AskDong

Larry Page, and Sergey Brin of the I will do no evil folks of Google and Megalomaniac Steve Jobs have one thing in common. All three of them of earn a lot less than me in wages. Too bad that isn’t really saying something about me. All three of them take home a salary of $1 per year. Sergey and Larry have been earing $1 for a few years now. Steve has been doing it longer than those two. The nominal salary is intended to indicate a commitment to the company each of them works for (and founded). At the surface of it, it sounds like these CEOs have been able to eschew the greed that is so prevalent in the corporate world. However, like everything in life, it’s not so simple, especially in the case of Steve Jobs.

None of these billionaires are lacking in money. Their wealth is primarily determined by how the GOOG and AAPL stock performs. I applaud a compensation structure that rewards CEOs who truly add value to a company instead of just holding the job. Long term ownership is the key part of a proper incentive structure for senior executives. While I do believe that all three of these men have taken the $1 salary as symbolic gesture of how they feel about their work, I also feel that $1 salary is a bit of a sham.

In the case of Steve Jobs, his $1 salary is particularly disingenuous because he receives particularly generous compensation in the form of stock. The Googler’s $1 salary is a more genuine reflection of their compensation as they are not given gigantic stock grants. They have enough stock as is.

The problem of the $1 salary is that it’s another example of the problem with having two different tax rates for capital gains versus income. I have a problem with this in the realm of private equity, and with further reflection have an increasing problem with it in all aspects. Not only are capital gains taxed at lower rate, but income derived by capital gains avoid payroll taxes as well. The uber wealthy like Jobs and Larry Page can avoid paying social security and medicare taxes. Are they intentionally avoiding these taxes? In the case of Larry and Sergey, I doubt it. Steve Jobs, I’m not so sure of. Regardless of the reason for their compensation structure, it exposes flaws in what should be progressive tax structure.

At the same time I am conflicted. Fundamentally I do understand why it’s good to have a lower capital gains rate - to spur new investment. The problem is really with what is often an arbitrary distinction between regular income and capital gains. Salespeople who are paid by commission have as much income risk as as an executive who is paid by stock grants. Yet their incremental income is viewed very differently by the IRS.

I realize where you live is a deeply personal choice, and many people have good and great reasons for living where they do. I myself and am unabashed of urban living, and urban living in larger more expensive cities. The reasons most often cited by people is culture. Personally, I’m not sold on culture. I feel that all places small and large have it’s own unique cultural offerings. The fact is also for all the museums in Boston, I hardly ever go to them. Culture, or at least museum culture, is certainly not the reason that keeps me in the city.

City living gets a bad rap for being more expensive. On the surface this is true. Rent and groceries are definitely more expensive in the city. I thought I would do quick comparison of what the cost of living is between different places. I used Google’s cost of living calculator with I actually spend a month. For health care, I made estimate of both my and my company’s contribution to insurance is.

Yikes! Good thing I don’t live in Manhattan. Cost of living calculators are rife with problems. These problems are magnified when dealing with cities. The biggest “problem” is not even a problem in the classic sense. Individuals will make different choices depending on where they live. For example if I lived in Lancaster, PA I’d probably drive to work. Here in Boston, I take the train to work everyday. A perfect apple to apple comparison would have me drive to work, and park my car for $600/month. However by virtue of the city I live in I can opt not to have a car, forgo gas, and be perfectly happy a month riding public transportation.

A similar analogy can be made to what is the biggest cost difference, housing. Not only does the cost of housing vary widely in a city even across a few blocks, the living arrangements are different. We can’t and shouldn’t assume that someone who lives in a 2 bedroom house in Grand Junction, CO will be getting a 2 Bedroom house in Manhattan. The fact is that most young people in the city will live with roommates to keep the cost of housing down. I realize many individuals might see this as tradeoff. I see it as just different if not better option. I’ve always liked living with people and even when I could afford to live alone, I still preferred living with others.

Now that I’ve deconstructed the idea that living in the city is so much more expensive than living in more “rural” areas, what are the benefits?

• Food - Cities have more and better restaurants. It’s hard to argue otherwise.
• Commute times - We typically think of commuting as between work and home, but commuting is also about commuting from home to activities like eating out, visiting friends, going to museums.

However, the best reason to live in a city are the opportunities that only a city can afford. The fact is that there are better job opportunities in cities, and more people to meet. This is not to say that it’s necessarily easy to get to know people in a city. It’s not, and I wouldn’t be surprised that most people have an easier time getting to know people in more rural areas. However, if one is willing to get out of his or her comfort zone cities offer the best opportunity to meet a wide variety of people, and network. The density of the companies means that the next better job is floor above or below, and the next person you meet might be that connection to that job. In my own career, I made a move across the street because I was friends with someone who worked at the new company. Today, I have my current position because I ran into a former colleague at a bar.

I just got an email from HSBC indicating that they were reducing their rate on online savings accounts from 3.55% to 3.05% to better reflect the drop in rates from the Fed. I’m not much of rate chaser, but given how low rates are getting I need to give some thought into making my money work a little harder. This is not only a problem with just my HSBC savings accounts, but across all my investment accounts. I hate to say it but I’m not fully invested at the moment. I would say I have nearly 30% of my assets sitting in cash.

When interest rates were over 5%, I had plenty of options between CDs, Treasury Bills, and even bonds. Now, I don’t have that many options that I find all that attractive. I don’t want to move my money around from place to place to chase an extra $75 a year which would be approximately the after tax difference on $10,000 between what I’m getting at HSBC versus the 4.05% at Countrywide. There are better rates to be had if you do a little digging at sites such as money-rates.com. I’m not so interested in putting my money in some fly by night operation. I realize my principal would be FDIC insured, but I hate to go through any bueracratic hassle if the bank were to actually fail.

