Certain Doubt

Capital Gains Scam

Wednesday, August 31st, 2011

In an August 14, 2011 New York Times
editorial entitled: “Stop Coddling the Super-Rich,” Warren Buffett called on Congress – pleaded actually – to raise taxes on the mega wealthy.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

While on the surface this might seem like an admirable piece of altruism, Buffet’s call for higher taxes on the rich, as noble as it may be, does nothing to address the real problem in our society today: the inequities in our economic system that allow billionaires like Buffett to amass their phenomenal wealth in the first place. Raising taxes on the super rich, though it would help raise revenue and reduce the deficit, does nothing to change the rules of the game that give those same billionaires huge advantages over the average American.

In an August 30th 2011 piece in US News and World Report,
Tom Sightings presents as clear a summation as you will find of what I’m talking about. In examining Warren Buffet’s investment in Goldman Sachs for example Sightings notes:

You, too, could have invested in Goldman Sachs in 2008. But here’s the difference between you and Buffett. If you had an extra $12,000, you could have purchased 100 shares of Goldman common stock at $120 a share. Considering that Goldman had been worth over $200 a share the year before, you might have thought you were getting a pretty good discount. You also would be receiving the Goldman dividend of $1.40 a share, a rate of just over 1 percent.
But Buffett had more than $12,000 to invest. He had $5 billion. So he negotiated a much better deal. He bought preferred stock that came with a special dividend. Instead of 1 percent, he negotiated a 10 percent dividend. So now every year he receives a check for $500 million. Then, only after he gets paid, do common stockholders get their paltry 1 percent.

This is the real secret to the success of investors like Warren Buffett. With billions of dollars to throw around, they are able to negotiate sweetheart deals that not only guarantee them a high rate of return, it also guarantees that they will get paid before ordinary folks see a dime in dividends.

It’s almost as though you are playing Monopoly and as soon as one player begins to amass a fortune, the game board begins to actually tilt such that money, houses, and property deeds actually physically slide into their lap.

So now, three years later, how have we done? Goldman is selling at roughly $110 a share, slightly below its 2008 price. If you had invested with Buffett, you would have lost about $1,000. Buffett’s lost some capital too, but he’s collected $500 million a year in his special dividend.

Raising taxes on the super rich is itself a red herring. The real secret, the real scam behind modern Capitalism, is not whether the tax rate on capital gains is 15% or 20% (or even zero% as one republican presidential candidate has proposed). The real crime is that once you get to a certain level of capital accumulation, you are almost assured of amassing an even more staggering fortune by virtue of the fact that your vast wealth allows you to not only dictate to banks and corporations what your rate of return will be, but also to demand that you will be paid before ordinary shareholders thus reducing your risk to practically nothing.

The rigged nature of the game is even more insidious than it appears. As Sightings shows in his analysis of Buffett’s recent “investment” into Bank of America:

Now Buffett is investing in beleaguered Bank of America. He invested $5 billion in a special preferred stock and will be getting a 6 percent dividend, while the regular stock you can buy pays less than 1 percent. Now I don’t know whether Bank of America is a good deal at current prices. Maybe it is. But the point is, if you buy now, you’re not getting the same terms as Buffett. You’re just pumping money into his dividend payment and hoping for the best.

Think about that the next time you open the financial pages. If you’re fortunate enough to own stock in Bank of America, the fact that Warren Buffett pays a lower tax rate than his secretary should not be nearly as galling as the fact that he gets a 6 times higher rate of return as you do and is guaranteed to receive his money before you see a dime. Still having trouble with this? Consider the numbers in the BOA deal. The math here is not difficult. $5 billion at 6% means Warren is getting $300,000,000. If you invest even $10,000 at 1% you’ll only receive a whopping $100.00! Even after taxes (15%) Warren gets $255,000,000 to your rather pitiful $85 bucks!

This is not to say that Buffet’s plea for higher taxes on the rich is not valid. But where is Buffett’s call for fairness in the game of making money itself? It is certainly not fair that, as he has noted, his secretary pays a higher tax rate – and a higher percentage of her income – than he does. But I don’t hear Buffett – or any other billionaire – complaining about the fact that they are able to command six times the rate of return that ordinary investors receive and even less complaints that they get paid before everyone else.

Thus Warren Buffett, while he may seem altruistic, is really not saying a word about changing the rules of the game which give him an unfair advantage to amass a vast fortune in the first place.

Tags: Buffett, capital, capital gains, certaindoubt, economics, finance, government, investing, monopoly, taxes, Thomas Vincent, Vincent, Warren Buffett
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Problems

Tuesday, July 26th, 2011

If there are two themes that have been central to my adult life, the first has to be that in order to come to any meaningful solution to a problem, one must first correctly identify the problem.

The second is that once correctly identified, most problems are really not all that difficult.

