On Being Unemployed

Last month (technically, June 26), I was laid off, completely unexpectedly.

When I tell people this, most respond with some sort of condolence, but I’m not saddened by this. In fact, I’m happier than I’ve been in years. To top it off, the lease on my apartment expired at the same time, so now I’m homeless, in a way. Still, I couldn’t be happier.

In all honesty, my mood has much to do with the situation in which our country finds itself. Normally, joblessness and homelessness would be conditions of much concern. But, with three million other Americans out of work, how can I really complain. After all, I received a severance and I live in a state with a high cost of living, so my earnings from unemployment won’t be that bad. Plus, without an apartment, I’m saving on all those overhead costs.

Further improving my mood, I hadn’t been happy at my job for a while. Frankly, I was bored. I wanted to travel, to do anything other than sit in a cubicle, roaming the internet for hours. I never thought I’d reach a point where the internet bored me, but I found it, about a month before I was laid off. Having recently taken a 4,300 mile road trip, I was ready for more travel, not more endless days spent at my desk without a project to complete. I’ve never seen the West Coast, and I want to drive Skyline Drive. Losing my job couldn’t have come at a better time.

With the economy in its current state, I don’t expect to find a job soon, even though I have a recruiter working diligently on my behalf. Normally, that should bother me, but, again, I’m among millions of other US residents who find themselves taking money from the state. As previously mentioned, I also find myself in the odd predicament of having no housing. My lease nearing expiration, I was in the process of finding a new apartment when I was laid off. Upon losing my job, the apartment hunt ceased, since no landlord will rent to someone without a steady income. At first, I was concerned, to say the least; then, I considered the opportunities these twin “tragedies” brought me.

To clarify, I’m an accountant but not a CPA. I’d planned on studying for the exam this summer, after finding a new apartment. In both losing my job and ceasing my search for new housing, an immense amount of free time has suddenly presented itself. Unlike the past two summers, I finally have time sufficient to study for the CPA exam. I can’t make excuses that work is too busy, that I’m too consumed with moving, or that as experience is concerned I’m insufficiently prepared for the exam. Suddenly, I have nothing to do but study for the exam. And travel.

The upside to an exam like the CPA certification is that scheduling is done months in advance and the test is standardized. As a result, I can plan months exam dates months in advance and spend endless time studying for a particular section of the test. Knowing when I have to be at a specific testing center allows me to plan the road trips I’ve only dreamed of.

I now find myself presented with the opportunity to travel the country while reviewing for the exam that will let me continue my career, all because I lost my job. In between sightseeing, I can study for the exam. I can even listen to review guides as audiobooks, all while visiting the vast parts of the United States I’m unfamiliar with. Given today’s technology, I can do most anything I need to from anywhere across our continent, and I intend to do so. Before I chain myself to a desk once again, I want to see the United States of America.

Bankruptcy is the catharsis the American auto industry needs

Bankruptcy allows the car companies to shed many of the burdenous liabilities that are their current problems, namely their union contracts. It’s time everyone in the industry feels some pain, and enters the 21st century of retirement benefits. Welcome to the world of the defined contribution plan, not the defined benefit. The auto industry needs to wake up to the current workplace reality, where one pays for his or her retirement benefits.

Red Sox Post-Manny

With Manny gone, maybe now the Red Sox can focus on baseball. While it’s sad to see a player go who’s been such a crucial part of two World Series and who hit his 500th home run with the Sox, his off-the-field antics—”Manny being Manny”—have gotten out of control. Assaulting the traveleing secretary over tickets pushed things over the line for me, and I’m happy to see him go. And from his comments to ESPN Deportes, I’m sure he is too.

Thank you Mr. Ivins

Bruce Ivins’ suicide is a tacit admission of his guilt. His timing amplifies this fact. I would like to take the time to thank Mr. Ivins for taking his own life, thereby saving the taxpayers millions of dollars in legal fees, suicide watch, and housing on death row. One simple act both answered a long-standing question (who sent the letters?) and resolved the situation at the same time. I think the American people should thank Mr. Ivins for saving us the time and money involved with his prosecution, conviction, numerous appeals, and eventual death. We, the public, can accept not knowing the “why” in exchange for Mr. Ivins’ self-serving sacrifice.

Mr. Ivins preyed on the fears of the American public, and for that, I have no mercy for him. And in some ways, by avoiding the trial, he has escaped the tortured life he would have and should have led for many years, taking mercy where he deserved none.

One wonders if he considered the ignominious existence his family is now condemned to when he sent the first letter.

Continuous Partial Attention

Today’s On Point (a production of WBUR and NPR) featured a segment on business jargon, its evolution, and what jargon says about its creators, users, and the economy.

