Sunday, September 20, 2009

Why is Boise State ahead of USC in the Polls?

Boise State is #8 in the current AP poll. They could easily go undefeated with only 1 quality win (Oregon) on their schedule. The problem with the BCS is not its process, but rather the voter mentality that enables Boise State to move up in the polls after wins over low quality opponents. Does anyone believe that Boise State is better than USC, Ohio State, Virgina Tech or Oklahoma? If not, why is Boise State ranked higher than them? Teams in non-BCS conferences just don't face the week-in-week-out competition that SEC, Pac-10 or Big-10 do. For example, if Boise State and USC both win out, Boise State would likely go BCS championship game instead of USC. Yet, USC will have played 10 quality opponents to Boise State's 1.

Teams that play in the WAC, MAC, Mountain West, Sun Belt and Conference USA should be explicitly banned from competing in BCS bowls because no matter how difficult of a non-conference schedule they play, having 8 conference games simply makes their schedules too weak to take a BCS bid away from an SEC or Pac-10 team with 1 or even 2 losses. Any football team playing in a non-BCS conference that wants to compete for the national championship should only become eligible if they go independent and schedule at least 8 opponents from BCS conferences or join an existing BCS conference.

Thursday, September 17, 2009

Obama's Tire Tariff Smacks of Special Interest

Barack Obama won the election on a platform of change with particular reference toward minimizing the role of special interests in politics and he did some great work early in his term to reduce the influence of lobbyists, but whats up with his recent decision to impose a 35% tariff on Chinese tire imports?

The AFL-CIO and the United Steelworkers pushed for the tariff but the Tire Industry Association (TIA) strongly opposed it. Shouldn't the TIA have more say in tire trade than the AFL-CIO or the United Steelworkers? The issue isn't 100% clear cut because the the United Steelworkers do represent some tire factory workers and some of the tire manufacturers did want protection, but it sure seems like the special interests won at the expense of the general public.

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Tuesday, September 15, 2009

An Idea for Bank Pay Reform

In general government regulation hurts economic growth. However, there are circumstances where minimal controls may be necessary. Wage controls and banking/trading are particularly tricky because bankers and traders can easily evade national regulation by moving to foreign firms while still operating in domestic markets. Despite the public outrage at Wall Street, its not entirely clear if pay regulation is necessary, but if it is, here are a couple ideas on how to approach it.

First, lets clarify that the goal of any regulation should not be to punish. It doesn't matter how much bankers and traders earn relative to the general public or that they may be perceived as overpaid. Everyone loses if regulation disincentives economic growth so there is no point in capping pay if the goal is assuaging the public.

The goal of any regulation should be to add stability to the system without dampening growth. In this case the goal of pay regulation should be to more closely align the banker/trader's interests with the long term success of the firm they work for. The problem with compensation is not how much is made, but rather how its made.

The problem in a nutshell is that system rewards individuals for taking outlandish risks without much downsides. Barney Frank calls it "Heads I win, Tails you lose." For example:

Year 1: Trader nets $100M for the bank and receives a $3M bonus
Year 2: Trader looses $200M for the bank and gets fired

Net-net, the trader has lost $100M for the bank but got paid a handsome $3M over a 2 year period and while s/he was fired, finding a new job probably won't be too difficult. Heck, even if takes them 2 more years to get a job they'll still average $750K per year in compensation over the total 4 year period. Thus, it really doesn't matter how much of the bank's money a trader looses over the course of his/her career so long has s/he has a couple good ones to lock in multi-million dollar bonuses. Thus the individual is rewarded for destabilizing the system by gambling with the banks money in order to maximize their personal compensation.

An outright compensation cap would be problematic because it wouldn't reward those that go above and beyond and could lead top talent to flee to unregulated foreign banks. However, shifting compensation above and beyond a certain level from cash to stock grants on a vesting schedule would align the banker/trader with the long-term interests of the bank that s/he works for. By putting the excess bonus into a stock grant the banker/trader would be motivated to maximize the value of his/her firm's equity and by putting the grant on a vesting schedule the interests could be aligned over a number of years.

Its tough to say exactly at what level the cash bonus cap would be most effective or over how many years the vesting schedule should be. Getting it wrong could be ineffective and/or lead to talent flight. However, a $1.5M cash cap and a 3 year vesting schedule seems like good starting points for discussion purposes. While many analyst/associate level bankers make bonuses that are below the $1.5M level, the managing directors that they report to (and who ultimately decide the analyst/associate bonuses) will be effected by the compensation plan and therefore highly motivated to run their departments with the goal of maximizing the firm's stock value.

Going back to the two year scenario above, in year 1 the trader would get $1.5M in cash upfront and $1.5M worth of stock in his firm vesting over the next 3 years. In year 2 the trader is highly motivated to do what is right for the firm because if s/he is fired or leaves the firm for any reason a portion of the bonus will be lost. On the contrary, if the trader makes a positive contribution to the firm's growth, not only will they secure another great bonus in year 2, but they will also increase the value of the stock that they were granted in year 1.

Mechanically, this could mean that large portions of what the bank would have paid in bonuses will now go into buying their own stock, which could provide a nice initial pop in stock price if the bonuses are large enough relative to the firm's market cap. Although Wall Street will likely resist any wage controls, this could be a motivating factor to get on board with pay regulation.

One downside to this plan is that the stock vesting schedule would decrease financial industry labor flexibility because moving firms would always leave 2-3 years worth of grants on the table. An approach to this problem could be enabling hiring banks to offer a hiring bonus of equivalent value (or a fraction of) in their own stock on the same schedule as the unvested portion of the banker/trader's grants at the old firm. A fraction would probably be best in order to discourage taking outlandish risks and then simply moving banks before the shit-hits-the-fan.

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Sunday, September 13, 2009

Obama Speaks but will Bill Maher Listen?

Earlier this evening on 60 Minutes Barack Obama said:
"In the era of 24 hour cable news cycles that the loudest shrillest voices get the most attention... And so one of the things that I'm trying to figure out is how can we make sure that civility is interesting... And that hopefully I will be a good model for the fact that you don't have to yell and holler to make your point and to be passionate about your position."
Hopefully this is a wake up call to fans of Bill Maher, John Stewart and Steven Colbert. Although rarely subjected to the same level of criticism, their influence degrades the quality of political discussion equally as much as their more notorious conservative counterparts, Rush Limbaugh and Michael Savage. Everyone could benefit from taking more time to understand the complex issues that we face today and the manipulations, sound bites, jokes and polarization that these pundits rely on are not helpful. Lets turn them all off and pickup a newspaper instead.

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