Betting on Premature Deaths

Wall Street has figured out yet another way to speculate on a financial instrument, this time on life insurance:

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

I have no problem with this idea on one condition: only life insurance policies covering Wall Street financiers would be eligible for such trading.

Ted Kennedy and Succession

Senator Ted Kennedy has died. His death is a huge loss to American governance and public welfare. He will be sorely missed.

Shortly before his death, Senator Kennedy wrote a letter to the principals in Massachusetts state government, including the governor, urging them to pass a law permitting the governor to appoint a temporary successor who would serve until a special election. Kennedy proposed that the temporary senator could not stand in the special election.

The great senator's last wish is still a great idea. The Massachusetts legislature should act on it. However, I would propose one very slight modification which would apply to future untimely deaths: elected senators (and for that matter representatives) should have the power to name a temporary successor themselves. Only if they fail to name a temporary successor, or if the temporary successor cannot (or will not) serve, should the state's governor appoint the successor. After all, we voters elect our representatives, investing in them the responsibility for making important decisions on all types of legislation. So it makes sense that the senator or representative himself/herself should have the first opportunity to name a temporary successor. He/she is in the best position to select an individual who would carry on the same legacy, consistent with the wishes of the voters in the most recent election, until voters get another opportunity to express their views. The governor is a different office, and perhaps a member of a different party, with more distant democratic authority to fill such a vacancy.

So, both to honor Senator Kennedy's legacy and as a matter of good public policy, let's start with Massachusetts and get a temporary successor law passed right away. The law should permit each senator or representative to name their own temporary successor. If for some reason this particular temporary successor is not named or cannot serve, then the state's governor names the temporary successor. In either case the temporary successor cannot stand for election, and a special election is held within a reasonable period of time. (Within five months is a reasonable period of time.)

Touchscreen Automatic Sushi

Recently I enjoyed dining at a sushi restaurant (すしや) in or near Funabashi (Tokyo area). It is an amazing place. Each table has a touchscreen showing the current menu items. If something is out of stock, then it automatically disappears from the screen. The screen keeps a running yen total, so you can spend exactly what your budget allows. You can also see which orders have already been filled and which the kitchen is still preparing.

The kitchen receives all the orders electronically, and then the staff prepare your sushi. When ready, they put your sushi on a special tray which carries an electronic tag matching your table number. (There's a supply of numbered tags near the kitchen's dispatching station.) The dispatcher places the tray on the conveyor belt, and the computerized conveyor belt automatically carries your sushi order to your table. There are well-timed paddles that push your orders onto your table. The only items that require waitress delivery, perhaps for legal or safety reasons, are the liquids, especially the alcoholic ones. (Non-sushi side dishes, desserts, and fruit enjoy conveyor delivery.) As with other sushi restaurants, self-service water and tea are available at your table. But unlike other kaiten (conveyor) sushi places, where the sushi ages on the line, this advanced conveyor sushi restaurant prepares everything to order. The quality is much better as a result.

Here are a couple links with more information on this uniquely Japanese sushi palace:

http://juventus.livedoor.biz/archives/51135407.html
http://www.yamato-f.com/yamadenmaru.html

It's the Card, Stupid

Ezra Klein cites a Boston Globe editorial about health insurance coverage in Massachusetts, and he makes an interesting point that if coverage comes first, cost control will naturally follow.

To extend that thought, I sure hope Team Obama is ready to mail every American a new, standardized, universal health insurance card quickly, very soon after they can get health care legislation in place. It's an important way to demonstrate that every American is getting a tangible benefit. Yes, there will be a few nutjobs who publicly destroy their cards, but they'd only reinforce the point, finally, that all Americans should receive reasonable health coverage.

I fear the White House and reformers in Congress haven't started getting the cards ready.

