Tha Bankster's Lose One

In the highway bill, congress has significantly reduced dividends paid by the Federal Reserve to banks:

Big banks will lose a portion of a multibillion-dollar government handout they’ve enjoyed for over 100 years, thanks to a compromise highway bill released Tuesday. One estimate pegged the loss to the banks at $8 billion to $9 billion over a 10-year time frame.

The bill, as it emerged from a House-Senate conference committee, pays for roads, bridges, and mass transit projects in part by reducing what is currently a 6 percent annual dividend on stock that the big banks buy to become members of the Federal Reserve system.

Fed membership offers many perks, from access to processing payments to cheap borrowing. But the dividend could be the sweetest gift, because banks cannot ever lose money on the stock; they’re even paid out if their regional Fed bank disbands.

Despite the total lack of risk, member banks have received the 6 percent dividend payout every year since 1913.

So for example, JPMorgan Chase, which has held stock since then, has made back its investment six times over without risking any loss. And if the bank stock was in place before 1942, that dividend payment is tax-free.

Originally — that is, 100 years ago — the Fed offered the dividend to entice banks into the new Federal Reserve system. But nationally chartered banks are today required by law to become members, and all banks must abide by the standards of membership. So the dividend is just a vestigial sweetener that never went away, pumping billions of dollars in public money to the banks for no discernible reason.

………

Senate Majority Leader Mitch McConnell, seeing no better option, stuck a version of it in the Senate highway bill. The provision called for cutting the dividend from 6 percent to 1.5 percent, eliminating $17 billion in big-bank subsidy over a 10-year period. It passed.

The banks freaked out, aided by Fed Chair Janet Yellen, who warned of unnamed “unintended consequences.” Through a well-worn lobbying strategy, they managed to get the House of Representatives to remove the dividend cut and replace it with a raid on the Fed’s capital surplus account, which is used to cover losses on the balance sheet.

In other words, Yellen and the Fed quietly preferred flushing their own surplus account over denying banks their full entitlement.

But when the final bill was released Tuesday, the dividend reduction remained in there, albeit with some modifications.

The reduction now applies only to banks with over $10 billion in assets, compared to the $1 billion threshold in the original bill. Instead of cutting the dividend to 1.5 percent, the rate will now match the interest rate of the highest-yield 10-year Treasury note at the point that the dividend is due. For context, the high yield at the last Treasury auction was 2.304 percent.

There are, however, some more giveaways to the banksters in the bill, including an attempt to exempt even more mortgage lenders from Consumer Financial Protection Bureau oversight.

Rule Number 1: Mark Zuckerberg Leaves a Trail of People Who Feel that he Cheated Them in His Wake

Rule Number 2:  See rule number 1.

As such, I am dubious of Mark Zuckerberg's pledge to donate 99% of his Facebook fortune to charity:

In a public post on Facebook, CEO Mark Zuckerberg and his wife Priscilla Chan announced Tuesday that they will donate 99 percent of their Facebook shares "during their lives"—an amount currently worth $45 billion—to their new charity, the Chan Zuckerberg Initiative.

The organization, which seems to be modeled on the Gates Foundation, states its laudable albeit vague goal to “join people across the world to advance human potential and promote equality for all children in the next generation.”

The announcement came in the form of a public letter to their newly born daughter Max. It addresses important long-term goals that are often stymied in the public sector, things like “advancing human potential and promoting equality.”

But when one dives into the details, it gets seriously hinky on closer examination:

When Mark Zuckerberg announced he would give away 99% of his Facebook shares — currently worth around $45 billion — the initial impulse from many was to assume the money would all go to charity. Indeed, very many news organizations described the donation as either going to charity, or a charitable trust.

Not so, a Facebook spokeswoman confirmed in an email to BuzzFeed News. The spokeswoman further confirmed the initiative is structured as an LLC, and not as a charitable trust.

While charity will certainly be one of the money’s destinations, it will be far from the only one.

It's beginning to look more and more like a way to avoid income and inheritance taxes than anything else.

I would also argue that relying on the altruism of today's robber barons is misguided, and  notes, so does German billionaire Peter Krämer:

SPIEGEL: Forty super wealthy Americans have just announced that they would donate half of their assets, at the very latest after their deaths. As a person who often likes to say that rich people should be asked to contribute more to society, what were your first thoughts?

Krämer: I find the US initiative highly problematic. You can write donations off in your taxes to a large degree in the USA. So the rich make a choice: Would I rather donate or pay taxes? The donors are taking the place of the state. That's unacceptable.

SPIEGEL: But doesn't the money that is donated serve the common good?

