November 2012 - Bankers Anonymous

November 29, 2012February 13, 2013

Interview Part I: Fracking and Regrets

$Bryant interview frac map$ I had a conversation with a friend who ships trainloads of ‘frack-sand’ into the Eagle Ford shale in South Texas. We talked about the Natural Gas Revolution, as well as the surprising and possibly regretful turn his life has taken, far from working in book publishing in Brooklyn.

Bryant: Hello, my name is Bryant, and I presently work for a company that develops and operates frack-sand silo terminals in the Eagle Ford shale.

Horizontal fracking or hydraulic fracturing is a new technology. It’s been around probably — I would say since about 2007, but obviously now it’s really picking up. What it is, is instead of drilling and fracturing the earth, only in a vertical manner you drill vertical and horizontal and you fracture along the horizontal, through the shale.

Michael: When you and I were having a beer with a mutual friend of ours, he was describing basically oil and gas trapped in small little bubbles of rock that you can’t, with conventional drilling, get at. But you sort of smash it up with this horizontal drilling by shooting water and sand and chemicals, and it smashes up the rock and then the oil and gas flows. Is that basically still the right, accurate description?

Bryant: Yeah, that’s exactly right. First you drill it, and then — which means you just basically drill a hole and then you pull out all the drill pipe, and you go in with the fracking equipment. They call it the gun. The gun then blows off, which shoots shrapnel in all directions. After that, you pull that out. You then pump millions of pounds of water at a very high pressure, which then opens up the routes that the shrapnel first created to get to those pockets, and then you pump millions of pounds of frack sand, chemicals, and guar. It almost creates a slurry that helps keep those routes open so the oil and gas can actually flow out of the well.

Michael: To go back to the original description, your link in this chain is that you move huge amounts of sand from northern United States into South Texas?

Bryant: Yes, right now we’re averaging about 35,000 tons a month, which is about 70 million pounds so it’s quite a bit. It’s about 350 rail cars a month. Each one holds 200 thousand pounds.

Michael: 350 rail cars, so you basically take over an entire train, you fill it up with sand. It leaves Wisconsin, or where is this coming from?

Bryant: The mines are all located in the north, mainly Wisconsin, Minnesota. Apparently it has to be portions of the earth that were covered over during the Ice Age, and therefore have been untouched for a very long time, and the earth is very, very hard. This sand can basically deal with very high pressure.^{^[1]}

Michael: Referring to Eagle Ford. I know what it is because I live in South Texas, as do you, but basically this is a giant area covering a huge number of counties under which they’ve discovered there’s all this oil and gas trapped in previously undrillable area in the shale formation.

Bryant: The Eagle Ford Shale actually is a formation that spans from Laredo, obviously it continues into Mexico, I’m only giving you the American formation. Starts in the Laredo, Carrizo, Cotulla area, spans northeast right under San Antonio, up through Cuero and Kennedy, really very key spots. That’s actually where the first well was ever drilled, but that’s really the formation of it.^{^[2]}

What makes it the best play really in the world right now is the economics of the play. So, all the infrastructure is in place to bring in high volumes of sand, high volumes of water, high volumes of guar from India coming into the Port of Houston, Port of Corpus Christi. You’ve got chemicals; you’ve got bauxite coming in as another form of I guess sand or proppant from South America. So, you have infrastructure in for high volume of rail and barges, etc. There is a large amount of workforce. You have a lot of people looking to work. You have infrastructure, and then probably the most important is it doesn’t cost a lot of money to then get the product to refineries because you have all the refineries located on the Gulf Coast, so your margins to get it to market are a lot higher when you’re in the Eagle Ford. That’s really what makes it the most attractive play right now in the world.

Michael: I went down to Eagle Ford to tour it. I asked one of the guys down there; I said, “How long is this thing going to go for? How many years do we have for drilling?” He said, “What we’re looking at is probably fifteen more years of heavy drilling and fracking operations.” Is that what people talk about when you’re there?

Bryant: It fluctuates all the time. When this first started a couple years ago, you know, it was twenty to thirty years. Now they’re saying yeah, about fifteen. I read an article the other day it’s sixteen. That seems to be the consensus.

