Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

Great Big Book of Horrible Things

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I recently read and highly recommend a book called “The Great Big Book of Horrible Things” by Matthew White with the sub-title “The definitive chronicle of history’s 100 worst atrocities”. Since it is the holiday season, not being involved in one of these events is definitely something to be thankful for…

As someone who has spent their entire life reading books about history and military history in particular, this “organization” of cataclysmic events is very interesting. The author has different types of events, such as major dictators, not just wars, as he attempts to “rank” and chronicle each occurrence. Here are the top ten items per the author:

1. Second World War 66m
2. Chinggis Khan 40m
2. Mao Zedong 40m
4. Famines in British India 27m
5. Fall of Ming Dynasty 25m
6. Joseph Stalin 20m
6. Taiping Rebellion 20m
8. Mideast slave trade 18.5m
9. Timur 17m
10. Atlantic slave trade 16m

(as a note the First World War comes in tied for 11th at 15m)

The first thing that came to my mind is that I didn’t even know what some of these items were; I know relatively little about ancient Chinese regimes and I had never even heard of the Taiping Rebellion which occurred from 1850-64 and per this book at least killed more than World War I (of which I know a great deal). Here is a wikipedia article on the Taiping Rebellion which also quotes the 20 million figure (for what it is worth).

I also find interesting the separation of individual dictators from the military conflicts that they led or sponsored. He did not break out Hitler from WW2 since Hitler’s atrocities were mostly contained within that time span. However, Stalin’s atrocities occurred pretty much from the moment he took power until the day he died so he received a separate section dedicated to his crimes. The author also makes a special section on the communist crimes where he aggregates the various tyrants and crimes in one spot for sad if easy reading.

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Too Big To Fail updated

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There was a made for HBO movie called “Too Big To Fail” about the 2008 financial crisis. I recommend watching it (even though it was controversial in some circles for showing Hank Paulson as a virtual saint) especially for people who aren’t in the finance industry because it is intelligently written (based on a book) and they really got big name actors to play the part of Wall Street CEO’s.

The Wall Street Journal has an “overheard” box on the back page of the financial section and they had some interesting observations on Wall Street in 2011 on how the various players have shrunk in market capitalization.

Here are the current market caps of the “Too Big To Fail” parties:

– Lehman Brothers (Dick Fuld) – bankrupt
– JP Morgan-Chase (Jamie Dimon) – 110B (CORRECTED)
– Vikram Pandit (Citigroup) – 69B
– John Mack (Morgan Stanley) – 25B
– John Thain (Merrill Lynch) – bought by bank of America (see below)
– Lloyd Blankfein (Goldman Sachs) – 52B
– Rickard Kovacevich (Wells Fargo) – 123B
– Bob Willumstad (AIG) – 38B (resurrected by Federal Government)
– PREVIOUSLY Bear Stearns – sold to JP Morgan-Chase

In the movie Wells Fargo was treated as an afterthought. Not mentioned are two banks listed below and Bank of America is given only a small part in the movie, even though they ended up buying Merrill Lynch (I don’t even know who played Ken Lewis).

US Bankcorp 45B
PNC Financial 44B
Ken Lewis (Bank of America) 52B

The fact that these banks which are generally thought of as “regional banks” like US Bankcorp and even Wells Fargo have market caps in line or ahead of the giant Wall Street banks is a sea change in reality.

As these Wall Street companies become smaller what you are also seeing is the relative shrinking of the financial sector as a total portion of the US market capitalization. Financials returned -48% over the last 10 years vs. -17% for the S&P 500 (for the link to work change the time frame to 10 years and you can see the results).

These companies have an outsize impact on the economy of New York in particular because they pay out such a high percentage of their revenue in compensation. According to this article the compensation will drop 20 to 30% this year compared to the prior year.

In the first nine months of the year, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup set aside almost $93 billion to pay employees, up from $91.25 billion in the year ago period, according to Johnson Associates. The final number, however, is not set until the fourth quarter, when firms have a clear idea of their total revenue for the year.

While employee compensation as a percentage of market capitalization is not always a good metric to use for comparison purposes, in this case it is enlightening. Much of the outsize pay (some would say obscene) that these New York traders and executives receive is justified by the profits (and high stock prices) that result from their actions. But if the banks are paying out such a high percentage of their total market capitalization in profits every year, that justification starts to take on water a bit.

As far as alternative metrics, Business Insider had an interesting article on Wal-Mart, which employs 1% of the US work force. This analysis attempted to show what would happen to the average worker if Wal-Mart plowed back all their profits into employee wages (just a theoretical case). Per the article:

If Walmart took its entire $22 billion of annual pre-tax income and used all of it to give each one of its 2.1 million employees a raise, this would amount to about $10,000 a year apiece. In other words, if Walmart decided to use 100% of its operating profit to pay all of its employees more, the average store associate’s salary would go from $20,000 to $30,000.

