Business

Conservatives are having epiphanies on tax rates (although not at WSJ).

Here’s the kind of article that I would only expect to find on the pages of Wall Street Journal. A tired and refuted by numerous studies argument for lower taxes on the rich. You see, the author argues, the rich pay a larger share of all income taxes (even more than they paid in 1950s) and thus their taxes should be cut.

In 1958, approximately two million filers (4.4% of all taxpayers) earned the $12,000 or more for married couples needed to face marginal rates as high as 30%. These Americans paid about 35% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans—many of whom would hardly call themselves wealthy—reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes.

This is what puzzles me most in such arguments – consistent and probably deliberate refusal to look at other factors of such disproportion, such as increasingly barbell-shaped nature of income distribution. Also, notice how artfully the author uses those making $209,000 to make a point about the rich paying too much taxes, and then turns around and points out that they are not rich at all. Lumping together those making $209,000 and the 0.01% is convenient for 2 reasons: You get to show how large a share of taxes paid by that group while still making an impression on the layman reader that it is the 1% that pay 50% share of all taxes. What share of that 50% is paid by the middle class (and I do consider those making $209,000 middle class) is not explored at all.

The following is a simplistic and extreme example just to illustrate my point. Suppose we have a town with 100 citizens. 98 citizens are making $10,000 and 2 citizens making $500,000: At the flat rate of 35% the 98 guys’ share of total income taxes would be $10,000*98*0.35=$343,000 and the 2 rich guys’ share of total income taxes would be $500,000*2*0.35=$350,000 – more than 50%!! Outrageous, if you dismiss the fact that the 2 guys are making 50 times more than those 98 moochers.

Now imagine that the income is more evenly distributed: 30 guys make $10,000; 60 guys make $20,000 and 5 guys make $100,000 (notice that the size of the total pie didn’t change). Now the share of the top bracket would contribute 5*$100,000*0.35=$175,000. And the share that all others would contribute – I’ll spare you the calculation – $525,000. Could it be that the rich paid less total share of taxes during the times when the income distribution was more even? As was the case in the 1950s?

These back of the envelope calculations would be even more compelling if I used the true rates. In reality, the bottom 30 guys pay no taxes at all (because they are too poor to pay any taxes); the top 5 guys pay 15% (as in capital gains), and the burden of taxation is being carried by those 60 guys in the middle. Since those 60 guys work for a living – they still would pay 35% rate and would generate $420,000 in taxes; but the top 5 guys would pay only $75,000 in taxes. Not only the burden is being carries entirely by middle class, we are not even generating the same amount of tax revenues as we would if everyone paid the same rate.

At this point 2 clashing camps emerge: those who insist that the bottom 30 guys pay their share and those who insist that the top pay the same share as everyone else. I’m in the latter camp. In fact I would be willing to entertain the idea of a flat tax for everybody, as long as 2 conditions are met: capital gains are taxed at the same rate as ordinary income and the bottom guys are paid decent wages, so that paying 35% tax would not break their backs. But because I find that raising minimum wages to a satisfying level is an impossible feat (politically and practically), I, being realistic, simply advocate for raising the taxes on capital gains. And that’s where cries of class warfare begin to emerge. And that’s where I move to my next argument: Why is it that making money on money is supposed to be more sacred and revered than working for wages? Why are “entrepreneurs” (I use quotes, because I do not find anything entrepreneurial about investors who don’t produce anything and more often than not risk someone else’s money) more valuable members of society, as evidenced by tax rates, than teachers and nurses? If top bracket insist that they are “job creators”, shouldn’t Walmart workers, office workers, accountants, IT and other clock punchers insist on being called “business facilitators” and demand equal respect?

If this still seems like a sure path to socialism (or a “road to serfdom”) you have missed some recent epiphanies on the right. Here’s the quote from a recent American Conservative magazine article:

 A capital gains tax rate (making money off money) that is lower than the earned income rate (making money off work) is just not fair. Bestowing that rate on hedge-fund managers through a specially designed loophole is just not fair. Allowing the rich to take mortgage deductions for second and third homes, or for homes worth over $1 million, is just not fair. Allowing business owners like me to take myriad deductions that our employees cannot take is just not fair. But, most of all, allowing the wealthy to pay very low tax rates while interest on the war debt accumulates, deficits continue, and middle-class incomes deteriorate is just not fair.”

