AskDong

I didn’t lose my wallet, but my girlfriend did.  There are few things in life I hate more than replacing the content of a wallet.  I hate being without my cards (credit cards, debit cards, and ID), but what I hate even more is getting everything replaced.  I hate the uncertainty of not knowing if I will find the wallet or not.  Of course whenever I’ve actually do find a lost card, it’s always when I’ve already replaced it - sometimes that’s the most frustrating part of it all.

So, I didn’t lose my wallet, but I am directly affected beyond just being collateral damage.   My girlfriend has two credit cards that are mine that I’ve given her to use so she can buy groceries and such when I’m not there.  Her losing her wallet is a direct impact on my credit cards.

I called immediately to put holds on the accounts, and was disappointed to learn I could only place a hold my entire Chase account rather than on any single card.  Given that I use this card, and my parents carry another for emergencies, putting a hold on the entire account is less than ideal.

My American Express is another story.  I was able to individually put a hold on a specific card rather than the entire account.  Each card has a different number.   Given that this card is my primary credit card - the first card I plunk down to pay a bill - I really appreciate not having to put a hold on the entire account.  I am surprised to learn that not all credit cards would implement such a system for extra cards.  I guess it’s just another reason my American Express is my preferred credit card.

I feared the worst last week as Congress worked on legislation to tax not only all the AIG bonuses, but potentially all bonuses due any firm receiving government.   I was absolutely disgusted by both the bonuses, and the solution.  One week later, I find myself surprisingly pleased with the turn of events.

Cooler heads seem to be prevailing.  The tax measure was both clumsy, legally questionable, angry, and retributive rather than forward looking.   I’ve grown optimistic that this tax will not see the light of law.   The president has voiced concern, and the Senate seems to be having cold feet.

Was this the game plan all along?  I doubt it, but I do think if it were it’s actually been a worthwhile excercise.   Why?  The bonuses pail in comparison the larger bailout.   I agree with the criticism of the media for not putting the bonus to scale with the bailout.  165 million is not even close to the same as 175 billion even though they sound read awfully similar.  I would like to think Congress and the President have more important things to do than being “outraged” about what effectively is rounding error for the real problem.

As things are playing out, the outcome hasn’t been so bad.  Over 50 million has already been given back by “choice.”  I imagine more will be given back at the end of the day.  The media coverage and public shaming has more importantly served a greater purpose.   There’s no question that some “innocent” babies have been thrown out with the bathwater.  AIG financial product group consisted of more than just the shysters who sold financially disastrous CDS.  Hopefully the next time, a well paid finance person has the opportunity to negotiate of big retention because they screwed up, they’ll think again.   With any luck, the whole financial world might start asking questions on compensation and risk.

I’m not against people paid well.  I want to be paid well.  I believe in capitalism, I think those who risk their money deserve to be paid well.  I believe entrepreneurs deserve the riches they make.  I believe many good CEOs have very much earned a share of the riches that they have made.  What I don’t believe is that people should paid handsomely just because they work with large sums of money.  Effectively what’s what many people on Wall Street are paid for, to know the difference between a million and a billion.   They definitely should not be paid for taking huge risk, none of it personal.  Yet, they are.  Do some deserve to make a lot of money?  Certainly, but most do not.  Anyone can bet the bank to reap large rewards with somebody else’s money.   The scrupulous treat the money as their own and take appropriate levels of risk, but too many like the guilty at AIG bet thinking of it as the house’s money.  In AIG’s case the house has effectively been the American taxpayer.

I finally got around to filing my taxes for 2008.   I generally owe taxes, so I’m never in much of rush to file them.  Every year, my taxes become more complicated to my general displeasure.   I’m happy to pay my fair share in taxes.  I don’t feel unjustly burdened by the actual amount of taxes I pay, but I am becoming more irate about the overly complex tax code.

