Slouching Towards Wall Street… Notes for the Week Ending Friday, January 14, 2011
by Moshe Silver — author of Fixing a Broken Wall Street http://tinyurl.com/cqgter9
May The Best Team Stay Out Of Trouble
Thinking of going on vacation? You probably want to stay away from Mexico whose government just announced a 60% increase in deaths in the drug wars in 2010 (Christian Science Monitor, 13 January, “Mexico Drug War Death Toll Up 60% In 2010: Why?”). Drug-related deaths in 2010 hit a high of 15,273, for a reported four-year total of 34,612. The breakdown is sobering. The Monitor reports “30,913 execution-style killings, 3,153 deaths in gang shootouts, and 546 deaths involving attacks on authorities.”
You may also want to think twice before visiting Rio de Janeiro. Brazil officially reports some 23,000-26,000 drug-related killings every year — in 2007, the most recent year for which we were able to track down verifiable figures, 35,000 people were fatally shot. The great majority were drug related.
Mexico has a population of over 107 million, and Brazil of about 200 million. Thus the percentages look eerily similar.
So while you are waiting to decide whether it’s safe to attend the upcoming World Cup (2014) or the 2016 Olympics, both of which will be held in Brazil, you are probably focused on going to the Super Bowl. After all, nothing like good clean fun in safe, clean America.
In the wake of the tragic shootings in Arizona a number of publications have cited the statistic of 30,000 gun deaths a year in the United States. With the caveat that we consider all statistics suspect — particularly those that “everyone knows” to be true — it’s clear that your trip to Arlington, Texas for next month’s Super Bowl may not be statistically safer than traveling to the slum neighborhoods of Rio. Based on prior years’ statistics reported by the Centers for Disease Control and prevention, suicides may count for as many as half the gun deaths in America. At the same time, there may be three times as many gun-caused injuries as there are deaths. In work reported in the aftermath of the Virginia Tech shootings, the Johns Hopkins Bloomberg School of Public Health reported (14 May 2007, “Q&A: Preventing Gun Violence In The United States”) that “the violent crime rate in the United States is about average when compared with most other high-income, developed countries. But our murder rate is much higher than most,” a difference the report attributed to the widespread availability and use of firearms.
While you are at the Super Bowl, you will be offered the very best in entertainment that America has to offer. The Super Bowl draws major talent from across the country, all of whom descend on the host city to offer their wares — musical and otherwise — in the upscale venues. Speaking of talent, one of the most significant annual migrations of talent is in the sex trades. We note a piece last year from the Broward / Palm Beach New Times (30 January 2010, “Prostitutes Plan To Profit Big From Super Bowl Week In South Florida”). The Broward police Prostitute Diversion Initiative projected, in the run-up to Super Bowl week, that “as many as 100,000 prostitutes — male and female — will descend upon South Florida in hopes of cashing in with football fans.” The sex industry approaches Super Bowl week with a logistical precision and capitalist zeal that would do Goldman Sachs proud. “Talent managers,” as the stripper bosses at the clubs are called, connect with out of town “managers,” as the pimps are known, to provide herds of “circuit girls,” as working ladies who travel to major events are called.
But there’s entrepreneurial panache out there as well, as many independent women team up to travel to town for the local commerce. One young lady interviewed in the New Times piece said “a girl we know came here three years ago (Super Bowl XLI) and walked away with 35 large.” Out of towners plan in advance, studying which are likely to be the highest traffic days and locations, booking rooms in inexpensive yet convenient locations, and — at least until now — advertising on Craig’s List to pre-book.
Not to be outdone, the Arlington police force has beefed up its sex crimes presence. (Was that an unfortunate metaphor?) Among the weapons in the war on illicit sex is a giant electronic billboard on the Collins Street off-ramp of Interstate 30 — the exit that leads to Cowboys Stadium. As reported on line by a local radio station (khou.com, 6 January, “Billboard Warns Customers Of Super Bowl Hookers”) the billboard features giant photos of four men convicted of offering money for sex in Arlington, and the “Your Name And Face Here” message couldn’t be clearer.