At conservative National Review magazine Ramesh Ponnuru seems to be getting a grip on reality: Especially refreshing is this passage:

“The Republican story about how societies prosper — not just the Romney story — dwelt on the heroic entrepreneur stifled by taxes and regulations: an important story with which most people do not identify. The ordinary person does not see himself as a great innovator. He, or she, is trying to make a living and support or maybe start a family. A conservative reform of our health-care system and tax code, among other institutions, might help with these goals. About this person, however, Republicans have had little to say.”

Even William Kristol at the Weekly Standard is seeing the light:

“After all, surely Republican members of Congress understand there’s something crazy about appearing to fight to the death for a tax code in which Mitt Romney and others pay a 14 percent tax on millions of capital income​—​while silently allowing the payroll tax on labor to go up from 13.3 percent to 15.3 percent for all the working stiffs?”

Advertisement

The Business of Losing an Election

“The base and the donors went apocalyptic (on Obama) over the last few years and that was exploited by a lot of people from the conservative world. I won’t soon forget the lupine smile that played over the head of one major conservative institution when he told me that our donors think the apocalypse has arrived.” David Frum.

The most repudiated idea this election cycle is that money can buy quality product.

Romney’s loss last week has opened a peek into the Republican mentality and offered a great study of how they think and operate. Republicans approach elections like a business transaction. Their party operatives and their billionaire donors outsourced the campaign to vendors (Super PACs, unscrupulous pollsters). Donors with money met smooth-talking consultants with promises and sealed their own fate.

Continue reading →

Lehman anniversary

This is an entry from my trading journal from Sep 15th 2008:

Well, Lehman filed over the weekend. No one wanted it without the gov’t guarantee and Fed didn’t want to backstop this time. This is a once in a lifetime event. I can’t even begin to describe the feel in the market right now. The levels that I’m seeing and the volatility are unprecedented. IG/HY/CMBX are wider by unseen before levels. I guess I picked the wrong day to quit sniffing glue.

Bill Gross is wrong again.

I know, I should be focusing on politics these days, but I just can’t but marvel at the sheer lack of common sense of some of the world’s best asset managers. Bill Gross, a legendary bond trader at PIMCO, has not had his top game lately and he keeps sticking to the losing trade. As some of you may know Bill Gross has been an inflation fiend for years now, predicting soon-to-come inflation back in 2008. And then in 2010. And then in 2011. And then again now. You can check current inflation data here, as you can see it’s under 2% as of July 2012. But he’s been wrong so many times before why should we listen to him now? I guess one day he will be right, but as a matter of coincidence, not as a matter of insight and expertise. I’d give him a few more years though.

This is one of the best commentary that I saw arguing that inflation isn’t coming anytime soon. I just don’t understand why everyone is puzzled by it.

“What the economy really needs for a full recovery is time and stability. Once U.S. banks have cleaned house and rebuilt their balance sheets, once consumers have their debt under control and their home values have stopped falling, and once companies have to start putting their cash to work, spending will pick up.”

Perhaps this what sums up my thinking for the last 4 years – I just thought about the delevering of both banks and individual homeowners and as I looked at the landscape it became perfectly clear to me – and mind you I’m not an economist or a venerated bond trader, I’m just an average observer – that it will take a long time for a turnaround and consumer spending to pick up and thus the ultimate inflation. I’m just amazed that people like Bill Gross (who is not running for political office and has no reason to scare the public with upcoming inflation) can’t grasp such simple truth. Perhaps, he’s still talking his book, but I thought he already took his Treasury position down. Maybe he’s trying, like a broken clock, to be finally right in the upcoming years. The fact that inflation will come eventually doesn’t make him a prophet or an insightful and thoughtful economist. Every fool in the industry in 2006 knew that the market was gonna crash, the trick was to know when exactly and on what scale.