Krämer: It is all just a bad transfer of power from the state to billionaires. So it's not the state that determines what is good for the people, but rather the rich want to decide. That's a development that I find really bad. What legitimacy do these people have to decide where massive sums of money will flow?

SPIEGEL: It is their money at the end of the day.

Krämer: In this case, 40 superwealthy people want to decide what their money will be used for. That runs counter to the democratically legitimate state. In the end the billionaires are indulging in hobbies that might be in the common good, but are very personal.

 Your mouth to God's ear, Herr Krämer.

Read This………

A transportation expert takes Pando to task regarding their analysis of Uber, and Pando sees fit to publish his letter.

Basically, Pando has gone after Uber as being a bunch of Silicon Valley snake oil, and Hubert Horan believes that this is not true.

Specifically, notwithstanding their somewhat horrifying business practices, Amazon and eBay actually innovate, reducing the costs and increase the selection relative to brick and mortar alternatives, while Uber provides the exact same service as any taxi or limo service, while adding the "benefits" of price gouging and drivers who have not passed a background check:

The letter is fascinating, insightful, and critical. I don’t agree with his characterizations of some of my arguments; but I do agree with his own arguments and explanations in this letter, and more than that, I appreciate the time and serious effort Horan put into this letter to educate all of us. Few people in America have his decades-long industry perspective and his unique political insights on the politics of transportation, antitrust, markets, and tech. Here's the letter in full.

-Mark Ames

………

I agree that Convoy, which appears to be closely mimicking the Uber playbook, raises major issues that fully warrant the attention you’ve given it, and I am grateful for the effort and critical thinking that you and Pando have brought to these unicorn issues over the last several years. Apologies in advance if the tone of what follows seems excessively critical, but I have four major concerns based on my background in transport and regulatory economics: (A) I think the Convoy piece (as well as most previous Pando reporting on Uber) misses the critical point that neither company has an underlying business model linked to any rational evidence of sustainable competitive advantage, and you’ve misled readers by equating the Uber/Convoy models with companies like Amazon, and EBay, which did have plans based on solid economics; (B) You correctly noted that the investors behind Convoy (and Uber) are seeking quasi-monopolistic dominance (trying to build a rent-extractive “narrow in the stream”) but you failed to lay out for your readers the critical difference between driving thousands of less-efficient existing suppliers out of business because you’ve built an overwhelmingly better mousetrap, versus driving more efficient suppliers out of business using artificial market power; (C) You correctly note the already lean conditions in trucking, and it is quite reasonable to discuss Uber-type companies in a broader historical/political context. But I think you’ve improperly equated the politics and economic thinking behind Ford/Carter transportation deregulation with much more radical finance-driven changes 20-30 years later, and I think the 1970s points you raise aren’t critical to your readers’ understanding of Uber/Convoy; (D) I imagine that Pando doesn’t get many letters attacking its failure to fully appreciate the problem of Uber and Uber-type companies, but if one fails to focus on the complete lack of competitive economics, and the huge dependence on (eventually) exploiting artificial market power, then I think you end up seriously understating the damage these companies could impose on the rest of society.