One of the phrases discussed was “continuous partial attention,” meant to reflect the effect of myriad technologies which grapple for our attention on a daily basis. As I regularly find myself in situations which induce this state, I found the term quite apropos and worth at least a cursory mention (anything more would require more attention than I can muster).

This was just one of the many examples discussed during the hour-long program. You can listen to the entire discussion here.

Changing the Window Dressing

Yesterday’s announcement that the Treasury Department has blessed covered bonds for use in the mortgage market made me wonder if Wall Street and the government have learned anything from the credit crisis gripping the national economy. There are two distinct differences between the collateralized debt obligations (CDOs) that got us into trouble in recent years and the covered bonds as announced yesterday by Treasury Secretary Hank Paulson. First, rather than removing the securitized assets from the seller’s balance sheet, the assets remain in the issuer’s control, providing purchasers recourse against those assets. The second difference involves the types of mortgages that can be securitized in a covered bond. So-called “stated income” or Alt-A mortgages, as well as the notorious subprime mortgage, cannot be included in a covered mortgage bond. Beyond these two differences, CDOs and covered bonds are essentially identical.

The idea with a covered bond is that since the assets stay on the issuers’ balance sheets, they are less likely to take risks with the securitized assets. Additionally, the purchaser of these bonds has recourse against specific balance sheet items, a feature intended to limit the default risk associated with mortgage-backed securities. Unfortunately, these debt instruments are still based on residential mortgages, an area of the US economy showing substantial weakness in the foreseeable future.

While intended to provide more liquidity to the mortgage market, covered bonds still rely too heavily on the CDO model. It seems unlikely to me that the minor differences noted above will instill enough confidence in the market for these instruments to have any impact on mortgage availability.

My other concern with covered bonds regards insurance. Bond insurers, having suffered greatly over the past year, are not in a strong position to offer insurance on covered bonds. Given that covered bonds provide recourse, the utility of bond insurance is further reduced. Additionally, I, for one, see little value in the insurance offered by major insurers.

Ultimately, the success of these securities will depend directly on the quality of the underlying mortgages and the health of the US economy, both of which are quite uncertain now and in the near term.

Minimum Wage or Living Wage

With the federal minimum wage increasing tomorrow, I recently had a discussion with a colleague about the propriety of such an increase during a time of growing economic distress. While my colleague felt it was a bad idea to further burden businesses with high wage expense, I disagree.

Even with tomorrow’s increase, America still does not have a “living wage,” or a minimum wage sufficient for an individual to hold one job and provide for his or her housing, food, and other basic needs. A minimum-wage worker in our economy needs to hold multiple minimum-wage jobs or is forced to rely on social programs for support.

Without any data to support my hypothesis, I argued that increasing the minimum wage to a living wage could lead to lower overall taxes. The tax savings, I theorized, would come from the decreasing demand for social welfare programs that support much of the working class.

While it will take some time for the tax savings to be realized, wouldn’t the short-term sacrifice in corporate profits be worth the long-term increase in wealth and self-sufficience acheived by minimum-wage workers?

The Problem With Being “Too Big To Fail”

“Too big to fail” is a nifty bit of rhetoric swirling around Washington right now regarding Fannie Mae and Freddie Mac. Yes, the government-sponsored mortgage giants do play a crucial role in the US housing market, funding or guaranteeing more than half of all mortgages. Clearly, a failure at either institution would be catastrophic for the domestic housing market, but their size is also a hindrance to their purpose. To understand this, one must realize where these two behemoths came from.

Created in 1938 as part of Franklin D. Roosevelt’s New Deal, the Federal National Mortgage Association, or Fannie Mae, was established to facilitate home ownership in America following the Great Depression. At the time, mortgage funding was unreliable and expensive, preventing many Americans from buying their own homes. The creation of Fannie Mae provided the funding necessary to lower barriers to home ownership. For nearly 30 years, Fannie Mae dominated the secondary mortgage market, buying home loans from other banks in order to free up those funds for new mortgages. Throughout this period, Fannie Mae was part of the federal government, representing a substantial burden on the federal budget and a barrier to entry for competition. In 1968, in response to these concerns, Fannie Mae was rechartered as a government-sponsored, publicly-traded entity. At the same time, Congress created the Federal Home Loan Mortgage Corporation, or Freddie Mac, to provide competition for the newly-independent Fannie Mae. The federal government hoped that by placing both companies in the private sector, competition would be created in the secondary mortgage market.

Over the next 40 years, Fannie and Freddie grew into their roles in the mortgage market. By 2008, the companies together guaranteed more than $5 trillion in mortgages, representing more than half of the market. It is because of their size that everyone from Treasury Secretary Henry Paulson to Senator Chris Dodd (D-CT, Banking Committee Chair) insists their failure must be prevented. While I understand how important their role is in the mortgage market, I do not think it is imperative that they continue in their current form.