So what are my options? I’m not looking to make any long term investment with the money. I’m just looking for somewhere easy I can park money. While this money is not a part of my emergency fund, it’s not money that I’m ready to invest. It’s money that I want to have around if I were to come across a truly great opportunity. It’s not alot of money, but it’s enough that earning a better rate of return could potentially make difference of a few hundred dollars a year. I want liquidity and low risk.

• Open an Account with Fidelity, Schwab or other brokerage that offers MA Tax Exempt Money Market Fund. The expense ratios on the standard funds for the masses are only marginally better than HSBC.
• Loan Participation Funds: These are funds that effectively invest in loans that banks make. They’ve been performing terribly as of late given the current interest rate and credit environment. Not Low Risk.
• ARPS (Auction Rate Preferred Securities): These securities have yield similar to longer term yields but because they could be sold periodic auctions better liquidity. Had I known about these a year ago, I think I mightve placed much of my cash in such instruments. However, the liquidity that had previously been taken for granted is being assaulted Of course I still don’t understand how to invest in these.

The options just aren’t that great currently. Then again, maybe this is just a sign that I shouldn’t be in as much cash as I am. The Fed has been lowering the fed funds rate to increase the amount of money that is available in the economy. The corresponding reduction in what money market funds are paying may lead me to take on some additional risk.

Apparently having a top notch FICO score doesn’t cut it anymore, according to this article in the Boston Globe. During the housing boom, anyone with a pulse and a FICO score above 620 was rubber stamped for a home loan. 620 being the cutoff between prime and the dreaded subprime. I know because I was one of these borrowers who got quickly approved.

Lenders are being more careful now, and holding borrowers to higher standards. I for one think this a good thing. I believe Banks and individual lenders act in the best interest of the economy when they treat loans as assets they own instead of a liability to be passed to an unsuspecting pension fund. When I was recently approved for my current mortgage, I was told that the bank who funded the loan was most likely going to hold onto to the loan. A few years ago, I was told the exact opposite, “your loan will be sold.” If the bank knows it has to hold the loan, then it’s in the business of making sure borrowers are good risks. When banks know they will sell the loan, they are in the business of processing as many loans as possible.

The article cites 4 example of excellent borrowers facing the crunch.

1. Professor and Harvard Business School Executive have their 100k Home Equity Canceled
2. Finance executive moving from NY making in excess of 300k can’t get mortgage
3. A Homeowner since 1993 isn’t able to refinance because his appraisal has come in 80k lower
4. A Condo owner invited to get a loan can’t get 10k out of a refinance to pay bills

Call me unsympathetic, but I find it very credible that each of these borrowers were denied.  Just call me Scrooge McDong.

1. Home Equity Loans are secondary liens on a home and as result are only paid after the primary mortgage is paid. As a result home equity loans are especially risky in a declining market in which the value of the home might not cover the value of the 1st mortgage let alone the home equity loan. Lenders as a result are being justifiably careful.
2. The finance executive is not being denied but rather the bank wants an actual paycheck from the new job and not just a letter from the new employee. This sounds reasonable enough. This executive can join the the masses and rent for a while. Personally I’d rather rent before buying if I’m moving.
3. The homeowner since 1993 says the house is being appraised for 80k less than it was a little over a year ago. Why was is appraised just over an year ago? This guy sounds like he’s refinanced already, and has probably already extracted too much equity.
4. A condo owner who needs 10k to pay outstanding bills sounds like a poor risk. If she can’t pay her other bills, why should she be able to pay the loan? 10k of outstanding bills is a lot. Loan officers want to lend money out as that’s how they are paid, but ultimately it’s not the loan officer’s decision to make. The underwriter ultimately decides which risks are good and which ones aren’t. A loan officer is just a sales person.

Last night I just finished by draft for my Fantasy baseball team from which I taken a year hiatus. Earlier in the week, I had a NCAA draft. In the fall I have fantasy football. I’m not even a huge sports fan. Yet, I spent quite a bit of money each year, and countless hours each year on the pursuit of victory. My guess is that I “spend” about $300 on year on fantasy sports. Of course since what I’m really doing is very akin to gambling if not outright gambling in itself, I actually end up recouping some of what I spend. For me that’s probably $20 bucks if I have a good year.

Is It Legal?

If it’s not I shouldn’t really be admitting in public that I’m basically gambling, but from what I’ve gathered it’s mostly legal. The New York Times featured a , and on the most part office pools and pools amongst a few friends should be legal. The basic takeaway from the article is to keep it small and local. Fantasy sports is a class activity on into itself. It’s not gambling in the classic sense of the word. It’s not a game of luck, or at least that’s the interpretation of congress. Apparently, Fantasy Sports is a game of skill, and not illegal gambling.

Is It Worth It?
Beyond the legal ramifications of my fantasy sports, friendly tournameant pools, I still have to ask myself if participating worth it? Brackets are easy enough and don’t take much time, but fantasy sports do a take quite a bit of time. Obviously I wouldn’t do it if I didn’t enjoy it, but I also know I wouldn’t do it with much gusto if there wasn’t money on the line. In this respect, fantasy sports is very much like gambling for me. Would I ever play blackjack to kill a few hours just for fun? I don’t think so, and in the same vein I wouldn’t spend a hour a week to look at what bench players are getting more at bats. Clearly the payoff is one of the reasons I participate.