Michael: Then I asked him, “So if we’ve got natural gas reserves that are now available in the U.S. that we never thought were available because this stuff was trapped inside the rock, and now it’s being released from the rock, how long do we have great reserves of natural gas?” He said, “About ninety years-worth is of the known or probable, available natural gas.” Ninety years worth in the United States, does that sound right? Is that what people talk about?^{^[3]}

Bryant: I wouldn’t doubt it. The Marcellus Shale which encompasses a lot of up-state New York, Pennsylvania, even creeps its way into Ohio and down into West Virginia – the Marcellus Shale they say hasn’t even been fully, surveyed. They’re saying that shale alone if developed would become the largest gas shale in the world. So yeah, I believe that’s probably pretty accurate.

Michael: So if we’ve got ninety years — here’s where I go with that. When I think about what is going to be sources of energy for, say, the rest of my lifetime, your lifetime, pretty much what that tells me is that extraction of carbons from the earth is going to be cheap for the rest of our lives, and renewables that from a political standpoint I may prefer that we use solar power or wind power because it just seems cleaner and better for the earth, but that’s probably not going to be viable when compared to natural gas, for the rest of our lives.^{^[4]} This is sort of what I take away from it when somebody says yeah, we’ve got about ninety years worth of really cheap gas we can access. I don’t know if you have any thoughts about that.

Bryant: I do. I’m originally from the Northeast, so I work in an industry that is frowned upon by a lot of people in the northeast. So a lot of my friends will tell me, “Why are you involved in something when you could be involved in solar power or something greener?”

Michael: When I told the woman who looks after my kid a couple days a week that I’d been down to see a fracking site, she said, “Fracking, isn’t that illegal?” Do you get a hard time from people, from your old world about fracking itself?

Bryant: I do. I get a horrible time. I even hate myself sometimes. If you were to tell me ten years ago that I would have been doing business with Halliburton, I would have denied it, but I’m now in that world. I attend a lot of conferences where you look around and it’s just not the type of people I thought I’d be hanging out with all the time. Basically it’s all about fifty, sixty, or forty or fifty-year old white men that have just been raised in the oil field in some form. I like art and things like that. So it is a little crazy, and I do get a lot of flack from them, but I always do welcome a debate.

Michael: Do you have any thoughts you care to share about where you see yourself in five years, either how you’re going to make your fortune as an oil guy or not, and another would be whether you have any kind of personal regrets about starting out in the publishing industry and ending up as an oil guy.

Bryant: Yeah I think I’ll probably answer the second question first because it will lead to the first one. Obviously when you’re young and in college, you’re a real idealist. I was really into writing and reading and if I could do it all over again I probably would have focused my energies more on a lifestyle where I could have lived off of some kind of art or humanities. But life is not — I don’t think college really prepares you as well for reality, at least in my opinion.

Personally, I would have preferred to not have taken this route, but I’m not ashamed in what I work in. I do find it fascinating. It is something that moves on a global scale, which I think is very interesting.

In this business you’re constantly meeting people with money and with ideas and with connections. I hope to one day be able to capitalize on my knowledge and my connections, but I actually prefer to go somewhere else in the world. I wouldn’t mind getting involved in South America.

I think the way it’s going to happen in the rest of the world is actually a little more interesting because they’re going to have all the little problems that we’ve already solved here a long time ago. And problem solving is actually kind of a fun part of the job. The rest of the world really doesn’t have the infrastructure that we have here for moving equipment and materials. I think that would be even interesting to do. I don’t have to necessarily get involved in drilling or trading. It could be as simple as logistics. Things like that are actually — I think there’s room for it in the future, and hopefully five years from now I’ll have some options to do that.

Next up in Interview Part II – Bryant and I talk about the Eagle Ford labor market.

[1] I described a fracking site in this posting.

[2] And the Eagle Ford shale play has really changed the look of South Texas. It’s kind of a Mad Max Bizarro world down there.

[3] In other words, this Natural Gas Revolution is huge. As further described here.

[4] I talk about the implications of this in this posting here.

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November 29, 2012November 29, 2012

Powerball – A Horrific Tax On The Poor

In recent posts I argued that current tax policy for the wealthiest people in the United States incentivizes inheritance over effort, encourages getting ahead either from:

…all the while punishing people who actually, you know, work for a salary to achieve the American Dream.