I accept that much of the added complexity is of my own making.  My taxes have steadily gotten more complicated over the years.   When Ifirst graduated from college, my taxes were blood simple.  I didn’t have a mortgage, owned nothing in terms of stocks, and had no money on which I earned interest.   Today, it’s a much different story:

1. I have a personal mortgage
2. I sold over 20 different securities last year (mutual funds, stocks, options, etc)
3. I earn taxable interest, federal exempt interest, and federal and state exempt interest
4. I own a rental property
5. I have business income - I earn about $40 a year from AskDong.com
6. I’ve steadily increased my charitable giving

Printed, my taxes were over 45 pages, and my taxes could easily be more complicated.    I’m single and I have no dependents, which automatically makes my taxes more simple.   The Alternative Minimum Tax does not apply to me.    Even with the rental property my taxes shouldn’t be this complex.

The problem is the tax code has become increasinly obtuse with every passing year.   Half of my taxes are taken up by calculations that only determine that I don’t need to make those calculations.  Student interest has not been a deductible expense for me in years.   As my salary has increased, I’ve given up more and more deductions.  I’m OK with not having those deductions.  What I’m not OK with is the shoddy and fragmented tax code that all us have to spend undue hours wrestling with.   There are too many different phaseouts for far too many different deductions.

Policy makers have fallen in love with carving out different pieces of tax code with the best of intents, and pitifully poor execution.  Who doesn’t want to encourage higher education with deductible interest?  Phasing out that deduction make sense as it should only be benefitting those who really need a leg up.   I may not have a problem with each specific aspect of the tax code, but taken as a whole the tax code is bloated and confusing.  

I spent about 4 hours this past year doing my taxes, not including all the time I’ve spent over the past year making sure I had records.  There are deductions I missed because I couldn’t find receipts.    There are dates for stock purchases I had to make my best guess on because I no longer have exact records.    At the end of the day, I’m very conservative with my taxes.  I’d rather pay slightly more in taxes,  and despite TurboTax indicating I have a very low audit risk, I still  worry about it.  

Taxes should not have to be as complicated as it has become.   I’ve always believed the better the tax code the simpler it is.   Lump all deductions in one category.   Phase all of them out as necessary, but all at once instead of provisions hitting at different points.  Better yet, increase the standard deduction so that most people don’t even have to worry about deductions.   Unify all the different retirement vehicles so everyone gets X dollars to invest tax deferred (401k, IRA, Simple IRA, etc) and Y dollars tax free (Roth).   The Government needs to tackle the issue of Tax Reform, not because it needs to raise or lower taxes, but because it needs to make the tax code understandable and more accessible to the average tax payer.

The media outlets are abuzz with the AIG Bonus fiasco. First I will state my opinion.  I like most of the known world am outraged at the bonus payments.  They are unconscionable.  Why should the very same people who have brought the world’s financial system to the brink of disaster be paid any kind of bonus after demonstrating at best incompetence and at worst reckless disregard for the world economy?

All of that said, actual situation is both more complicated and less clear.  On one hand, we should not worry about millions when the magnitude the crisis is a few order of magnitude larger.  450 million is less than .5% percent of the bailout, and less than .01% of the total AIG Credit Default Swap risk.   Still, just because the percentage is small does not mean we should not do the right thing.    Sadly, however, the clear right course of action is neither implementable nor practical.

Much of the problem is cultural.  I found the graph below from EconomicPicData very illustrative of how Wall Street and the financial world views bonuses.

In the case of AIG, the employees effectively negotiated as if they were in the lower right quadrant.  The threat was that they would go elsewhere and leave AIG and the Government in a lurch.   Part of the problem is that eleven of top 73 best compensated employees already have left.   If million dollar plus bonuses for employees who have demonstrated abject failures of judgement isn’t enough to maintain a 90% retention rate than I don’t know what would be?

For too long individuals in the financial world have held other effectively to gun to get what they want (more money) regardless of outcome.  The retention plan was put in place before the avalanche of the financial crisis, before AIG was bailed out.   The retention plan was put in place by management under a gun.  They worried that these employees who had managed to accumulate 2.3 trillion in exposure would walk.  Even though it was already clear at this point, the business was going to lose hundreds of billions, there was still more to be lost if AIG were left in a lurch.   These positions had to be managed, and the current employees were probably still the best people to do so despite the massive losses.  It’s disgusting that employees who were pushing the company across the cliffs of doom thought they could still squeeze more for themselves despite the havoc they already wrecked.   These retention bonuses are little more than blackmail.  The employees had effectively accelerated the car to dangerously reckless speeds, and were now basically threatening to cut the breaks if they didn’t get paid to slow the car down.  Disgusting.

