June 16, 2014 12:29 PM
The Kronies are back with a video about the Export-Import Bank, one of the federal government’s largest corporate welfare programs. While the video is less than subtle, it makes the rent-seeking and deal-making surrounding the Bank very clear. Fortunately, the Bank’s charter expires on September 30 of this year. Ex-Im will cease to exist unless Congress votes to reauthorize it. CEI’s Iain Murray recently weighed in on the Ex-Im fight here.
June 5, 2014 3:22 PM
Are hedge funds dangerous? Depends on who you ask -- and where you look. For most investors, they're no riskier than other assets -- just ask Eastman Kodak shareholders. But this week, the Guardian featured a brief discussion of hedge funds that shines a light on type of investor whose involvement in hedge funds is more questionable: public pension funds seeking higher returns.
The first essay -- subtly titled, "Hedge funds: the mysterious power pulling strings on Wall Street" -- provides more heat than light. Author Chris Arnade describes hedge funds as shadowy entities that thrive on secrecy as a means of exaggerating performance in order to earn lavish compensation for fund managers.
The bottom line: investors, sophisticated or not, can't know in detail what many hedge funds are doing. But as long as the mystique exists, perhaps many don’t want to know.
In his response, Timothy Spangler clears away some of Arnade's imaginary fog. As he explains, hedge fund manager compensation isn't all that mysterious.
Hedge fund managers who earn large amounts of money from their clients do so for one simple reason. For every $1 of profit they earn on their client’s account, they get to keep 20 cents. This is called a performance fee. No profits, no performance fees.
So the astute manager who turns $100 into $200 gets to keep $20 as compensation. The client gets his or her original $100 back plus the $80 of profit. No profit, no performance fees. Its fairly clear incentive arrangement and aligns interests between manager and client in an unambiguous way.
May 15, 2014 8:10 AM
Today, after delays and much opposition from many quarters on different grounds, the Johnson-Crapo housing finance overhaul is set to be voted on by the Senate Banking Committee. If it clears, the vote will likely be narrow.
The Competitive Enterprise Institute coordinated a letter opposing the legislation signed by 26 leaders of conservative and free-market groups. Here are four key reasons to why Johnson-Crapo, named for Senate Banking Chairman Tim Johnson (D-S.D.) and and Ranking Member Mike Crapo (R-Idaho), is such a monstrosity.
April 29, 2014 3:43 PM
Today, in a surprise move, the Senate Banking Committee postponed the vote it had been set to mark up for Johnson-Crapo. Reports vary as to whether this bill is "dead on arrival" or coming up soon with amendments (mostly to bring around liberal Democrats).
One thing is clear, though. The bill is losing momentum, and the proverbial Congressional clock is ticking.
Today's delay is great news for ordinary American taxpayers and shareholders who would have been ripped off by Johnson-Crapo and its creation of the Federal Mortgage Insurance Corportation, or Feddie Mic. The Competitive Enterprise Institute (CEI) has for decades warned about the risk to taxpayers and the economy posed by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. In 2000, CEI founder and then-president (now chairman) Fred Smith warned in Congressional testimony that if anything went wrong, Fannie and Freddie could put taxpayers on the hook for $200 billion. Many thought he was exaggerating then, but he turned out to have underestimated it.
Needless to say, we would support any true reform of the GSEs that reduces the government's role in the housing market. Unfortunately, after examining the Johnson-Crapo legislation, we have concluded it would actually make the situation worse. It replaces Fannie and Freddie with an even bigger government backstop in the form of the Feddie Mic, which could hold the bag for as much as 90 percent of losses from mortgage-backed securities.
April 23, 2014 12:56 PM
Senior Fellow John Berlau argues that a bill from Senators Tim Johnson and Mike Crapo intended to reform Fannie Mae and Freddie Mac would only make things worse.
March 20, 2014 8:57 AM
Ever since the phrase appeared in Shakespeare's Romeo and Juliet, "A rose by any other name would smell as sweet," and its variations, have become familiar expressions. A corollary is that garbage by any other name would stink just as badly, if not worse.
The latter phrase seems applicable to the "reform" of the government-sponsored housing enterprises Fannie Mae and Freddie Mac just introduced by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho). The media often describe this plan as "ending" Fannie and Freddie.
