AT&T and Time Warner

In what seems like a repeat of Comcast’s purchase of NBC Universal, AT&T has announced its intentions to purchase Time Warner to the tune of $85 bn. AT&T, a provider of TV, internet, phone and wireless services, is purchasing the content to carry on those pipes and airwives: HBO, TBS, TNT, CNN, and Warner Brothers TV, movies and video games.

James Stewart of the New York Times mentions how vertical integration deals rarely get prohibited by regulatory authorities, especially in recent decades. Even the Comcast and NBC Universal deal, which faced fierce public opposition, was ultimately approved 4-1 by the FCC with minor concessions. If you are not buying a direct competitor, as when AT&T attempted to purchase T-Mobile, then there are few things in the way, generally, according to the current antitrust calculus. But the public’s appetite for such deals has appeared to sour in recent years as there’s been a growing awareness of corporate power in society.

There’s little risk here for AT&T to pursue Time Warner, with a break-up fee of just $500 mn (a drop in the bucket for AT&T) in the event the deal doesn’t work out, compared to $4 to $6 bn in cash and assets sent to T-Mobile when that deal failed to pass regulatory muster. But there are a few questions here that can help illuminate whether regulators should take action to block the deal. As James Stewart notes, things have changed in recent years. Donald Trump says the deal shouldn’t be pass; so do Bernie Sanders and Tim Kaine. Trump says lots of things, but let’s go with it for now.

First, why is AT&T going for Time Warner?
It’s important to note a few things. AT&T is profitable in offering cellular service to consumers, but the U.S. market is increasingly saturated: almost everyone has a smartphone with a data plan, and it’s increasingly difficult to add new customers. AT&T is also profitable in offering TV, internet and home phone services to consumers, but again, this market is largely saturated (and there are expected to be a fair amount of cable cutters in the future).

Furthermore AT&T has already begun experimenting with alternative revenue streams. As part of building out gigabit internet (with a terrabyte cap) and offering it to consumers for $70 (depending on the market), there is the scarcely mentioned fact that as part of the subscriber agreement, customers agree to allow their internet traffic to be used to target ads to them. They can opt out by paying $100 instead. This should raise privacy concerns, but there is an (expensive) option to opt out. At an extra $30 per month, few will. Verizon, meanwhile, is pursuing a similar strategy of highly-targeted ads in their wireless services, and this is one reason they have purchased AOL and Yahoo in recent years (for the ad tech as well as the high-traffic properties).

So what’s the business motivation here? As noted above, providing core services (the pipes) has ceased to be a growth industry, although it remains profitable. And so these companies, with huge cash reserves, low interest rates, and scarce investment opportunities, are increasingly buying the content delivered on their pipes. AT&T would deliver the content to consumers regardless, but it usually pays fees to Time Warner for the right to do so. Now they don’t have to pay those fees, and can collect the fees from other competing cable service providers. Second, they now own both the pipes and much of the content delivered on these pipes. And they increasingly collect large amounts of information about their consumers. They approach a position of collecting fees to use the pipes; fees to view the content regardless of whether it’s on their pipes; and fees for highly targeted ads on the content given to consumers. At every step of the process, a new AT&T can now earn revenue on every part of the flow of information and content.

Second, what has been the impact of Comcast purchasing NBC Universal? Were consumers benefited or hurt?

This one is harder to assess. It’s hard to imagine a public benefit that came out of it, as Susan P. Crawford has noted in the NYTimes piece. And it’s easy to note some instances where Comcast, with or without NBC Universal, has exercised its market power for ill (think of the hoops they made Netflix jump through). This had less to do with NBC Universal, but it’s something to consider.

There was a recent report that stated the FCC was probing whether there was an effort by cable companies to harm the growth of internet video, including Comcast and Hulu (which they explicitly stated they would not do in order to gain approval for purchasing NBC Universal). The evidence looks bad to neutral, and it calls into question whether concessions can ever be effective for taming the market share and power of the companies merging.

Third, should industries involving the flow of information be treated differently by antitrust law?

In a word: yes. This is in some ways the main point in Tim Wu’s book, The Master Switch. Information is different (the content on TV and internet), and concentrated power should be fought and avoided at every possible turn. Giving power over content to companies who already have large power over the pipes that control what information we get is a dangerous trend.