While the right and wrong of the matter seems clear enough to laymen like myself, the legal issues are much less so.   AIG did sign these contracts, and the sanctity of the law should be upheld.   Nor, do I believe we should be setting up specific laws to target specific individuals.   That is a very dangerous precedent.   Allowing and supporting a government that retroactively targets individuals just because it doesn’t like them is akin to fascism.  That said, had AIG actually gone bankrupt these bonus payments would not be paid.  When a company enters bankruptcy, broad authority is given to determine who and when people are paid.   Many bondholders are not paid despite being under the auspices of contract law.   There is no question that AIG would have had to file for bankruptcy protection if not for the Government intervention.   The Government failed in giving itself more broad authority on controlling these payments in the haste of bailing out AIG.   While the Government did place clawback provisions when it first issued TARP money, these provisions however were limited and not applicable to the bonuses being paid.

Some believe that some of the AIG particpants should be convicted of fraud.   They are certainly guilty of bad, risky, behavior, but are they guilty of breaking any laws?  That is unclear.   AIG has wrought more financial destruction than Enron but it seems like most if not all of its employees will escape prosecution.  There were no laws or regulation that prevented from selling more CDS than the could actually insure.  Should not reckless endangerment of the whole financial system be a crime?  Misleading investors affects millions of people, reckless leveraging of the entire financial system endangers billions of people. What is a greater crime?  Even if such laws were in place, in practice they would likely cast too wide net that makes for abuse.   As I’ve stated before, it’s not that we need more regulation, just better regulators.  Would AIG behaved a little differently had regulators at the SEC come down and questioned their behavior.  What if they had been threatened by the regulars with criminal action?  Might they have given their actions a second thought?

I’ve been an investor in VMATX which is Vanguard’s Massachusetts Municipal Tax Fund over the last 2 years. A few years back, I had thought about constructing my own bond portfolio, but found it too much of a hassle. The commissions were expensive, researching bonds were difficult, and it was unclear what benefit I really gained.  Certificates of Deposits yielded similar rates.  Bond funds such as VMATX performed better but not that much better.

In the last 9 months, the pros have begun to outweigh the cons.  CD rates have plummeted as the economy has soured, and the fed has lowered rates. VMATX is intermediate term bond fund meaning it holds assets on average with a maturity of 5-10 years. The current climate of fear and potential budget shortfalls have made municipal funds risky, and this risk translates into lower prices on the underlying bonds that make up VMATX.  This risk is real, but I think it has been somewhat unfairly applied across the board on all bonds, regardless of issuer.  As a result VMATX and many other bonds funds have taken a hit in price.  VMATX continues to steadily make it’s dividend payments.  The price of the fund has however been uneven over the last year.

Fixed income instruments vary with the general interest rate environment or with the individual risk of the debt issuer.   Typically as interest rates decline as they have over the last year, bonds increase in value.  This is not what has happened this past year.   Bonds of all varieties, corporate and municipal, have decreased in value.  The only exception have been Federal treasuries.

People have fled to the safety of Federal debt, fearing that corporations and municiplalities will end defaulting on their obligations.  Some of this fear is rational, and some overdone.   As a result corporate bond yields have widened.  Safe bonds such as 6 Month Bell South bonds yield less than 1% while Citigroup bonds of the same duration (6 months) yields nearly 33 percent.   I’ve quoted those based on the offer side, yields based on what sellers of the bond are will to take.   If anything the bigger issue currently is the very wide bid/ask spreads.  The bid is what someone is willing to pay and the ask is what someone else is willing to sell at.  For example the bid ask spread on the Citibank bond I cited above is 48%/35%.   The buyer demands a yield of 48% while the seller is only willing to give 35 percent.

The high yields, and the wide bid ask spreads are reflective of bond market that remains uneasy.   There is fear on the street.   Bonds and stocks have both taken a beating, and there are opportunities in both.   I’m still trying to figure out how to best construct my own portfolio.  How to pick bonds that will pay good returns without defaulting.  In this light, it’s very similar to my foray on prosper.com