Here’s one quote from his article:

If the dancing has slowed down, then the reason is not just an overweight partner. It’s that the price of money (be it in the form of a real interest rate, a quality risk spread, or both) is too low. Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it. When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over.

So that’s his argument for the upcoming inflation? System is stalled that’s why the inflation is coming?

He then goes on to say that “by historical models 0% interest rates should inevitably lead to dynamic economic recovery”. But did those historical models account for the massive debt plaguing potential borrowers? He seem to focus on the one side of the equation – banks flush with cash with nowhere to put it – and the notion that too much cash in the system will lead to inflation. It sure will – if it’s spent. But who is there to spend it and on what? He himself said there’s no yield out there and the potential borrowers (who would spend it) are overleveraged. To me that’s the answer that the inflation is not coming anytime soon.

“But what about the Chinese?” – some would say. “Don’t they hold a trillion dollars of US Treasuries? What if they stop buying it?” That’s a good question. If the Chinese stop buying Treasuries, or start demanding a higher yield – that can certainly spur inflation. But why would they do it now? Why didn’t they demand a higher yield when the world was coming to an end in 2008, 2009 and every year since then? They had plenty of opportunity to demand a higher yield before and they didn’t. What’s to change that dynamic now?

 The solution to a heavily indebted borrower and consumer is a slow, step by step process of deleveraging. This will take years, perhaps even a decade. Underwater homeowners will not get a refi or a principal reduction because of the absence of mechanisms to do it on a massive scale, uncooperating servicers and banks unwilling to refinance. So the consumers will not go out and buy a 5th plasma TV and stock up on other goods until their house values will meet their outstanding mortgage balance. So, if it’s not the American consumer and not the Chinese then who? Who will bring about the inflation that conservatives like Paul Ryan and bond masters like Bill Gross have been warning us for years? What will generate it?

Time will. Mortgage servicers are a bottleneck for foreclosure relief, and banks are the bottleneck to healthy lending. Money, received from the Fed for free, is sitting on banks’ balance sheets and the inventory of underwater mortgages has no way of resolution other than time. A long time.

That’s my trade and I’m sticking to it.

Wall Street vs. Regulators

“Herod: I’ll tell you what, I’ll be a Good Samaritan. What’s the cheapest gun you got? Not in a case. I mean the cheapest piece of worthless crap you have in the whole miserable store.

Kid: All right. (Brings out the cheapest gun and slams it on the counter). 5 bucks.

Herod: Sold!

Kid: (starts putting bullets in the gun)

Herod: What are you doing? Preacher here’s got the Lord on his side. He only needs one bullet. Just one. Otherwise he might be tempted to shoot his way out of town.”

The Quick and The Dead.

The current dynamics of the regulatory overhaul is a depressing development. While I’m normally quick  to criticize regulators, and for good reason, I also have to admit that monetary deprivation of such agencies by Republicans, as evidenced by budget cuts for CFTC, place some blame on anti-regulatory forces in Congress. Regulators that are currently entrusted with the task of policing Wall Street are facing a well-funded, well-connected and politically shrewd beast.

In essence, regulators are not writing the rules for Wall Street. Wall Street is writing the rules for regulators.

A few months ago, for example, the CFTC was given the power to oversee derivatives and the futures markets. At the same time the Congress plans to cut $25M (a 12% cut form a year before) from CFTC budget in a time when they desperately need more resources to effectively accomplish their new responsibilities. The regulators have resource allocation problem that will prevent them from properly enforcing their mandate.

It is remarkable although not surprising that the most restrictive language in the bill came from Wall Street lobbyists. What’s more amusing is to hear the authors of the bill vying for fair and effective regulation, offering suggestions on how that sort of regulation should be achieved and then cutting funding that would undermine the implementation of those very suggestions. This is schizophrenic!

