Is Goldman Sachs quarterly loss due to 'regulatory uncertainty?'

Maybe. But the New York Times doesn't offer any evidence to back up this assertion:

To improve their profitability, banks have three main options: increase revenues, cut expenses and reduce the shareholder base. But the first method is not working at a time when earnings have been crimped by regulatory uncertainty and economic woes.

The reason I ask the question is that "regulatory uncertainty" is one of those Luntzian phrases—like "death tax," say—that Republicans toss around cavalierly. And it's true that Dodd-Frank regulations are altering the investment banking landscape. But is that the reason Goldman Sachs lost $428 million during the quarter?

Consider the very next paragraph in the Times' article:

Goldman reported a loss of $428 million during the third quarter, compared with a $1.74 billion profit a year ago. The firm was punished by its holdings in stocks and bonds, losing $1.05 billion on its holdings in Industrial and Commercial Bank of China, a strategic investment the firm made in 2006. I.C.B.C. stock fell about 35 percent in the quarter, a paper loss that flowed through to Goldman’s results.

Well, wait. Why is I.C.B.C.'s stock falling so far, so fast? The Times doesn't explain. Fortunately, Bloomberg reported on the story in February:

Chinese banks’ loans to local governments are about 3.5 trillion yuan ($540 billion) more than the national auditor’s estimate, and the industry’s credit outlook could decline, Moody’s Investors Service said.

“The Chinese audit agency could be understating banks’ exposure to local governments,” Yvonne Zhang, a Moody’s analyst in Beijing, said in the report today. The “apparent absence of a clear master plan to deal with this issue” is likely to exacerbate problems and lenders may be left to manage a portion of the souring loans on their own, it said.

The nation’s first assessment of local government debt showed that 79 percent of the liabilities are bank loans and 8 billion yuan is overdue, Auditor General Liu Jiayi said June 27.

The additional 3.5 trillion yuan of loans, which account for about 7 percent of China’s 50.8 trillion yuan in outstanding local-currency loans, aren’t considered by the audit office as real claims on local governments, Moody’s said. That indicates the debt may be poorly documented and at greater risk for defaults, it said.

In other words, Chinese banks like I.C.B.C.—and it's not the only one faced with this problem—got a little credit crazy, made too many loans that may not get repaid and documented the whole process poorly. This is starting to sound familiar, isn't it?

In this scenario, Goldman Sachs is the late-50s woman on the verge of retirement who plans to live off her nest egg—only to find the nest egg has been wiped out because of bad investments. I'll leave it to others to engage in schadenfreude—except to say this: Maybe Goldman Sachs is part of the 99 percent after all!

Instead, I'll note this: Goldman's loss on I.C.B.C. is more than double its overall quarterly loss. Take that off the books, and the bank turns a profit of more than a half-a-billion dollars—not as huge as it's used to doing, no, but still considered a tidy sum in most parts. That Goldman took a loss, in other words, isn't due to "regulatory uncertainty," but to the breaks of the business—and, perhaps, it's own failure to do due diligence. But why blame your own bad business acumen when you can blame the government instead?

Commenter's Corner: Andrew on Starbucks and small-biz credit

This is in the comments on my Starbucks post, but I think Andrew S. offers some good and interesting commentary that I want to highlight:

It really doesn't reduce new and small businesses to charity cases. It treats CDFIs--and the services they provide in the form of technical assistance and low-cost credit--as charity cases which almost all of them have always been. That's the innovation. I think this effort does a good service by recognizing that not all sources of credit are the same and that getting a loan as a small business is not merely a matter of declaring your interest in getting one. If you have a sexy internet company with high growth potential, money can be easy to come by. If you want to start a lawncare business, not so much. The "technical assistance" part of the picture is important as well. There are lots of people with great ideas for starting their own businesses who don't really know how to use debt effectively. Coupling loans with that kind of education has proven extremely effective in the CDFI community. Kickstarter is great for some things, but it has high labor costs and it's an all-or-nothing payoff which is a terrible structure for a long term sustainable business to work with. Anyway, recognizing that the market has failed small business borrowers is a good thing, and recognizing that lenders who serve those borrowers will need subsidies to do so is also a good thing.

Michael Gerson on Uganda and the president's conscience

Michael Gerson offers what I think is the best defense of the president's decision to send 100 American soldiers to Africa to aid in the fight against the Lord's Resistance Army, but I think he makes a slight misstep at the end:

Some critics insist that military force should be used only to secure the narrowest definition of national interests. But it is the president, not his critics, who must live with the ethical consequences of inaction. And most presidents conclude, as Obama has done, that a broader national interest is advanced when America aids its friends and shows its decency.

I think most of us want our president to have a conscience. But the presidency isn't about the president's conscience—few men or women who hold the office will leave the White House with their souls unbruised, I suspect. The president, to some extent, is required to get away from the mushiness of his own feelings and make cold, clear-eyed decisions based on A) what is allowed and permitted by the Constitution and B) what best advances and defends the interests of the American people. There's a cost-benefit calculation involved in the latter decision, and Gerson may have convinced me it's worth it in this case, as long as the American footprint remains very small and limited. But I don't really much care about the president's feelings about this. It's the national interest that should matter, no matter how narrowly or broadly defined. The president's gut is not the same thing.

