Friday, January 30, 2009
1. Here is Bill Simmons' moving piece about his golden retriever, Dooze:
It's not your typical ESPN Simmons, and it shows a different side to him, one I've never imagined.
2. Here is the BBC on curvy women and IQ:
It's got a nice pic of the beautiful Nigella Lawson.
Thursday, January 29, 2009
In July 2007, when [she] traded in her job as a corporate compliance officer [making 80K] to attend law school, she thought would help advance her career. But after a year of law school, she decided it wasn't for her. By then, her old job was gone and the job market had shrunk.
Basically, if you want to go to law school, wait until there's a recession. Don't do it when you have a good-paying job. Law school requires a lot of money, so you're shelling out beacoup bucks to pay for tuition. But that out of pocket cost isn't the only loss you have when you attend any school full-time. In addition to "losing" the money you spend on tuition, you lose in terms of opportunity cost. Basically, by attending law school full time, you lose time you would otherwise have to work and earn money. So it's a double loss. You're paying for tuition AND you're not making money someplace else.
The bottom line? Be sure you want to go to law school before you go. Most people cannot discharge student loans in bankruptcy, but they may be able to get a deferment. The woman in the CNN article probably owes at least ten grand in student loans. Sigh.
Wednesday, January 28, 2009
Justice Roberts feels judicial pay is too low. According to the article, federal district judges make $169,300; federal appeals court judges, $179,500; Supreme Court justices, $208,100; and the chief justice, $217,400.
Basically, Justice Roberts is saying that $169,300 + full health care benefits + a pension + absolute job security (federal judges get lifetime appointments) are not enough to attract talent. What really infuriates me is that he calls the more-than-adequate pay scale a "constitutional crisis." This is the same man who thought everything was peachy in Guantanamo and voted against giving detainees due process rights. But when it comes to getting paid 169K a year, Justice Roberts suddenly invokes the Constitution? Perhaps Justice Roberts is tinkering with a legal doctrine involving the fine art of douchebaggery.
The 1/19/09 NY Times article cleverly implies that Justice Roberts' primary argument relies on appealing to a nebulous "human dimension."
Tuesday, January 27, 2009
The next information release date is today, January 27, 2009, after 1:00PM Pacific Standard Time. "Days to cover" refers to the number of days it would take for the short sellers to buy back stock. The number of "days to cover" comes from dividing the number of shares sold short by the company's average daily volume.
You can interpret the level of short interest in at least three ways:
1. If short interest declined, it usually means investors are more optimistic about the stock.
2. If short interest increased or is high, it means many investors (or some big investors) are pessimistic about the stock.
3. If you're a contrarian, however, you would view a high level of short interest (or a dramatic increase in short interest) as a positive sign. If the short sellers are wrong, at some point, they all have to buy back the stock. Thus, assuming bankruptcy is not an option, a high level of short interest can establish a floor for a stock's price. This is because short sellers must buy back the stock at some point, and many short sellers are inclined to take profits as soon as possible. When short sellers start buying back stock, it results in a "short squeeze," which can drive out other short sellers and cause an increase in the stock's price.
I am particularly interested in the level of short interest in Intel (INTC). Intel recently announced layoffs, and now, all of its bad news is already public. Therefore, assuming short sellers are rational, they would have covered their positions, leading to a decline in short interest.
On the other hand, I'm biased--I wrote earlier that Intel's stock price would move up because most of the negative information has been released, and I'm bullish on the stock. Given its superior market position--which some might call monopolistic--and its stable financial condition, Intel at between 12 and 14 dollars may represent a good opportunity for long-term investors.
Disclosure: I own shares of Intel (INTC).
Monday, January 26, 2009
From 1999 to 2007, the price of Pu'er, a fermented brew invented by Tang Dynasty traders, increased tenfold, to a high of $150 a pound for the finest aged Pu'er, before tumbling far below its pre-boom levels.
For tens of thousands of wholesalers, farmers and other Chinese citizens who poured their money into compressed disks of tea leaves, the crash of the Pu'er market has been nothing short of disastrous. Many investors were led to believe that Pu'er prices could only go up.
Green tea bubbles? Now I've seen everything.
Hat tip to Jeff E. for the link.
Sunday, January 25, 2009
Investors should be worried. California's unemployment rate just skyrocketed, and Bay Area employers are laying off thousands of employees. As the eighth largest economy in the world, California and its consumers move worldwide markets. Shannon Love writes about California taxpayers and tax consumers here. Ms. Love talks about a tipping point, which is reached when state employees achieve enough power and money to dictate to the people. Once this tipping point is reached, she says, "it is only a matter of time before civil servants become civil masters."
Former Presidential nominee Barry Goldwater said it even better: "A government that is big enough to give you all you want is big enough to take it all away." I've echoed similar concerns here and here. Despite the danger of overweening government, nothing seems to jolt the average American citizen and voter into action. This is particularly distressing, because informed citizens seem to have become apathetic to the government's siphoning of taxpayer dollars.
Take this 1/22/09 SJ Mercury news op-ed, for example. The writers chastise a San Jose City Councilmember for trying to rein in profligate spending and public sector union demands. However, in promoting more government benefits, they reveal just how stunningly fat government employees have become.
Mr. Bruce De Mers and John Diquisto write: "[M]ost police and fire retirees left public service well before the advent of 90 percent retirements." [Emphasis added.] There's no way to escape the reasonable inference from this statement. We are being told that at least some current police and fire retirees will receive around 90% of their salary after retirement. This isn't an uninformed slip--Mr. De Mers is president of the Association of Retired San Jose Police Officers and Fire Fighters, so he knows his numbers. The writers forget to mention the lifetime medical benefits also given to police and firefighter retirees, but after getting 90% of your salary in retirement, why add fiscal insult to fiscal injury? I can't find a non-executive private sector worker in San Jose who gets 90% of his salary at retirement and lifetime medical benefits--and I'm an employment attorney, so I've met my share of San Jose workers. (As I explain below, I am not against paying police officers and firefighters high salaries--I am against paying any public employee hard-to-calculate and unpredictable benefits.)
But let's get back to the article. It contains the usual platitudes, such as, "Panic is not productive. Promoting panic is a disservice to the public." Informed people should read between the lines. Our government officials want us to remain calm--while they dig deeper into our pockets. Unsurprisingly, the writers resort to the public safety argument: "Attacking retirees who risked their safety to make San Jose one of the safest big cities in America may feel good. [T]hat doesn't make it right."
