Tag: hedge funds

How to Tell If the Government Has Taken over Health Care

From the Washington Post:

Hedge fund executives and other investors are increasingly interested in the timing and nature of health-policy decisions in Washington because they directly affect the profits and stock prices of pharmaceutical, insurance, hospital and managed-care companies…

[Former Centers for Medicare & Medicaid Services] director Thomas Scully, who served during the Bush administration…said he thought that it was useful for CMS officials to have more communication with Wall Street investors as a way for regulators to learn and “explain what an $800-billion-a-year agency” does with its money.

So long as someone is still making a buck, it’s not socialized medicine…right?

Who Wants To Be ‘Too-Big-To-Fail’?

I’ve argued that the Dodd-Frank financial reform bill does not end “too-big-to-fail”, that is the belief that certain companies are implicitly backed by the government because policy-makers are unlikely to let said institutions actually fail. By naming some companies as ”systemically important” – as required by Dodd-Frank – the government is actually sending a signal as to who is likely to be bailed out.

As evidenced by regulators’ behavior during the financial crisis, the prime beneficiaries would be the creditors of these companies, as even when shareholders and management suffered, creditors generally did not. This should allow such firms to borrow at a cost lower than firms not deemed systemically important.

Given this funding advantage, it would seem natural that firms would want to be included as systemically important. Sure they might be examined by bank regulators more often, but that’s hardly a large cost compared to the funding advantage.

Congressman Frank has attempted to refute that there are any benefits from being deemed “systemically important” by the fact that ”so many financial institutions have lobbied against being designated in this way.” What his argument misses, or chooses to ignore, is that these benefits are not the same for all institutions. It is companies that rely heavily on debt market financing, such as banks, that have the most to gain. And under Dodd-Frank, the largest banks are automatically included. They have no opportunity to lobby to be in or out. The firms that are not automatically in, the most important of which are insurance companies, do not fund themselves primarily via the debt markets. Insurance companies get most of their funding from the premiums paid by their policyholders. And those premiums must be sufficient to cover expected losses, which have little to do with funding costs in the debt markets. Other non-bank financial companies, such as hedge funds and private equity, do not gain to the same extent that banks do because they have traditionally been a lot less leveraged than banks.

So the answer to Mr. Frank’s point is that those who have the most to gain from being ”systemically important” are already included, those with the least the gain are the very ones lobbying against being included. The real perversity is that once they are included, they will have a strong incentive to shift their business models toward more debt funding, making them riskier and more likely to fail (debt markets are far more fickle than insurance policy-holders). We are left relying solely on the judgment of the regulators to avoid this outcome, the same regulators who were asleep at the wheel as the housing bubble expanded.

British Economic Suicide

A Bloomberg story on one cause of the ongoing British economic disaster under Prime Minister Gordon Brown:

Andrew Wesbecher moved to London from New York in 2006 to sell software to banks and hedge funds. This month he joined the exodus of American expatriates fleeing high taxes and the city’s shrinking financial industry … Americans are heading home as Britain plans a 50 percent tax rate for those who earn more than 150,000 pounds ($248,000) a year and employers cut benefits for workers living abroad, reducing the allure of London. That comes a year after the U.K. said foreigners who have lived in the country for more than seven years must pay 30,000 pounds annually or give up the special status that shields overseas income from British taxes.

Since the 1980s, London has boomed as an international city open to the world’s entrepreneurs and their wealth, and perhaps home to more billionaires than any other city. The British economy as a whole has done quite well, pulled ahead by London and driven by a new free-market spirit in the wake of Margaret Thatcher’s privatization, deregulation, and tax cuts. Thatcher rightly argued that her cuts to income tax rates “provided a huge boost to incentives, particularly for those talented, internationally mobile people so essential to economic success.”  High tax rates at the top end were a “symbol of socialism” that she wanted to scrap.

Brown is killing the free-market goose that laid the golden eggs of Britain’s success. I really don’t understand the vision of such politicians – don’t they know what they are doing? I want people to be successful. I want entrepreneurs to create wealth. I love growing, vibrant cities.  Why do some people want to destroy all that?