There’s also the issue of precedence. AT&T is buying Time Warner, in part, because Comcast bought NBC Universal. They’ve even stated that this deal is much less problematic than the Comcast deal, and on those grounds it should be immediately approved.

Consolidation, power, and vertical integration by one company pushes the other few competitors to make similar decisions in the future. You see this not just in vertical mergers, but also in horizontal mergers. Over the course of a few years, the airline industry consolidated and merged to essentially a few major players. They have cut capacity and been very profitable. In part this is due to low oil prices, but it also has to do with having fewer major competitors to deal with. This started a while back, in 2005. By 2015, when US Airways merged with American Airlines, there was little hope of stopping the deal. How else would they compete with the other large airline groups: Delta/Northwest, United/Continental, and Southwest/Airtran? In other words, approving the earlier deals tied the regulators’ hands. They created the conditions early on under which they would have to approve later deals. This was one reason why AT&T and T-Mobile were not allowed to merge: it was clear that Sprint could not exist in that market (and it might not, still).

Approving these deals also leaves regulators in a fundamentally reactive and passive state of being. They are never breaking companies that get to be too large; they are always allowing companies to get bigger. Not since going after Microsoft in the late 1990s (with no major consequence, ultimately) have antitrust authorities made any attempt at breaking up large powers.

Given the stakes here are not just higher airfare, but how we receive and consume information, and how we express ourselves to a large extent, and that there is little consumer benefit to be had, it’s hard to argue in favor of the deal. Vertical integrations should be looked at suspiciously, especially when they involve just a few large corporations and the flow of information.

Links:


Remembering what’s at stake in 2016

Lost in the arguments about who is sane, and who has the right temperament for the presidency, is the practical impact of the election. People have wondered aloud: how can men of conscience like Paul Ryan endorse and support someone like Donald Trump? They ascribe a level of moral consciousness that is not deserved according to Ryan’s actions and plans. And they furthermore ignore the entire premise and goal of most of the elected GOP members: to slash taxes on the rich and gut the safety net.

It has been apparent for a long time now that this is what Paul Ryan intends to do: it was clear in 2012 when he was picked as Romney’s vice president. The GOP will in all likelihood control the house regardless of the presidential outcome due to the extreme gerrymandering done at the state level since the 2010 census and district redrawing, and there is a desperate fight for control of the Senate right now, where the tie-breaking vote could be the vice president’s (a role which Cheney played several times). If Trump wins the presidency, it’s likely that Republicans will also control the Senate, and at least have the tie-breaking vote.

What is Paul Ryan’s plan in the event of a Trump presidency and Republican control of the Congress? Here is the lede of a Politico story:

If Donald Trump is elected president and Republicans hold onto Congress, House Speaker Paul Ryan is bluntly promising to ram a partisan agenda through Capitol Hill next year, with Obamacare repeal and trillion-dollar tax cuts likely at the top of the list. And Democrats would be utterly defenseless to stop them.

He would do this through the use of budget reconciliation: this is what was used to pass the Bush tax cuts in the early 2000s, and it was used to finally get Obamacare passed (to reconcile the differences between the House and Senate bills, the latter which required a super-majority to pass). There would be no president to veto: in fact, Paul Ryan is counting on Donald Trump’s support to pass the plan, which explains Ryan’s quiet endorsement despite personal objections to Trump’s style, instability and blatant racism.

Apparently, Americans want Congress to “get things done” as opposed to gridlock, while awarding the party causing the gridlock with a massive and radical legislative victory. They will award this to Republicans through a series of protest votes for third-party candidates and a core failure to understand the actual stakes of the election. They are content with either saying “single-payer or nothing” while ignoring the 20 million + who have receive health insurance under Obamacare, and ready to punish a center-left agenda they see as corrupt by giving massive tax cuts for the wealthy (ignoring that the center-left Obama successfully drove up taxes for the wealthy).

Here is a line in the article that summarizes what is at stake:

By the end of the decade, the richest 1 percent would have accumulated 99.6 percent of the benefits of the House GOP plan, according to the nonpartisan Tax Policy Center.

