Friday, April 24, 2009 - Posts
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Friday, April 24, 2009
Plot Holes: In their New Republic cover story divining Obama's "new theory of the state"--which turns out to be "Nudge-o-cracy," or having the state "monkey around with the choices people face, seeking to influence decision-making rather than mandate decisions"--Franklin Foer and Noam Scheiber declare that:
Obama has set out to synthesize the New Democratic faith in the utility of markets with the Old Democratic emphasis on reducing inequality. [E.A.]
They go on to describe Obama policymakers' shift in attitude since the Clinton administration:
In recent months, several of the architects of Clintonomics--Larry Summers, Gene Sperling, Rahm Emanuel--have reassembled to take another crack at creating broad-based prosperity. What's striking is the change in their thinking about how to pull it off.
In fact, the center-left had revised its economic theories while the bubble was still inflating. Beginning in 2004, the data gradually began to undermine the Clintonites' central assumption: that the benefits of growth would accrue to the poor and middle class. Their policies, it turns out, had only temporarily tamped down the income inequality that had been rising since the 1970s. Workers' wages had once tracked productivity growth. Now workers were producing more, but only the wealthy were reaping the rewards; everyone else's income had basically flattened out.[E.A.]
But Foer and Scheiber's description of Obama's attempt, in the face of these realities, to restore "the old Democratic emphasis" on reducing income inequality never gets around to giving us Obama's nudge-o-cracy plan for reducing income inequality. Just thought I would point that out! I suspect it's because there is no Obama nudge-o-cracy plan for reducing income inequality--which, I suspect, is because there is no conceivable nudge-o-cracy plan that could reduce income inequality in the face of the global economic forces of trade and increasing returns to skilled labor.
Obama at least claims to have a non-nudgeocratic plan, based on restoring the power of labor unions through the Employee Free Choice Act ("card check"). But a) the Employee Free Choice Act is dead in the water, for now, b) Obama doesn't seem to be pushing it very hard; c) the idea that signing up more workers in labor unions will reverse growing inequality (at least while maintaining prosperity) is wishful thinking untested. The backup EFCA mechanism for propping up middle class incomes--mandatory arbitration--is pretty much the opposite of mere "nudging." It's the direct mandating of wages by federal mediators. ... 4:08 P.M.
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Do the Federal Reserve and Treasury Department really think they can keep the results of the "stress tests"--i.e. which banks are in trouble and which aren't--secret until May 4? With no flurry of trading on insider knowledge? (Or is the idea that there will be so many flurries of insider trading that they will cancel each other out--i.e., nobody will know what to believe?) ... 12:08 P.M
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The best book review I've ever read, Mary McCarthy's amazing figuring-out of Pale Fire, is now online at New Republic ... 12:01 P.M.
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From the New York Times' non-probing April 5 story on Steven Rattner's ascension to auto czarito:
[I]n 2000, after a power struggle at Lazard, Mr. Rattner co-founded an investment firm, Quadrangle Capital, specializing in private equity investing focused on communications media. ... Quadrangle's funds have performed well, on average ... [snip]
One thing that is clear: Mr. Rattner knows how to make money. Not only has he stockpiled a personal fortune, but Quadrangle’s two private equity funds have performed well, despite some soured investments.
The first Quadrangle fund returned 15 to 20 percent, according to one investor. The second, which has yet to use all its capital to complete its investment portfolio, is already showing single-digit gains. ... [Emphasis added.]
Not so fast says author William D. Cohan, who claims to be an investor in Quadrangle's first fund. Writing in Fortune, Cohan notes that while the Wall Street Journal reported that the fund "fund delivered 'net annualized returns of 10.7%' to investors as of the end of 2008" (while the NYT had its "15 to 20 percent" gain) "It is very hard for Quadrangle's investors to see where the 10.7% IRR number comes from because it is based upon in part Quadrangle's subjective valuation of unrealized gains."
The key to understanding how the firm calculated the 10.7% IRR for the first fund rests with its fully audited valuation of the firm's unrealized investments. Some of these investments - such as those in NTELOS, Cinemark, a movie theatre operator, and Protection One, a home security-alarm company - are in the equity of publicly traded companies. Together these three companies alone represent 59% of the first fund's unrealized value as of December 31. The problem for investors in that fund - and the IRR calculation - is that in the first quarter of 2009, NTELOS' stock has fallen 32%, Protection One's stock has fallen 35% while Cinemark's stock has increased around 27%. The rest of the unrealized investments are in private companies that are valued through a series of generally accepted but purely subjective methodologies.
For instance, Quadrangle valued its equity investment in ONO, the Spanish media company, at $49.8 million as of the end of 2008, even though the senior debt of ONO trades at around 25 cents on the dollar, implying that investors don't think that loan will be repaid. To value the ONO equity then at anything above zero is a bit of an investment-banking dream. If the unrealized investments in Quadrangle's first fund are excluded from the IRR calculation - implying a valuation of zero for them - then the fund has returned to its investors (including me) on an annualized basis very little indeed: $1.294 billion of gross returns - before fees, expenses and carry, on invested capital of $1.079 billion. The fees and carry alone reduce that $215 million to close to nothing. Meanwhile, Quadrangle's partners and employees have taken out from the first fund alone $94 million in management fees and millions more in carried interest. Quadrangle declined to comment for this article. [Emphasis added]
Maybe a return of zero is an achievement in the market of 2008. And I still think Rattner may be just the man to help wring enough concessions from the UAW to prevent General Motors from requiring a permanent Treasury transfusion. But the gap between the legend and the reality seems to be growing. ... 1:25 A.M.
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