« January 07, 2007 - January 13, 2007 | Main | January 21, 2007 - January 27, 2007 »
I have to confess that I don't understand the logic of CEOs who own big chunks of stock in the companies they run getting involved with related-party transactions. Take Commerce Bancorp. The stock has plummeted on news that the Feds are investigating transactions between the company and entities related to CEO Vernon Hill. As Ben White reports in the Financial Times:
Commerce said it was co-operating with investigators and had formed a special committee of the board of directors to oversee its interactions with regulators conducting the probe.The bank previously disclosed that it leases land for some of its banks from limited partnerships in which chief executive Vernon Hill is a partner or in which a corporation owned by Mr Hill is a partner.
The bank has also said it has leases with a Hill family trust and has obtained architectural design and facilities management services from a company owned by Mr Hill's wife. Commerce said it spent $7.5m for such services in 2005 - an amount "substantially equivalent" to what it would have paid an outside company.
The bank said in its 2006 proxy that the service provided by the company owned by Mr Hill's wife "has been an important factor in the success of the Commerce brand".
The leases, which date to 2002 and earlier, cost Commerce about $1.9m in 2005. The bank said in its proxy that the leases were set at market rates and approved by independent members of the board.
So, the $7.5 million paid to Hill's wife and the $1.9 million in leases add up to $9.4 million in Commerce cash funneled to entities that benefitted the Hill family in 2005. But clearly, only a portion of those funds are profits. His wife has to pay overhead and employees in the design business and the partnerships that own the land have to pay interest and operating costs. So lets assume, for the sake of argument, that the profit margins are a very healthy 50 percent. The Hill family netted at most $4.7 million from those payments in 2005.
Now, Hill owns about 2 million shares of Commerce Bancorp. So every time the stock moves down a point, he's out $2 million. In the past three trading days, as news of the investigation came out, the stock has lost about 3.5 points, which means Hill is out about $7.5 million. In other words, the disclosure of an investigation surrounding related party transactions has cost Hill more than his family likely netted from them back in 2005.
Posted by dan at 10:53 AM
Another worthy calls a bottom in the U.S. housing market.
From yesterday's Financial Times:
"Rodrigo Rato, IMF managing director, said the US housing market appeared to be bottoming out and a soft landing for the economy as a whole now seemed more assured."
I'd advise Mr. Rato to visit Florida and drive up and down A1A (the road that snakes along the ocean) between Palm Beach and Boca Raton, and count the for-sale signs in front of condos, mansions, and modest homes. I stopped counting at 100.
Posted by dan at 10:48 AM
An interesting finding from Spectrem, which studies the consumption and investing habits of the ultra-rich. Plutocrats are apparently souring on hedge funds:
"Households with a net worth of $25 million or more, not including primary residence (NIPR), reduced their exposure to hedge funds significantly in 2006. Just 27% of those households owned hedge funds last year, down from 38% in 2005, according to a new Spectrem Group report, "What's in Your Portfolio?" released today.That represents a decline of 29% in a year that brought some
well-publicized challenges for the industry.The Ultra High Net Worth segment as a whole, representing households with a net worth of $5 million or more (NIPR), saw total hedge fund exposure fall to 14% in 2006 from 17% in 2005. The decline was most prevalent among the wealthiest subset of this group, the $25 million-plus households.
Posted by dan at 10:43 AM
Another strange op-ed from Thomas Byrne Edsall in the New York Times today. He writes:
While there are upsides to the early success of House Democrats, they are by no means home free. Many Republicans see Democrats undermining themselves with the adoption of pay-as-you-go budget rules, which require new expenditures to be accompanied by equivalent spending reductions or tax hikes. At some point, Republicans argue, Democrats will be forced to make unwelcome cuts, raise taxes, or go back on their word. With these rules, argues Grover Norquist, president of Americans for Tax Reform, Democrats have set the stage to once again become the “tax and spend” party.Mr. Norquist may have a point. A yet-to-be-released post-election poll of 36,000 respondents by the Cooperative Congressional Election Survey showed virtually no public support for a tax increase. Asked to pick alternative ways to reduce the deficit, 49 percent said they would cut domestic spending, 32 percent said they would cut defense spending and only 15 percent said they would raise taxes. For freshman Democrats who won seats in centrist states like Indiana and Kansas, support for a tax increase would probably be political suicide.
Well, of course Americans in a poll say they'd rather cut government spending than raise taxes to reduce the deficit. But imagine the question is phrased differently. Would you prefer to have less health insurance for your parents (Medicare) or higher taxes on the highest earners? Or, would you rather have eliminate the prescription drug benefit or boost the marginal rate on people earning more than $500,000? Or, would you rather cut Social Security benefits or keep the estate tax on the tiny, tiny sliver of households that it now affects?
Something tells me the numbers would fall out in favor of a tax increase, thus defined. And given that the districts in Indiana and Kansas that just elected Democrats have comparatively few high earners--and that high earners in those districts tend to vote Republican anyway, and that these districts skew elderly--it's hard to see how coming down on the side of social benefits that benefit middle-class older voters is going to be political suicide.
Finally, what's the point of quoting Grover Norquist? Even if Democrats called for the abolition of the estate, the imposition of a flat tax, and the elimination of taxes on capital gains, he would still refer to them as the "tax and spend" party.
Posted by dan at 10:15 AM
My latest in Slate, on more jobs Americans are "unwilling to do."
Posted by dan at 10:14 AM