New York Magazine’s Ed Kilgore also covered Ryan’s agenda, in an article titled “Paul Ryan Is Planning a Revolution, and It Starts in January”

[T]he illusion that the filibuster would give Senate Democrats a veto over anything egregious, the Republicans-in-disarray meme has lulled a lot of Democrats, and the media, into a drowsy inability to understand how close we are to a right-wing legislative revolution if Donald Trump becomes president and Republicans hang on to Congress.

This was the plan in 2012 as well if Romney were to win. People claimed nothing much would change back then, or that it wouldn’t be much of a disaster. They were wrong then and they are wrong now. They ascribe a fundamentally undeserved level of moderateness in policy substance to politicians based on speaking style and handsome looks alone.

I am unsure of the Clinton strategy: they want to win over independents and moderate Republicans by appealing to their sense of patriotism and the fact that Trump is clearly unstable and bigoted. But the campaign has done precious little to demonstrate the radical nature of the GOP plan that would go into effect with high likelihood in the event of a Trump presidency.

And I am unsure of the voters “unhappy” with the two candidates and what they will ultimately due in roughly a month’s time. There are real stakes to the results of the election; voting for someone you don’t personally respect or like seems to be a small price to pay for saving the hard fought gains of the last 8 years and salvaging any hope of withstanding a radical set back to the progressive agenda for years to come.

Ed Kilgore concludes:

[I]t should be a warning to Democrats as well, and something that with imagination and persistence they can convey to those critical progressives who are meh about voting for Hillary Clinton and don’t think the identity of the president much matters. Even if you think Clinton is a centrist sellout or a Wall Street puppet, she’s not going to sign legislation throwing tens of millions of people out of their health coverage, abolishing inheritance taxes and giving top earners still more tax benefits, shredding the safety net, killing Planned Parenthood funding, and so on through Ryan’s whole abominable list of reactionary delights. If Democrats think a scenario so complicated that it’s lulled the press to sleep cannot be explained to regular voters, maybe they should break out the hand puppets. There is no more urgent and galvanizing message available to them.”


Putting July’s job numbers into perspective

Or, why the Fed should not raise interest rates in September.

The BLS reported that 255,000 jobs were added in July. The New York Times ran a story quoting Michelle Meyer of Bank of America Merrill Lynch saying, “This was everything you could have asked for, maybe more.” The unemployment rate held steady at 4.9 percent, and wage growth has finally picked up a bit, growing at 2.6 percent year over year. After years of nominal wage growth that barely kept up with inflation, 2.6 percent represents real gains, if only just so.

The underlying threat to any good jobs report over the last few years is that the Federal Reserve will potentially overreact and raise interest rates prematurely, just as the recovery is gaining steam, and despite constant threats to recovery from a tumultuous world. I am not in the Fed prediction business, but prior to the release of the report, Fed watcher Tim Duy stated that July’s FOMC meeting was really just laying the markers for a showdown between hawks and doves in September, and with July data now in hand, a good jobs report may make it untenable to push off on raising rates again. September may be the month interest rates go up to 0.50%.

Why do I worry that the Fed raising rates in September is premature?

It’s true that job growth was strong in July. And it’s also true that the unemployment rate stands at 4.9%, which might normally be considered full employment, which is the unemployment rate where people think things can’t get much better without inflation spiraling upwards.

But, there are a few charts and data points that better describe the status of the labor market than the headline unemployment rate, and they show that the recovery from the greatest recession since the Great Depression is still far from complete, and that there is no sign of inflation getting out of control. The downsides of not raising rates, then, are minuscule compared to the downsides of raising rates, which could harm the still fragile and incomplete recovery.

The headline unemployment rate doesn’t count a lot of people who have exited the labor force: if the jobs just aren’t there, people don’t look, and thus aren’t included in the relevant denominator of the calculation. The BLS thankfully calculates an alternative measure: the unemployed (those actively looking for work but not employed) as well as those who are part-time for economic reasons, plus those who are “marginally attached” to the workforce. This latter category includes those who are available for work, but who didn’t bother looking for various reasons, including the belief that there were no jobs available.

fredgraph1

U-6 Unemployment Rate

 

As of July of 2016, this expanded-definition unemployment rate stood at 9.7%, much higher than the troughs in the previous economic expansions at 7.9% in December of 2006 and 6.8% in October of 2000. The usual suspects argue that this is structural: that there is a mismatch of skills, and that this is just the new normal. But these people were wrong at the start of the recovery, and there are few reasons to believe they are right now.