Newsflash: if more police kept cities safe, or if police were even a substantial catalyst for safety, then New York City, Oakland, and Baltimore would be almost crime-free. (Last time I checked, they had plenty of police officers.) In reality, police and firefighters are just two components in the public safety analysis. The determinative factor in public safety is the composition of the residents themselves--especially their education levels. For example, imagine a city with 1,000 cops and 1,000 gang members, most of whom lack a college degree. Will there be more violent crime in that city, or in a city with 50 cops and 50,000 accountants, doctors, and engineers? And yes, that's a rhetorical question.
Most Santa Clara County residents have a college degree--61%, by some accounts. College-educated adults tend to be less interested in drugs and dangerous behavior, and somewhat more likely to be married. These traits generally lead to law-abiding behavior.
Ultimately, the police and firefighters' unions do Santa Clara County residents a disservice when they claim to be the primary cause of our safety. It's almost as if they are saying, "Pay us off, and you'll be safe. Don't pay us off, and, well...who knows?" Combine financial self-interest with political power, and you have a ready-made recipe for oppression, or at least government-sanctioned extortion.
Investors must realize that public sector retirement benefits are a stock market issue, not just a political issue. Continuing generous government benefits will affect stock market gains in several ways. First, public sector retirement plans aren't necessarily linked to the stock market--CalPERS, for example, can invest in hard assets, like timber and land, as well as other investments unavailable to ordinary people. (CalPERS controls around 239 billion dollars, and its investment decisions move markets.) Having a separate, two-track retirement system allows government to invest taxpayer money with little regard for the retirement prospects of ordinary citizens. Consequently, while non-government investors must rely on an ever-increasing stock market to retire, public sector unions and their employees are not so inhibited. Not being similarly situated, they may take actions to inhibit corporate profits and, in turn, stock market gains.
In fact, there is no question that continuing government's generous retirement benefits will drain taxpayers, providing them with less discretionary income. General Motors (GM) and Ford (F) are two analogous examples. Like the United States, they have deficits and are losing money. Just like government unions, the UAW lavished their employees with generous retiree benefits during flush times. As a result, until 2007, a Ford (F) employee's average hourly wage was $71.00/hour--but with only $29/hr going to actual wages. Around forty percent (40%) of the total hourly wage went to retiree benefits and health insurance programs. (See WSJ, 1/22/09, A12.) Meanwhile, foreign automakers pay around $49/hr to their employees and still manage to create better products and have better service.
Basically, GM and Ford became non-competitive (at least until declaring bankruptcy and/or gaining union concessions) because they offered generous retirement and medical benefits based on overly optimistic actuarial projections. The costs of their programs--like America's public sector pensions--are linked to the life expectancies of retirees and future profits/tax revenue; therefore, without a crystal ball, true costs are difficult to predict.
Since it's difficult to ascertain the exact costs of benefit programs--which, like construction projects, often take longer and usually go over budget--prudent persons would favor cutting hard-to-measure benefits and then increasing present-day salaries. If the private sector--with its self-interested, sophisticated shareholders--couldn't restrict union health and retirement benefits to a manageable level, what chance does California have? After all, unions in California have heavy influence over a majority of California legislators. To be clear, I am not anti-union--I am against unpredictable and hard-to-calculate government costs, especially costs that are passed off to future generations. We simply cannot expect the government to consistently and accurately predict the lifespan of all government workers, the number of its retirees in any given year, or the future health and medical conditions of all of its retirees. Yet, in order to accurately predict future costs in any system that provides pensions and lifetime medical benefits to millions of people, the government would have to act as a financial soothsayer, which it has been unable to do.
Unions, both private and public, were originally great ideas (See the film, Harlan County, U.S.A.). However, like most entities with billions of dollars of influence and political involvement, many of the largest unions have become corrupt and unwilling to look at the big picture. If GM and Ford are any indication, California's state budget could end up allocating 40% of our taxes to government retiree/health benefits and still not produce a balanced budget or better service. Like Ford and GM, if the status quo continues, California will become non-competitive. But that's not all. Ford and GM recently considered bankruptcy but were bailed out by the White House at the last minute. Although some California cities have filed for bankruptcy because of overly generous public sector benefits, an entire state has never gone bankrupt. Who's going to bail out California if it goes bankrupt? Will we see the day when California has to offer a 25% interest rate on its bonds to attract investors?
Finally, generous government benefits create major mis-alignments of interest. Having two separate retirement systems--one for Joe the Plumber and another for Sally the Cop--allows the government dangerous leverage against ordinary citizens. The day may come when CalPERS says, "If you don't give us what we want, we'll pull all our money out of the stock market, invest it someplace else, and you can kiss your 401(k)s goodbye." Sound implausible? Until recently, so was the idea that our federal government would give $700 billion to financial institutions without strict oversight. Also, don't forget that just ten years ago, banks like Citigroup (C) looked ready to take over the world. Now, of course, Citigroup (C) sells for around $3/share and is looking for a bailout.
Citizens should develop an eye for non-violent oppression. An oppressive government doesn't need to lock you up or arrest you to control you--it just needs to take enough money from you to buy off politicians and pass laws favoring them over regular folks. Investors, both foreign and domestic, need to stop being calm about overly generous government benefits and take action. Future generations of taxpayers--namely, our children--deserve nothing less.
Bonus: more on California's government unions HERE:
Approximately 85% of the state’s 235,000 employees (not including higher education employees) are unionized. As the governor noted during his $83 billion budget roll-out, over the past decade pension costs for public employees increased 2,000%. State revenues increased only 24% over the same period. A Schwarzenegger adviser [Pat Dando] wrote in the San Jose Mercury News in the past few days that, “This year alone, $3 billion was diverted to pension costs from other programs.” There are now more than 15,000 government retirees statewide who receive pensions that exceed $100,000 a year, according to the California Foundation for Fiscal Responsibility.Many of these retirees are former police officers, firefighters, and prison guards who can retire at age 50 with a pension that equals 90% of their final year’s pay. The pensions for these (and all other retirees) increase each year with inflation and are guaranteed by taxpayers forever—-regardless of what happens in the economy or whether the state’s pensions funds have been fully funded (which they haven’t been).[Steven Greenhut, WSJ, 1/22/10]
Friday, January 23, 2009
The author defines conservatism as the following:
1. Belief in natural law
2. Belief in established institutions
3. Preference for liberty over equality
4. Suspicion of power— and of human nature
5. Belief in exceptionalism
6. Belief in the individual
As far as simple categories go, it's not a bad list; however, when defining a conservative (also known as a "classical liberal"), I prefer to use Milton Friedman's principles:
1. The scope of government must be limited.
2. Government power must be dispersed.
3. "The power to do good is also the power to harm; those who control the power today may not tomorrow; and, more important, what one man regards as good, another may regard as harm."
