Friday, January 31, 2014

An Open Letter to Warren Buffett

Why is Warren Buffett offering $1 billion dollars to one person (out of 10 million entries) for selecting, in advance, the perfect 63 team winners of the NCAA Basketball Tournament - the Sweet Sixteen or March Madness? Why is the man who has been espousing "sensible investment strategies" for most of his probably six decades of experience suddenly hosting the most cockamamie gambling proposition ever offered? Is it time to call in Charlie Munger and tell him to put Mr. Buffett on a tight allowance with close financial supervision? Or does Mr. Buffett have some other ulterior motive?

On the face of it, the gambit has little chance of producing a winner. At the opening bell, March 3, contestants have to submit a slate of 63 winners of the sixteen days of college basketball playoffs.

Oddsmakers report the chances of going the distance and selecting all winning teams is about 1 in 5 billion, but Mr. Buffett is hedging his bet by buying insurance that it won't happen. If a winner gets close, Mr. Buffett will simply meet with the lucky contestant and "offer him or her a deal too good to refuse." Who really believes it will be a "her"?  Actually, don't bet against a "her" because it just might happen!

College basketball is supervised by the National College Athletic Association.  The NCAA supposedly discourages gambling on college basketball games. Did anyone at the NCAA comment on Mr. Buffett's major incentive to break NCAA rules? Or are we "winking, winking" again?

Other than teaching America's youth that gambling on college basketball bracket winners is the best investment of their intellectual endeavors for the next month, what are the lessons Mr. Buffett could be offering?

By collaborating with Quicken Loans, Mr. Buffett is demonstrating the power of outlandish gambling escapades as a marketing ploy. Not only does Quicken's CEO Dan Gilbert share in Mr.  Buffett's advertising limelight (PR by star-power association), but Quicken also gets the freebie email addresses of the potential 10 million entrants. Actually, they will get significantly more emails because many more will try to enter and never make it into the candidate pool - just suckered into the Quicken Loan email list pool.

In a recent op ed piece by billionaires Eli Broad and Richard Riordan (LA Times, December 27, 2013), we were told "it's not a sin to be rich." We were also told that society benefits when the rich create jobs, entrepreneurial ventures, and socially-beneficial nonprofits and charities. How is society benefitting in any way, shape, manner or form by Mr. Buffett's tossing out all of his sensible investing insight on a $1 billion marketing gamble?

Newly-appointed Maria Contreras-Sweet, prospective head of the SBA and founder of ProAmerica Bank, could have shown Mr. Buffett how even 10% of his NCAA gamble (how often have you seen those two words side by side?) invested in America's science, technology, engineering, or math business opportunities could make a significant difference in income and job prospects for our college students and graduates. But, no, Mr. Buffett is having a good time envisioning himself court-side, maybe with Spike Lee.

Wasn't Mr. Buffett the one who bemoaned the failure of our tax system to "level the playing field" between the tax burden faced by his low-income secretary/assistant and himself? Is it possible that Mr. Buffett is trying to demonstrate to us the true economic costs of income inequity and an unfair tax structure? Well, he's convinced me, but -- as evidenced by the drooling that has emerged among college basketball fanatics -- it would appear that his lesson might be way too subtle to have such a sensible desired impact.

Mr. Buffett certainly knows that huge financial incentives, like his wager, have an inevitable likelihood of diverting the attention of millions of young people away from meaningful and productive endeavors and toward the mad gambit that he has proposed. It adds no value to their education, creates no jobs, builds no infrastructure and provides essentially nothing of substance. 

Mr. Buffett's own advice and wisdom henceforth will be painted and possibly even tainted by this inglorious venture into financial farce.

Tuesday, January 7, 2014

The Alchemists

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin (The Penguin Press HC: April 4, 2013) provides a comprehensive sense of the challenges Dr. Janet Yellen will encounter as the new head of the U.S. Federal Reserve. Not only do you meet all of the personalities on the stage of international intrigue relating to the Great Recession, but you also get a sense of what is required to sustain the concept of “transparency” of decision-making within the Federal Reserve itself. Dr. Yellen was an advocate of greater communication of Fed discussion and decisions as far back as the Alan Greenspan years as Chair of the Federal Reserve System (1987 to 2006). Ben Bernanke took the helm from Greenspan in 2006 and will retire January 2014. The book carefully documents how Bernanke juggled the interests of domestic US financial monetary policy in our most challenging era of global financial stability.