The employment-to-population ratio for ages to 25 to 54 is another metric that is more informative than the headline unemployment rate. This “prime-age” ratio captures employment in the part of the population you’d like to see employed. It captures similar trends to what we saw in the expanded unemployment rate: again, we see an incomplete recovery:

 

fredgraph2

Employment to Population Ratio, 25-54 Years

 

The peak in the prior economic expansion was 80.3%, and we are still at 78.0%. There’s clearly been improvement, but there’s also still quite a bit of ground to make up. A back-of-the-envelope calculation shows that if an employment to population ratio of 80% represents full employment, and the estimated population ages 25-54 stands at about 125 million, then we are still short 2.5 million jobs.

I hopefully have convinced you that there’s still considerable slack in the job market. Is inflation the metric that is then pushing the Federal Reserve to raise rates?

Various measures based on the consumer price index (CPI) make it hard to think inflation is getting out of control. I plot a few here for reference:

fredgraph3

16% Trimmed-Mean and Median CPI

Median CPI and 16% trimmed-mean CPI, both intended to get at the momentum or inertia of inflation without being affected by volatile outliers like food and energy, show 2.2% and 1.9% inflation, respectively, in June of 2016. This is right around the Fed’s target (and one could argue the target is far too low).

So: inflation is right around the 2% target, and there’s still significant slack in the labor market. What, then, is the hurry?

 

 


Lots of fences

For whatever reason, today I was reminded of the poem Mending Wall by Robert Frost.

The narrator in the poem writes about his interactions with his neighbor:

My apple trees will never get across
And eat the cones under his pines, I tell him.
He only says, “Good fences make good neighbours.”
Spring is the mischief in me, and I wonder
If I could put a notion in his head:
“Why do they make good neighbours? Isn’t it
Where there are cows? But here there are no cows.
Before I built a wall I’d ask to know
What I was walling in or walling out,
And to whom I was like to give offence.

I don’t know much about Robert Frost, but this poem was published in 1914, and it strikes me that Frost was alive through much of the Gilded Age, that period of time where the rich and powerful few controlled American politics, and inequality was reaching its dramatic local maximum in the 1920s, even as incremental progress had been made under Roosevelt and Wilson. He was not writing about any of those things in this poem. But I think of his poem because of how we collectively interact with each other, and how this matters in a discussion about inequality that is sometimes missed.

Paul Krugman writes in The Conscience of a Liberal (2007):

[H]igh levels of inequality strain the bonds that hold us together as a society. There has been a long-term downward trend in the extent to which Americans trust either the government or one another. In the sixties, most Americans agreed with the proposition that ‘most people can be trusted’; today most disagree.

In 2012, this number was just 32.4%, as compared to 46% in 1972.

He also notes a bizarrely wrong op-ed by Irving Kristol in 1997 defending high levels of inequality: “in all of our major cities, there is not a single restaurant where a CEO can lunch or dine with the absolute assurance that he will not run into his secretary.”

This was a strange argument to make in 1997: it’s even stranger in 2016.

A recent New York Times investigation by Nelson D. Schwartz looked at the world of the rich and the companies that cater to them. The lede says it all: “Companies are becoming adept at identifying wealthy customers and marketing to them, creating a money-based caste system.”

The world it describes is one we all know exists: the rich are being catered to, and importantly, separated from the rest of us because they can pay to do so. In some ways it is also to the detriment of everyone else. Disturbingly, it seems that the big data that is collected on every single one of us (thanks to modern technologies) is used so that companies can just target those who matter (the rich) with greater accuracy than ever before.

Along with the rich being able to purchase and isolate themselves from everyone else, there is a set of drawbacks for everyone else. In an exchange with a reader, Schwartz writes:

If 20 percent of people end up going to the front of the line – and there’s only one or two lines at the airport or to board the ship, for example – the rest of us have to wait longer. Similarly, seats in coach are getting squeezed ever closer together to make more space in the front of the plane for first, business class and premium economy.