In response, many outraged readers commented that the poorest Americans pay no income taxes, and that the real injustice wasn’t Richie Rich starting out life with $10 million tax free, but rather that Welfare Queens and moochers were living high on the hog of their $28,000 in annual transfer payments, off the sweat of the brow of the upper classes.

Ah, but dear outraged reader, do not worry and do not be alarmed – the poor do not slide by tax free. No, no, no. If those poor people want good schools and good roads, our leaders have devised extraordinary measures to tax people who pay no income taxes.

Moreover, taxes on the poor have been rising steadily in the past two decades. What is this hidden tax?

Lotteries! Casinos! The great thing about lotteries and casinos is that the government can capture significant revenue[1] from those Welfare Queens and moochers, without having to raise taxes on the wealthy to pay for stuff like, you know, schools and roads.[2]

Indeed last night’s extraordinary Powerball drawing reminds us that governments constantly levy hefty taxes on poor people, especially poor people who are bad at math.[3]

Lotteries, which generate state revenue of approximately 30 cents for every dollar spent by purchasers, implicitly tax participants much more heavily than other revenue sources, between 25% and 56%.

As I wrote before, what I really find offensive about the abolition of the estate tax and the loopholes for the wealthy is the message that government leaders implicitly send about the value of work and government-incentivized methods of accumulating wealth.[4] Likewise, what I really find offensive about lotteries and casinos is the clear message from government leaders to the poor about the way to get ahead in life, and the way to accumulate wealth.

The implicit message of taxation through lotteries and casinos is the following: Never mind trying to work for a living. It’s best for you to try to reach the American Dream through pure dumb luck: the roll of the dice, the spin of the wheel, the turn of the card, or the scratching off of the ticket. Money is best made not by discipline, sacrifice, intelligence, education, or work, but rather by playing a game, secretly knowing that the odds are rigged against you and that you’re going to lose anyway.

That’s our hugely regressive tax policy for the folks who don’t pay income tax. That’s the message to poor people from our leaders rushing to promote lotteries and casinos.[5]

[1] States collected close to $18 Billion in revenue from lotteries in 2010.

[2] How, besides common sense, do I know poor people pay these Lottery and Casino taxes in disproportionate numbers? Great stats and facts accumulated here. To highlight a few: 1. Instant tickets in Texas were more likely purchased by someone out of work than someone working or retired. 2. 49% of Californians without a college degree play the lottery, versus 30% with a college degree. 3. 54% of lottery players in South Carolina earn less than $40K a year, although they account for 28% of the state population.

[3] Of course, last night’s estimated $580 million Powerball lottery payout was exceptional – in that the expected value of $1 spent on a lottery ticket was actually positive – an unusual case. The government still seeks to tax the poor with this lottery, but at least it wasn’t, for this brief instance, taxing both the poor and the innumerate.

[4] To be specific about that message: “The best way to get wealthy is to be born in to the right family. The best way to earn a living is to have your money make money for you. The best business you can set up is a private equity or hedge fund, as we will give you generous tax breaks on your income if you do that.”

[5] Also of course the fact that I bought two Powerball tickets and did not win has fueled my anti-lottery feelings this morning. Go ahead, call me a hypocrite. I can take it.

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November 22, 2012July 3, 2013

The Natural Gas Revolution Part VI – Has It Killed Renewables In Our Lifetime?

Here’s my hypothesis[1]: The abundance of cheap domestic natural gas – what I’m calling the Natural Gas Revolution – makes “renewable” energy sources like wind and solar financially untenable, and possibly unnecessary, for the next 90 years.[2]

I can’t prove my hypothesis because energy pricing is complicated.

Figuring out the ‘price’ of energy derived from traditional fuels such as coal, natural gas, and nuclear is not as straightforward as it may seem. I’ve made an attempt based on a conversation with an official at my local utility company. But every financial assessment depends on a series of assumptions: from the future price of input fuels, to regulatory changes, to models that take into account the depreciation of assets such as a nuclear or coal plant.