The new appropriations bill carves out very specific amounts to be spent on very specific assignments. For instance, the Republican lawmakers are absolutely certain that to update the crumbling IT infrastructure at CFTC would cost $32mln. The authors of the bill also demand that before regulators implement anything they must conduct a comprehensive quantitative analysis of the impact of the rules. Shouldn’t the public, by the same logic, demand that before lawmakers make such definitive decisions about how much money the regulatory agencies will need, they, too, should conduct a thorough analysis of the needs of those agencies? I am very curious to know how they came up with the figure of $32 mln to revamp the CFTC antiquated computer systems. Do they expect regulators to hire new IT personnel, buy new equipment, write/purchase new software, not just any software, but the kind that would effectively monitor a number of important markets, including high-frequency trading (HFT), an obscure but powerful Wall Street niche that commands the brightest minds and the thickest purse? And do they also expect the CFTC to conduct a thorough analysis of the possible consequences that may harm the business, a grotesque request in itself, and report the results to Congress in 30 days? And the most curious question of all, is Wall street ready to open their books and submit their HFT trading codes to regulators in order to ensure the analysis they themselves insisted upon is truly “thorough”? Are you, like me, suspecting that no matter what kind of results the CFTC submits, the Wall Street (via Congress) will never be satisfied?

I think it’s a brilliant business model for Wall Street. First, it doesn’t get any headlines – do you expect an average person to read anything that has ‘regulatory’ and ‘appropriations bill’ in it? Second, you can pass as many as 100 tough Dodd Frank bills and placate the public, but then quietly get to work on carving loopholes, exceptions and if that isn’t enough, just starve the damn beast of the funds! Wall Street arms itself with heavy sophisticated weaponry (no amount of money and resources are spared when building a high-frequency trading desk, it’s a multi-billion dollar business; and no amount of money is spared on lobbyists), then, with the complicit help of Republicans in Congress, they deliberately put themselves into position of handing out weaponry to their watchdog, and, surprise, hand him an old 19-century pistol. And then, to add insult to the injury, they also demand the watchdog to conduct an analysis, a thorough analysis, not just and “administrative check”, of what kind of harm that 19-century pistol can wreak on fragile Wall Street “lemonade stand”.

Even during Wild West times, so revered in American mythology as the time of true rugged individualism and unfettered capitalism, not even a conniving villain had the chutzpah to demand the sensitive treatment. If you love allegories, like I do, there’s a fitting scene from The Quick and The Dead, where Gene Hackman (Herod) is buying a gun for his dueling opponent Russell Crowe (Cort). Except that Herod doesn’t demand Cort to be gentle.

http://www.youtube.com/watch?v=6RdrYt1eFGk

Our regulators are no Cort. They have not been trained to shoot. Especially with one bullet.

Libor Fixing Scandal in the Grand Scheme of Things

“Save me from these evil deeds before I get them done.” Fiona Apple

The Libor fixing scandal is really not a very entertaining story. It’s a boring scandal. There’s no evil masterminds, no clandestine operations. Calling it a sham would give real sham a bad name. Fixing the Libor is as simple as tweaking the golf ball closer to the hole. It comes down to this: Libor rates are what I say they are.

The traders who were fixing the Libor didn’t think they were doing something wrong. Everyone else was doing it, so why should they be any different? Why stick your neck out? In such a high-five, fratboy culture it’s a bad taste to stand out. They don’t even have to be scheming bad guys for participating in the fixing. There was simply no coherent alternative mechanism to report those rates independently. If they don’t play the game the way everyone is playing it then their book will take a hit and they won’t get a bonus. But there’s a family to feed, kids to send to college, mortgage to pay. The little tweak here and there, in the grand scheme of things, wouldn’t do much damage. The accounts skimmed of a few basis points won’t even notice it and if there’s no victim there’s no crime. Add to this the desire to “not look bad” and fear of being “out of the loop” and you have a perfect mix that makes otherwise good guys do bad things. And if fudging the numbers is rewarded the incentive becomes even stronger. The reward is personal and immediate and the results of your actions are tangible. The loss is borne by many customers who won’t even notice that they have been shortchanged. I mean what are the benefits to blow the whistle? The participants are like members of a small cult – if you’re in on it you get the benefits, if you speak out you’ll be ridiculed and ostracized, besides whom are you going to complain to – the Fed? The SEC? Nobody wants to be a martyr, especially for such an obscure and unsexy, to an average observer, matter. If there’s no upside in exposing the weakness of the system to the feds, one will find an upside in exploiting these same weaknesses to his advantage. And try to explain to the general public why they should care about a few corporate investors being scammed of a few basis points on their investments when people lose their homes and jobs left and right? It’s not like selling toxic securities to unsuspecting customers, for Christ’ sake!