The author of "Conservative Resources" has another interesting post, where he compares liberals to conservatives:
It's good to see intelligent commentary about different political groups. Categories aside, I look forward to the day when America has a viable third party. A viable third party might force both Democrats and Republicans to move to the center, where most Americans are.
I wrote here that a third major party would most likely result when more conservative factions within the Republican Party decided to create a splinter group.
As of around 2:19AM PST, futures are down 199 points. If General Electric (GE), which is reporting in a few hours, tells the Street it will cut its dividend or do nothing to sustain its credit rating, we are going to be in for a really bad day. I wouldn't rule out Dow 7500 if GE reports particularly poor results.
In other news, it appears my prediction that Intel stock will reach 14 dollars this week will be proven incorrect. My average buy price is around $13.50/share, so I am not concerned (Update on January 28, 2009: Intel stock today increased above $14/share). With the upcoming dividend payout, I will have an opportunity to buy more shares while I wait for Intel to return to more reasonable levels.
For now, Intel appears to be in full-blown cost-cutting mode. Bloomberg recently reported that Intel is shutting down its Santa Clara, CA chip factory:
There are no incentives to have sizable manufacturing operations in Silicon Valley. The Valley is hugely focused on intellectual property and innovation, rather than on manufacturing.
"Silicon Valley, CA" may now be a misnomer. As Cypress Semiconductor's CEO T.J. Rodgers warned earlier, employers are leaving the Bay Area in droves, taking manufacturing operations with them:
Few people know it, but so-called Silicon Valley is not really Silicon Valley anymore--almost all of the wafer fabrication plants have been shut down due to the hostile business climate.
As a Santa Clara County resident, this is troubling, but I understand why Intel made its decision. California has strict environmental regulations and very expensive land. As a result, it's almost always cheaper for companies to build fabs or other manufacturing operations outside of California. Although it's tough seeing a large, well-known employer offshore any work, I've heard over and over that the top brains and talent are still in the Bay Area.
It's surprising, however, that Intel seems to be offshoring such an IP-laden part of its business. The Bloomberg article doesn't specify whether a chip fab or a research fab is shutting down. In either case, if an overseas employee takes Intel's chip-level (not motherboard level) source code, or the manufacturing specs for Intel chips, it can sell them for millions of dollars to many interested buyers. That's one problem technology companies have when moving overseas to save costs--they may not be as familiar with local employees, cultural norms, or local court systems. America, despite its problems, still has a healthy respect for the rule of law--something that isn't universally shared.
Disclosure: I own Intel shares.
Thursday, January 22, 2009
Wednesday, January 21, 2009
"For a long time now, there's been too much secrecy in this city," Obama said.
Obama gets it. He really gets it. God bless him, and God bless America.
From what I gather, it's like Kiva, except micro-finance investors receive 2% interest on their loans (instead of Kiva's 0% rate). I am not an Oikocredit investor, so I don't have any personal experience with the organization. I find Oikocredit's website hard to navigate and their procedures convoluted. In addition, they appear to favor donations/investments from organizations (like churches) rather than individuals.
Do your own due diligence. I am not endorsing Oikocredit. However, if you do invest in Oikocredit or are already an investor, please post a comment and let us know your opinion. It would be nice if Kiva had some competition to keep them on their toes.
Update on March 28, 2009: this eBay-affiliated site looks very promising:
Update: found another site worth checking out:
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
Tuesday, January 20, 2009
Every time I read what Warren says, I relax. America is lucky to have such an articulate, honorable spokesman. Excerpts from the interview are below.
Warren on public pensions:
[T]he pension plans of states and cities...have been decimated in the last year. And the costs from that, the lack of revenue they're going to face as the economy slows, means that you are going to see a parade of mayors and governors to Washington like you've never seen it. And they're gonna say, "If you can help out General Motors, and you can help out Citicorp, you can certainly help out, you know, this state or that state." So I think it's gonna make inauguration day look like nothing in terms of the public officials that come in here and say, "We need help." Their revenues are gonna be down. Their expenses, particularly including pension expenses, are going to be up. And you're going to have unbalanced budgets just all over the country with states and cities.
Warren on economic stimulus:
[E]very time you read about 523,000, or whatever, those people losing their jobs in December, those are 523,000 human tragedies. I mean, I can think of nothing worse than going home and saying, you know, to a family that, "I've lost my job and we've got mortgage payments and food to buy." And so we need to solve that one. And we will have consequences to the kind of deficits we're running up. And some of them will be unpleasant. But I would rather face those consequences than to face the consequences of doing nothing.
Warren on investing:
[Investors] have to look to the business, the asset itself. If you own an apartment house you wouldn't get a [price] quote on it every day. You'd just look at the rent, and what your taxes were and expenses were. And if they all came in line with what you expected when you bought it, you'd feel you'd made a satisfactory investment, and you'd never get a quote on it. So I don't look at quotes. Mostly-- I can't tell you what Berkshire Hathaway [BRK.A, BRK.B] is selling for today.
Warren on bailouts:
Well, that's [bank, auto bailouts] exactly what we did in 1933. I mean, in 1933, when Roosevelt came in, there was something called the Reconstruction Finance Corp, RFC. Actually, It got enacted under Hoover in '32. But Roosevelt appointed Jesse Jones in 1933. And they put preferred stocks into the banks. They concentrated on banks, but they went into other things. Incidentally, when [Jesse Jones] put that money in, he told 'em what the compensation rate was gonna be too. I mean, he was a tough tsar. And it helped take the United States out of a depression. I mean, the RFC was an important component. And I'm sure they got criticized at the start. And they said, "People, you're throwing money into the wrong things and all that." ...But you can't separate Wall Street, Main Street, side streets. We are connected. This is one big community. And you better have credit flowing.
I knew that Congress authorized loans in 1979 to prevent a Chrysler bankruptcy, and J.P. Morgan once bailed out the Treasury, but this is the first time I've heard about the RFC and Jesse Jones. I shouldn't be so surprised--as I wrote here, the more things change, the more they stay the same.
I didn't hear the address, but reading the transcript, this is my favorite part:
[I]t has been the risk-takers, the doers, the makers of things – some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.
In other news, stocks markets are down. The Dow is down 2.6%, and Nasdaq is down 4.2% in mid-day trading. It's got nothing to do with Obama's address--corporate earnings are still coming out, and people are scared.
Monday, January 19, 2009
For the thousandth time, the lesson is “diversify”:
More than a decade ago, when I was in my late 40s, I handed over my life savings to Madoff’s firm...
It's also clear the elite were the ones connected to Madoff:
I was brought up in very comfortable circumstances in a Waspy Connecticut suburb. My mother was a descendant of Greek royalty, an intellectual grande dame who wore elegant shaded glasses. But my father, a Greek immigrant, was a product of the Depression. He was a smart, strict Harvard lawyer who had seen bad times...I asked around and talked to my smartest friends with Harvard and Wharton MBAs. There appeared to be a secret society of Madoff investors. A friend who was older, wealthier, and more established somehow got me in.