My point here is not that inequalities in income are leading to inequalities in services that did not previously exist, although that is certainly happening. My point is more that we are increasingly being separated from each other on the basis of class even outside of where we work and where we live (which had already increasingly become the case over the last several decades). A benefit of having a relatively compressed income distribution in the 1950s is that people of different economic classes were not separated from interacting from each other in the same way (ignoring the major issue of racial segregation). Unions and moral outrage ensured that workers, blue-collar or white-collar, made incomes that were not exorbitantly different, and further more individuals also occupied similar spaces in the world outside of work. Luxury items existed, of course, but fundamentally, whether someone drove a Chevy or Cadillac did not hinder or stop people from interacting with each other and understanding each others’ concerns. How can we trust or empathize with anyone as we pay money to separate ourselves from each other? How can the very rich, who separate themselves from the rest of society while having a disproportionate voice in the political process, possibly understand the problems of most people?

I think that the the modern conservative response, without irony, might simply be: “Good fences make good neighbors.”


Pay for no performance

How can CEOs, management and boards of directors have their interests aligned with the long-term health of the companies they run? How can their interests be aligned with the interests of their employees?

I’m grappling these questions as I look to a few glaring cases of capitalism gone wrong, and I am wondering why boards of directors ultimately do what they do. In my mind, a board should provide diverse expertise and guidance for a company, choose its CEO, and stay vigilant in making sure the chosen CEO has taken an appropriate course. Part of choosing the CEO also requires setting contract terms and compensation. And on this, I have a hard time understanding how boards in America can agree to such large compensation terms with so little downside risk for the executives involved.

It has recently come to light that in the event of a merger, Marissa Mayer, CEO of Yahoo, would receive $55 million in severance if she were ousted. Just as ridiculous is her compensation across 5 years: at minimum, it was projected to be worth $117 million across 5 years. It will likely end up being closer to $365 million, depending on the share price. Not only are these amounts ridiculous, but they are in part determined based on share price, an imperfect indicator of company health. If you happen to enter as CEO during a recession, and you stay on just as the economy and the technology sector expand, then you see the gains flow to your pay. All you had to do was nothing. This is almost precisely what happened with Yahoo: their share price increased entirely due to a large stake in Ali Baba (an investment made prior to Mayer’s tenure), which had its IPO in 2014 and currently has a market cap of nearly $200 bn.

People who defend CEO compensation in America try to draw comparisons with everyday workers and their own motivation to show up and do a good job based on the pay they receive. Money rewards good work, so their fable goes. But there is no parallel here. When most people do a poor job, they can be let go. Most don’t receive severance, and most immediately worry about how they will make ends meet, or get another job. The psychological and financial impact is often severe.

There is no similar downside for Marissa Mayer. She never has to worry about money, and she gets paid tens of millions of dollars even if she screws up and leaves. And so, I wonder: what are boards of directors thinking? This kind of thing doesn’t even seem to align with shareholder interests.

Yahoo recently laid off 1,600 people. Make the rosy assumption that Yahoo did not lose any revenue from cutting all of these workers, and that the move only cut costs. Suppose Marissa Mayer gets her severance this year of $55 million: assuming (conservatively) that employees receive a total of $200,000 in compensation on average (including health insurance and other benefits), $55 million would pay 275 workers for a year. If we consider her $365 million potential pay across 5 years, that money would pay for 365 workers for 5 years. In reality, Yahoo arguably lost some revenue from laying off these workers.

The same would not be said for the CEO. Is it at all possible to make the argument that she, or some other CEO, would have done a worse job with just $36.5 million instead of $365 million? This discussion leads easily to questions of taxing the rich. Many arguments against raising rates on the very rich seem nonsensical when put in this perspective.

There are other examples of  boards of directors making poor decisions: Men’s Warehouse tried a disastrous acquisition of Joseph A. Bank and ousted its famous founder George Zimmer in the process. In this case, the board went against the CEO, and gave him no severance. Why? Men’s Warehouse’s largest shareholder was the hedgefund Eminence, which also owned a stake in Joseph A. Bank. They had pushed for a merger of sorts (and overpaid, to their simultaneous detriment and benefit). Among the members of the board of directors was Deepak Chopra, bullshit artist and new age spiritualist. What expertise could he have brought to Men’s Warehouse’s business dealings? Zimmer deserves some of the blame, as he handpicked many of the directors.