The more interesting story here is how this sort of “enchantment” has spread to the regulatory quarters. After all it’s hard to blame bankers for this sort of behavior – that’s what bankers do, they are in business to exploit every opportunity to make money.

 The emerging story now is that the Fed and Bank of England might have known about the fixings. If Bob Diamond’s reasoning goes along the lines: I was just of many, we didn’t want to stick our neck out, then what is the reasoning for the Fed for not to have done anything? What was the risk for the Fed to get involved? I really don’t know why regulators didn’t do their job, or rather, I have many reasons that come to mind. The best analogy I would use to describe their actions is that of parents of a misbehaving child on the plane, careful not to take any drastic measures to rein him in and subject everyone to even more annoying cries. Sure, they have powers to discipline but it would create noise, and they just don’t want to face those disapproving passengers and would rather keep the whole thing as is. Child, of course, is perfectly aware of this kind of dynamics and is exploiting it with impunity.

But there’s some twisted beauty in the entire predicament. Everyone looks bad or at the very least disingenuous.  Republicans, no friends of regulations, are now going to investigate why the regulators weren’t tough enough. “Some news reports indicate that although Barclays raised concerns multiple times with American and British authorities about discrepancies over how Libor was set, the bank was not told to stop the practice,” Representative Randy Neugebauer, a Texas Republican and the head of the House oversight panel, wrote in the letter to the the NY Fed looking for transcripts of phone calls between Fed and Barlcays officials. Such tough stance is commendable but how can we be sure that there’s no politics involved in this sudden conversion, given his  and other Republican’s historical hostility towards regulations?

Wall Street is gleeful every time the public focus shifts onto regulators.  You know, we weren’t policed like we were supposed to, what did you expect us to do – follow the rules unsupervised? It’s reminiscent of last summer’s British hacking scandal where Rupert Murdock-controlled media defended the actions of those involved in the hacking along the lines: “Sure there were some misdeeds, but look at the police! Why didn’t they police us? How could they let us do this?” There was nobody there to “keep me from these evil deeds”. Got it? Now leave us alone, if you can’t even enforce your own rules.

That’s a tactical mistake. The fact that regulators have tacitly approved or simply decided not to intervene into business as usual does not let bankers off the hook. In fact it kills one of their major arguments about regulations being too aggressive. As soon as the public sees that regulators didn’t do their job it becomes harder to convince us of the Wall Street-peddled notion that regulations are an impediment to a normal flow of business. All the cries of heavy-handed regulators are a fantasy, simply because such regulators never existed. Bankers can’t have it both ways: they either suffer from too much regulation in which case they admit that regulators actually have some pull; or they proceed to do their business because regulators are too weak in which case their complaints about regulatory hurdles and heavy government oversight that harms business are a simple disingenuous posturing. You can’t claim to be a victim of watchdogs and at the same time blame watchdogs for being dumb, inept and disorganized. And if you claim to be a victim of dumb, inept and disorganized watchdogs then you are simply too stupid to be in this business.

Righteous indignation of the public has worn itself out at this point. While this scandal affects trillions of dollars of investments that are reliant on Libor rate, the headlines of wrongdoings on Wall Street fail to shock at this juncture. This is business as usual. The beauty of Wall Street crime is that there’s almost never a smoking gun, or a dead body. If a wrongdoing occurs the bosses blame the subordinates, the subordinates blame the bosses and the corporate lawyers find a technicality that absolves all parties.

