Sunday, 26 August 2012

Rhetoric of the Ridiculous

Did you happen to see this recent dramatic quote:
We are in a POW camp, trying to survive.
That's Christopher Donahue, chief executive officer of Federated Investors Inc., whose firm has most of its assets in money market funds.

So who has taken Donahue prisoner? The Afghans? Syrians? Iraqis? How did he smuggle out this message, past his captors? Who else is trapped in the camp? How long have they been held against their will? Why doesn't the U.S. --

Oh right. He's just straining for a metaphor.

Well, at least it's a richly deserved metaphor, yeah?

Judge for yourself.

Here's the context: SEC chairman Mary Schapiro believes that, in an effort to rein in the systemic risks of shadow banking, money market funds should declare a floating NAV (net asset value). That would replace the current fake $1 a share NAV that leads a dumb schmuck investor to believe the funds are invested in fairy tale assets that can never go down in price. Alternatively, the money market funds could hold higher levels of capital or put limits on withdrawals, to better protect themselves.

Remember something: this is an industry that could have undergone a catastrophic meltdown during the financial crisis. The Boston Fed recently reported that 21 money market funds had to be bailed out by their parents. Rules for money market funds need to be reformed. These funds are critical players in the unregulated shadow banking system.

And Mr. Donahue's response is to suggest ... we do nothing, while he spouts war rhetoric of the aggrieved and besieged.

Of course he's still not the winner in over-the-top, completely ridiculous rhetoric from the financial industry. That honor, as CBS recently reminded us, is still held by Blackstone chairman and co-founder Steve Schwarzman, who two years ago said, also choosing battleground imagery:
It's war. It's like when Hitler invaded Poland in 1939.
Schwarzman, if you recall, was talking about President Obama's suggestion to close the carried interest loophole that enables private equity bigwigs to pay a tax rate of only 15 percent on millions of dollars of income.

CBS breaks down what that's all about:

Fund managers earn a management fee, typically 2 percent of assets under management, and a share of the profits, typically 20 percent ... In some cases, Bain charged 2 and 30. The 2 and 20 structure makes for a nice tax deal: While the 2 percent management fee is taxed as ordinary income, the 20 is treated as a long-term capital gain, which is taxed at 15 percent. In private equity lingo, the income from profits is called "carried interest." Many people, including Warren Buffett, have criticized the tax treatment of carried interest, arguing that it's simply compensation, and ought to be taxed as such.

Indeed, it's a distortionary tax break that encourages excessive takeover activity.

And by the way, that 15 percent is the same marginal tax rate that someone with $9,000 of taxable income is paying ... and Mr. Schwarzman is worth oh, let's say, $5.5 billion (according to Forbes).

It's amazing how out of touch some people are.