Great Haircut Deal in Tokyo

I stopped by "Hair Shop Japan" in Funabashi this morning. They offer full service for a mere 1900 yen. Full service means a haircut, shampoo (after the haircut, which is the way it should be), and full shave. Unfortunately they don't use the straight razor except around the ears and in back. The remainder of the shave is with a safety razor, and of course that's not nearly as good. However, I think for an extra charge they'll use the straight razor all around.

Recommended.

Pondering Suicide? Don't Block Traffic in China

Speaking of China, the AP reports that Chen Fuchao perched himself on the edge of a bridge in southern China, contemplating suicide and bringing traffic to halt for about five hours. A passer-by, Lai Jiansheng, walked up to the man, shook his hand, then pushed him off the ledge, saluting after he fell.

Lai said he was fed up with Chen. "I pushed him off because jumpers like Chen are very selfish. Their action violates a lot of public interest. They do not really dare to kill themselves. Instead, they just want to raise the relevant government authorities' attention to their appeals."

Chen fell onto an air cushion positioned by police and survived, suffering spine and elbow injuries. Lai was arrested.

Back from China

I just spent about 4 days in China, in Hangzhou specifically. It still amazes me how common China's national bird, the construction crane, is. And how many McMansions there are.

Heads I Win, Tails I Win

Previously I wondered aloud why, for example, Ken Lewis, CEO of Bank of America, still has a job, amidst soaring unemployment. He ran his company into de facto bankruptcy, drove the stock price into a ditch, required massive infusions of taxpayer support, and overpaid for Merrill Lynch. If he were a plumber the house would be flooded, sewage would come out of the shower head, and there'd be no hot water. Yet he still has a job, and thousands of competent plumbers are collecting unemployment insurance.

Lewis is not just an isolated example. Why do most of AIG's corporate risk officers still have jobs? If they worked for an automobile manufacturer, they would have failed to notice that a metal knife blade affixed to the steering wheel and pointing at the driver might pose a safety hazard.

Then there's the case of Jake DeSantis, one of the 377 vastly overpaid geniuses at AIG's Financial Products group, the one that destroyed the company. He wrote a New York Times Op-Ed explaining why he still deserved a bonus. Matt Taibbi tears him a new orifice.

These cases are not isolated. They are common, even typical. Executive compensation has been totally decoupled from shareholder interests. And it's the taxpayers who own many of these companies now, or should if public officials were acting in taxpayer interests instead of grabbing money from public coffers and sending it to Wall Street, even without equity stakes.

We don't have a market economy. We have a kleptocracy, more akin to Putin's Russia or Marcos's Philippines. (I am in general agreement with Simon Johnson.) Obama is trying to get FDIC-like authority to take financial institutions into receivership if they are insolvent, and there's also a proposal that shareholders vote directly on executive compensation rather than leave such important matters to a board of directors. (Speaking of which, why, in corporate America, is a shareholder, who does not return his proxy, surrendering his vote to the current Chairman and Board, to vote as they please? If shareholders support current management, then they should have to vote as such. If they don't vote, they shouldn't count for any side.) Obama's budget proposal also helps make the tax code more progressive and close loopholes such as hedge fund compensation taxes. All these policies will help, but they won't be enough, and of course the kleptocracy is fighting them. After all, when you don't have the talent to make money the old fashioned way (by earning it), why not steal it?

AIG Monstrosity

AIG is an absolute horror now, if it wasn't already. The whole situation is blowing up in the young Obama Administration's face. For example, I doubt the President can explain why several AIG employees received million-plus retention bonuses...after leaving the company.

So what now?

Congress will pass some type of legislation raising income taxes on financial industry employees working at zombie companies. Unfortunately that legislation won't cover non-U.S. nationals who worked at AIG's London office, and there are plenty of those. The President should also ask U.K. authorities to do the same. That's the short-term fix for this narrow issue.

