Year: 2008

Dutch to Curbe Excessive Executive Pay

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This is a a good start on a very serious problem, and pay of Dutch executives is on the order of 1/4 that of US executives.

The Dutch finance minister, Wouter Bos, sent a bill to parliament to crack down on this, and I agree with his sentiments:

“I believe cohesion in society is not served by inexplicable inequalities,” Bos said at a recent seminar of center-left politicians, held at a country-house hotel north of London. “Public support for entrepreneurship around the globe is eroded if you let this continue, and this is not in the interests of our economy or entrepreneurship.”

His proposal would place a 50% tax on golden parachutes in excess of €500,000 (about $800,000), and, “would increase by 15 percent the employer tax contributions to company pensions for executives who make €€500,000 a year or more.” (Not exactly clear on the specifics of Dutch pension law, so I would appreciate an explanation here)

In our system of economics, wages are very much a zero sum game, with a fixed pool of money for compensation, and the mega-compensation that exists takes money from everyone else.

I remember once running the numbers on Michael Eisner’s $550 million pay package in the mid 1990s. It came to something like $6000 for every employee of Disney, and had that money been distributed to the employees, there would have been a payback in terms of less turnover and a higher quality employee that would have increased profits.

Of course, they find some rich guy, in this case Ad Scheepbouwer, who got a €1 million ($1.6 million) bonus to argue that it will create an environment unfriendly to entrepreneurs:

Scheepbouwer argues that the Dutch government now, with its proposed limits, is encouraging a climate that penalizes entrepreneurs.

“For really talented and really exceptional performers this is not a very attractive place,” he said. “It is not accepted that people are outside the normal. The only people that are accepted outside the normal are musicians or football players.”

The my answer:

  1. These people are not entrepreneurs. They are highly compensated employees.
  2. The “talented and exceptional” bit is largely a myth, as shown by the financial executives with billion dollar packages who are now failing abysmally in the financial world. People get to where they are because of connections and luck at least as much skill.
  3. So you’re telling me that you would not do it for €1 million/year? That you have to have €20 million, or €100 million, or €1 billion?

This is another toxic export of the American capitalism model, where highly compensated executives sit on each others’ boards of directors, and vote each other raises.

KC-45 Tanker: NG Harshing on Boeing Again

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Another Northrop-Grumman Press Release:

Northrop Grumman KC-45: Why We Won – Development Cost

Highlighting Reasons the U.S. Air Force Selected the KC-45 Tanker as Best for Our Men and Women in Uniform

WASHINGTON – May 12, 2008 – The U.S. Air Force found Northrop Grumman Corporation’s (NYSE:NOC) bid to build the next generation of aerial refueling tankers superior to Boeing’s in four of the five most important selection criteria. Despite this fact, the losing bidder wants the Government Accountability Office to overturn the Air Force decision to award the contract to Northrop Grumman even though the Air Force conducted what even Boeing described as a fair, open and transparent bidding process. Here is another reason Northrop Grumman won, drawn from a list of facts included in a redacted version of a protected Air Force selection document.

Development and Production Costs

When the Pentagon considers proposals from defense contractors, one of the key elements of its decision is whether the project can come in on time and on budget. Acquisition planners will frequently take cost estimates provided by the prospective contractor and either raise or lower them, based on the U.S. Defense Department’s assessment of whether those cost predictions are likely to be accurate.

For the system development and demonstration portion of the program, the Air Force concluded that Northrop Grumman was at “low risk” of coming in over budget or not meeting its production timetable, while Boeing was rated “moderate risk.” Many of the reasons Boeing was rated a higher risk than Northrop Grumman are redacted for business competition reasons, but Air Force guidelines state that a “moderate risk” rating would occur if “Some difference exists between the offeror’s proposed cost/price and the government’s probable cost/price that is not reasonably explained.”

A key reason why the Air Force could assign lower development risk to Northrop Grumman is that Northrop Grumman has already built, flown and tested a prototype refueling tanker. In all, the Northrop Grumman tanker has flown 73 flights and spent more than 200 hours airborne. The KC-45 team has also conducted a successful fuel transfer test from its boom to an F-16.

By contrast, Boeing’s aircraft hasn’t been built, and exists only in its design phase. The proposed new boom also has not been built, tested or certified. Boeing is also late on delivering a different version of the KC-767 tanker to both Italy and Japan.

For the production portion of the contract, the Air Force noted that, for the Northrop Grumman offer, “Substantially less funds required to develop and buy the first 68 in support of Air Force tanker recapitalization efforts.”