The victims of this scandal are not average Joe Schmos who lost money on their mortgage, but major financial institutions and municipalities who invested in Libor-linked securities. If regulators, lawmakers and ordinary people can’t police the banks then those institutional investors are our last recourse. I wonder if some of them can find the will to engage with Wall Street in the following manner:  http://www.youtube.com/watch?v=mbwqeSV8Wc4

You think they’ll get the point?

Jamie Dimon wins this round.

After listening to Jamie Dimon’s testimony before Congress the other day I became less enthusiastic about Volcker Rule. No, I didn’t suddenly turn into a laissez faire supply-sider, I simply became more convinced that if such matter is entrusted into the hands of regulators we would have to be dependent on these regulators struggling with definitions, like what a hedge is. That would be too painful to watch.

I have to admit that, perhaps, capital requirements and other Basel III rules   can be more effective than outright ban on certain kinds of trades.

My comrades on the left might disagree. But think about it: banning something outright will simply ban it on paper but in reality such ban will not prevent smart and resourceful Street guys from finding ways around it. Even potheads could for years find ways around the drug laws. Moreover, a sweeping ban will make a great excuse for the ever-complacent or complicit regulators to fall asleep again while giving the public the illusion of things being under control. Besides, show me any ban that has prevented people from obtaining/providing the illegal goods or services. What would prevent various exceptions and exemptions from being forced quietly into the legislation that renders the entire brick wall between deposits and trading desks useless?

Jamie Dimon and many others on Wall Street want regulations to be simple and effective. So do I. And so do regulators, I suspect, who are helpless in the face of complexity. Having capital requirements will be hard not to enforce simply because it’s quantifiable. All they have to do is build a spreadsheet where column B is needed capital and column C is actual capital, subtract one from the other and voila, there’s the list of those who meet the criteria and those who don’t. I’m being slightly facetious and simplistic, but you get the idea. Much easier than wrestle over definitions of what is a “directional trade” or a “macro hedge” with those who made a career out of twisting the terminology. Arguing over a definition of a “hedge” is a battle that the regulators, in their current state, can’t win.

It was almost comical to see senators asking Jamie Dimon his opinion on how to regulate the financial system. Here’s Jamie Dimon’s idea of sensible regulations: Proper capital requirements, proper liquidity, proper risk management and risk controls. It does not sound unreasonable at all. I could almost sense the slight disappointment among some (mostly Republican) Senators as they haven’t received anything less of “let the market take care of it”. The whole Senate testimony was worthy of a Monty Python’s skit in its absurdity, as the only voice of reason was coming from a Master of the Universe (Tom Wolfe accurately described this dynamic almost 25 years ago in his Bonfire of the Vanities). I wonder what was going on in Jamie Dimon’s mind at that point, but if I had to speculate I’d say disbelief, amusement mixed with a breathtaking realization that he’s the sole de-facto arbiter of a system that affects millions of people and trillions of dollars.

Meanwhile, capital requirements under current Basel III rules would have prevented Goldman from buying CDS contracts from AIG, for example. Or at least they would require Goldman to post higher capital in these kinds of trades to account for the risk of AIG becoming insolvent. While we can’t be sure such a trade would not have been done, we can be sure it would have been much smaller in size.

If OTC derivatives have been cleared through the exchange, there would be no high-stakes “who has what” poker game going on between the biggest financial institutions, trying to figure out who has what in ‘Assets available for Sale’ section of the balance sheet or other hard to decipher nicknames given to toxic assets. These holdings would have been more transparent. Thus, as Jamie Dimon rightly pointed out in his testimony, JP Morgan would not have been asked to take the bailout package, as everyone would see their minimal exposure to the crappy assets, compared to other firms. Thus, it is quite possible, that the bailout could have been smaller and more targeted (to Citi and BofA) and not sweeping and imposing.

Look, I’d love to have regulators who are smart and capable of doing their job, but the truth is, they will always be at least one step behind, because they don’t have the capacity and the wits to anticipate what is the next product to be invented on the Street. Regulators are a reactive force, not proactive. Lawmakers proved to be no better at understanding the complexities of the current financial system and dealing with the repercussions. Good intentions are a poor excuse. What we care for are the results.