We know that energy produced from nuclear and coal plants has relatively low prices, partly because, in the case of my local utility, it bore the cost of building the nuclear and coal plants long ago. As a result, we can afford that energy. We also like the price of natural gas, because both plant construction and current market prices are low.

On the other side of the ledger, my local utility in recent years added solar- and wind-derived energy to its energy portfolio, both of which cost considerably more. At a free-market price, wind power would be about 50% more expensive than natural gas energy, but a federal government Production Tax Credit (PTC)[3] brings the wind-energy price within the range of natural gas-derived energy.

Solar power is even more expensive than wind. Solar may cost three times as much per KW hour as natural gas – assuming current technology – but with a federal subsidy through tax credits,[4] solar energy can be priced at a cost about twice as expensive as natural gas.

The energy provider of my home city targets a ‘portfolio mix’ by 2020 of 20% ‘renewables’ – at this point primarily wind and solar energy.[5]

As a retail consumer, I pay 9 cents/Kilowatthour on my energy bill. This retail price reflects a blend of energy costs from the utility’s primary sources of nuclear, coal, natural gas, and renewables, plus the cost of administration and delivery to my house. The price per KWhour could be brought down, somewhat, by prioritizing energy sourcing purely on a cost basis, which would favor coal and nuclear, and increasingly – given the natural gas revolution – natural gas. Wind and solar make less sense on a pure cost basis without the federal taxpayer subsidies that make them feasible for the local utility.

My local utility has chosen to build a portfolio to include wind and solar energy; as a person with environmental sensibilities, I see the benefits of this and I feel good. In addition, from a risk-mitigation perspective, the utility wants to stay ahead of regulatory changes which may make coal production more costly[6], or periodic events that make nuclear untenable[7], or market prices that would increase the cost of energy from natural gas.

So the local utility embraced wind and solar in part as a reasonable portfolio hedge against the risk of high natural gas prices.

But the future price of natural gas, and the likely range of prices for gas[8], just shifted massively with this natural gas revolution. Folks I’ve spoken to in the natural gas sector forecast 90 years’ worth of known, accessible, cheap natural gas in shale rock formations. All of this natural gas we really had no way of bringing to market just 4 years ago.

As a result, from a purely financial perspective I fear we’re locked into paying extra for renewables in a way that makes much less sense than it did just a few years ago, before the natural gas revolution started.

Fans of renewable energy are not going to like this message, I know. In the largest sense, however, it should be seen as good news, and I’ll explain why.

It’s a huge economic boon to the entire country.

So why is cheap natural gas such good news? For the majority of consumers the natural gas revolution will benefit their pocketbooks in subtle but important ways.

A drop in the price of energy impacts the price of nearly everything, keeping goods and services cheaper than they otherwise would be. Just as expensive oil during the Oil Embargo of the 1970s kicked off a round of intense inflation, cheap natural gas will act to keep inflation contained in the future.

To ask people to throw away cheap energy and adopt expensive energy is a lot like asking everyone to throw away cheap food to consume expensive food.

The closest analogy I’ve come up with for renewable energy is the organic food movement.

Organic food works on a small scale, with a dedicated group of true-believers who eat food as an expression of their values. It’s interesting to think about, but I’m not betting on widespread adoption.

Of course I’m in favor of organic food, and I serve it to my daughters whenever I can. I’m happy to pay a little extra for the pleasant feeling of using fewer chemicals on the earth, or to support happy, free-range chickens. The vast majority of food consumers in this country, and the world for that matter, however, do not have the luxury of paying more for food today for some intangible or unvalued long term benefit, even if it ‘costs’ more in terms of health or environmental impact in the long run. The organic food movement pushes against the immutable logic of the wallet.

Similarly, renewable energy has required people to express their values through their energy consumption, paying more for something that impacts the earth less.

I’m generally in favor of renewable energy, and I would love for more things to be powered from solar and wind generated energy. Unfortunately renewable energy is a luxury, and it just became even more so with the natural gas revolution. The risk of future natural gas price spikes decreased dramatically with this revolution, making a portfolio including renewables less financially relevant than it was until recently.

Most people live in a resource-limited world, where cheap food or cheap energy is not a choice, but a necessity. In my city, San Antonio, for the 25% of residents and 30% of children who live with daily food insecurity, the organic food movement exists in a parallel, irrelevant universe.