It's still difficult to identify with Madoff investors, partly because there's an element of self-exploitation involved. Ms. Penny, for example, uses her article to promote a sex book she wrote years ago. She also unconsciously reveals how insulated she is when she talks about her forty white shirts, ironed by an immigrant named Yolanda:
I wear a classic clean white shirt every day of the week. I have about 40 white shirts. They make me feel fresh and ready to face whatever battles I may be fighting in the studio to get the best out of my work.
The language is shockingly out-of-touch. "Battles" fought "in the studio"? Is she forgetting that Americans, mostly poor and middle class, are fighting real battles right now? Also, who has 40 white shirts? I'm an attorney, so I actually need white collared shirts. Yet, I own only three--one from Gap (GPS), one from Macy's (M), and another from Nordstrom (JWN). I also specifically look for "wrinkle-resistant" shirts to save money on drycleaning.
Other readers picked up on the "white shirt" phenomenon, too--here's a comment from "Hammett":
Hey, you're worried about clean white shirts. So, you're going to have to learn how to iron and stand there until your back hurts, like most people. That's life. Get off your [arse], and get to work. And stop feeling sorry for yourself.
More on Madoff here and here. Public outrage isn't going to go away anytime soon. Scott Burns, one of my favorite finance writers, received 3,000 emails/letters when he asked readers how Madoff should be punished. What do you think, readers? What would be an appropriate punishment for Madoff?
Sunday, January 18, 2009
[T]he median household income in the United States is $48,000... [but] the median-household-income statistic is too blunt an instrument, because it contains households headed by 20-year-olds (i.e., students), as well as 90-year-olds (i.e., retirees). If you earn $48,000 at 20, you're doing fine and don't need government help; at 90, you're on a fixed income and have different needs (and more options) from government than someone younger. According to an analysis by The Third Way, the median household income for people ages 25 to 60, the prime working years, is about $68,000; if they're married, it's about $78,000. If both spouses earn income at some point during the year, the number rises to $85,000.
Makes you reconsider the definition of middle-class, doesn't it?
Saturday, January 17, 2009
In a nutshell, President-elect Obama has asked Congress to give him more taxpayer money--more than the $700 billion already printed. Purportedly, this new money would be used to stimulate an economic recovery. The problem is, much of it will go to a new "education stabilization fund," or into the pockets of government workers. Under the proposed plan, $80 billion would go towards programs benefiting teachers' unions.
Is this change, or just maintaining the status quo?
Friday, January 16, 2009
If you, like author Chuck Thompson (Smile When You're Lying), are disenchanted with the sanitized media, check out "No Reservations." In one of his best shows, Bourdain travels to Columbia. In between bites, we are treated to stories about Pablo Escobar, a local rap group, and the evolution of Columbia itself. (Other fans praise the Vietnam show as his best, but I haven't seen it yet.)
Bourdain's funniest moments seem to take place in cold weather. In Sweden, after a night out on the tundra, Bourdain goes on a hilarious 30 second monologue about how he wants to be called "Giver of life," because his cigarette lighter provided fire for his crew. In Iceland, Bourdain is looking forward to an annual party, and when it's nothing like promised, he gets drunk and proceeds to mock everything about the event. At one point, he busts out his lighter in tribute to an Icelandic a capella group. Later, he names a horse Sarah Jessica Parker (she has a long face).
Mr. Bourdain also has a blog.
Bonus: here is a fantastic salon.com 2006 interview with him. My favorite excerpts are below:
On Bourdain's intense dislike for Rachael Ray:
Q: Will we see you in a year saying, "Oh, I had drinks with Rachael Ray, and actually, she's all right"?
A: Yeah, right. "After the hot-tub incident, I've changed my mind." You know, listen, like I said, I could be wrong. Unlikely. But maybe she's nice to puppies...[Anyway,] If I ever saw her getting trashed on Old Crow, pistol-whipping a vegan after a bar crawl, I would think, "That's an interesting woman. I would like to know her.
Listen, in 25 years, I don't remember ever seeing an American-born kid of any income level walk into my restaurant, or any restaurant owned by any of my friends, and ask, Do you have a dishwasher job, or a prep job, or a job for a kitchen porter? We're not willing to do it. If somebody else wants to come over here and do it, that's fine with me...
I also like the idea of people from other places coming to our country and multiplying. It makes for better food, higher expectations, more diversity and cuter people. Foreigners should come to our country and have sex with our womenfolk.
On how laws, P.C., and regulations are driving Americans apart and reducing merit-based values:
I think it's great that kitchens are maybe the last meritocracy, the last workplace where men and women can speak to each other honestly, however offensively that might be, where your value is only in how well you do your job and how well you can talk shit back at somebody. I see that as an admirable quality. I don't like the idea of tiptoeing around each other. I think that if you say something stupid and offensive, somebody should get right up in your face and say, "That was incredibly stupid and offensive, and f**k you too!" Once you enforce it, bring in the human resources department, everybody goes home to their own neighborhoods, and we never really talk.
[More on kitchens as meritocracies here (Judy Joo, 1/22/09, WSJ, "Out of the Fire, Into the Frying Pan").]
Author's note: Bourdain's paragraph above really appeals to me. I am usually non-confrontational, so it's hard to tell my stance on most issues. However, despite my generally flexible nature, I am steadfast when it comes to the idea of meritocracy. Judging people based on their work, not their beliefs, should be the norm, not the exception. As a lawyer, for example, I don't care what a judge's political affiliation is, as long as s/he reads the pleadings. I don't even care if I lose, as long as the rationale makes sense. But give me a judge who's lazy, who got his/her job through charisma rather than hard work, and who relies entirely on law clerks, and it's all I can do not to have a Tourette's "incident" during oral argument and an anger-induced aneurysm afterwards.
Unfortunately, many judges, because of the political nature of the appointment process, got their jobs through charisma rather than a widely-acknowledged work ethic. Once on the bench, judges are given highly trained staff who prepare advisory legal memos on each case. Because of these law clerks--who initially have more overall substantive legal knowledge than the judge--the incentive to read litigants' pleadings is removed. Predictably, most judges lapse into a titular position, where they rubberstamp their clerks' opinions or memorandums of law.