Starbucks becomes a microlender? (Or: Capitalism becomes a charity case)

Joe Nocera highlights Starbucks' new effort in the NYT:

Here’s the idea they came up with: Americans themselves would start lending to small businesses, with Starbucks serving as the middleman. Starbucks would find financial institutions willing to loan to small businesses. Starbucks customers would be able to donate money to the effort when they bought their coffee. Those who gave $5 or more would get a red-white-and-blue wristband, which Schultz labeled “Indivisible.” “We are hoping it will bring back pride in the American dream,” he says. The tag line will read: “Americans Helping Americans.”

It didn’t take long for Starbucks to find the perfect financial partner: Community Development Financial Institutions, or CDFIs. These are lenders, mostly under the radar, that specialize in underserved communities. Most, but not all, CDFIs are nonprofit, and their loan default rates are extremely low. “We specialize in expending credit, getting paid back, and paying back our investors,” says Mark Pinsky, whose organization, Opportunity Finance Network, acts as an umbrella group to the best of them.

It seems to me this is a variation on microlending, usually a developing-world phenomenon to help the poor develop their own businesses. It could be effective. But I'm worried about one thing: Starbucks' effort reduces new and small businesses, essentially, to charity cases.

And maybe that's the way it has to be in 2011 America. But—since I'm not a socialist, and want to actually see markets made to work for the maximum public good—I'd rather see Starbucks put its muscle behind a Kickstarter-style operation that lets entrepreneurs raise capital by going directly to the customers for their products. That lets businesses that have an actual market for their ideas rise to the top rather quickly, instead of going through a bureaucracy—even a well-intentioned one—that'll have more of a hit-miss rate. And Kickstarter-type operations strengthen capitalism by providing investors with a return on investment—even if that return is simply the product being manufactured—instead of the warm glow of nebulously "saving American jobs."

I'm grateful that Starbucks CEO Howard Schulz is thinking about this kind of stuff. But Starbucks didn't start out as a charity case; it created a product that people liked, and became fabulously successful doing so. For the next generation of businesses to succeed and provide jobs, they'll have to do the same thing. In this case, maybe it's better that we ask Americans to be investors instead of donors.

Dennis Prager: Occupy Wall Street is like Hitler

Dennis Prager goes there in his column for NRO today:

The major difference between Hitler and the Communist genocidal murderers, Stalin, Mao, and Pol Pot, was what groups they chose for extermination.

For Hitler, first Jews and ultimately Slavs and other “non-Aryans” were declared the enemy and unworthy of life.

For the Communists, the rich — the bourgeoisie, land owners, and capitalists — were labeled the enemy and regarded as unworthy of life.

Hitler mass-murdered on the basis of race. The Communists on the basis of class.

Yes, this is a column about the Occupy Wall Street movement. And it's clear that Prager would rather resort to tired old anti-Communist tropes rather than seriously examine the complaints of the protesters. Here's Prager, not getting it:

Being on the left means that you divide the world between rich and poor much more than you divide it between good and evil. For the leftist, the existence of rich and poor — inequality — is what constitutes evil. More than tyranny, inequality disturbs the Left, including the non-Communist Left. ... Non-leftists who cherish the American value of liberty over the left-wing value of socioeconomic equality, and those who adhere to Judeo-Christian values, do not regard the existence of economic classes as inherently morally problematic. If the poor are treated equally before the law, are given the chance and the liberty to raise their socioeconomic status, and have their basic material needs met, the gap between rich and poor is not a major moral problem.

I'll distill that last sentence down to three rules: If the poor get to play by the same rules as the rich, have an opportunity for economic mobility, and can feed and house themselves, there's no problem.

Here's the problem: At least two of those three conditions aren't met in America today. First: Do the poor get to play under the same rules as the rich? We already know that if a poor man and a rich man step into court charged with the same crime, the rich man is much more likely to walk away free. Beyond the arena of criminal law, though, I outsource my commentary to one of Andrew Sullivan's readers:

When the financial industry came to the brink of collapse because of the reckless behavior of these "too big to fail" corporations, we saw an amazing ability for our government to come together to bail them out. In return, they've repaid the favor by working night and day to lift the already watered-down provisions of the Dodd-Frank reforms so they can continue with their same insanity, and to basically act like spoiled, entitled brats towards those of us who saved their butts in the first place.

Contrast this with any legislation in Congress that might actually help out rank-and-file Americans, and suddenly everything becomes gridlocked and impossible to achieve. From out here, it appears that when you have a lobby on your side, government works, and if you don't, well tough luck.

Rich financial institutions get bailed out; regular Americans are left to flounder. One of the three legs on Prager's stool is looking mighty shaky.