Monopoly and competition are rarely complementary concepts. This is especially true in the case of Fannie Mae and Freddie Mac. While the later was originally intended to compete with the former, nowadays there is little difference between them. Rarely is one mentioned in the news without the other accompanying it. Because of their size and near homogeneity, increased regulation will have no impact on competition in the secondary market. Instead, both should be broken up into smaller entities. Doing so will allow them to operate as they were intended, competing with each other for a share of the mortgage market. In the following clip from Bloomberg Television’s Morning Call, Marc Faber, editor and publisher of “The Gloom, Boom, and Doom Report” makes his argument for the breakup of Fannie Mae and Freddie Mac.

As Mr. Faber pointed out at the end of this clip, the federal government has stepped in before to break up a monopoly, namely in the cases of Standard Oil and AT&T. Competition was created when those two behemoths of their industry were split up. The same should be done with Fannie and Freddie.

The “baby Maes” which would result from a breakup of Fannie Mae and Freddie Mac would need to retain many of the characteristics of their parents in order for them to be successful. Government sponsorship is important as it reassures investors and carries with it an implied guarantee, thereby allowing more investors to purchase securities issued by the companies. By placing more companies in the secondary market, a breakup would foster competition, thereby lowering borrowing costs for would-be homeowners. Splitting up the entities also reduces the risk assumed by the government should one of the entities falter. Current plans to bolster Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion if either failed, according to the Congressional Budget Office. By breaking the companies up, the failure of one would not damage the entire mortgage system, and the cost to taxpayers would be reduced significantly.


Hurry Up and Wait, FCC Style

Not surprisingly, the FCC continues to hold up Sirius’ purchase of rival XM. Three of the five commissioners whose decisions will ultimately bless or kill the deal have cast their votes, all along party lines. As it stands, two Republican commissioners have voted for the merger and one Democrat has voted against the deal, leaving one commissioner from each party who has yet to cast his or her vote. The remaining Democrat, Jonathan Adelstein, has laid out concessions that the merged satellite radio provider would need to make to gain his support. Deborah Taylor Tate, the remaining Republican on the commission, hasn’t given any indication of how she might vote or what concessions may accompany her vote.

As it stands, the FCC is the only federal body standing in the way of the merger. Sirius and XM shareholders approved the deal last year, with the Justice Department signing off earlier this year. Now, two people stand in the way of a multimillion dollar deal which both companies had expected to complete by the end of last year.

Commissioner Adelstein will likely be the one who kills the deal with his list of concessions, including:

  • Six-year price cap for existing subscribers
  • Interoperable radios capable of receiving (terrestrial) HD Radio
  • Reservation of 25% of channel capacity for non-commercial and minority programming

While most of these requests are inconsequential, one will likely hold the deal up for some time. By requiring interoperable radios to receive HD Radio (a digitally-enhanced version of terrestrial radio), Mr. Adelstein forces the combined company to take on additional expense with little benefit to the subscriber or company. This additional expense comes in the form of royalties to iBiquity, the company which developed HD Radio technology. Such a move will also impact advertising revenue by forcing the satellite radio provider to compete with terrestrial radio within its own system (no, HD Radio will not be broadcast via satellite; presumably the new radio antenna would be capable of receiving satellite and terrestrial radio broadcasts).

What does Commissioner Adelstein hope to accomplish with such a ridiculous requirement? I don’t know. As a Sirius subscriber, I have no interest in listening to terrestrial radio, regardless of whether it’s HD or not. That’s precisely why I subscribe to satellite radio. Regardless of delivery method, the majority of terrestrial radio is still commercial-supported. Broadcasting in HD won’t change the sad fact that commercial broadcasters devote nearly as much time to programming as they do to advertisements.

Commissioner Adelstein’s remaining demands are inconsequential. Both providers have said that the combined company won’t raise subscriber prices. In fact, both companies regularly discuss how the combination may allow them to lower their monthly fees. As for requiring capacity to be set aside for non-commercial and minority programming, this will have little impact on the merged company. Already, both providers feature non-commercial programming from National Public Radio, Public Radio International, and the BBC. XM has its own version of public radio, which would also help meet the 25% quota. As for minority programming, Sirius offers a lineup of Spanish-language programming, as does XM. Both providers carry channels catering to African American tastes, and Sirius even has a channel devoted to the gay and lesbian community. To meet Mr. Adelstein’s final requirement, the combined company may have to set aside a few additional channels, a move unlikely to have a noticeable effect on the majority of listeners.

In the interest of full disclosure, I am both a Sirius shareholder and subscriber.