………

1. You’ve improperly equated the Uber/Convoy and Amazon/EBay business models—one is based on legitimate /competitive economics; the other isn’t. Your post said that even if it’s not Convoy, “it’s safe to assume that sometime soon, tech will transform and restructure the $749 billion trucking sector” in a similar way to Uber and taxis, Amazon and booksellers, and EBay and newspaper classifieds. This totally misses a critical distinction-- Amazon/EBay type business models were based on powerful competitive advantages over the businesses they were seeking to supplant while the Uber (and apparently Convoy) models seek to “disrupt” an industry with economics that are actually worse than existing competitors. Despite other issues, Amazon could offer consumers much wider choices than they ever had before, eliminated all of the costs of retailing, achieved huge warehousing and distribution efficiencies and clearly had scale economies that no traditional competitor could match. On the other hand, the Uber business model (software/brand company plus its “independent” contractors) fails each of these efficiency/competitive/technological tests. Uber isn’t transforming the consumer product—it offers the exact same service as traditional taxi/limo operators. Uber—even a future, more mature Uber-- will have much higher driver, insurance, training, ownership and maintenance costs. The massive subsidies that create the appearance that Uber offers better/cheaper service are not sustainable. Since the mature Uber won’t be able to produce urban car service at significantly lower cost, there are no welfare gains from increased service or lower prices. There is no evidence that a reasonably well run taxi/limo company has bloated costs that cry out for new market entrants, and there’s ample evidence (dirty cars, horribly paid drivers) that industry costs are already extremely lean. Even Uber’s vaunted app is irrelevant to competitive economics. The ordering/pricing aspects of the app are a tiny piece of total costs, they don’t drive any big network economies, and apps can easily be copied. The app actually illustrates a serious Uber structural disadvantage. The economic key to any transportation company is the ability to balance supply (i.e. assets) against volatile demand in the medium/longer term. Thus profits depend on managers with long experience dealing with complex markets, and with sophisticated tools for capital planning and shorter-term price/supply adjustments. Airlines, railroads and shipping companies use some of the most advanced management systems anywhere in the private sector. Yellow Cab isn’t in the same league, but has managers with serious fleet management capabilities, and dispatchers who understand all the idiosyncrasies of local demand patterns (factory night shifts, conventions, bar/restaurant patterns). Uber has an app that ignores the both vehicle management, and market demand forecasting, has no local market knowledge and simply reacts to short-term car requests. Any urban transport operator faces much tougher economics than freight or intercity passenger operators, because there’s no way to reduce costs by smoothing demand peaks. Airline revenue management can massively reduce capital costs by getting price sensitive people to not fly on Friday afternoon. The Long Island Railroad has had peak/off-peak pricing for a hundred years, but rush hour is still rush hour, and the LIRR suffers with the cost of hundreds of cars that only get used ten hours a week. Surge pricing will not get anyone to shift their Saturday night out to fill empty cabs midday Tuesday, and there’s nothing else in the Uber model that addresses any of these fundamental problems with the economics of urban transport. Given the vastly greater complexity of trucking, the idea that a company with a software app could produce new efficiencies great enough to drive most existing trucking companies out of business seems too ludicrous to take seriously. As you clearly point out, there is lots of historical evidence that the last few decades of competition have already made existing operators pretty efficient. Unlike urban car services, trucking includes lots of companies (UPS, JB Hunt) with incredibly advanced industrial engineering capabilities. Anyone who thinks that there are tens of billions worth of trucking efficiencies out there—efficiencies that absolutely no one anywhere in the trucking industry could see—and that these billions can be generated by a scheduling app, but will be so huge that they’ll totally disrupt a$749 billion industry---is either delusional or willfully dishonest.

Uber-type companies need to be understood as a radical departure from Amazon/EBay type models. Instead of displacing competitors through actual efficiencies, or by creating entirely new markets, its model is entirely based on getting the world to believe that it will inevitably dominate the entire industry. This requires aggressively suppressing any discussion of empirical economic evidence (which would undermine its case) and emphasizing the factors driving inevitability--the brilliance of its early stage investors, the ruthlessness of management, and the raw political power of the company’s wealthy supporters. PR is a component of every start-up; at Amazon/EBay it played a supporting role and relied heavily on economic evidence of competitive strengths, but at Uber PR is the heart of the plan, and replaces the need to figure out how to provide much better service at much lower cost. As with 97% of Uber’s media coverage, the Fortune and Bloomberg pieces you cited totally avoided any discussion of competitive economics and tried to pass off its faithful repetition of Convoy’s “industry disruption is inevitable” PR theme as “news reporting”. But by equating the Amazon and Uber approaches you’ve fallen into the same trap. You’ve failed to tell your readers that there are no competitive economics behind the “inevitability” claim, and you’ve helped spread their “our valuation is legitimate because we’ll produce huge economic value just like Amazon and EBay” PR claim.

Read the rest.

While my (and Mark Ames') point have made the point that Uber is designed to succeed by fobbing off many of its costs onto its employees and society, in doing so, we had ceded that Uber had in some way a built a better mousetrap.

He argues that it's all an exercise in PR where the real business is to create a monopoly, or oligopoly, model where they sit astride the market extracting rents.

No wonder Wall Street loves Uber.

This is the Least Surprising News of the Day

Russia accused Turkey of buying ISIS/ISIL/Daesh/Whatever oil. Turkish President Erdogan called this a false slander.


But guess what? Putin is ready to give the world pictures:

Russia's defense ministry said on Wednesday it had proof that Turkish President Tayyip Erdogan and his family were benefiting from the illegal smuggling of oil from Islamic State-held territory in Syria and Iraq.

Moscow and Ankara have been locked in a war of words since last week when a Turkish air force jet shot down a Russian warplane near the Syrian-Turkish border, the most serious incident between Russia and a NATO state in half a century.

Erdogan responded by saying no one had the right to "slander" Turkey by accusing it of buying oil from Islamic State, and that he would stand down if such allegations were proven to be true. But speaking during a visit to Qatar, he also said he did not want relations with Moscow to worsen further.