The President should also fire both Timothy Geithner and Lawrence Summers. They're done. It's time for a new team already. Then bring in Bill Seidman and Paul Volcker, veterans from the last banking crisis. (They are change we can believe in.) And give them carte blanche to place financial institutions into full and proper receivership, not this half-assed AIG-style receivership-without-the-benefits. It's your mess now, President Obama, so man up and take control. Didn't you read any book about FDR?

As the AIG situation so wonderfully illustrates, there are a bunch of contracts that need to be broken, starting with multi-millionaire employment contracts that are still rewarding many employees who would otherwise be guilty of criminal fraud on any other planet. Instead we are living in this "New Democrat" ideological fantasy that socialism (massive and continuing subsidies to zombie companies) is really capitalism. It's exactly the opposite! Meanwhile, the Secretary of the Treasury is cutting backroom deals with his Wall Street buddies so they can avoid the fair consequences of their mismanagement. This all stinks, and it's long past time to put these institutions into Swedish-style receivership. Otherwise it looks like we're going to have a new scandal every week.

Do you really want a new financial scandal every week, President Obama? Do you really want to spend the rest of your presidency defending the actions of de facto criminal Wall Street managers? Shut this stupidity down, now, and start with AIG, before this crisis cripples your presidency.

Larry Summers Suggests Buying Stocks

Lawrence Summers, Director of the U.S. National Economic Council, spoke at the Brookings Institution on March 13. In his remarks he pointed out that, after adjusting for inflation, the Dow Jones Industrial Average this past week dipped to the same level it was in 1966. "While there could be many ways to question this calculation, that the market would be at essentially the same real level as it was in 1966 when there were no PCs, no Internet, no flexible manufacturing, no software industry, and when our workforce was half and our net capital stock was a third of what it is today, may be regarded by some as the sale of the century."

I'm glad Professor Summers qualified this calculation. Economists generally believe that, at least in the long run and on average, the prices of financial assets (like stocks) depend on the net present value of expected future profits. (I'm oversimplifying, but only slightly.) The past is the past: PCs, the Internet, software, etc. are all reasons why investors in, say, the early 1970s could be bullish about future earnings growth and, thus, stocks. They are not reasons now.

So what events and innovations will generate future earnings growth in the U.S. economy? It's something I worry about practically every day at work, to make sure we're focused on real, sustainable growth. From our perspective that includes gaining marketshare, as long as it is profitable. Unfortunately too many actors in the U.S. economy focused on financial gimmicks to generate false bubble "growth," and we now better understand that true growth was limited.

Out of curiosity I looked at the composition of the Dow Jones Industrial Average in 1966. Here were the 30 listed companies at that time: Allied Chemical (now part of Honeywell), Aluminum Company of America (now Alcoa), American Can (now part of Rio Tinto Alcan), AT&T, American Tobacco (divided and now owned by other tobacco companies), Anaconda Copper (now only a Superfund environmental liability for BP), Bethlehem Steel (now part of Arcelor Mittal), Chrysler (now owned by Cerberus Capital Management), Du Pont, Eastman Kodak, GE, General Foods (now part of Kraft), General Motors, Goodyear, International Harvester (now Navistar), International Nickel (now Vale Inco), International Paper, Johns-Manville (now part of Berkshire Hathaway), Owens-Illinois Glass, Procter & Gamble, Sears Roebuck, Standard Oil of California (now Chevron), Standard Oil of New Jersey (now ExxonMobil), Swift & Company (now part of JBS S.A.), Texaco (now part of Chevron), Union Carbide (now part of Dow Chemical), United Aircraft (now United Technologies), U.S. Steel, Westinghouse Electric (now split up, with broadcasting as part of CBS), and Woolworth (now Foot Locker). Notice something interesting? There's not a single financial services company on the list. It really was an "industrial" average. With the exception of Sears and Woolworth (and possibly AT&T), every company on the list made something physical. In later years the Dow would add American Express (1982), J.P. Morgan (1991), Travelers (1997, which later became part of Citigroup), AIG (2004), and Bank of America (2008).