Arlington police also launched a sting project that calls sex businesses that advertise on the internet. They place phone calls, then arrest the prostitutes who show up at their appointments. They credit the sting operation with tracking down a 15 year-old runaway and say they could probably run the sting ad infinitum and make arrest after arrest.
Men who planned their trip to Arlington with more than football in mind may have to rethink their vacation plans. They may want to visit Costa Rica, where prostitution has been legal since 1894 — though strictly in its entrepreneurial form, as pimping or running a brothel are illegal. While there are few reliable statistics, a local academic estimates that as many as 40,000 American sex tourists visit the country annually.
As a still darker side of an already dreadful business, Costa Rica is a major hub of the international traffic in child prostitution. The government has engaged in several initiatives, including programs funded by the US Department of Labor, to combat both child labor and child prostitution. A 2005 USDOL report quotes an independent child advocacy group saying upward of three thousand children were likely engaged in enforced prostitution in Costa Rica. This is a doubling of the number reported only two years earlier by a different NGO, though obviously the methodologies and data bases may not match. Worse, this is probably well above ten percent of the total active sex trade in the country. It is well known that child prostitution is the major draw for American sex tourists, which means Costa Rica’s child trafficking problem is cut from the same cloth as Mexico’s and Brazil’s drug problems, where local production and delivery networks meet Gringo demand. Having dismantled their military by constitutional amendment in 1949, Costa Rica clearly embraces a policy of Make Love, Not War.
As an unregulated activity operating largely in a cash market, prostitution does not bring a definable economic benefit to the cities in which it thrives. Worse yet, as some intrepid economists have discovered (see Slouching, 12 February 2010, “Right Down The Bowl”) the economic benefit of Super Bowl related illicit entertainment often leaves the city in which it is generated. Professor Philip Porter, an economist at the University of South Florida and a longtime student of the economics of the Super Bowl, says the influx of sex workers hurts the local economy in two ways: first the out of towners pay venue owners a premium to replace locals during the event, which means the regulars find themselves shut out even of their normal weekly take. Then, to paraphrase the dictum of Wall Street managers who observe that their assets walk out the door every night, as soon as the event is over, the road warriors who have garnered top dollar for Super Sex hop on the next Greyhound bus back to their usual haunts, meaning the cash spent on Super Week entertainment will be spent anywhere but in Arlington itself.
This is not unique to the illicit cash businesses that thrive during Super Bowl week. Professor Porter’s work shows the majority of the additional economic benefit during the Super Bowl does not remain in local hands. Premium room prices in hotels that are part of a national chain revert to the corporation, with only the standard room fee staying at the local level. Premium transportation costs will go to the airlines, not the city of Arlington, and while taxi drivers may charge more, they are still largely paid in cash, which means the money will find its way into the local economy, but not the tax coffers.
Says Professor Porter, the Super Bowl is not a money making enterprise. If it were, the NFL would build its own stadium and hotel / entertainment complex and host the event itself. Porter’s analysis suggests that the host city may not even retain the all important “feel good” component usually associated with hosting a major sports event. Our advice to fellow armchair social scientists: sit back and enjoy the game. And may the Green Bay Packers win!
Giant Facebook-Sucking Vampire Squid
As we go to press, it is reported that Goldman and Facebook have decided not to offer shares in the private company in the US (LA Times on-line, 17 January, “Goldman Sachs Cuts US Investors Out Of Facebook Deal.”) Goldman’s US investors are reportedly angry over being closed out of the deal of a lifetime, and the firm says it will also lock out its partners — not only domestically, but worldwide, because fair is fair.