At a briefing in Moscow, defense ministry officials displayed satellite images which they said showed columns of tanker trucks loading with oil at installations controlled by Islamic State in Syria and Iraq, and then crossing the border into neighboring Turkey.

The officials did not specify what direct evidence they had of the involvement of Erdogan and his family, an allegation that the Turkish president has vehemently denied.

"Turkey is the main consumer of the oil stolen from its rightful owners, Syria and Iraq. According to information we've received, the senior political leadership of the country - President Erdogan and his family - are involved in this criminal business," said Deputy Defence Minister Anatoly Antonov.

"Maybe I'm being too blunt, but one can only entrust control over this thieving business to one's closest associates."

"In the West, no one has asked questions about the fact that the Turkish president's son heads one of the biggest energy companies, or that his son-in-law has been appointed energy minister. What a marvelous family business!"

………

The Russian defense ministry also alleged that the same criminal networks which were smuggling oil into Turkey were also supplying weapons, equipment and training to Islamic State and other Islamist groups.

"According to our reliable intelligence data, Turkey has been carrying out such operations for a long period and on a regular basis. And most importantly, it does not plan to stop them," Sergei Rudskoy, deputy head of the Russian military's General Staff, told reporters.

The defense ministry said its surveillance revealed hundreds of tanker trucks gathering at Islamic State-controlled sites in Iraq and Syria to load up with oil, and it questioned why the U.S.-led coalition was not launching more air strikes on them.

"It's hard not to notice them," Rudskoy said of the lines of trucks shown on satellite images.

Russian officials said their country's bombing campaign had made a significant dent in Islamic State's ability to produce, refine and sell oil.

Oh, snap!

I've Had It with These Motherf%$#Ing Shooters On ……… I've Just Had It!

Some bunch of lunatics just shot up a Christmas party at a center for the disabled in San Bernadino, California:

At least 14 people were killed and 14 others injured in a shooting at a San Bernardino, Calif., center for people with developmental disabilities, Police Chief Jarrod Burguan said. (Reuters)

At least two attackers opened fire at a holiday party for county employees in San Bernardino, Calif., on Wednesday, killing at least 14 people and injuring 17 others in what the city’s police chief described as an act of domestic terrorism.

Five hours after the shooting, law enforcement officials swarmed a residential neighborhood not far from the complex where the shooting occurred after police “located what appeared to be the suspects’ vehicle,” Sgt. Vicki Cervantes, a San Bernardino police spokeswoman, said during a news conference.

Officials exchanged gunfire with the suspects, she said, after finding a dark SUV that appears to match a description given by police earlier in the day. Two suspects — a man and a woman — were killed during this shootout, Jarrod Burguan, chief of the San Bernardino Police Department, said during an evening news conference.

A third person was seen running away, and it is unclear if that person was involved in the shooting today, Burguan said. That person was in custody late Wednesday afternoon, he said. Authorities were still working on seeing if there was a third person involved in the shooting or possibly any other people, he said.

F%$# the NRA.

F%$# Wayne LaPierre.

F%$# US culture of violence.

Just F%$#.

Martin Shkreli Has Just Made Express Scripts® a Hero

This is a bigger shock than Darth Vader being Luke Skywalker's father.

Deeply and ineluctiblky evil pharmacy benefits manager Express Scripts^®, in partnership with the compounding pharmacy Imprimis^®, will offer a $1.00 clone of Turing Pharmaceutical's Dataprim anti-parasite drug:

Express Scripts, the largest pharmacy benefits manager in the U.S., said on Tuesday it will partner with Imprimis Pharmaceuticals to provide a $1 alternative to Daraprim, the 62-year-old drug for a rare parasitic infection. In September, the company that owned the drug stoked outrage when it hiked the drug's price by more than 5,000 percent overnight.

Imprimis, a California compounding pharmaceutical company, said in October it would make the alternative—a compounded formulation of the active ingredient in Daraprim, pyrimethamine, and another drug, leucovorin—available for $99 for a 100-count bottle, or less than $1 per pill.

That compares with a price of $750 per pill for the drug provided by Turing Pharmaceuticals, the company that acquired Daraprim earlier this year and dramatically raised its price from $13.50 a tablet to $750.

Express Scripts^® is so evil and incompetent that it stuns Richard Bruce Cheney, but Martin Shkreli has just allowed them to be heroes.

This is a mindf%$# on a level I would heretofore think impossible.

Light Posting Tonight

I am fighting a cold.

F@$& rhinoviruses!

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