In fact, if you were to put a camera above most judges during oral argument, you'd see only a legal memo prepared by a law clerk. The judge usually doesn't open any of the case files, unless an attorney specifically mentions an exhibit or particular page. Also, a judge knows that if s/he changes a law clerk's proposed opinion, either the clerk or the judge must spend time drafting a brand new opinion. As a result, changing a clerk's proposed opinion creates work (and trouble) for everyone. In this way, the "memo" system fundamentally changes oral argument and the legal system. Rather than seek the truth or a just result, the judge's job becomes corralling the attorneys into the confines of the law clerk's memo.
Inevitably, the "memo" system results in a clash between hard-working lawyers and judges who don't read the pleadings. That's because the "memo" system is fine if you're a bad or lazy lawyer--you get treated the same as a lawyer who's spent hours reading every single case cited in the papers and who knows every detail of his/her case. It's like going to a class with a teacher who doesn't prepare for a lecture and who treats all the kids the same--regardless of whether they did their homework perfectly or didn't bothering opening a textbook. If you're a student in that class, you can't help but be upset.
First, your teacher just got paid taxpayer money for showing up unprepared. Second, your teacher is wasting your time because s/he has nothing to offer. You could have spent the day doing productive, money-generating activities, but you can't, because you have to spend time preparing in case the teacher does have questions, and you have to spend time attending the class. Third, even if the best students don't get discouraged, they are less motivated to do their best. Good students like being pushed--lazy ones don't. Fourth, anyone who cares about the schooling system as a whole should get upset. By failing to work hard, your teacher is incentivizing his/her students to be unprepared or to submit shoddy work. Predictably, everyone starts slouching towards mediocrity, because unprepared teachers discourage students who ask questions or who are passionate about a topic. There's no point in having any substantive interaction anyway, because the unprepared teacher's job isn't to get the truth or the proper result--it's to get the students to be quiet and accept the findings in his/her research assistant's memo. (Some teachers, if they're particularly devious, will try to embarrass vocal students by having arbitrary decorum rules. Such rules allow teachers to divert attention from substantive matters when in a tough spot, while also making well-prepared students appear ill-mannered.) Thus, the purpose of the schooling system--to create an environment that encourages achievement and well-informed debate to maximize accurate results--is perverted, all on the taxpayer's dime. Change teachers to judges, research assistants to law clerks, and students to lawyers, and you might have an accurate metaphor for how our current judicial system works.
To be fair, most law clerks are quite good (almost all of them graduated at the top of their class). They're usually sitting in the back of the courtroom, silently viewing oral arguments. In the current judicial system, good lawyers learn that their job is to divine what the semi-invisible law clerk wants, not the judge. There are at least two major problems with this delegation of judicial work:
1. There is no way for an attorney to question the clerks; in fact, one federal court refused to even give me a clerk's name after I protested the court's refusal to have a hearing.
2. Most clerks usually have no law firm experience, so they don't know much about the actual practice of law. This can result in a new or pusillanimous clerk making a credibility determination based on the size or prestige of a firm rather than the merits of the case. It also results in a system that is disinclined to take any risks, no matter how small. (Better to "split the baby" and award something to each side, even if one side is completely correct. No one will protest too much, except perhaps the client--who is mostly invisible until trial.) Good lawyers quickly learn they need to prepare their clients for settlement--no matter how good or bad the case.
As for judges, they continue to have little incentive to read any of the pleadings. For example, I had one case where a judge got the name of my client's supervisor wrong--even though I had quoted her numerous times in my papers, and her testimony was our main source of evidence. Lest you think this was a routine motion, it was a dispositive motion that eventually dismissed my client's entire case. (This judge's colleague once said the judge isn't enamored with "motion work," and prefers to spend his time on trials. That's fine, except if your law clerk is the only one reading the pleadings, s/he decides whether you have a trial.) I've had a case where a judge pointed to my PO Box mailing address on my pleading caption, thinking I didn't have an office address. (After the first page, my papers actually listed my office address.) I could go on, but I'll spare my readers.
In any case, judging people on their work ethic is the clear solution to solving the timeless issues of racism, sexism, etc. I don't mean we should have a nation of Orwellian Boxers--the result counts, too. But make no mistake--without affirming work ethic as our primary value, we will rely on our prejudices and lesser angels to make decisions, leading to a decline in merit-based progress. Down the road, we'll realize that when meritocracy goes, down goes any nation--and by then, it will be too late.
And on that note, here is a paragraph attributed to Bourdain I can relate to, sans the Mary Jane:
I know there's deep inside (me) some lazy hippie who'd be perfectly happy to lay on the couch, smoke weed and watch The Simpsons all day - I'm really afraid of that guy. I don't like him. I don't want him around. And my whole life is kind of constructed to avoid reverting to that guy: Stay busy. Stay focused. Try not to mess up.
Update on February 4, 2009: I forgot an essential element that needs to accompany work ethic--self-restraint. Without self-restraint, having a wonderful work ethic could mean Germany gearing up for WWII.
Thursday, January 15, 2009
If you read the first article linked above, you'll notice that two analysts downgraded Intel, even assigning a $10/share price to Intel recently. (Intel is trading around 13.58/share in after-hours trading.) Analysts came under fire because they were overly optimistic during the subprime crisis, so expect a reversal of sentiment--analysts will now become too pessimistic. In over a decade of investing, I've rarely seen any analyst issue "sell" ratings or assign prices to blue-chip companies below current trading levels. If you're a contrarian investor, you may be encouraged by these overly pessimistic signs. I know I am.
I just re-read a Money "special report" issue from September 2002, another turbulent time. The cover page had the following deja vu titles: "When will the bear market end?"; "Where should I put my cash?"; and "Who can I trust?" As I flipped through the pages, I began smiling. If Money magazine re-issued its September 2002 issue today, no one would notice any outdated information. Indeed, most stock prices and indices are back to where they were in 2002. In addition, Americans had just suffered through the Enron and Worldcom debacles, which reduced not only investor confidence, but faith in the entire capitalistic apparatus.
Let me share with you some lines from Money's 2002 special report--see if they look or feel familiar:
Stock prices in free-fall: "There's a disconnect between how these businesses are doing and how their stocks are performing," says one manager. (p. 36)
Anger over corporate irresponsibility: Nell Minow has developed some very clear ideas of how to cure what ails corporate America. To her, it boils down to one thing: Change the way boards of directors operate. Yes, reform of the accounting profession is needed. Yes, it ought to be easier to put corporate fraudsters in jail. Yes, something has to be done about those insanely outsize options packages that have given so many executives the motive to commit fraud. But to Minow, all of this is secondary to reforming corporate boards. (pps. 57-58). [Author's note: someone get Ms. Minow an SEC position pronto.]
