Randomly Noted

Recently approved ”proxy access” should mean  more would-be directors’  names listed in the voting packages received by shareholders.

But an even greater additional power granted big institutional investors by the regulation, which mandates larger holders’ director nominees be listed alongside board-approved selections, may be demonstrated through their greater leverage in private meetings with current board members.

Here’s Kathleen L. Casey, one of the five commissioners at the Securities and Exchange Commission, as part of  her dissent last week on this issue.

Continue reading…

Journalists often say, somewhat jokingly, that if you find three things moving in the same direction you have a trend. Well, I have two that have recently crossed my transom heading in the same direction, so maybe that’s enough for a column.

The theme that connects the two disparate dispatches (tied arbitrarily by originating in the geographical midwest of the U.S.) is that they attribute some portion of stubbornly high U.S. unemployment to structural problems in the job market, rather than simply the result of a near-flat economy, worrisome outlooks and the costs involved in adding full-time employees.

The newer of these two recent missives was released Wednesday by the global temporary worker firm, Manpower Inc. The firm’s findings, based on a first calendar quarter survey of more than 35,000 employers in 36 countries, included a global shortgage of skilled, blue-collar workers. Despite all the idle workers out there, Manpower cites an “acute” shortgage of skilled production people in the U.S., Germany, France, Italy and other nations. 

Separately, earlier this month, one of the newer Federal Reserve policy officials talked about a skills mismatch that might account for as much of one-third of the 9.5% U.S. unemployment rate.

Narayana Kocherlakota, who took over as the president of the Federal Reserve bank of Minneapolis in October 2009, said that based on a breakdown in the relationship between job openings and the unemployment rate, we are apparently experiencing an employment mismatch. “Firms have jobs, but can’t find appropriate workers,” he said, as noted previously in this column. “The workers want to work, but can’t find appropriate jobs.”

While Manpower Inc. narrowed its own jobs mismatch to skilled industrial workers, Narayana Kocherlakota wasn’t as specific, though he did employ the catchy quote that the Fed “does not have the means to transform construction workers into manufacturing workers.” He said super-easy Fed interest rate policy had created conditions in which manufacturing plants want to hire new workers.

Among the broad categories Kocherlakota cited for the problem were geography, skills and demography. Back at Manpower Inc., the firm settled on skills and the dubious psychological space occupied by skilled blue-collar work  in many developed nations, including the U.S.

“Inadequate training and negative sterotypes relating to skilled trades are further fueling a dangerous shortage of skilled workers,” said Manpower Chief Executive Jeffrey A. Joerres in a press release. “Employers and governments need to bring honor back to the skilled trades.”

If you accept these theses, the free market concept of supply and demand hits some bumps in the world of labor. If more people want to buy houses in Connecticut, the prices of houses in the state will go up. But if Connecticut employers need more machinists, they don’t appear to be packing up in Alabama or Texas and heading north.

Maybe they can’t sell their houses. Maybe they don’t want toleave their friends in Alabama. Or maybe, as the Manpower survey suggests, there aren’t enough skilled workers anywhere in the developed world because non-economic factors such as status has pushed more and more people towards white-collar work.

Or maybe the market hasn’t worked hard enough. If wages doubled for the skilled workers needed, reflecting their slim supply, somehow, one suspects, despite all the impediments, that supply would rapidly grow.

Call him the stock market senator. The fix-the-plumbing stock market senator, to be more precise.

Sen. Edward “Ted” Kaufman, the Democrat from Delaware who is filling out the term of Joe Biden after Biden ascended to the vice presidency, has distinguished himself with his knowledge, concern and vigor about the inner workings of U.S. stock trading. He’s now getting some media attention because of it.

There likely are some in the high-frequency trading community and other pockets of Wall Street pleased with the prospect that Kaufman’s term is winding down and that he won’t run for election when his Senate seat comes up in November of this year. He’s keeping the heat on them, as he is on the Securities and Exchange Commission.

Kaufman’s year-long interest in the current state of stock trading reached a high-point with an early August letter to SEC Chairman Mary Schapiro in which Kaufman makes a series of reform recommendations.

Usually, when legislators send letters to regulators, they are looking for answers because something is affecting their constituents or a media report has shed light on a problem in an area where they have an interest because of committee membership or otherwise.

The Aug. 5 Kaufman letter to the SEC bears no resemblance to such documents. Besides showing an acute understanding of the myriad and obscure workings of today’s stock trading - dark pools, high-frequency trading, excessive messaging and the like – Kaufman has eight pages of proposals.