And yes, it does "end" them in the sense that there will no longer be entities named Fannie and Freddie. But most of their functions would simply be transferred to a new giant government entity called the Federal Mortgage Insurance Corporation. Not only would the government's role in subsidizing and micromanaging housing not be reduced, in some ways it would substantially be increased.
The legislation would create, for the first time, an explicit taxpayer guarantee of the GSEs' $5.6 trillion in debt. The "affordable housing trust fund," a slush fund for "housing advocacy" groups such as ACORN with political agendas until it was closed due to Fannie and Freddie's financial woes, would be reopened and parked in the new FMIC.
Worst of all, and sending the worst possible signal to potential private sector investors in the housing market, Fannie and Freddie common and preferred shareholders would be wiped out permanently under the bill's Section 604.
March 6, 2014 3:36 PM
In my previous post, I described the "California rule," which puts state governments in a legal straitjacket when trying to reform underfunded public pensions. Specifically, it places pensions in a privileged position relative to other types of compensation, like salary or health insurance benefits, by making them more difficult to change. This post highlights a real-world example of the California rule's dangers.
The place is Pacific Grove, California, a town of 15,000 residents on the Monterey Peninsula's northern tip, with an annual budget of $11 to $12 million. In 2008, John Moore, a Pacific Grove resident and retired attorney, learned that the City of Pacific Grove had issued $19 million of pension bonds two years earlier, while at the same time it gave the police union a 30% raise.
After making several requests under California's Public Records Act, Moore uncovered a tale of self-dealing by Pacific Grove and union officials to rip off California taxpayers. The result of Moore's investigation, "The Fall of Pacific Grove," was published in The Pine Cone, a Monterey County paper; it's now available online thanks to the California Public Policy Center.
In 2002, the Pacific Grove city council adopted a 50 percent pension increase for public safety workers, after being told by the city manager that the increased benefit would cost around $51,500 per year. However, the city manager withheld from the council an actuary report that estimated the benefit at over $800, 000 per year. The hidden actuary report was not discovered until 2009. The results have been predictable and dire. Pacific Grove's pension deficit has ballooned to $45 million, plus $20 million in pension bonds, and is growing at 7.5 percent a year, according to Moore.
March 5, 2014 12:52 PM
These days, local governments announcing bankruptcy seems like routine in California. Since the onset of the 2008 financial crisis, many state and local governments have seen their pension funds take huge losses. Yet, many of the underlying problems that have made pension shortfalls difficult to address go back many years -- more than half a century, in fact.
One major reason public pensions have been so difficult to reform is their having a special legal status above other kinds of employee compensation. A new Federalist Society paper by Emory University law professor (and CEI alumnus) Alexander Volokh explains how this strange situation came to be and offers some ideas for reform.
One of the most important developments in public pension policy occurred in 1955. That's when the California Supreme Court created what became known as the "California rule" regarding the legal status of public pensions. The case, Allen v. City of Long Beach, concerned a challenge to a 1951 city charter amendment that increased the employee pension contribution and changed the formula for determining payouts.
March 5, 2014 11:34 AM
In my previous post, I looked at some basic principles that should guide state policy makers when tackling pension reform. Now, we turn to the politics. And in that regard, Rhode Island's 2011 pension reform offers a useful example for other states to consider.
In his Brookings study, "Pension Politics: Public Employee Retirement System Reform in Four States," Drew University political science professor Patrick McGuinn looks at recent reform efforts in four states' experience in implementing pension reform.
Two of these states—Utah and Rhode Island—enacted significant structural changes to their pension systems while the two others—New Jersey and Illinois—enacted more limited changes that were less innovative.
Drawing lessons from those four states, he then outlines some basic principles for how to implement reform, citing examples.
March 5, 2014 11:30 AM
Few people would raise their hands when asked that question. But actually putting a state's financing on sound footing is difficult in practice. That makes Rhode 's Island's pension reform not only unique, but also a good example for other states to consider. Rhode Island got not only the policy, but also the politics right, according to Drew University political science professor Patrick McGuinn in a new Brookings Institution study.
In other words, how pension reform is accomplished is as important as what the reforms entail. In his study, McGuinn offers some sound principles on the politics -- the "how" -- of pension reform. Another new study, commissioned by the Society of Actuaries (SOA), offers some basic principles on the policy -- the "what".