Most people I talk to don’t seem aware that the natural gas revolution of the past 4 years has made renewable energy untenable, financially. for the next century.

I see two reasons not to mourn the financial marginalization of renewables right now.

The first is purely financial since the tax subsidies needed to close the gap between wind and solar and more ‘market-based’ energy sources such as natural gas would have to grow in the future rather than shrink.

The second is more political. This next point is more my instinct than provable fact. But here goes: Whenever you have an important business – like renewable energy – wholly dependent on government subsidies, the opportunity for power-brokering by public officials and ex-public officials becomes extremely tempting. More than tempting, it’s inevitable.

I have a real issue with ex-government employees who go out and create ‘green energy’ investment companies, which fund companies whose major source of income is government guaranteed contracts for expensive energy in the form of wind and solar. Since it’s all divorced from market prices, there’s a huge opportunity for influence peddling and government favors for former public servants.

There may be some of this going around in my city of San Antonio, but there are also big national examples of this. Yes, I’m looking at you Terry McAuliffe and your GreenTech Automotive. Most egregiously, I’m looking at you, Al Gore, and your New York Times-reported net worth over $100 million, largely built on this power-brokering technique,[9] earned in just 12 years since leaving office. I’m very sorry you weren’t president, but your way of making money since then disgusts to me.

As the gap between the cost of natural gas energy and government-subsidized renewables grows in the coming years, one of the main externalities of the renewable energy sector is the opportunity for government graft. So I’m not just concerned that we’ll pay more than necessary for energy, but I’m also convinced some of our public servants will make sure that the green energy industry pays them back handsomely for their support.

See also Part I – Mad Max Bizarro World

Part II – Big, Corporate, Well Capitalized

Part III – The Drilling and Fracking Scene

Part IV – How Big Is This?

Part V – The Labor Market

[1] I can’t prove this with data, hence it’s only a hypothesis to be tested over time. But I still think I’m right.

[2] The natural gas revolution is happening mostly in the United States right now, in the Eagle Ford area of Texas, as well as the Bakken in North Dakota, and the Marcellus Shale of the Eastern US.

[3] Created by the Federal Government’s Energy Policy Act of 1992, which allows energy providers an income tax credit of 2.2 cents/KW hour. Assuming a current natural gas energy derived price of 4 or 5 cents/KW hour, we can estimate the ‘market’ price (before PTC subsidy) of wind energy for the local utility at around 7 cents/KW hour.

[4] Solar tax credits tend to be Investment Tax Credits (ITC), providing 30% of the cost of development of a solar plant.

[5] With a minimal amount of ‘landfill’ gas supplying a third alternative source of renewables. My local utility’s published description of their mix of energy sources now and in the near future can be found here.

[6] If environmental regulation made utilities pay out of pocket for ‘carbon offsets’ for example, coal could become much more expensive.

[7] Like periodically happens, e.g. 3-Mile Island, Chernobyl, Fukushima.

[8] At the risk of stating the obvious, I believe the natural gas revolution means low natural gas prices at low volatility for decades, perfect if you’re a utility company forecasting your energy portfolio needs.

[9] No, I don’t have a breakdown between fees he’s earned on his movie, speaking fees, and his income from serving on the board of private equity firms that value his power-brokering to the ‘green-energy’ industry. Kleiner Perkins made him a partner in 2007 and it wasn’t really for his investing acumen. I just don’t think he’s rethinking the entire private equity business with his Generation Investment Management Fund, the way he describes in this WSJ Op-Ed. Instead, I think he’s probably doing the same old power-brokering that becomes available anytime a big industry becomes completely dependent on government contracts and subsidies.

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November 21, 2012March 13, 2013

Interview Part II: Pawn Shop Owner Fights The Good Fight

Podcast: Play in new window | Download

This audio interview is a continuation of an earlier interview with Shirley, in which we talked about her pawn shop, and the customer service they offer that banks rarely offer.

In this portion of the interview Shirley and I talked about serving the traditionally Hispanic West Side of San Antonio, and the barriers to trying to build something new and beautiful on the West side. The barriers come from the neighborhood, city government, and even from within.