The “flash crash” of May 6, when stocks gyrated wildly and breathtakingly dropped at warp speed in a few minutes of an otherwise uneventual Spring mid-afternoon, has to a degree borne out Kaufman’s pre-dated concerns. He’s questioning the whole thrust of market developments of recent years.

“The proliferation of exchanges and other market centers that has increased fragmentation, the substantial rise in volume executed internally by broker-dealers in dark pools, excessive messaging traffic, the dissemination of proprietary market data catering to high frequency traders, and order-routing inducements all may be combining in ways that cast doubts on the depth of liquidity, stability, transparency and fairness of our equity markets,” he wrote to Schapiro.

Among Kaufman’s specific suggestions: register high-volume, high-frequency traders with the SEC; raise the standards for becoming a market center (there are more than 50); examine whether too much order flow is being hidden from ‘lit’ markets in dark pools; and essentially rethink the whole structure to emphasize truly liquid markets.

The SEC, of course, has quite a bit on its plate. The Dodd-Frank financial reform bill handed over some important new powers. Indeed, just today, the SEC is expected to vote for a controversial plan to make it easier for large shareholders to nominate directors whose candidacy must be carried in company distributed materials.

Kaufman, who earned a master’s of business adminsitration from the Wharton School at the University of Pennsylvania, told the SEC it is at a historic juncture.

Will it be a “regulator by consensus,” which Kaufman described as one that only moves “when it finds solutions favored by large constituencies on Wall Street?” Or, in his view, something more.

You can agree or disagree with Kaufman’s recommendations. It’s hard to disagree with the notion that what we call the stock market has morphed into a complex web of interactions that few truly understand. And it’s good to see a legislator who knows his stuff before he speaks his mind.

Underfunded pension commitments to public employees is a central, long-term issue for local governments and for the U.S. municipal bond market.

According to a new academic study, even substantial revisions to those pension plans likely will leave taxpayers with a big bill to fill the hole, a $1.5 trillion-sized hole.

Dramatic policy changes such as eliminating pensions’ cost-of-living adjustments and kicking retirement ages up to levels in line with the Social Security regime still leaves a $1.5 trillion hole, said Joshua D. Rauh, co-author of the study and associate professor at Northwestern University’s Kellogg School of Management.

And such changes can hardly be assumed. “While these ‘drastic’ actions may be less politically viable than more incremental policy measures, even these do not come anywhere close to solving the problems associated with states’ legacy pension liabilities,” says the  study by Rauh and Robert Novy-Marx of the University of Rochester.

Their findings were presented Thursday at a meeting of the National Bureau of Economic Research. 

Without changes, they estimate the unfunded liability stands at $3 trillion.

Throw another worrisome fact into the public pension mix. Most states figure they are going to earn a return on their existing assets of about 8% to help fund future payouts. At least in the current investment environment, that’s quite an assumption.

None of the gloom should stop states from enacting sane reforms for pension schemes. A nascent movement is under way. This column has previously noted a significant ‘agency’ problem exists with public employee retirement benefits. Temporary state political leadership has little incentive to tackle these nasty issues or to be tough in union negotiations, unless  they see tangible short-term political advantage.

As more voters understand the pension liability predicament many states are in, that political will may make itself known.

At a minimum, retirement age and other standards should better mirror private industry.

“The debate over the solution is over transfers,” the study’s authors write. “The current situation is one in which beneficiaries view their benefits as secure promises and taxpayers do not perceive that they will be held accountable for guaranteeing those promises.”

Ultimately, Rauh and Novy-Marx figure taxpayers will have to come up with the money to fill the bulk of the gap that remains regardless of the level of reform that takes place. “If unfunded liabilities continue to grow, the bailouts could be even larger.”

It’s not an economic story, except in the broadest sense that sports and entertainment are big parts of the U.S. economy.

Stilll, the potential lesson in the case of Roger Clemens, the former top-notch major legue baseball pitcher, resonates throughout the business and financial worlds.

That lesson is (assuming the perjury charges filed against Clemens hold up) that the questionable act is usually not what gets people in the biggest trouble, it’s the attempt to cover up that act.

 Clemens was indicted today, charged with making false statements to Congress when he declared under oath he never used performance-enhancing drugs.

“Prosecutors and the FBI have been gathering evidence in the steroids probe since Mr. Clemens testified before a House committee in 2008,” The Wall Street Journal reported. The Journal also reported Clemens’s lawyer wasn’t immediately available to comment.

It wasn’ t a legal matter like this, but allegations of a certain type of cover up are what reportedly prompted the Hewlett-Packard board just recently to push out Chief Executive Mark Hurd. There was the Martha Stewart case, and on and on.