In an even sharper turn down the rabbit hole of linked causality, Wal-Mart itself is essentially moving off Wall Street to become a private company. This is obviously an exaggeration but Wal-Mart is using its profits to buy back stock, and much of its stock is held by the descendants of Sam Walton in the first place, so the outstanding stock metric is even lower than it appears. Wal-Mart has 3.46 billion shares outstanding but the “public float” is only 1.73 billion shares. And Wal-Mart is working hard to whittle away that public float, per this article…

Wal-Mart said on Friday that it would buy back $15 billion more of its shares to try to improve returns for its shareholders. The initiative, which was announced at the company’s annual shareholders’ meeting here, comes after a previous $15 billion repurchasing plan that was announced last year. The company bought back 244 million shares, worth about $13 billion, under that program

So there you go. Wall Street, that icon of capitalism, justifies high salaries for traders and executives on the basis of stock capitalization values that no longer support this line of reasoning. And on the other hand, the core basis for Wall Street, the raising and allocation of capital, is turned on its head as one of the largest and most well-run companies, Wal-Mart, essentially plows its earnings into a de-facto move to privatization and off Wall Street in the first place.

Cross posted at LITGM

Trump Tower

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The base of the Trump Tower parking garage is lit up for the holidays. Here is a view looking south towards the river.

It is difficult to get a photo from the ground that captures the entire height of Trump Tower and the lit up “pylon” on top. You can see the reflection from the lights of the adjacent IBM building alongside.

Cross Posted at LITGM

Norway and Germany

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I recently traveled to Norway and as a minor military historian was fascinated by their historical entanglement with Germany. I was not able to travel to see the coastal fortifications in the Northern part of the country that I wrote about here.

Balestrand and The Kaiser

Balestrand is a beautiful little community along a large fjord (Sogenfjord)in Norway. While we were there I stayed at the Hotel Kviknes, which has a long tradition as a fine tourist hotel.

The Kaiser brought a portion of his fleet up the fjord with him while he visited Norway as a tourist. I saw a photo from a local guide but I can’t seem to find one on the internet. He had a touring vessel and it looked like a couple of light cruisers but am not certain.

This is the chair in the Hotel Kviknes where the Kaiser supposedly sat when WW1 was declared. There was a young couple having a drink at the table and they were nice enough to let me get a photo of the bottom of the chair which was marked accordingly.

Stalheim Hotel and the Kaiser

The Stalheim Hotel is one of the most famous hotels in Norway, known for its fabulous views as you can see below.

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The Creeping End Game of Government Bureaucracy

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In today’s Wall Street Journal there are two articles that seem to be completely disconnected but are really linked at the core. One is titled “Health System Reflects Greece’s Ills” which summarizes Greece’s public sector health policy:

Like nearly all Greeks, Mr. Gianakouras was covered by a state social security fund, which provided $13,6000 for the hospital bill. There was just one more thing: Mr. Gianakouras said he gave his surgeon “black money” – $5000 Euros in cash – to perform the operation.

‘If you don’t pay’, he said, ‘you don’t get anything done’.

While we might be surprised by this type of situation in the United States and a few other western countries, it is the way the world operates elsewhere when the government or constitution gives “rights” to citizens without the means to pay nor proper incentives to get work done in an organized and systematic (market-based) fashion. This system was brought to a fine art in the former Soviet Bloc countries where the free-market was squeezed almost entirely into niches; a vast, parallel system of bribes, favors, and illicit goods and services ran alongside the “official” system which got little or nothing done.

Alongside the uselessness of utilizing the official channels is the general impunity of the government workers that run the sham system. Periodically there are calls to remove “corruption” but that implies that corruption is a deviation from the system when in fact corruption is the system itself. There is little or no motivation for the government workers to follow rules and bribes and favors are commonplace, so what is the point in going after them in the first place for participating in a system that can’t work?

A different article discusses the “penalty” faced by SEC workers for their failure to spot the Bernie Madoff fraud, titled “SEC Discipline over Madoff” which can be easily summarized in the first paragraph:

The SEC admitted Friday that it has disciplined eight employees over their handling of the $50 billion Bernard Madoff Ponzi scheme without firing any of the workers.

In one of the most obvious cases of gross governmental negligence (there are entire documentaries about individuals that tried to bring Madoff’s scam to light and were ignored by the SEC employees so I won’t summarize them here), there is NO CONSEQUENCE for these workers for their failures.

The core concepts of moving away from the free-market to a governmental run system are 1) bribes , corruption and favors being built in to the system to make it work 2) general impunity of workers for participating in this sham “rights based’ process.

My advice is to befriend governmental workers and medical care professionals in the future as our system moves more towards the “Greek” model of over-promising care to everyone and under-funding and not incenting the hard work necessary for quality care to occur. And be prepared for a wall of government workers who can rule with impunity based on arcane processes and standards not tied to the free market or any sort of accountability based system as our “investment” in government increases; the first thing these workers will do is build a system where they are put “first” before the mission that they are trying to accomplish.

I never thought that my classes on “command economies” would ever come in so useful, but it shows the long-term arc of our creeping end game in the West.

Cross posted at LITGM