The Air Force also said it “Estimated Northrop Grumman as … less than Boeing in out-year production,” meaning that it believes Northrop Grumman’s production costs would remain lower than Boeing’s for the life of the contract.

In the document explaining its decision, the Air Force noted that “Northrop Grumman’s more advantageous cost/price proposal was a discriminator” in picking Northrop Grumman. The KC-45 offered more capability at a lower unit cost than the KC-767 to provide the Air Force with the best value.

About the KC-45

The KC-45 Tanker aircraft will be assembled in Mobile, Ala., and the KC-45 team will employ 48,000 American workers at 230 U.S. companies in 49 states. It will be built by a world-class industrial team led by Northrop Grumman, and includes EADS North America, General Electric Aviation and Sargent Fletcher.

Northrop Grumman Corporation is a global defense and technology company whose 120,000 employees provide innovative systems, products, and solutions in information and services, electronics, aerospace and shipbuilding to government and commercial customers worldwide.

(emphasis mine)

Lately, Boeing has had an record of over budget, behind schedule, and under performance that boggles the mind, and NG is just pointing it out.

Crucial Interest Rate Metric to be Reworked

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As I’ve mentioned earlier, there are concerns that one of the crucial interest rate indices, the LIBOR, is not accurate because the member banks are not accurately reporting interest rates.

It now appears that the , “benchmark interest rate for at least $347 trillion of derivatives and 6 million U.S. mortgages” will be modified to address these concerns. (Yes, that “t” after the $347 is correct)

The British Bankers’ Association, which is responsible for reporting the rates, has, “report based on discussions with member banks to its independent Foreign Exchange and Money Market Committee.”

There are estimates that the reported rate could be as much as 30 basis points too low, or about 10%.

Iraqis fire surface-to-air missile at chopper over Sadr City – On Deadline – USATODAY.com

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The cease fire in Sadr City appears to be holding for the moment in Baghdad, though if I were a US military man, I would be rather concerned at the report that someone, probably a Mahdi Army member, fired a surface-to-air missile at at a helicopter before things settled down.

This was likely not a lone combatant making this decision. This was likely a conscious decision made as a warning to the US that the militias have resources that could mean that air operations over the Baghdad slum will no longer be quite so easy.

For some context, I would suggest that this article from Think Progress goes a long way towards explaining Muqtada al-Sadr’s popularity. Money quote:

One of the central elements of the elder Sadr’s program (and now of Muqtada’s) was a distinction between the “silent clerics” (represented by Sistani and the Najaf establishment) — bookish sorts who stay remote from the lives of their people — and the “speaking clerics” who take part in the suffering and struggle of the Shia, as Sadeq did. And here the “silent clerics” once again stayed silent while Shia were crushed in Sadr City, of all places, while medical care, food, and shelter are being doled out in Muqtada’s name. It doesn’t require any math to see that Sadr benefits politically from this.

Vaccine Junk Science: the NY Times Almost Gets It Right

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When they have the following paragraph in a story on an Autism-Thimerosal law suit:

Every major study and scientific organization to examine the issue has found no link between vaccination and autism, but the parents and their advocates have persisted.

The get close to being right…Except that it’s paragraph 3, and it should be in paragraph 1.

A core fact on the vaccine stupidity is that there is no correlation between vaccines or Thimerosal and conditions on the Autism spectrum. Period, full stop, check my earlier posts.

It is a fraud put forward by an unethical doctor.

Today’s Elections

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Hillary stomped Barack in West Virginia….No Surprise there.

However, there are some other elections of interest, in Mississippi, you have Democrat Travis Childers running against Greg Davis in a district that went 62%-37% for Bush in 2004.

Childers won the first round, but was just short of an absolute majority, and as of about 10pm EST, courtesy of the Cotton Mouth Blog:
CHILDERS (D) 42,029 – 51%
DAVIS (R) 40,275 – 49%
(366 of 462 precints reporting)

Update: AP Calls it for Childers, and there was much rejoicing.

We also have a primary contest in Nebraska between Scott Kleeb and Tony Raimondo for US Senate. Kleeb has gotten a fair amount of netroots support, and Raimondo was a Republican until he decided he wanted to run for senate, so I’m pulling for the guy with the 5 letter name.

At this moment, the NE Secretary of State is showing Kleeb with a 68%-26% lead over Raimondo with 24% reporting.