But no one seems to get the message.

If I were one of the state legislators shuffling out of the venue in Charleston, S.C., after having been addressed today by South Carolina native and current Federal Reserve Chairman Ben Bernanke, I would feel pretty low.

In addition to having essentially been given the long slog view of the national economic recovery (“But we have a considerable way to go to achieve a full recovery in our economy, and many Americans are still grappling with unemployment, foreclosure and lost savings”) Bernanke  told the folks running states and cities they have some intractable long-term problems.

And Bernanke wasn’t much for providing helpful answers.

Take the ticking time bomb of pension and health benefits promised state and local employees. Many feel they compare too well to what’s offered in the private sector. And because of the squeeze of the recession on government tax receipts, some states have been neglecting their contributions, simply making the future hole bigger.

One solution is for the political leadership to say sorry, we simply can’t afford these pension costs and slowly over time adjust the costs downwards.

Not so fast, said Bernanke. “This daunting problem has no easy solution,” he said in remarks prepared for delivery today to the annual meeting of the Southern Legislative Conference of the Council of State Governments. “Proposals that include modifications of benefits schedules must take into account that accrued pension benefits of state and local workers in many jurisdictions are accorded strong legal protection, including, in some states, constitutional protection.”

If the states can’t change what’s already agreed to, they better get moving on adjusting down the retirement costs of future employees, which presumably they have to power to do.

Just about every state can’t use long-term bonds to cover deficits in operating budgets. That’s a good thing given human and political nature. Absent that, we’d have 50 mini (or perhaps on a percentage basis, not so mini) versions of the gaping federal government deficit.

Bernanke applauds that restraint but laments the resulting state spending cutbacks in weak economic times, “when services are most needed.”

Freed from such restraints, the growing budget gaps from Washington to Athens to Madrid to London tell you something’s got to give. Over time, political leaders have to find ways to spend less and lower taxpayer expectations of government’s role.

Bernanke mentions beefing up state rainy day funds when things are flush to supplement revenues during downturns. The central bankers admits this “may not be politically popular.”

Separately, Bernanke notes the municipal bond markets has remained “reasonably receptive this year to most borrowers ….”

I hope they have something fun planned for this evening in Charleston. Those legislators will have had more than enough daunting news for one day.

We are as close as you can probably get in an economy as large and as sophisticated as the U.S. economy to being becalmed, basically stuck in neutral.

That’s the impression one gets from the very first paragraph of the summary of the “Beige Book,” the compilation of economic activity across the various districts of the Federal Reserve.

The latest Beige Book was released by the Fed today and is based on information collected on or before July 19. Taken together, it’s a picture of an economy not declining, but growing at a level that’s probably not all that discernible from unchanged.

Continue reading…

Mary Schapiro could have been triumphal in her talk today to the U.S. Chamber of Commerce.

The chairman of the Securities and Exchange Commission walked into the den of perhaps the agency’s leading adversary with a massive new regulatory law in her back pocket that greatly enhances the SEC’s powers.

That law demands the SEC undertake studies and rulemaking to get the job done.

Continue reading…

Pardon my skepticism, but in his prepared remarks to accompany his signing today of the historic Dodd-Frank financial regulatory overhaul, President Barack Obama use some very finite words about the end of taxpayer bailouts.

“The American people will never again be asked to foot the bill for Wall Street’s mistakes,” the President said. “There will be no more taxpayer-funded bailouts. Period. If a large institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy.”

First of all, never is a long time.

Second, the untested regulatory wind down of failing systemically important institutions seems to require foresight and exquisite timing from regulators, something that hasn’t heretofore been on display in abundance.

Third, since there are no caps on size, one would presume that the large, important financial institutions in this country (those previously deemed too big too fail) will simply grow larger as they take advantage of strong market positions and economies of scale. That would make any future wind down all the more complex.

It would be a great thing if taxpayer money never again has to go to keep a systemically important financial institution from failing. But it’s a question whether the just signed reform law fully guarantees that.

Ben Bernanke is now positioned to outshine his long-serving predecessor among those making the greatest impact as leaders of the U.S. Federal Reserve.

It’s not just that the 18-year reign of Alan Greenspan, the once universally admired Maestro, is now perceived as severely tarnished from the vantage point of our post-2008 woes.

Greenspan, who once could do no wrong with the denizens of Capitol Hill and the inhabitants of bank trading rooms, now stands accused of being so allergic to economic downturn as to prime the system for asset price bubbles.

Continue reading…