, argued that KKR should not be entitled to any fee for buying the company. Kohlberg argued he was entitled to a fee: “I’m an investment banker.”17 Lenders got high interest rates as well as substantial fees. When junk bonds started to be used for financing LBOs, Drexel Burnham Lambert (Drexel) received a fixed fee (0.50–1 percent) of the amount raised, a commitment fee, an underwriting fee, an advisory fee, warrants over the stock, and expenses.
Security Analysis by Benjamin Graham, David Dodd
asset-backed security, backtesting, barriers to entry, capital asset pricing model, carried interest, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fear of failure, financial innovation, fixed income, full employment, index fund, invisible hand, Joseph Schumpeter, locking in a profit, Long Term Capital Management, low cost carrier, moral hazard, mortgage debt, p-value, risk-adjusted returns, risk/return, secular stagnation, shareholder value, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, zero-coupon bond
By the way, the previous approach to accounting for stock options was even odder: options granted with a strike price equal to the market price had no expense impact, but those granted below market would, in some cases, result in an expense every year thereafter that the underlying stock rose. There is equal confusion to be found in the FASB approach to accounting for derivatives, hedging, pensions, leases, and recognition of profits for carried interests, to name a few. Now companies can even record a profit if their debt gets downgraded. Sometimes accounting rules seem designed to carry us very far from economic reality, and some managers are quite amenable to taking investors on such a journey. Having analyzed the historical record, the second and far greater challenge is to determine “the utility of this past record as an indication of future earnings.”