We also would like to offer some advice to Jamie Dimon and other Wall Street alpha dogs – be a mensch, stop being offended at being called names. It’s not Obama’s job to become friends with Wall Street. He plays his game – you play yours. At this point of their careers neither Jamie Dimon, nor Lloyd Blankfein nor many of others on top of the Wall Street hierarchy care about money – they care about their legacy. Right now none of them look like socially conscious tycoons of the 1900s, no strangers to consolidation and market manipulation, sure, but who nonetheless understood the long-term dynamics of the society and came to rescue the system with their own money when the circumstances called for it. And yet, the bar has been set so low, and in part by our own public servants, that even Jamie Dimon, a fox guarding the hen house, looks as having more integrity than the subservient watchdogs. As evidenced by ingratiating senators who are on Wall Street’s payroll, asking Dimon for advice on how to run things, all Wall Street’s powerful men’s grievances about unfair treatment look nothing more than a simple disingenuous posturing. Guys, let me break it to you: You run the freaking game! You don’t have to have a TV show (like Ace Rothstein in the Casino), or bring attention to yourself by verbal sparring with various politicians; you have to have the whole thing to be quiet. Please, no more displays of victimhood and defensive language. And I’d like to conclude by posing a question to Mr. Dimon to ponder: imagine a less sharp and more reckless man inheriting your job one day. Wouldn’t it be a fitting legacy for a man in your position to help build a system that is less dependent on someone having both superhuman qualities and spotless integrity and more dependent on built-in levers of control that work regardless of someone’s pedigree and ambitions?

Conservative case for taxes and regulations.

Damn, Joseph Stiglitz beat me to it. I have been working on the related topic of why the top 1% should also be worried about current income disparity.

It’s no secret to anybody that Republicans in Congress in general and the top 1% of earners in particular are no big fans of taxes and regulations. In this post I’d like to demonstrate that this is a rather short-sighted view and, out of their own sheer self-interest, they should be for higher taxes and government regulations.

Imagine, you are a billionaire and the economic reality around you has been rather, shall we say, anemic. But why should you give a fuck? You’re set for life, live in a gated community, have private security, household help – in other words with money you can theoretically shield yourself from daily struggles that the peons face every day. There are many reasons why you should (give a fuck), beginning from the fact that, if you’re a billionaire, your worries are of a different scale, namely, you want to close deals, sell products and make smart investments. None of it can be done in a vacuum. You need a solid consumer base, a partner on the other side of the deal, people who want to buy when you want to sell, the suckers at the poker table if you will! In order to be the king of the hill, you have to have the freaking hill! You have to have a vast and robust middle class whose wages are rising consistently year after year. Henry Ford was no fool when he paid his workers high salaries – so that they could buy his cars. The taxes have been falling for the last 30 years but that did not bring the promised prosperity and jobs to the middle class. Let’s admit that we tried it and it didn’t work.

I must also admit that the game that you played for the last 30 years is spectacular in its shrewd, take-no-prisoners ways: pushing for tax breaks and lobbying for favorable legislation, eliminating competition, skimming consumers. Congratulations, you won. Now you’re all dressed up and ready to play but there’s no one left to play with. Now you’re a lonely player at the poker table with mountains of chips in front of you, wondering why is it that no one wants to come and play with you. Maybe it’s because people have no more chips left. In real poker, as in most games, being the last guy standing is the most optimal and desirable outcome, because there are other tables and other games always readily available. But the point of a real life game is not to win the most chips, but to keep the game going, simply because we only have one table. Besides, taking chips and going home is anathema to any businessman worth his salt: chips are supposed to be working. Now that you have that picture of yourself with all the chips let me ask you: Will the dealer taking smaller rake from the pot (I’m drawing an analogy with smaller taxes here, for those who don’t play poker. The dealer takes part of every pot, a ‘rake’) offer real solution to the lack of players at your table?

