Inside the Mind of an Investor (PIC)

This is why I don't play the market.

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Guess who got fired today-

http://www.bizjournals.com/charlotte/stories/2008/08/25/daily13.html?f=et56&ana=e_du

Wonder what the board said; sorry we were irresponsible and paid you too much, now you're fired. May be a little cliche, but isn't that the pot calling the kettle black.

Underpaid & Overworked

The executive director of the United Way Central Carolinas received over $1,000,000 in compensation in 2007, partially to catch up retirement contributions from prior years. Her compensation will level off at approximately $900,000 for the next few years. http://www.bizjournals.com/charlotte/stories/2008/08/25/daily7.html?f=et56&ana=e_du

Given that a United Way Director's primary mission is to raise donations, it may seem fair to compare their salary as a percentage of donations to others in their geographic area. Using this metric Mrs. King's salary actually falls below that of some of her colleagues. So what metric if one such exists is an appropriate compensation factor for those who do not work in the private sector?

Fortunately the metric has already been set by the market, as long as transparent information remains available to supporters. All supporters of the United Way have access to Mrs. Kings salary records and that of the executives of other charities. Donations will come to charities that appear to be good stewards of the charity and are able to keep their administrative burdens low regardless of a single executive's pay. How much you are worth is determined by what others are willing to pay.

Unfortunately the Central Carolina's United Way board has allowed Mrs. King to hijack the fundraising powers of the United Way to manipulate her perceived value to the organization. The business leaders on this board should take a minute to remember what made them successful in business, and employ those tactics when it comes to dealing with Mrs. King and stop paying her like a realtor.

Privatized Gains and Socialized Losses

Privatized Gains and Socialized Losses is catchy phrase fit for any local news reporter or opinionated columnist. It's easy for viewers and readers to take stock in a phrase like this when it allows them to be the victim, it's very similar similar to the underdog phenomenon. Populist rhetoric aside, the phrase does have some truth if the government provides bailouts to wayward capitalists. Recently this phrase has been applied to the Fannie/Freddie mess and the Bear Sterns bailout. The real issue is that the government provides a stop loss, thus effecting the future behavior of firms toward risk.

With Fannie and Freddie, the implied government guarantee has been in the cards since the inception of these firms. Now is not the time to claim socialization of losses, the government is simply following through on their initial guarantee. Imagine the fallout if investors came to believe the U.S. Government may or may not honor its previous commitments; I'm sure treasury yields might move just a little.

The Bear Sterns Debacle or so it was labeled has different characteristics, but falls short of "Socializing Losses". First you have to consider that shareholders did see their shares fall from $150 to $10 (-$140 - privatized). Second, you must consider what the actual loss for taxpayers would be. The "Bailout" involved the Fed guaranteeing around $30 Billion of mortgage backed bonds assumed by J.P. Morgan i.e. the cost is the portion of the $30 Billion that defaults. Gains while harder to measure are also a part of the Bailout. Gains result from the entire credit market not falling into free fall (research Bear Sterns counter party trades if your a doubter). Gains are also attained from the continuation of the securitized mortgage market that provides capital for millions of homeowners (who don't live in govt housing). Perhaps in the next decade we will decide the Bailout was a net loss, but if the gains are properly measured and monetized hopefully we will be reading about Socialized Gains.