They Are Spying on US, but They Aren’t Prosecuting Terrorists

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The LA Times is reporting that despite an enormous expansion in surveillance of Americans, there has been no increase in terror prosecutions.

Kevin Drum has a useful pictorial perspective:

He also has a perspective that is even more alarming:

If anything, the real situation is almost certainly even worse than this: ‘Warrants’ understates the vast increase in surveillance, which also includes things like national security letters and the warrantless programs run by the NSA, while ‘prosecutions’ overstates the number of genuine terrorists who have been taken to court. It would be nice if Congress actually took a serious look at this.

Needless to say, I’m not sanguine about the likelihood of a Congressional investigation, but I do have a theory as to why you would have an explosion in surveillance without any increase in anti-terror actions: surveillance of political enemies.

By expanding surveillance to unprecedented levels, it allows a few dozens of actions to be taken against political opponents. For people who are actually conducting the surveillance, typically non-poltical civil service appointees, it would be easy to miss the political surveillance among the hundreds discreet actions, but someone *cough* Karl Rove *cough* would have the clearance to get the data that they wanted.

5 Gitmo detainees to face 9/11 capital case – 05/12/2008 – MiamiHerald.com

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In what is rather politically convenient timing, the Guantanamo kangaroo court has formally decided to charge Khalid Sheik Mohammed, Ammar al Baluchi; Ramzi bin al Shibh, a Yemeni who allegedly organized the Sept. 11 suicide squads; and alleged co-conspirators Walid Bin Attash and Mustafa al Hawsawi with capital offenses relating to the 911 attacks.

If the Bush administration gets its way, they’ll try to have the trial in process in September and October, though I think that the defense might throw a monkey wrench into the works.

The potential 6th defendant, Mohammad al-Qahtani, had all charges dropped, probably because all of the evidence against him was as a result of torture, though Paul Keil of TPM has an alternate hypothesis:

The Convening Authority Susan Crawford had planned to include charges against Mohammed al Qahtani, the supposed 20th hijacker, along with the other five, but Qahtani has been struck from the charging sheet. Now, Qahtani’s lawyer has immediately jumped to the conclusion that Crawford’s decision to dismiss the charges affirms “that everything he said at Guantánamo was extracted through torture — or the threat of torture,” and that his treatment was “so well documented and unconscionable that he is unprosecutable.” But I gotta figure that this crew is sharper than that. Crawford can bring those chargers against Qahtani at any time. The 20th hijacker deserves his own unique launch, to be sure. Maybe in October?

Me, I’m a cynic, so I’m inclined to go with Mr. Keil.

Economics Update

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Well, the financial news is reporting that consumer spending are up, but as Barry Ritholtz notes, “Retail Sales were rather unimpressive: Gasoline, Groceries, Food & Beverage were up, while pretty much everything else was flat to down. (see picture)

Also note that the real numbers are actually a reduction when adjusted for inflation.

In the “same as it ever was” department, we have crude oil and gasoline hitting a new record again, $126.98/bbl.

In real estate, The median single-family home price dropped 7.7% Q1, annualized, that is around a 30% drop, but you will see articles calling a bottom soon.

In banking, we have Bank of America saying that credit costs are up.

Translated from bank-speak, it means that they are having more late payments, defaults, and foreclosures.

On the good news side, Ben Bernanke is promising more free money through the Federal Reserve’s “sh%$pile for dollars” auctions.

Roubini Likes the Mortgage Proposal

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If you’ve been following my posts on the various bits of legislation to help homeowners, you know that I’m in general agreement with Dean Baker, an economist I highly respect*, that most of the proposals are more about bailing out banks than homeowners, and that attempts to prop up home prices do little more than make housing less affordable.

However, I also highly respect Nouriel Roubini†, and he likes the Frank-Dodd Proposal mortgage relief.

Seeing as how I’m not an economist, banker, or realtor, I thought that my readers (both of them) should see his take.

First, he admits that this would be nationalization of bad mortgages to a large degree, but he sees the lenders benefiting, after a 15+% haircut, because they get a guarantee, homeowners get to stay in their house, their neighbors don’t deal with the effects of vacant lender owned housing, and it is far less expensive to the taxpayer than a full bailout.

I still think that real estate needs bankruptcy reform, and allowing mortgages on a primary residence to be adjusted by bankruptcy judges would be the best reform both in the long and the short term.

*Not only did he call the housing bubble, he actually sold his home on that expectation in 2004, and he’s now renting.
†Perhaps the strident of the bear economists. The frightening thing is that to the degree he has erred, it has been because he has been too optimistic.