Another, more mundane reason why you should support taxes is unpleasant visuals that can spoil your day, if you’re not a complete sociopath. Do you like seeing bums on the streets or on subway trains, or, especially heartbreaking, neatly dressed middle-aged, resumes in hand, standing in unemployment line? Neither do I. Conservatives’ standard solution to this kind of situations and other life’s misfortunes is personal responsibility and charity. I disagree. It’s hard to be personally responsible if you’ve been a victim of forces beyond your control: mental disability for example as is the case with many homeless, or mass layoffs. The problem with charity is that it’s selective and whimsy. While there’s no shortage of charity causes here in New York City, the problem is that they mostly target arts, children and breast cancer. Nothing wrong with this, of course, but you can see how many other areas worthy of charity get omitted because, let’s face it, some of them are not picture perfect. And in a bad bonus year even those “New Yorkers for Children” (my favorite moniker on emotionally manipulative scale, to be surpassed only by “New Yorkers for Puppies”) charities will take a back seat to personal priorities of an otherwise generous and vain Wall Street soul. As for the unemployed, I have yet to hear any conservative to explain what is exactly wrong with government hiring those people for useful projects? Because government is evil?

But we’re way past worrying about the homeless problem. At this stage we need a charity ball for the middle class. I’m afraid that such a task is insurmountable, even to Koch brothers and Warren Buffet combined. There’s only so many maids and drivers that they can hire.

Sometimes I think that I’m more conservative than conservatives because I prefer order to chaos, rules to anarchy, so that I don’t have to spend most of my waking hours solving logistical problems like dysfunctional or non-existent public transport, unsafe drinking water in the tap, malpracticing doctors. Which brings me to regulations.

“I can’t be bothered with that shit”. This is my favorite argument in support of regulations. Do you really want to spend valuable time experimenting in choosing the best vendor who sells the best meat, doctor who practices solid medicine, insurance provider that pays off? Especially if you work 12 hours a day? If we lived in the realm of neighborhood mom-and-pop shops (many conservatives still think that this is the world we live in), where you could just go to the other one down the street if the first one treated you unfairly then you could make that case. But unfortunately we live in towns where only 2 or 3 big vendors exist for any product. What is your recourse against, say, an insurance provider to whom you dutifully paid premiums for several years, and who refuses to pay off if an accident happens? Are you going to follow a classic conservative advice and go to another provider? No, you’re going to call your lawyer. Moreover, if you can do your own “testing” of the quality of meat, how are you going to know the promised quality of products that you have no expertise of measuring, like software, for example? Or how about products which questionable quality you can measure only after you’re no longer a consumer, like bad surgery or faulty car breaks? Or how can you be sure that the guy managing your 401(k) is not a crook? Do you want to spend months doing research, aside from your main job, making sure that the guy you’re entrusting your money to is not the next Madoff? And more importantly, who’s going to enforce business contracts that you enter into? Who is going to help you collect? Nicky Santoro?

Sports have strict rules. That doesn’t keep athletes and teams from succeeding. In fact that makes the game more exciting because it is the ultimate ‘let the best man win’ situation. The beauty of a fair competition is that no particular party has an advantage at the beginning of the game. There are stronger teams and weaker teams, of course, but they all play by the same rules. By the same token, I do not resent the fact that there are rich and there are poor, contrary to conservatives’ cries; I resent the fact that there are different rules for different classes, that the game is rigged.

Conservative insists on being left alone, but who is should provide that aloneness, that peace of mind, that mechanism that makes trains run on time, the streets lit up at night, the garbage picked up in the morning? Hire a guy to do that for you. Let that guy have enforcement powers if someone is out to screw you. Such guy is the government, whether you like or not, whether you admit it to yourself or not.

By the way, speaking of Nicky Santoro. What can be better to conclude my post than this insightful quote from the movie, where Nicky laments on how reckless the Mafia has handled the casino business:

“But in the end, we fucked it all up. It should have been so sweet, too. But it turned out to be the last time that street guys like us were ever given anything that fuckin’ valuable again.”