It was obvious when the deal first came to light that it would attract close scrutiny by the Commission. Given the media hoopla surrounding the deal, no one should be surprised at this latest turn of events. Goldman’s decision moves all dealings in the private shares offshore and puts them beyond the SEC requirements around disclosure. Facebook will not have to disclose the kind of detailed information that US securities laws require when shares are held by more than 500 US investors. It is not yet clear what type of offshore entities will be created to accommodate Facebook investors, nor whether any such special purpose vehicles will ultimately enable Goldman partners, or even select US investors to circumvent the Commission’s less than eagle eye.
As we wrote last week (“The Auld Boys Network”) Regulatory Flight is in full swing. Goldman’s profuse apologies about having to move the offering offshore sound like Brer Rabbit’s pleas not to be thrown into the briar patch. This latest development means the world’s most powerful investment bank and the world’s most populous social network. At 500 million active users, Facebook comprises over 6% of humanity. If it were a country, it would be the third most populous nation in the world — after China and India, but way ahead of the US. While the financial press focuses on the market aspects of this trade, let us also not forget the broader social policy issues.
SEC regulations go hand in hand with Sarbanes Oxley requirements on public US companies. While we admit that both US securities regulation and the corporate governance standards imposed by Sarbanes Oxley are inefficient nightmares whose value is obviously small in contrast to the costs of implementation and enforcement, they nonetheless affirm that we require some minimum standards, both of financial transparency and of responsible corporate citizenship. While everyone is focusing on the former, we should not forget the latter.
People in the media are crediting Facebook with changing society’s concept of Privacy. Analysts and executives in the on-line business world say that people have different notions of privacy “in the post-Facebook world.” But the fact is that Facebook has not so much brought about evolutionary social change, as shoved aside folks who have such bourgeois concerns as not wanting people to see naked pictures of their adolescent children, have access to their home telephone number and home alarm system security code, or be able to call up their bank account information, complete with mother’s maiden name and the name of their favorite sports team.
As Goldman and Facebook meander off arm in arm into the golden sunset, people everywhere should worry — even the tiny fraction of wired humanity that do not have a Facebook page. Because of the size and scope of this investment, Goldman’s transaction is not just another really, really big private placement. It is the leading edge of redefining the way Wall Street does business. Because of Facebook’s size and reach, they are redefining the way society interacts. What started as an open community defined fluidly by its users can just as readily be turned into a machine for controlling a significant portion of the world. We are the first to admit to being paranoid, but by shoving aside privacy concerns, Facebook is not so much rewriting the social contract, as abrogating it. Without even the admittedly pathetic oversight provided by US regulators, who is going to sniff out the next transgression of what the whole world considers a basic societal right?
Goldman saw its opportunity and pounced, and for that we can not fault them. They are in the business of pouncing. But we find this development more troubling than liberating, because it has co-opted the grass roots mechanism that created a truly open global society. Facebook is no longer revolutionary. It is, in fact, downright scary.
Speaking of regulatory inquiries into abusive financial practices, in the wake of recent allegations of abuse in the micro-finance industry, the man who has been praised as the creator of this concept had a few choice words this week (NY Times, 15 January, “Sacrificing Microcredit for Megaprofits”). Muhammad Yunus, the Bangladeshi economist and Nobel Prize winner writes “there are always people eager to take advantage of the vulnerable.” In the case of Facebook, “the vulnerable” is the entire US financial and corporate governance system, partly because it has failed miserably at keeping up with the real world, and partly because American society does not demand that companies like Goldman and Facebook be forthcoming about their dealings.
Yunus cites another disaster that anyone with even a rudimentary grasp of Right and Wrong could have seen coming: microfinance banks going public. In 2007, Mexican microlender Compartamos went public, and last year India’s largest microfinance bank, SKS Microfinance, raised $358 million in its IPO. The business of microlending is clearly at odds with the notions of public securities markets trading. What makes microcredit banks successful is the powerful culture that grows up as women rise from being borrowers, to entrepreneurs, to partners in the bank. The women at the top of these networks continue to borrow from the institution in which they own shares, while also banking the proceeds of their successful businesses there, and mentoring new members as they launch their first ventures.