Regardless of how intractable and tough a quandary may seem, when you strip off all the non-essentials, when you lose the emotional baggage you bring to a problem, peel away the layers of “woulda, shoulda, coulda,” the essential nature of most of life’s dilemmas is usually pretty simple. Often, I have found, the difficulty of correctly identifying a problem far exceeds the difficulty of coming up with a fix. Moreover, when identified, it is uncanny how often the “problem” turns out to be not a problem after all.

Need an example?

Take the problem of getting to the moon. On the surface this problem might seem to be daunting in its complexity, requiring among other things, a prodigious amount of mathematics, physics, and engineering. (To say nothing of a mountain of cash.) In short, getting to the moon, really is rocket science.

But take a step back for a minute and ask yourself: is the question of how to get to the moon really a problem that needs solving? In retrospect, I am not at all certain. To be sure, our few trips to the moon took a herculean effort and were a monumental scientific achievement. However, if we really face the facts, our moon shots, indeed our entire space program, was motivated principally by a desire to win the cold war “space race,” by reaching the moon ahead of the Soviet Union. Thus we spent millions of dollars of tax payer money and years of research in what amounted to a politico/galactic pissing match that netted us little more than some cool photos and a handful of exotic rocks. When one considers the other uses that money could have been used for, other problems that could have been solved – oh, say, developing solar energy, or building up our infrastructure, or even educating our population in math and science such that we didn’t have large numbers of ignorant nut jobs wandering around who are so gullible to believe that a project as big as a moon shot could be faked – it’s enough to make one weep.

Thus, while the problem of how to get to the moon is undeniably complex, if one truly asks oneself why the problem needs to be solved, one might decide it simply wasn’t worth the effort. The issue would be moot.

Need a domestic example? Most of the few problems my wife and I had with our son when he was a teenager had more to do with our preconceptions of what was right and proper than they did with anything he did. His actions were rarely unsafe, or harmful to others. If he decided to dye his hair green like he did one Halloween was that really the end of the world? Nope. The obscenity laden graffiti drawn on his wall with a sharpie? Annoying, but not really life and death. Ultimately, the problems I had with most of my son’s acting out had more to do with me than to do with him. Thus, they were not really problems at all. Or they were not battles that needed to be fought.

And speaking of unnecessary battles, our current militaristic foreign policy is a classic example of a whole slew of problems that seem insurmountable, yet when you step back, they are not really problems that need solving. We didn’t have to invade Afghanistan or Iraq. We don’t need to be occupying those countries. Like most wars of aggression, the argument can be made that our entire foreign policy is nothing short of one big global pissing match. It’s tragic to think of what we could be accomplishing with the trillions of dollars and needless blood we are spilling in an effort to convince the world we are still a super power.

The debt ceiling? Another issue that seems to get more insurmountable every day. But is it really a problem? The congress rubber stamped increases in the debt ceiling as a matter of course for presidents from Regan on to Bush. Yet, somehow, the “debate” over the debt ceiling has taken on an ominous tone as the “tea party” branch of the republican party is stonewalling to get what they want on budget cuts and no taxes for the wealthy. As many have noted, they are holding the country hostage over an issue that is so obviously a political ploy that even rank and file republicans are starting to become disgusted. In short, they are making a problem where none exists.

“It’s embarrassing,” said a stock broker acquaintance of mine today. “The countries around the world are looking at the debt ceiling argument and shaking their heads in disbelief.” President Obama is fond of the phrase: “America’s vital interests.” If the threat of defaulting on our debts is not harmful to the nation’s vital interests I don’t know what is.

The Tea Party, anti-tax crowd is so bad at identifying what the problems in this country are it’s difficult not to come to the conclusion that they are actively trying to create problems instead of trying to solve them. I know that Eric Cantor and the other right wingers in the House of Representatives want to see Obama gone in 2012, but I think they really need to take a step back and ask themselves if they aren’t creating more problems for the country – and even for their rich constituents – than anything that could possibly occur if they just left well enough alone.

If anyone doubts that the debt ceiling is a bogus issue just consider the following: Suppose Obama holds a news conference tomorrow and says, “I’ve decided to replace Joe Biden with Eric Cantor. And I’m seriously considering packing it in in 2012 and turning the reins over to the Tea baggers.” If you think the debt ceiling would stay an issue for more than 2 seconds after that, then I have a conspiracy you’ll be sure to find interesting.

It involves the cover-up of a faked moon landing.

Tags: Cantor, certaindoubt, debt ceiling, election, government, moon landing, Obama, Politics, problems, republican, tea party, Thomas Vincent, Vincent
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Republican Harpies

Wednesday, June 29th, 2011

Obama’s woes with Congress make it seem like he’s being hounded by a chorus of Republican Harpies.

Tags: 9gag, certaindoubt, debt ceiling, government, humor, imgur, Obama, picture, Politics, reddit, republicans, taxes
Posted in Uncategorized | No Comments »

It Always Comes Down to Money.

Wednesday, June 1st, 2011

In the end it always comes down to money.

