Wednesday, September 20, 2023

Is the opportunity cost of net-zero too high?

For Sweden it is:
It cited the tough economic climate along with a plunging krona, expecting to also fall short on other targets for protecting the environment.

Saturday, September 16, 2023

Prosecutorial Discretion: Attorney General Edition

In the late 1980's, I went with a friend to help her work the Ambassador's Ball at the French Embassy, a pay party and charity auction to support MS research.  I bought my first tuxedo and showed up early to sign people in and help set up.  After an hour or so, our job was done and we went inside to join the party.  

We grabbed a drink at the open bar, and into a big room containing the items being auctioned off: cases of rare wine, catered dinners, and vacation homes in exotic locales.  My favorite, or at least the one I might have bid on but for the money, was a week at a Chamonix chalet.  In front of each item was a lined piece of paper where people wrote down their bids.  

As the night wore on, I noticed two couples actively bidding for the chalet.  One couple would watch the other write down a bid, wait a while, and then walk over and bid again.  This went on for three or four bids, until I noticed the two couples talking to one another.  

At the time, I worked as a staff economist at the Antitrust Division of the US Dept. of Justice, challenging  anticompetitive mergers and prosecuting conspiracies to fix prices, allocate customers, or rig bids.  For these kinds of criminal conspiracies, the Sentencing Guidelines recommend prison terms up to ten years.  

I had worked on and written about a number of bid-rigging conspiracies--dealers at antique auctions, loggers at Forest Service timber auctions, and Frozen Perch sellers at Navy Procurement auctions--so I was excited to actually witness one.  [note: The Economist has reported on my articles on bid rigging albeit with a small mistake].  

The event was chaired by Ursula Meese, whose husband Ed was my big boss, the Attorney General.   I saw him standing by himself in the center of the room, so I walked over, showed him my badge--that's what I liked to call my work ID--and told him what was going on. 

"Do you want me to take 'em down?" I asked.  

He smiled and said "Book 'em Danno."  [reference for those too young]


Middle panel of my first-day class slide shows Attorney General Meese and me in the Reagan Justice Dept.  

Wednesday, September 13, 2023

How would you align the incentives of a Data Protection Officer with the goals of the organization?

 In a previous posts, we have blogged about the onerous EU privacy rules.  Just came across another, a GDPR Data Protection Officer or DPO.

According to Article 38, other employees in the organization aren’t allowed to issue any instructions to the DPO regarding the performance of their tasks. So, not only does the DPO have wide-ranging responsibilities, but the position is shielded from potential interference from the organization.
Wow. What is the performance metric, and are you prohibited by law from tying pay to performance as it could constitute "interference?"

Capital Gains Taxes destroy wealth in these EU countries

If you tax something, you get less of it.  In EU countries without capital gains taxes (Switzerland, Belgium, Luxembourg, Turkey, Slovenia, Czech Republic and Slovakia), an investment that costs $100, but returns $150 after five years has an annualized Internal Rate of Return (IRR) of 8.45%.  In other words, this investment is not profitable unless your cost of capital is less than 8.45%.

For the countries with the highest capital gains rates, Denmark (42%), Norway (35.2%), and France (34%), this investment won't get made unless capital costs are less than 5.2%, 5.7%,  and 5.9%, respectively.  

BOTTOM LINE:  the higher the capital gains rate, the smaller the investment, and the poorer is the country, compared to what it would be without a capital gains tax.

Monday, September 11, 2023

In-class question (Ch1): Wells-Fargo

QUESTION:  In 2016, Wells Fargo was fined $185 million for fraudulent sales practices. The bank's employees had opened as many as 2 million unauthorized bank and credit card accounts in customers' names. Figure out what the problem is and select the best way to fix it.   

 1. Let someone else make the decision.
 2. Change the incentives.
 3. Give the decision-maker more information. 

1. Let someone else make the decision: Replacing the CEO and firing thousands of employees was part of the response, but it doesn't address the root problem - the sales-oriented incentive system. 
 2. Change the incentives: This would be the most effective solution. After the scandal, Wells Fargo had to review and change its sales practices and incentive systems to focus on customer satisfaction rather than solely on sales volume. 
 3. Giving the decision-maker more information: This alone would not have been sufficient. The executives were aware of the aggressive sales culture. The issue was the incentive system, which encouraged employees to open unauthorized accounts. 

How Saudi Aramco, world's largest oil company, became "Green"

Irony is my favorite kind of humor!  From Bloomberg:
The unlikely tie-up between Aramco and ESG began with the creation of two subsidiaries — the Aramco Oil Pipelines Company and the Aramco Gas Pipelines Company. Aramco sold 49% of the shares in each unit to consortiums led by EIG Global Energy Partners LLC and BlackRock Inc., respectively. These investors used bridge loans from banks to fund those transactions.
In order to generate cash to repay the bank loans, the EIG and BlackRock consortiums created two special purpose vehicles: EIG Pearl Holdings and GreenSaif Pipelines Bidco, both registered at the same Luxembourg address. These SPVs then sold bonds, which, since they had no direct links to the fossil-fuel industry, ended up getting an above-average score in a widely-used JPMorgan Chase & Co. sustainability screening based on third-party ESG scores.
From there, the bonds made their way into JPMorgan’s ESG indexes, which are cumulatively tracked by about $40 billion of assets under management. Investors in the SPV bonds include funds managed by UBS Group AG, Legal & General Investment Management and the investment arm of HSBC Holdings Plc.”
BOTTOM LINE: if you cannot measure it (ESG), you cannot control it.