Shirley: My name is Shirley, and I’m a long-time pawn-shop owner.

Michael: Thanks for joining me on Bankers Anonymous, Shirley. I really appreciate it.

I had a conversation with my friend Shirley, whose family has run a pawn shop on the West Side of San Antonio for 50 years. In the course of the discussion I learned about the type of customer she serves, who typically is under-served by the traditional banking sector.

I learned something else though, about the challenges of trying to get ahead in the world, if you come from the West Side of San Antonio and try to do something good in that area.

Michael: Who is your ideal customer or regular customer that you depend on?

Shirley: The average customer that comes into a pawnshop is a woman in her mid-thirties. She is usually a single mom. She’s working. Usually she might bring in something like a television and we would lend a hundred dollars. She would then within thirty days come and pay 120 dollars and redeem that item.

Seventy percent of the time, a customer does come back and pick up their merchandise. It’s a short-term collateralized loan where the person has sufficient — usually the person has every intention of coming back and getting their merchandise. That’s how it’s designed to work. If they don’t, there’s no recourse. We are non-recourse lenders. A person doesn’t have to pay the loan back. We don’t call them. We don’t notify them. We do occasionally send reminders but nothing that forces them to come back and get the item.

Michael: You and I live in the same city. We live in a Hispanic-dominant city. I know you’re located on the side of the city that traditionally is Hispanic. Would you say most of your customers are Hispanic origin? Do they speak Spanish at home, or are they just of origin and it was great-granddad from three generations ago move to that area of town? Do you know that demographic?

Shirley: Demographically it’s ninety percent Hispanic. We do require all our employees to speak Spanish so they can communicate well with the customers. I would say at least half of the customers are Spanish-speaking only. We communicate back and forth between English and Spanish all day long.

So the majority of people are Spanish-speaking, and what’s the most important part for us is that our employees can communicate with them and explain the lending process to them, so that they understand what the transaction is and what they’re getting into and what their recourse is if they don’t — well, there’s no recourse if they don’t pick it up, but explain that whole process to them.

Michael: Do you have a sense that your customers are also going into a bank and they’ve just preferred to do this, or would you say most of your customers never — pretty much never set foot into a traditional bank?

Shirley: Most of the customers don’t step foot into a traditional bank. I also feel like not just our customers, but my employees don’t want to go to a traditional bank. Recently when we tried to change the way we do our payroll, the employees didn’t want to go to a bank either. It seems like traditional banking as we know it may not be what a younger generation or a more recent immigrant generation of people want — how they want to deal with their money.

The market that we serve daily, and we know, we understand the pressures that people are facing just to make ends meet. I think the larger community doesn’t really understand that there’s a whole segment of our population that really is paycheck-to-paycheck, and a weekly paycheck-to-paycheck.

They can’t guarantee that they’re going to get work every single week consistently month-after-month. All these people still have the same needs that all of us have. They just don’t have the same access to credit cards. They don’t have necessarily people to ask to bail them out because most of their families are in the same situation.

There is a sense that there’s a large group of people that get left out of traditional financial services, whether they’re credit cards, whether they’re banks, whether they’re equity loans or even just regular every day, consistent payroll. We’re filling that gap. The pawn industry feels like we’re filling that gap, and we do absolutely no harm to people.

I’m very proud of being able to provide that service to a very large group of people that often get left out. I think that our industry does it clearly and fairly, without doing any harm.

I quickly came to understand an irony of Shirley serving the underserved and unbanked of San Antonio’s West Side with her pawn shop. Because when she had a vision for developing her entire city block, she found barriers on all sides, from the City, from the banks, and even from within. I’ll let her tell her story.

Michael: Can you tell me about the scope of the project that you have in mind that you either are going to do or have wanted to do for a long time? What does it mean, the project you’re trying to do?

Shirley: We are working on a new building within our existing space, but we’re looking at a 10,000 square foot addition, about 5,000 square feet of retail space and about 5,000 square feet of warehouse. It’s going to be a beautiful project here. We feel like we’re one of the only people that are here on the west-side of San Antonio that have done a private investment in the community in many, many years. It’s going to be a really beautiful project. We have a great architect who designed our building, and we’re working with every detail to make sure it’s something that the community can be proud of, that are many long-time customers can be proud of. It’s a whole new retail space, and a whole new building that I think is going to be the pride of the west side.