The Alchemists is the story of the three biggest egos on the international stage when the proverbial sh*t hit the fan with the financial crisis of 2007. The three were Bernanke, King, and Trichet. The book documents the decision-making, negotiations, and disputes surrounding global responses to that crisis. It sheds light on the challenges of transparency and financial strategy in a fluctuating political reality. It shines a light on the human beings who occupy these temporal positions of power and responsibility and demonstrates the qualities we need in our appointed, if not elected, financial leaders.

Ben Bernanke was chair of the Federal Reserve Bank (2006-2013) and head of the Fed's Monetary Policy Committee, responsible for decisions about money supply, interest rates, and bond-buying under "quantitative easing" policies. Janet L. Yellen will succeed Bernanke February 1, 2014.

Mervyn King was Governor of the Bank of England (2003-2013). The current Governor is a Canadian, Mark Carney (2013). Alexander Darling was the Chancellor of the Exchequer (2007-2010), succeeded by George Osborne (2011).

Jean-Claude Trichet was President of the European Central Bank (2003-2011) and a member of the Board of Directors of the Bank for International Settlements (BIS). Mario Draghi (former Governor of the Bank of Italy from 2006-2011) succeeded Trichet as head of the ECB in 2011.

The European Union (EU) is the European Common Market, merging the interests of 28 national members. The European Council sets overall policy direction, while the European Parliament represents the interests of its citizens. The European Central Bank sets the monetary policy for the EU. In 2013, Daniele Nouy was named Chair of the Supervisory Board responsible for oversight of the European Central Bank. The Economic and Financial Affairs Council (EcoFin) is one of seven component councils of the EU and consists of the economic and financial ministers of the EU member nations. Marco Buti has been Director-General for Economic and Financial Affairs at the European Commission since December 2008.

Alex Weber was President of the German Bundesbank (2004-2011), succeeded by Jens Weidmann (2011).

Dominique Strauss-Kahn was Managing Director of the International Monetary Fund (2007-2011), succeeded by Christine Lagarde in 2011.

Henry Paulson was US Secretary of Treasury (2006-2009) and was succeeded by  Timothy Geithner (2009-2013). Geithner previously served as president of the New York (2nd District) Federal Reserve Bank (2003-2009). Paulson and Geithner were responsible for instituting the federal bailout of bankrupt banks thought TARP (Troubled Asset Relief Program).

The European Union’s counterpart to the US TARP bailout was the European Stability Facility (ESF) which was created in May 2010 as a temporary rescue mechanism for member states under the authority of the EcoFin Council. It was replaced by a permanent rescue mechanism, the European Stability Mechanism (ESM), which entered into force in October 2012.

The Bank for International Settlements (BIS), based in Basel, Switzerland acts as a bank for central banks in their pursuit of monetary and financial stability and fosters international cooperation in those areas. Jaime Caruana has been General Manager of BIS since 2009, while Christian Noyer has served as Chair of the BIS Board of Directors since 2010.   Since November 2003, Noyer has served as Governor of the Bank of France, where he chairs the General Council. Anne Le Lorier has been 1st Deputy Governor of the Bank of France since 2011.

The BIS Basel Committee on Banking Supervision developed Basel III, the global, voluntary regulatory standard on bank capital adequacy, stress testing, and market liquidity risk in 2010–2011.  Implementation of Basel III requirements are now scheduled beginning early in 2018.

Zhou Xiaochuan has been Governor of the People's Bank of China since 2002, where he has been in charge of the monetary policy of China. He also is a member of the Board of Directors of BIS.

The international community began collaborating among nations' finance ministers as the Group of 6 (G6) industrially-advanced economies in 1975 (US, UK, France, West Germany, Italy, and Japan). The addition of Canada made it G7 in 1976 and Russia made it G8 in 1997. It became G20 in 1999, representing the finance ministers and central bank governors from 19 major economic countries plus the European Union, represented by the President of the European Council and by the European Central Bank.

As the saying goes, “you can’t tell the players without a program.”  If anyone aspires to a corporate board of an international company, especially a financial institution, these today are the players and roles one needs to know and understand.  It is fascinating to see how councils, boards, and supervisory entities emerge over time to enable mere men/women and nations to address complex financial and monetary issues.  It is also intriguing to see and learn about the women (primarily economists) as there emerge on that same international financial stage. 

Monday, January 6, 2014

Dr. Janet L. Yellen to Head U.S. Federal Reserve System

On January 6, 2014, at about 6:00 PM in Washington, DC, Dr. Janet Yellen was confirmed by the Senate (in a 56-26 vote along party lines) and became the first woman to head the U.S. Federal Reserve System effective February 1, 2014 replacing Ben Bernanke. Dr. Yellen has been Bernanke’s Vice Chair since 2010 and thus is intimately familiar with the Fed policies to bolster the U.S. economy during the Great Recession through “quantitative easing” (QE or the Fed’s $85 billion bond-buying stimulus program that has served to prop up the American economy by keeping interest rates at abnormally low levels.