What is a debt coverage ratio, and how does it affect apartment rents in Nashville ($1880)?

 From investopedia:
  • The debt-service coverage ratio (DSCR) measures a business’s cash flow (Net Operating Income) divided by its debt payments, including principal and interest. 
  • Lenders use a DSCR between 1.15 and 1.5 to determine whether to make a loan to a developer.
Here is an example, involving the cheapest loan available.
  • A Nashville builder can build apartments for $167K/unit= $150K(construction) + $17K(land)
  • FHA is willing to lend at $167K at 6% for 40-years, resulting in a debt payment of $986/month.  
  • With FHA's DSCR of 1.15, the builder must make at least $1134/month in Net Operating Income (NOI) to qualify for a loan.  
  • With 7% vacancy the expected NOI increases to $1213/month
  • Add operating cost to NOI to get Rent=$667+$1213=$1880/month 
New apartment supply will enter the market when Nashville rents rise 20% to $1880.

HT:  Bill H.

Sunday, September 10, 2023

Lobster Roll Strategy

He began with the fact that he could not get a decent lobster roll in Manhattan. Everything was off, Holden said. The price was too high, 30 dollars. The lobster meat was inferior with fillers, masks and diluters “to essentially hide the fact that the lobster meat wasn’t as high quality as it could be.”
Then there was the white table cloth service – ridiculous, and as far from the quintessential Maine lobster shack as you could get.
“I’m not a big fan of mayonaisse,” Holden added. “I really struggled to find a lobster roll in the city not drowning in mayonaisse.”
Here’s the recipe for a true Maine-style lobster roll: chilled meat, somewhere in the realm of a quarter-pound of fresh knuckle claw lobster meat; a New England top-split bun, which serves purely as a vessel for the super high-quality lobster meat.
Shave a little butter onto the sides of the bun, toast it golden brown, add a little mayo for texture, some secret seasoning and celery salt to accent the lobster, a little warm lemon butter to bring it all together. That’s all you need.
“That literally is the key to the program,” Holden said. “Once you start trying to do anything other than put your star of the show facing forward, you’re playing from behind. You have to lead with your best food forward. Lobster is the star of the show.”
The first day, Luke’s sold 500 lobster rolls. They were expecting to sell 100. Holden’s dad, Jeff, drove down more lobster meat from Maine overnight for the next day.
Then geographic expansion and vertical integration:
Ten years later, Luke’s is still in the East Village in its original location, but it also has 30 more locations in Maine, Boston, New York, Philadelphia, Washington, D.C., Chicago, Las Vegas, and Miami, plus 10 locations in Japan, and two locations in Taiwan.
Luke’s also has one of the largest lobster production facilities in the United States in Maine, where it manages the lobster for Whole Foods, among others. Luke’s Lobster Seafood Co. processes about 5 million pounds of lobster annually and 2 million pounds of Jonah crab.
HT: Giselle

Tuesday, September 5, 2023

Synthetic Diamond Disruption

Prices of synthetic diamonds have fallen dramatically.

About five years ago, lab grown gems sold at about a 20% discount to natural diamonds, but that has now blown out to around 80% as the retailers push them at increasingly lower prices and the cost of making them falls.

Synthetic gems have been around for decades, but it appears that their costs have recently fallen. The resulting price decreases have increased synthetic diamond demand considerably. This is causing the longtime incumbent monopoly on natural diamonds, De Beers, no small amount of pain.

In June 2022, De Beers was charging about $1,400 a carat for the select makeable diamonds. By July this year, that had dropped to about $850 a carat.

Will DeBeers become the most recent in a string of now defunct market leaders? We are used to seeing digital disruption of traditional retailers, e.g., Blockbuster Video, Borders Bookstores, and Encyclopedia Britannica. It is harder to find recent non-Internet related examples.

HT: Marginal Revolution

Friday, September 1, 2023

Should the Justice Dept be more concerned with Google's complaining competitors or their enthusiastic customers?

Judge Mehta:
A dominant firm like Google does not violate the law, however, merely because it occupies a monopoly market position. It must act in a manner that produces anticompetitive effects in the defined markets. [e.g., that harm consumers].
Mozilla CEO testifying on behalf of Google (page 109 of MSJ transcript):
...consumers are choosing Google. We’re making search easy for them, and we added choice in a product in a way that no one else had or even thought of. We’re making it easy. ...

In response, the Justice Dept. is trying to exclude testimony about Google's quality. They seem to miss the irony that this makes them seem as if they are more concerned with Google's complaining competitors than their enthusiastic customers.

UDPATE:  the judge ruled against the DOJ, in essence telling them they should be more concerned with what Google's customers are saying.

Dollar General strategy shifting, but not too much

 From WSJ:  

  • 1000 new stores in rural areas, 
  • Target demographic <$40,000 income/year, 
  • Its workers earn about $16,000/year.
  • Experimenting with upscale brands, DGX