Mr. Zimmer, who lives in the Bay Area, says he feels bad for Men’s Wearhouse employees, but not for Eminence. “I don’t have a high regard for hedge funds,” he said. “Nothing personal — I’ve never met the Eminence people — but I love the idea they might lose a fortune. Hedge funds may force companies to be more efficient, but that’s not always the best thing for every stakeholder group, like employees. It’s curious we’ve allowed capitalism to become all about shareholders.”

At least in this case, you could argue that the decision was based on large stakeholder in the company. But it sucks that the employees will ultimately pay the price. Should boards be prescient rather than short-sighted? Shouldn’t they be actual experts on business matters, representing both shareholders and the many employees that work for the company? Was Deepak Chopra qualified to be a part of that decision?

Freeport is another example where a board of directors failed to do its job properly, sitting idly by (and getting rich) while letting an overcompensated CEO take the company down. The mining company decided to get into oil at the height of the commodity boom by taking on massive amounts of debt to the tune of $20 billion. The chairman, James Moffett, argued for the purchase of two companies: Plains Exploration and Production and McMoRan Exploration, where he was also the CEO. The conflicts of interest are staggering, as he stood to get rich from buying a company he had a large stake in. Where was the board to voice these concerns?

Freeport’s chief executive, Richard Adkerson, was McMoRan’s co-chairman. Nine Freeport directors owned stock in McMoRan totaling about 6 percent of the shares. Freeport agreed to buy McMoRan for $2.1 billion — a 74 percent premium over its market price before the deal was struck. Mr. Moffett himself was paid $73 million.

Moreover, Plains owned 31 percent of McMoRan, enough to block any deal. Freeport eliminated that possibility when it bought Plains. And James Flores, Plains’s chief executive, who now runs Freeport’s oil and gas operations, was also a director of McMoRan. He made $200 million on the deal.

In addition to the $73 million, after Moffett was “let go”, he received another $79.4 million in severance. The company’s market capitalization had fallen to as low as $4bn and is now $13.08B, far below its debt obligations.

Not all companies face such dramatic ends. But the questions remain: how can boards of directors do a better job for the company and the employees, and how can CEO compensation be drastically changed?

 


Financial regulation has been in the news recently, in big and small ways.

As part of the Dodd-Frank financial regulation act from 2010, a Financial Stability Oversight Council (FSOC) was established. A key responsibility was to designate institutions as “systemically important financial institutions” (SIFI), resulting in stricter regulations and higher capital requirements. This is a simple way to make the financial system safer. More capital means being able to weather a storm, when it comes (not if). Having financial assets over a certain amount automatically designates institutions as SIFI, but there is a class of other institutions that FSOC may decide qualifies as well.

Metlife, the insurance company, had received this designation. They appealed, and a judge agreed with them. That a judge could undermine a key regulatory capacity of Dodd-Frank is a little frightening. The Treasury Department is appealing the decision.

The New York Times notes:

It is unclear how the ruling may affect the other three nonbank companies that regulators have designated as “systemically important”: the American International Group, Prudential Financial and General Electric’s financing arm.

This could have ripple effects and water down Dodd-Frank’s effectiveness. The systemically important tag was a primary reason GE decided to become an industrial company again and sell off GE Capital, rather than be weighed by considerable financial risk moving forward. This is the downside of having a law that empowers regulators and committees to make rules, rather than have the rules enshrined in the law itself.

As the Treasury Department prepares their appeal, they have been busy in other ways as well.

Coming off Pfizer’s $160 bn attempt to relocate its headquarters overseas by merging with Allergan, the U.S. Treasury Department announced rules to further stop “inversions”. The details are difficult to understand, and could be reversed, absent legislation, in the next presidential administration. But the effect was immediate, with Pfizer calling off the merger, resulting in a $400 mn penalty.

Finally, I couldn’t talk about tax avoidance without talking about The Panama Papers, leaked documents from a Panama law firm specializing in individual tax avoidance. The fallout has been significant. Among other things, the rulers of China who had wanted to spearhead a crackdown on corruption turned out to have family members named in the papers, and censors have blocked many western media outlets.