Anger over inadequate government oversight: But after 2 1/2 years and a market loss of nearly $7 trillion, the White House and Congress still don't get it. (p. 63)
No commentary needed: Whoever said crime doesn't pay obviously never ran a big corporation. (p. 64)
Bargain hunting: Is General Electric (GE) stock a bargain? It looks like one to us. (p. 68) [note: GE was selling for around $28/share at the time. It is now selling for $13.77/share. I liked it at $14.66/share and look forward to averaging down.]
Nuff' said: Is Our Financial System Broken? (p. 79)
What's the lesson? Just this: the more things change, the more they stay the same. I will leave you with some reassuring words from experienced investor Peter Lynch, circa 2002 [warning: PDF file]:
RUKEYSER: If you could give one sentence of advice to scared investors right now what would it be?
LYNCH: I think you ought to see some kids. You know, hire an eight-year-old. Hire a six-year old. Just watch them. They don't know who Alan Greenspan is. They don't know about the shape of the curve. They're optimistic about the future. We'll be fine for the next 30 or 40 years.
When I heard Mr. Lynch on the Louis Rukeyser show in 2002, I remember thinking, "He gets it." I coach youth basketball to get away from the vicissitudes of my legal practice and investing. There's something about seeing a bunch of happy, healthy kids coming together as a team that inspires faith in the human race. This year, I'm coaching 4th graders at the Campbell Community Center. My favorite current NBA player is the San Antonio Spurs' Tim Duncan. Yet, in some sort of cruel cosmic joke, my assigned team this year is the Spurs' nemesis, the Lakers. Fittingly, our team uniforms consist of hideously bright yellow t-shirts. Oh, well. Things on the outside may look bad right now, but deep down, our future is bright, we have plenty of land, a new president, and peace within our shores. I don't know when we'll get a market recovery, but just like post-September 2002, it'll be here before we know it.
Disclosure: I own shares of GE and Intel.
Wednesday, January 14, 2009
...for out of nothingness we are not born,
and into nothingness we do not die.
Existence is a circle, and we err
when we assign it for measurement
the limits of the cradle and the grave.
The grave holds nothing but a skeleton;
and life within this mortuary vault
continues secretly to find its substance.
Beautiful, isn't it? The entire poem can be found here.
For whatever reason, it reminds me of John Donne's "Death Be Not Proud."
Update: two analysts disagree with me--they have price targets of 11.50 and 10 dollars. Intel closed trading today at 13.08/share.
Disclosure: I own Intel shares and recently bought more Intel shares.
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
Tuesday, January 13, 2009
With all the talk about earnings per share and future profits, it's easy to forget that a country's stock market won't experience a bull market if the country spends more than it collects. This is the basic law of business, and it doesn't change just because government is involved. One area that needs a closer look is public pensions.
Pension Tsunami is a website about public pensions, and it's definitely worth a look. Here is one recent article on San Jose public pensions, focusing on police officers and firefighters. (The San Jose Mercury article contains the chart posted above.)
Most people respect police officers and other public safety workers, but there is no reason for any public worker to receive more benefits and a higher salary than the average private sector worker. When government employees receive higher salaries and benefits than private sector employees, private citizens end up protecting and serving the government--an odd reversal. This is because private sector taxes and IOUs (bonds) are used to finance government expenditures, and those monies come from the private sector. If there is an imbalance, government will have to run up deficits to keep paying itself, creating an imbalance that will devalue the currency (due to the need to print more money to pay for the higher-than-normal benefits) or cause inflation. Thus, whenever the people work to serve the government instead of the other way around, fiscal responsibility will not exist.
There's also the small matter that America was created so private citizens would not have to kowtow to kings or an insulated, domineering government. In short, American government was designed to serve non-government citizens. America's founders would probably disapprove of a political system where people work primarily to serve and pay their government.
Even though the evidence favors treating government workers no better than private workers, it will take a massive paradigm shift to educate the public about the danger of excessive government spending/benefits.
First, television glorifies police officers, D.A.s, and other government workers, while accountants and small businesses don't get any airtime. I still remember my CHiPs costume when I was a kid--but I don't remember seeing any bank teller or taxi driver costumes on Halloween. When the average American watches hours of television, public sector workers have an advantage because they are portrayed as more important than private sector workers--even though it's the private sector workers who are footing the bill.
Second, most of the people teaching our children are government workers. As a result, most students spend eighteen years in a system that has no incentive to educate them about the true costs of excessive government spending and exclusive government benefits. This systemic education failure not only aggrandizes teachers' unions, who have no incentive to reform themselves, but also creates a class divide. Rich people tend to send their children to private schools rather than public schools. In addition, many top government workers, including President-Elect Obama, send their children to private schools. When the children of the middle class and poor spend eighteen years in a different system than the children of the rich, class conflict is virtually guaranteed.
This is why allowing parents to have the option of charter schools is so important. With charter schools, public schools have competition--which usually improves performance--and public schools no longer have a monopoly on education. In general, the public opposes monopolies, knowing they typically produce less innovation and high performance; however, when it comes to charter schools, much of the public is against them. This is surprising, because vouchers are the easiest way the middle-class and poor can escape the monopoly of public schools. When the public views teachers' unions as the Microsofts of education and charter schools as the Googles of education, change will happen.
There are simple ways to resolve the problem of entrenched government. One, require all government workers to have medical and retirement benefits only available to private workers. If a 401(k) is good enough for private sector doctors and lawyers, why do D.A.s and teacher get better retirement benefits in the form of guaranteed pensions? If the average private sector worker doesn't get lifetime medical benefits, why should government workers get such an expensive benefit? (By the way, if we actually equalized medical benefits, all Americans would probably get subsidized healthcare coverage.) When government workers have to use the same services as the public, they have more information about how the average person lives and more of an incentive to fix problems.
Two, institute term limits for all government workers. If we have term limits for the president and other representatives, why allow lifetime jobs for other government workers? A reasonable term limit would be 10 to 15 years. After this time period, a government worker could not go into any other government position and would have to earn his keep in the private sector. The knowledge that a government job is not a lifetime position would incentivize the government worker to improve his/her skills for the inevitable day when s/he applies for a non-taxpayer-subsidized position.
In addition, the turnover would be beneficial to the younger population, who could learn significant job skills through government work and then use those skills in the private sector. It would be like having a government-funded apprenticeship, where future leaders would be trained by experienced government workers to serve the public. Experienced government workers would begin training the new crop of workers from Year 13 to Year 15.
Doing it this way, government would be a non-fossilized place. This moderate turnover (as opposed to almost non-existent turnover) would allow new ideas to flourish in government. It is true we would lose skilled government workers to the private sector, but the key is to train newer workers to ensure a consistent stream of skilled government workers.
In the end, if America wants another bull market, it needs to return to budget surpluses. Demanding that our government not spend more than it collects is one way Americans can help get our country back on track.