The recent article in the New York Times by David Sanger and Elisabeth Bumiller entitled “Pentagon to Consider Cyberattacks Acts of War,” presents a chilling scenario:

“The Pentagon, trying to create a formal strategy to deter cyberattacks on the United States, plans to issue a new strategy soon declaring that a computer attack from a foreign nation can be considered an act of war that may result in a military response.

The new military strategy… makes explicit that a cyberattack could be considered equivalent to a more traditional act of war.” NYT

Just what constitutes a “cyberattack” is not made clear except to say that “any computer attack that threatens widespread civilian casualties — for example, by cutting off power supplies or bringing down hospitals and emergency-responder networks — could be treated as an act of aggression.”

That the Pentagon should employ such a broad reaching definition for cyberattack should give us pause. But it is the proposed response to such an attack that is really mind blowing. In a Wall Street Journal article Pentagon officials outlined the rationale behind the policy:

One idea gaining momentum at the Pentagon is the notion of “equivalence.” If a cyber attack produces the death, damage, destruction or high-level disruption that a traditional military attack would cause, then it would be a candidate for a “use of force” consideration, which could merit retaliation.
WSJ

Given the increasing alacrity with which the United States has been exercising its military muscle around the world, the conclusions about the effects of this policy are inescapable. As one military official is quoted as saying:

“If you shut down our power grid, maybe we will put a missile down one of your smokestacks.”

The putative logic presented by the Pentagon is that by laying out a clear and forceful policy for dealing with threats such as malicious cyber attacks, the Pentagon will – at least in theory – provide a deterrent. The model quoted in the article is that of the deterrent posed by an American policy of absolute retaliation in the event of a nuclear attack.

“A parallel, outside experts say, is the George W. Bush administration’s policy of holding foreign governments accountable for harboring terrorist organizations, a policy that led to the U.S. military campaign to oust the Taliban from power in Afghanistan.” WSJ

The main problem with the Pentagon proposal is that it is a stunning display of overkill. Not only is it hard to imagine which foreign country would be lurking out there with the capability or desire to inflict lethal cyber-damage on the United States, but it defies belief that any bit of cyber chicanery that such a country could come up with could possibly produce the kind of devastation that a single nuclear warhead could wreak. Thus, the kind of “mutually assured cyber-destruction that the Pentagon is implying is not only unnecessary, it is incredibly assymetrical and in no way “equivalent.” It’s sort of like responding to a bee sting by hitting the hive with a 2,000 lb. bunker buster.

Another problem with the Pentagon’s policy is that most of the cyberattacks that the United States has acknowledged have come not from foreign nations at all but from independent hackers and loose-nit organizations such as “Annonymous.” Given the broad definition the Pentagon puts forth it wouldn’t be much of a stretch to label any malicious cyber activity as an attack that would merit a military response. One can even envision a group of strategists in the Pentagon basement thinking up strategies for dropping a smart bomb down Julian Assange’s chimney.

Even when cyber attacks represent legitimate threats, it is often difficult to pin down where the attack originates from. As the NYT article notes:

“During the cold war, deterrence worked because there was little doubt the Pentagon could quickly determine where an attack was coming from — and could counterattack a specific missile site or city. In the case of a cyberattack, the origin of the attack is almost always unclear, as it was in 2010 when a sophisticated attack was made on Google and its computer servers. Eventually Google concluded that the attack came from China. But American officials never publicly identified the country where it originated, much less whether it was state sanctioned or the action of a group of hackers.”

“One of the questions we have to ask is, How do we know we’re at war?” one former Pentagon official said.

Another variable not explored in either the Wall Street Journal or The New York Times is the sometimes tenuous dividing line between the U.S. government and the defense contractors it employs. For example, Lockheed Martin recently claimed it’s information systems were the target of a “cyber attack”

Given the fact that Lockheed Martin’s products include the Trident missile, P-3 Orion spy plane, F-16 and F-22 Raptor fighter jets and C-130 Hercules military cargo planes among many other major weapons systems, could this attack on a private corporation be considered an attack on the United States and thus one that would merit a military response by the U.S. military? With all the various contractors and sub-contractors now employed by the Pentagon would a cyber attack on any of them be considered an act of war?

If the danger is not clear and present, if the culprits are hard, if not impossible to identify, and if the list of targets is endless, why on earth would the Pentagon be proposing military action, i.e. war, as a response?

Not surprisingly, like so much that comes out of the Pentagon , the answer comes down to money.

“The Pentagon strategy is coming out at a moment when billions of dollars are up for grabs among federal agencies working on cyber-related issues, including the National Security Agency, the Central Intelligence Agency and the Department of Homeland Security. Each has been told by the White House to come up with approaches that fit the international cyberstrategy that the White House published in May. “

Thus, once again, the Pentagon’s strategy for dealing with a perceived attack has little or nothing to do with protecting the homeland.

Surprise, surprise. Once again, it’s all about the Benjamins baby!

Tags: Benjamins, Certain Doubt, cyber attacks, cyberattacks, defense, ethical, government, money, Pentagon, reddit, retaliation, spectacle, Thomas Vincent, Vincent, war
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