How about the second leg? Can Americans live the Horatio Alger dream and transform themselves from nothing into something by dint of hard work? Maybe. But it doesn't seem to happen as often as it used to. The Brookings Institution (PDF) analyzed the situation in 2008:

The view that America is “the land of opportunity” doesn’t entirely square with the facts. Individual success is at least partly determined by the kind of family
into which one is born. For example, 42 percent of children born to parents
in the bottom fifth of the income distribution remain in the bottom,
while 39 percent born to parents in the top fifth remain at the top. This is
twice as high as would be expected by chance. On the other hand, this
“stickiness” at the top and the bottom is not found for children born into
middle-income families. They have roughly an equal shot at moving
up or moving down and of ending up in a different income quintile than their parents.

There is less relative mobility in the United States than in many other
rich countries. One well-regarded study finds, for example, that the
United States along with the United Kingdom have a relatively low rate
of relative mobility while Canada, Norway, Finland, and Denmark
have high rates of intergenerational mobility. France, Germany, and
Sweden fall somewhere in the middle.

In sum: inequalities of income and wealth have clearly increased, but the
opportunity to win the larger prizes being generated by today’s economy
has not risen in tandem and has, if anything, declined.

In short: If you're born rich or poor, you're likely to remain rich or poor. Those born middle class have more mobility up or down—but remember, this is before it became clear what devastation was being wrought by the Great Recession. In any case, you have a better chance of rising up if you're born in a socialist hellhole like Canada than you are in the United States. The opportunities just aren't there like they used to be. The second leg of Prager's three-legged stool is also increasingly shaky.

Finally: Do the poor have their basic material needs met? Prager might have his strongest case here: America's poor are more likely to have cars, TVs, microwaves and other items that might be considered luxuries ... if one compares them to the very poorest people on earth. On the other hand, the U.S. Department of Agriculture (PDF) estimated in 2010 that 14.5 percent of all households were "food insecure" —meaning at some point in a year, there wasn't enough access to food "for an active,
healthy life for all household members." In 5.4 percent of households, some people had to do without meals because there wasn't enough money to buy food. But I acknowledge: Your mileage may vary whether you consider this an indictment of our entire society.

Still, it would seem by Prager's own estimation, we're facing a real problem of inequality in this country. The playing field isn't even and hard work (if you can find it) won't help you get ahead. Meanwhile, the rich can fail and still be fabulously successful—not because of nest eggs or smarts, but because the government had their backs.

I doubt that Prager would agree with this assessment. But in his leap to compare the OWS protesters to genocidal tyrants, he fails to consider that they might actually have something to protest against. He fails to contemplate that many of us who are sympathetic to the protesters don't hate the rich—we just don't want them consolidating their gains through government action unavailable to the rest of us. Some conservatives are sympathetic to that notion. Too bad Prager isn't.

Today in Philadelphia police corruption

A 21-year veteran Philadelphia police officer was arrested Monday and charged with theft, receiving stolen property, and related offenses.

Kevin Workman, 47, was arrested following an investigation conducted by the Internal Affairs Bureau and the District Attorney's Office. The Police Department did not provide further details about the case.

via philly.com

No, college doesn't guarantee you a good job. But that's missing the point of Occupy Wall Street.

Many of the protesters I have met are understandably ruffled that they are unemployed, and they often finish their remonstrations with a non-sequitur, delivered as if it were a knockout blow: “And I went to college!” Well, one might ask, “So what?” 

I first noticed this “college = good life” fallacy back in England. A close friend of mine was looking for a job straight out of college, and remained unemployed for six months while he searched for what he described as a “graduate job.” Outside of those careers that rely on specific skills and expertise — doctors, veterinarians, and so forth — I have never been sure quite what this term means. My friend has a degree in modern history. Congratulations! But there is no obvious career path for this qualification. Why should it lend itself more to working in, say, finance than to working in a 7-Eleven? Compare this attitude to that exhibited by another friend of mine — a recently naturalized American citizen. After her parents escaped from the Soviet Union in the mid-1980s and fled to the United States, her engineer father worked as a garbageman for five years until he found a job which tallied more closely with his abilities. At no point did he complain. Was it a waste of talent? Undoubtedly. Did he have a right to a “post-graduate job”? No. That’s just not how free economies work. 

via nationalreview.com

Charles Cooke, who wrote this bit for NRO, is right. He's also missing the point, to some extent. The point being: That median incomes have stagnated and dropped in recent decades; that financiers and bankers—who presumably have MBAs that make them exquisitely qualified to do the work they do—have managed to live high on the hog at taxpayer expense while touting the virtues of the market for everybody else; that unemployment persists above 9 percent, and when you count people who are underemployed or who have simply given up looking for work, that number really doubles.

There's not enough jobs, and those jobs aren't paying very well. It's easy to mock the guy with the modern history degree. But there hasn't been an outcry in recent years—except in certain, seasonal agricultural fields that are usually served by immigrant labor—that there are plenty of jobs for taking if only people had the right qualifications. There are something like four or five job-seekers for every available job in the United States. Would the dynamic be different if there weren't so many liberal arts majors out there? I've seen no evidence for that.