But barriers came from the City. A special IDZ, or Infill Development Zone, was supposed to make this type of project easier on the West Side, but in fact because of that it became somewhat of a nightmare.

Michael: It’s the Infill Development Zone that’s been hurting you also?

Shirley: It delayed us ten months.

Michael: In what way, what are they doing?

Shirley: We needed council approval for that and there was some concern that we were changing our — I think it’s possible that it was just a miscommunication with the councilman and our neighborhood association, that we were not changing our zoning. We continue to be in a “C2”. We just needed an overlay, an Infill Development Zone overlay to allow us the parking waiver.

Michael: So they create this special zone to help you but P.S., it’s actually another barrier to getting done what you need to get done.

Shirley: First of all, it was very complicated, so that I could not read it and understand it and go myself to council, or rather to the board of adjustments. I had to hire lawyers. I didn’t have to hire lawyers, I suppose I could have hired a consultant but it was complicated. It was very important to me because we’ve been here for fifty years and it was recommended to me to hire a lawyer to help get that passed. The lawyers were very expensive. Then I think unfortunately complicated the issue even further because once lawyers get involved it seems to be more complicated. They didn’t quite seem to understand that we were just asking for an Infill Development Zone.

Delays came not just from City Council and lawyers, but from her bank. This got Shirley to reflect on the financial barriers, the political barriers, and the barriers from within. But she’s still trying her best.

Shirley: Again, I’ve been hitting my head against the wall for two years and I can’t get it done. But I think that for a long time I thought it was me, because I’m not competent enough or strong enough, or I don’t have the qualities that are necessary to move this forward.

I think it’s possible that as a community we feel like “it must be me,” that I can’t get things done. But I think there’s a possibility that maybe in fact that’s not true. There are in fact these real barriers, so even just recognizing that there may be something that’s beyond myself, it’s not just me, that people that are working in these communities, that there are barriers. We have a bit of a hard time navigating them because at the same time this is what we know. But I think that by having our mayor speak the way he does, and having some of the other politicians come in and really working within this community, there starts a change. It’s slow-changing but even just recognizing that we have the power to make that change.

Without sounding too trite about it, I really do think it’s possible. It’s just a recognition that there is plenty of opportunity right here in this community. First of all recognize that it’s actually happening, but then move forward. I think the fact that everybody else is starting to recognize, the politicians are starting to recognize that we have a very powerful voice here.

Michael: I hope you get a beautiful new construction.

Shirley: I can’t wait. I’ll definitely do a big grand opening for everybody when the time comes.

Please Also See: Interview Part I: Pawn Shop Owner on the Unbanked

Also see: Video: Pawn Shop owner turns Politico!

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November 21, 2012

SAC Capital – Too Much Of A Good Thing

I covered the mortgage bond side of SAC Capital in the early 2000s, and I remember half-kidding, half-probing my client about Steven A Cohen’s seeming inability to miss. Back then Cohen’s SAC had put together a string of annual monster returns like no other hedge fund.[1] Cohen’s SAC Capital was the Mark McGuire of stock trading, and we knew enough to think the home run records of 1998 looked mighty suspicious.

My client was one of the nicest and most straight-forward men I ever worked with, and his team of bond portfolio managers were really not the beating heart of SAC’s fund, which at its core was a high volume, stock-trading firm.

My client honorably defended his employer Cohen, marveling at his ability to stand in the middle of his trading floor in Stamford, CT and synthesize all the trading inputs and react unerringly with his ‘feel’ for the markets.

SAC was known then to produce an inordinate amount of volume on the NYSE for just one fund,[2] making Cohen’s fund the top equity client for a number of broker-dealers who earned extraordinarily high commissions on his stock trading. The implication of high volume like this, at the time, was that a top client like SAC could command top coverage from the Street.

According to the honest way of looking at things, this meant SAC might receive a phone call,[3] tip-off, or access to the Street’s best research ideas, first.

According to the dishonest way of looking at things, this meant SAC might get information that nobody else had access to, possibly – unethically – the client-flows of rival funds, or – illegally – straight-up insider information.