More on public pensions here.
Here is my book review of Capitalism and Freedom, Milton Friedman's short, seminal book on economics and freedom.
Monday, January 12, 2009
Sunday, January 11, 2009
Over the last five years, [1995-2000] we have completely restructured and refocused the DaimlerChrysler Group...In the process, we have shed not only a number of loss-making and non-core operations, but we have also considerably improved the cost structure of our automobile operations in Germany... [Great! So things should be fine now...right?]
During the course of the year, we have also taken further important steps to focus our operations on the core automobile business...[But] competitive pressure in the US automobile market increased significantly, as evidenced by the strong rise in sales incentives or discounts which are up by over one third compared with a year ago, and are almost three times what they were in 1997... [Oh, I get it. It's not you--it's your competition. You can't compete on the open market. Got it.]
The management team has a wide-ranging mandate to reposition and restructure the Chrysler business to enable it to regain its strong market position and to become highly profitable again...
In order to restore Chrysler to profitability as soon as possible what is already clear is that we must also restructure the business--this will bring with it a cost. [Sounds like the job of the "car czar" has already been done.] This expenditure however should also ensure DaimlerChyrsler maintains its position at the forefront of the modern automobile industry. [Chrysler was mentioned as the most likely candidate for bankruptcy before the bailout.]
It boggles my mind that our government is using our money to finance companies that can't seem to ever get it together. In a hilarious press release titled, "The $13 Billion Industry Is In No Fear Of Collapse, But Why Take Chances?", Larry Flynt satirized the notion of bailing out troubled industries. Jokes aside, when, if ever, does moral hazard trump "too big to fail"? This question isn't just idle thinking. The bailouts have exposed a core weakness in our political system. Apparently, if you can't compete on the open market, all you need is a bunch of lobbyists to convince your government to give you taxpayer money. Luckily, in this case, the political system actually worked--Congress rejected the auto bailout plan. Even so, the White House, over the objections of the public, provided the bailout money. George W. Bush in bed with the automakers and their unions? Historians will be amused.
Social Security is the largest outlay, with 21% of our taxes going there. Next up is Defense, with 19%. Obama may reduce defense spending to shift more taxes towards infrastructure spending. Doing it this way would allow him not to raise taxes.
Defense hawks may disagree with any decrease in defense spending, arguing that it would cause a decline in domestic security. I do believe terrorists will hit the United States again, but much of the current defense spending is on major projects, like stealth fighters. Meanwhile, port security is inadequate. Consider this simple, low-tech scenario: a terrorist pays two dock workers to put an unmarked package on a ship. The dock workers will be told they are transporting drugs and will be paid a few thousand dollars for their discretion. In reality, the box would contain a major bomb or chemical weapon. The bomb doesn't even have to be inside a box. The terrorists could place a bomb inside an imported car, major appliance, or some other product that has many electrical components, making the bomb harder to detect.
Rather than focus on large-scale projects, such as the next generation of aircraft, which always seem to run over cost, the U.S. should shift more money into intelligence work. More specifically, Obama should hire more workers to 1) supervise America's major ports (e.g., Los Angeles, Miami, etc.); and 2) more effectively monitor the contents of packages before ships on-load and offload them. I realize modern ports have automated systems, but having more hi-tech automation doesn't necessarily lead to higher security.
If you're interested in reading more about Obama and defense spending, here is an interesting article:
Saturday, January 10, 2009
Using hyperbole and humor that became infamous then, and sound far more awful today, Newsweek said those 40-year-olds were "more likely to be killed by a terrorist" than land a mate...Meanwhile, new research suggests that women today who are highly educated are actually more likely to find husbands.
At least we know what can knock the gender wars off the front pages: terrorism, a real war, and a recession.
Before reading the above post, I didn't understand why deflation could lead to a Depression.
PLI also provides a link to another blog, Debtwatch, which may interest some readers:
Friday, January 9, 2009
[L]awyers, as a group, have their own unique set of characteristics. For one thing, they are famously prone to depression. A frequently cited Johns Hopkins University study from 1991 found that among more than 100 occupations surveyed, attorneys topped the list for having major depressive disorders, suffering from depression at a rate 3.6 times higher than the general employed population..."You see figures that 20 to 25 percent of lawyers have an alcohol problem," says [Carol] Langford [who practices state bar defense]. "I think it's more like 40 percent."
When I went into law, I thought I could change the world. My thinking proved to be naive, as I learned about insurance, bankruptcy, overloaded court dockets, and procedure over substance. Hearing about my initial desire to change the world, one of my friends, also a lawyer, told me, with a kind laugh, "The world changed you." There's a lesson in there somewhere, but knowing I'm a positive agent in most of my clients' lives keeps me going. Like everything else, the legal profession is what you make of it.
As a peace-maker the lawyer has a superior opportunity of being a good man. There will still be business enough. -- Abraham Lincoln
Thanks to the Hon. Judge Morgan of the United States Bankruptcy Court (Northern District of California) for posting Lincoln's "Notes for a Law Lecture" outside her courtroom, where I and many other lawyers have discovered the above words.
Thursday, January 8, 2009
Oh, the wisdom before an election.
Update: from the year 2000 debates, George W. Bush:
Q: How would you project us around the world?
A: "I'm not so sure the role of the United States is to go around the world and say this is the way it's got to be...one way for us to be viewed as the ugly American is for us to go around the world saying, 'We do it this way, so should you.' ... If we're an arrogant nation, they'll resent us."
U.S. District Judge Emmet Sullivan said he was forced to delay ruling on whether to free Aymen Saeed Batarfi because as many as 10 documents of classified information were withheld from the court until recently.
So here's what we know: the U.S. sought to deny Guantanamo detainees habeas corpus rights; it specifically placed them in Guantanamo, outside of the U.S., to bolster its argument that the detainees didn't deserve Constitutional rights; it detained them on secret evidence for years; and now it's hiding evidence?
It appears even after Justice Antonin Kennedy, attorney Seth Waxman, and Boumediene v. Bush, the U.S. Constitution is gasping for its life.
Here is an interesting documentary on Guantanamo:
There is also an excellent, must-read article in Transcript, a UC Berkeley School of Law journal (Fall-Winter 2008, Vol. 40, No. 2). I can't find an online link, but it includes an article by Jon Jefferson titled, "Life After Gitmo," and an interview with Moazzam Begg.
Update on January 14, 2009: the Washington Post reports that some Guantanamo Bay detainees were tortured:
The interrogation, portions of which have been previously described by other news organizations, including The Washington Post, was so intense that Qahtani had to be hospitalized twice at Guantanamo with bradycardia, a condition in which the heart rate falls below 60 beats a minute and which in extreme cases can lead to heart failure and death. At one point Qahtani's heart rate dropped to 35 beats per minute, the record shows.