In 1967, Yellen earned a bachelor’s degree in economics (summa cum laude) from Pembroke College (which merged with Brown University in 1971. She earned her doctorate degree in economics at Yale University in 1971, then was an assistant professor at Harvard University from 1971 to 1976. She joined the Federal Reserve Board of Governors from 1977 to 1978 as an economist in the international finance division. From 1978 to 1980, she was a lecturer at the London School of Economics and Political Science, then joined the faculty at UC Berkeley in 1980.

Dr. Yellen is Professor Emeritus at the University of California at Berkeley where she was the Eugene E. and Catherine M. Trefethen Professor of Business and Professor of Economics and has been a faculty member since 1980.

She was named a member of the Board of Governors of the Federal Reserve System by President Bill Clinton and served from 1994 to1997. She left the Federal Reserve to become chair of Clinton’s Council of Economic Advisers from 1997 to1999. She also chaired the Economic Policy Committee of the Organization for Economic Cooperation and Development from 1997 to 1999.

Between 2004 and 2010, she served as president and chief executive officer of the Federal Reserve Bank of San Francisco (12th District) and then was invited by Bernanke to become his Vice Chair on October 4, 2010 for a four-year term ending October 4, 2014. Dr. Yellen simultaneously began a 14-year term as a member of the Board that will expire January 31, 2024.

She met George A. Akerlof while they both were working at the Federal Reserve in Washington in 1977. They were married in June 1978. Akerlof is a Nobel prize-winning economist and professor emeritus at the University of California, Berkeley. Their son, Robert Akerlof, was born in 1981 and currently is an assistant professor in economics at the University of Warwick in south-central England.

Until late August 2013, Lawrence Summers had been the front runner to replace Bernanke until a group of women economists and women’s advocates began a letter-writing campaign and targeted interviews with Senate committee members.  Principle anti-Summers arguments were that he was a key player in policies that contributed significantly to the Great Recession: primarily, the repeal of the Glass-Steagall Act, which removed the wall between banks and investment firms and thereby contributed to the creation of banks that were "too big to fail." Over 500 men and women, identified as public policy economists, signed a letter to President Obama citing her far better credentials.  Lawrence withdrew from consideration mid-September.

At the end of October 2013, Sen. Rand Paul (R-KY) threatened to block Yellen’s nomination unless Senate Majority Leader Harry Reid (D-NV) agreed to allow a vote on Sen. Paul’s legislation to audit the Fed.

On Thursday, November 21, 2013, Democrats used a rare parliamentary move (the so-called “nuclear option”) and changed Senate rules so that federal judicial nominees and executive-office appointments could advance to confirmation votes by a simple majority vote, rather than the 60-vote supermajority that had been the standard for nearly four decades. Majority Leader Reid had clashed for several years with Minority Leader Mitch McConnell (R-KY) over Republican filibusters of Obama’s agenda and nominees.

Also on November 21, 2013, the Senate Banking Committee voted 14-8 to approve Yellen’s nomination, winning the support of three Republicans on the committee.

Dr. Yellen is the first Democrat to win confirmation as head of the Federal Reserve since Paul Volcker in 1983 and will be the first female ever to lead a major international banking regulatory entity. While the Fed is an independent authority that operates on revenues generated from the financial entities that it regulates, it is facing increased scrutiny from both House and Senate. Yellen can expect to be pulled onto the carpet by both Congressional oversight committees in the coming year.

******

Federal Reserve website, The Wall Street Journal, UC Berkeley website, White House website, Warwick University website.)

For an interesting take on what it was like for Yellen to study under Nobel-prize winner James Tobin at Yale University, see the Rich Miller article, “Yalies Yellen, Hamada Put Tobin Twist Theory to Work in QE” (October 31, 2013) at http://www.bloomberg.com/news/2013-10-31/yalies-yellen-hamada-putting-tobin-s-twist-theory-to-work-in-qe.html

See also: Allan H. Meltzer, Professor of Political Economy at the Tepper School of Business, Carnegie Mellon University and author of A History of the Federal Reserve (Volume 1: 1913-1951, University of Chicago Press: June 2004. and Volume 2: Book 1: 1959 – 1961 and Book 2: 1970-1986, University Of Chicago Press: February 1, 2010).