With yesterday’s accusation of one of SAC’s portfolio managers, we have what some believe to be the first major chink in the armor of Steven Cohen’s code of silence around his trading success.

This has got me thinking again about hedge fund cheaters and too-good-to-be-true results.

The first investing lesson of the Madoff scheme was this: If your hedge fund manager is flawless, if he never endures a down month, if he beats the competition month after month and year after year, then he’s not a genius, he’s a crook. Real investing sometimes involves losses, and sometimes involves volatility. Fake investing by contrast offers you steady, non-volatile wins every month. Until all the money’s gone.

The second investing lesson of the Madoff scandal was that investors will look the other way with their own crooked hedge fund manager, if they think it benefits them. Investors turned out to be wrong about Madoff (he wasn’t cheating on their behalf!) but many people inside the financial community have long wondered if SAC fits in this category of acceptable cheaters.

Insider trading is a kind of ‘everybody wins’ cheating[4] that investors hope benefits them, so they are willing to not ask too many questions.

Steven A Cohen’s unrivaled success over the years brought the unwelcome attention of securities crime prosecutors long ago, as the Lance Armstrong of the hedge fund world.

As we learn more about Cohen’s proximity to insider trading, the parallels with Armstrong hold. Armstrong enforced a code of silence among his fellow riders for nearly ten years at the top of the cycling world, as who wants to be the first Judas to admit the whole operation depends on cheating? Too many people’s livelihoods depended on maintaining appearances and not asking questions.

Cheating on the kind of scale of Armstrong, or the SAC scale, however, involves so many people that eventually a few can be peeled away to talk to prosecutors. Based really on a gut feeling, and on no particular personal knowledge of the situation over the years, I wouldn’t be surprised if Steven Cohen eventually gets his 7 Tour de France titles taken away as well.

[1] With the possible exception of Jim Simonds’ Renaissance Fund, but that managed no outside money.

[2] This was ten years ago, and SAC was alleged to generate 25% of equity commissions on the NYSE. These days, its all run by Skynet so I can’t believe any one fund could have that kind of influence.

[3] Back when, you know, people used phones. It’s all so quaint.

[4] It’s not really ‘everybody wins,’ it’s just that winning is concentrated in the hands of a few interested parties with quantifiable benefits, while losing is diffusely shared by the entire system of unknowing, losing, participants. Kind of like tax loopholes.

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November 16, 2012

Tax Update – An EVEN BETTER WAY To Get Your First $10 Million

Earlier this week I posted about how the tax code incentivizes you toward the old-fashioned way to make your first $5 million: Inherit it.

That’s because, at least until December 31^st, the first $5 million you receive through estate inheritance comes to you tax free.

I was trying to point out that there’s no better way to get ahead in life, as the tax code tends to take your money away if you are so foolish as to, you know, actually work for a living.

But, as the Wall Street Journal reminds us today, there’s an even better way to make your first $10.24 million, at least until the law changes or gets updated on December 31^st.

An expiring but very generous lifetime federal gift-tax exemption allows individuals (presumably your parents) to gift you up to a maximum of $5.12 million each[1], without paying any taxes on it. This works like the better-known $13,000 annual gift tax-exemption, except your parents can only take advantage of it once.

This is far better than the estate tax gift I mentioned earlier in the week.

You see, the downside of inheriting $5 million is that somebody close to you has to die first. That’s kinda sad, and it’s also hard to count on, timing wise. You might need the $10 million, like, right now. But fortunately, because of this generous lifetime gift exemption, your living parents can start you off right in life, like, right now.

So, Richie Rich, you have no time to lose because the tax code either reverts to a $1 million lifetime exemption per person[2] next year, or Congress passes a law to extend the gift-exemption.

I think its time to be nice to your parents again.

And if that doesn’t work, get on the phone with your Congressman and get him to extend that exemption.

“Either way, Daddy, start writing checks!”[3]

[1] Hence, the $10.24 million total, $5.12 million from each parent

[2] $2 million if both your parents maximize their lifetime exemption.

[3] as I once heard a classmate at Harvard say, un-ironically, when she didn’t get into the prestigious dormitory of her choice

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Month: November 2012