Americans should oppose torture because it's in our own self-interest. The next time an opposing country captures one of our military personnel, our moral authority to object to his/her torture may not exist.
Update: excellent WSJ Op-Ed (12/22/08) by Thomas Wilner.
Wednesday, January 7, 2009
It is now apparent that the so-called "debt super-cycle" of the the U.S. economy has gone into reverse and that, consequently, savings must be rebuilt. As a result, much lower consumption levels have to be expected for years to come.
Mssrs. Hottinger and Millisits take a dim view of recent government intervention:
While government efforts are addressing the liquidity issue for now and some of the solvency issues, these efforts have not yet resulted in making private credit more available.
I kept waiting for the silver lining, but to no avail:
The world economic order is being structurally re-balanced away from growth driven by the U.S. consumer. The current process of de-leveraging is the result of a reduction in the U.S. current account deficit, a condition that had been pushed to the extreme. During this adjustment period, accidents are prone to happen.
As more investors seek safe havens, the Swiss franc (FXF) may receive a boost. This would allow Swiss companies to increase M&A activity, strengthening their future competitiveness. Roche's expected acquisition of Genentech (DNA) is one example.
If you're looking to invest in Swiss shares, the iShares Switzerland ETF (EWL) has outperformed SWZ over the last two years. Today, for example, SWZ dropped over 3%, while EWL declined by less than 1%. As it happens, I own SWZ. I am unsure whether to add to my SWZ positions, or open a new position in EWL.
Leon Panetta will take over the Central Intelligence Agency. He will work with another SCU grad, Janet Napolitano, who is the current appointee for Director of Homeland Security.
You smell that? Yup, that's change in the air.
Tuesday, January 6, 2009
I wish the article mentioned the name of the attorneys handling the case [Update: according to the ACLU's website, the attorneys were Aden Fine, Reginald Shuford, Dennis Parker, Director of the ACLU Racial Justice Program, and Palyn Hung of the NYCLU]. Raed Jarrar was the plaintiff.
I was laughing at the TSA's stupidity until this line: "Last week, nine Muslims, including three children, were ordered off a domestic US flight after passengers heard what they believed were suspicious remarks about security...[E]ight of them [were] US citizens, were cleared by the FBI, [but] they were reportedly still barred from the AirTran flight."
"If the pilot is uncomfortable with someone flying on their plane, that's their decision," said Christopher White, a federal Transportation Security Administration spokesman. Is the TSA serious? Under their logic, if you pay for a ticket, and you say something the driver/pilot doesn't like, or you just happen to look at him the wrong way, s/he has the complete discretion to kick you off. Sounds like another lawsuit is in order.
Update: here's a link to more information, including a neat vid:
Hat tip to Political Colors for the link.
He's making less money than at his last job and has thought about moving back to his parents' house. "I didn't think three years out I'd be uninsured, thinking it's a great day when a crackhead brings me $500."
Monday, January 5, 2009
Simple overspending has driven most personal bankruptcies in recent years, a change from previous decades when illness and unemployment were major factors, concludes a new study from the University of California, Davis, Graduate School of Management.
"The reasons people file for personal bankruptcy indeed have shifted during the past couple of decades," says Ning Zhu, the study's author and an associate professor of management at UC Davis. "Although our research supports the notion that adverse life events, like losing one's health or job, contribute to personal bankruptcy filings, excessive consumption contributes more to the recent increase in personal bankruptcy filing."
According to the American Bankruptcy Institute, 2,039,214 personal bankruptcies were filed in 2005, up nearly five-fold from the 412,510 bankruptcies filed in 1985. Indeed, personal bankruptcies jumped from 0.3 percent to 1.8 percent of all U.S. households during the same period.
The UC Davis study looked at all personal bankruptcy filings in Delaware in 2003, because the state was among the first to make its bankruptcy filings available through the Public Access to Court Electronic Record system and its demographics closely resemble those nationwide. The year 2003 was chosen because it allowed the study to follow cases to their conclusion, and permitted observation of filing patterns before 2005. (Filings may have been accelerated in the months leading up to October 2005, when the federal Bankruptcy Abuse Prevention and Consumer Protection Act took effect, by households wanting to avoid the new act's stricter requirements.)
So that he could compare bankrupt households with solvent ones, Zhu also collected information from the Federal Reserve Board's national Survey of Consumer Finance about households that had never declared bankruptcy.
Overall, Zhu concluded that debt accounted for more than 50 percent of recent bankruptcies, while medical problems caused just 5 percent and unemployment led to only 13 percent.
Zhu found that bankrupt households have bigger mortgages, car loans and credit card balances than solvent ones, but make less than half as much money.
Among bankrupt homeowners, mortgages were 3.21 times higher than annual household income, versus 1.73 times for solvent households. Auto loans were double the annual income for bankrupt households, versus 0.4 times for solvent households. And bankrupt households carried credit card balances that almost equaled their annual household income, while the average credit card balance for solvent households was 6 percent of annual income.
In addition, bankrupt households had a median annual income of $25,738, versus $43,341 for solvent ones. (The median is the midpoint in a set of values; a median income of $25,738 for bankrupt households means that half of the bankrupt households in the study made higher salaries and half made less).
Interestingly, more than 5 percent of bankrupt households owned at least one luxury automobile (average age of the car was 7 years), compared with 8 percent of solvent households (average age was 8 years).
The study also suggests that some Americans deliberately spend beyond their means with the intention of using the bankruptcy system to erase some or all of their debt, and recommends reforms to discourage such abuse.
"Our results emphasize that bankruptcy law reform should aim to address the issue," Zhu writes. "Current means test focusing on income, rather than consumption patterns or adverse events, may not set the best criteria for sorting out the households who truly need bankruptcy protection from those that consume beyond their means to take advantage of the system."
The research has been presented at Boston College, the Massachusetts Institute of Technology, UCLA and Yale, and will be published in an upcoming issue of the Journal of Legal Studies, a publication of the University of Chicago Law School. The working paper is online at [PDF file]:
http://www.gsm.ucdavis.edu/Faculty/Zhu/PersonalBankruptcy [PDF file]
Zhu earned his doctorate in finance from Yale in 2003. He specializes in individual behavior in financial markets, bankruptcy and distress, and investments.
* Ning Zhu, Graduate School of Management, (852) 9848-2096, email@example.com (Ning is on sabbatical in Hong Kong; note time difference when calling his cell phone.)
* Tim Akin, Graduate School of Management , (530) 752-7362, firstname.lastname@example.org
* Claudia Morain, UC Davis News Service, (530) 752-9841, email@example.com