One step back, two steps forward.


Remembering that People are People

It is sometimes too easy to be jaded and cynical, and to write people off as merely a product of their affiliations and past lives. This especially applies to public figures and how we think about them. When I say easy, I mean cognitively easy: we think of a person and what they stand for in a way that challenges our world view the least and fits neatly into a narrative we had already started writing. Rewriting, or adding digressions and nuance to the story, is too time-consuming. I am as guilty of this as anyone. In many cases, the judgement is actually correct, and more often than not it is borne out by an abundance of evidence.

But every so often, I need to be reminded that people are people, and that they can be complex and difficult to label. Their motives are not so simple, and not so impure as we might have first thought. This realization doesn’t automatically render individuals great, nor does it wipe the slate clean. But it is an antidote to thinking of the world as a static and stark chess board, where everyone plays a single role for a single side, never changing.

The first example is Neel Kashkari, the Goldman Sachs banker picked by Treasury secretary Hank Paulson (and former Goldman Sachs banker himself) to “administer” the Troubled Asset Relief Program (more commonly known as TARP). It was never clear to me what his job was precisely, or whether he was particularly good or bad at it: but members of Congress were not happy with it or the turn TARP had taken after being passed under the spectre of a harsh financial collapse. Recall the famous hearings, where Kashkari was asked by Rep. Cummings: “Is Kashkari a chump?”


After going back to the world of finance and working for Pimco, he then ran for governor against Jerry Brown in California (we know the outcome there). His ads made him sound like any other ostensibly fiscally conservative Republican. Low taxes, less government, etc. Nothing remarkable, interesting, or particularly thoughtful.

Then, surprisingly, he was picked as the next head of the Federal Reserve Bank of Minneapolis. I don’t think he was qualified or should have been picked for that position, in which he will occasionally be asked to vote on monetary policy that impacts the entire economy, but I’ll leave that for others: Brad DeLong and others summarize the issues and his views well.

But then, in February, he gave his first major speech. It was all about ending Too Big To Fail (TBTF). Here are his policy prescriptions:

  • Breaking up large banks into smaller, less connected, less important entities.
  • Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
  • Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.

Sounds like the Bernie Sanders plan. It’s not clear that breaking up large banks into smaller banks is a good solution (nor do I understand how one enforces them to be less connected than if they were part of a big entity with a large capital base). Nor do I think TBTF is something you can regulate away. The tax on leverage is probably a good idea (a financial transaction tax), and large banks have been forced, thanks to Basel III and Dodd-Frank, to hold significantly more capital. Stress tests carried out by the Treasury have also pushed towards this.

But all of this is a long way of saying I was surprised by the speech. Probably it went into territory that’s not really standard (and maybe not appropriate) of a newly-appointed Federal Reserve Bank president, at a time when there’s unprecedented scrutiny by outsiders to politicize the Fed. And the usual caveats apply, especially when dealing with an aspiring politician: this could simply be an attempt to change his public perception rather than a sincere belief in the kind of financial regulation he talks about. Only time will tell. But it certainly did not sound like a Wall Street banker.

The second example is Tom Wheeler, FCC chairman since 2013. Ars Technica had an in-depth interview entitled “How a former lobbyist became the broadband industry’s worst nightmare.” Tom Wheeler had served as a chief lobbyist for the cable and telecommunications industries prior to his appointment. Few had expected him to be anything but a friend to those industries, and progressive were unhappy with his nomination.

Fast forward to 2016, and he has largely acted as an opponent to the telecommunications and cable industries in their ambitions to consolidate and monopolize. Famously, he led the charge to destroy the proposed merger between Time Warner and Comcast. Most recently, he has pushed for rules requiring cable companies to conform to a single standard in cable boxes, thus allowing customers to purchase rather than lease the boxes at extraordinary rates (to the tune of $20 billion annually, or $231 for the average customer). The entire interview is worth reading. There is even a reference to The Master Switch by Tim Wu, a definitive text on monopolies in the information industries of past and present from the man who coined the term net neutrality.

Wheeler’s tenure has been consequential. But looking at his resume, you might have thought he would reach different decisions on a number of important issues. Sometimes people can surprise you. It’s worth remembering that.