The capitalist argument is that the public markets will “liberate” microfinance from dependence on charitable donors and foundations. What they overlook is that publicly trading these shares has also liberated the institutions from their deep culture of community roots and mutual responsibility. Yunus writes that his Grameen Bank has 2500 branches across Bangladesh and “lends out more than $100 million a month.” This doesn’t sound like an organization in need of rescue by the capitalists.
We think it is capitalism’s notion of social assistance that needs saving. There is a terrible disconnect in the world when the wealthiest individuals band together to donate their billions to charity, yet one of the most successful charitable projects in history gets perverted and put in the hands of the investment bankers. We agree with Yunus’ proposal that it is time to launch microcredit regulatory authorities in countries where the phenomenon has taken root. More to the point, the fact that the microcredit industry has grown beyond its ability to police itself through its original peer culture and the mutual assistance and pressure of owner-lender-borrower-entrepreneurs is a clear indication that it has hit maximum operating capacity. The day that a grassroots organization requires federal oversight, it is by definition no longer grassroots.
It is no wonder that microcredit went Wall Street. It has clearly hit its wall. What, we wonder, can logically replace it?
We challenge the billionaires to create merchant banking for the underprivileged. The current project to give their money away is grand PR. In practice, though, the billionaires are good at writing checks, but far less adept at creating or directing effective programs to deploy their gifts. There are thousands of small businesses across America in desperate need of financing, and of management expertise to help them operate more efficiently. And there are smart people who are out of work. The match, to us, is compelling. Let the Billionaire’s Club draft management and financial talent and launch a charitable fund that will act as merchant banker to distressed businesses. Paying the salaries of several thousand people in dying companies creates multiple social benefits: it gives people the self-esteem of continued employment, it enables them to pay taxes and maintain their mortgage payments and keeps them in the consumer pool, it has the up- and downstream effect of stimulating other businesses, and it just may be the added push many businesses require to survive. The Night Of The Living Fed continues to practice economic Lysenkoism in the hopes that the economy will revive, and our whole economy is marking time waiting for the elusive upturn. If we truly believe the recovery is right around the corner, then it makes much more sense to keep businesses alive until it comes. If this investment program succeeds, it will generate profits that will enable it, like Grameen, to be a self-financing social program, and it will foster a culture of mutual self-reliance among business owners and their employees. A sense of ownership in the US economy.
But what if it fails? What if the recovery never comes after all? We believe Keynes’ dictum about the half-life of irrationality applies broadly to all market phenomena, and it is likely that this market malaise will last longer than the Fed can sustain its program of pecunia ex nihilo. What then of the billionaires’ spent billions? you ask. But, we answer, the money is earmarked to be given away. If all it accomplishes is to keep several thousand people gainfully employed a few years longer than otherwise, is that not a minimally acceptable outcome?
Our elected officials have tossed the hot potato of fiscal responsibility to the appointed academics. The Fed Chairman reminds the public every chance he gets that these type of programs haven’t been tried before, especially on such a grand scale, and there’s no precedent to determine what the outcome might be — but we are forging ahead. Congress is locked in a death struggle over how much more unfinanceable debt to allow ourselves to take on — much of the new debt will be purchased by the government with newly-printed money, so they can keep liquidity flowing into the economy with the goal of keeping businesses afloat, so they can keep people employed, so they can pay taxes, so the government can pay down the deficit… Our biggest company and our most powerful investment firm have moved what may be the most significant financial transaction of the generation out of the reach of the American marketplace. The richest people in the world would like to give away billions of dollars — which, in the scheme of things, isn’t all that much — yet are hopelessly incapable of formulating a coherent plan.
For years our brother stockbrokers bought their customers muni and Treasury bonds saying, “It’s an investment in America. The day these things go worthless will be the day your money isn’t worth anything any more either.”
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