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As April 15th looms again (it seems to come every year), all the same old articles appear about taxes, budgets, deficits, government spending, and the inequities in the universe. This year, Ben Casnocha sent me a link to an article from the LA Times titled Tax and spend with a twist with a note saying "I think you expressed a similar sentiment awhile back."
Indeed I did. I dutifully pay my taxes every year, yet I feel helpless when I think about how the government spends my tax receipts (and all the other tax receipts they get – which appears to be about $1.2 trillion this year according to the LA Times article.) Yeah, I know I can vote (I do) and I can get involved in influencing my little corner of the universe (I try), but I don’t feel like I have any impact on how any of this money gets
A college friend mentioned the idea to me 20+ years ago that everyone should get a line item allocation when they paid their taxes. His idea was that you’d essentially create your own spending plan for your taxes and the government would have to honor it.
While I love the "vote my taxes" idea, Adams and Hamilton wouldn’t like this very much since it shifts a lot of power back to the individual. So, how about an intermediate step – a category allocation that the government has to publish in aggregate. Everyone gets to allocate their taxes across 20 categories when they pay their taxes. The IRS aggregates all this information anonymously and publishes the macro data.
Step one would be to get this information out there. Let’s show our politicians how "the country" thinks about how our tax dollars are spent. Guns? Butter? Or maybe education.
Happy day before tax day.
Today’s NY Times has a clearly written article describing what’s really going on with Auction Rate Securities titled It’s a Long, Cold, Cashless Siege. There’s a lot of confusion going around about what ARS are and how they work so it’s nice to finally see "the simple stories" appearing. If you are curious about how these things really work or if you are interested in another straightforward story, Fred Wilson has one of the best first person accounts up on his blog titled Our Run In With Auction Rates And What It Taught Me About Markets.
When the auctions first started failing a few months ago, a close friend mentioned to me that he had most of his liquid cash tied up in ARS. For him, it was a good news / bad news story as he needed access to the cash, but was able to borrow against it at a much lower interest rate that his ARS reset to (in almost all cases, if the auctions fail, the interest rates get reset higher – sometimes much higher.) So – while he’s now borrowing against his own money (er … ok) he’s at least making some points on the spread.
I hadn’t ever heard of ARS so I sent a note to the firm that manages my bond portfolio and asked "do we have any ARS." It turns out that we only had one – a Denver International Airport bond that reset to an interest rate 150% higher than it was previously paying. The amount of cash tied up didn’t impact me so I was / am perfectly happy to get the higher interest rate while the bond is illiquid.
A couple of days later I got a note from Silicon Valley Bank – where a number of our portfolio companies bank – announcing that they don’t have any auction rate security exposure with any of their clients. It hadn’t occurred to me that our portfolio companies might have any of their money tied up with ARS since our default investment policy for portfolio companies is "keep your money in 100% liquid things like money market and treasuries." So I sent out a note to a couple of banks to check. Simultaneously, I heard from one of our companies (not one that I was on the board of) that they did have a bunch of their money in ARS’s. This prompted me to dig in a little deeper, especially with that particular bank.
Since most of the companies I’m on the board of bank at either SVB or Square 1, my investigation was easy. Square 1 – like SVB – has no ARS exposure so all of those companies were fine. I had one company that banked at the same place that our other portfolio company did (which it turns out – had half of their cash tied up in an ARS – unbeknownst to them since the bank has provided it as part of the "as safe as cash" investment opportunities.) A couple of days and several emails and a phone call later, I determined that (a) the company I was on the board of had no exposure, and (b) the bank was trying hard to convince people that there was no issue, yet they were doing it by dodging the direct question until you asked them verbally.
In the middle of all of this, a TechCrunch article came out titled 20% Of Valley Startups Can’t Get To Their Cash. While this alarmed me at first, it didn’t tie with the results of my investigation into our portfolio. Either my companies are all brilliant at cash management (unlikely), I’m incredibly lucky (possibly), or most of our companies bank with folks that didn’t get tangled up in ARSs (true – SVB and Square 1.)
My personal cash in the ARS is still in it (the auction hasn’t restarted) and I’m happily getting 150% of the interest payment I was getting before. The bond doesn’t come due until 2010 (and I usually hold individual bonds through to maturity) so check back in a couple of years to see if this has worked its way through the system.
Marc Andreesen has a scathing but brilliant post up today titled Congratulations, you’re paying Jimmy Cayne’s marijuana bills! I love Marc’s analysis of what Bear Stearns would have been worth if the Federal Government hadn’t backstopped the deal with a $29 billion loan.
The US taxpayer is loaning Bear Stearns and JP Morgan Chase, Bear Stearns’ acquirer, $29 billion — just revised from $30 billion, simultaneous with JP Morgan Chase raising its acquisition price for Bear Stearns to $10/share from $2.
Without that $29 billion of taxpayer money, Jimmy Cayne’s stock would be worth $0/share, and if you multiply that by 5.66 million shares, the total would be $0.
The $29 billion taxpayer loan is almost certain to lose money as it is being used to backstop stinky assets on the Bear Stearns balance sheet — the same assets whose plummeting fall in value catalyzed Bear Stearns’ effective bankruptcy.
It is virtually certain that taxpayers are going to take some loss on that $29 billion loan.
When we do, we will have the immense satisfaction of knowing that the first $61.3 million of those losses represent a direct cash transfer from US taxpayers to Jimmy Cayne.
It will be interesting if Cayne comes to this same conclusion and gives the $61m back to the government after some of the $29 billion (say – the first $61m) gets vaporized.
This was so predictable. As I mentioned in my post from a few weeks ago titled Can I Have Some More Crack Please? I am not a macroeconomics guy. I don’t watch the market nor do I watch TV news. However, I do get WSJ.COM alerts (mostly for my own amusement to see what they think is worth emailing out alerts about.)
Here was today’s:
Feb. 5, 2008
The Dow Jones Industrial Average plunged by 370 points, or 2.9%, as investors’ anxiety about a possible recession flared following a bleak reading on the U.S. services sector and cautionary language about the economic outlook from a Federal Reserve official. It was the worst performance of the year so far for the blue-chip average in both point and percentage terms. Other major benchmarks also sold off dramatically. The S&P 500 Index plummeted by 3.2% and the Nasdaq Composite Index dropped 3.1%.
I guess the crack high has worn off and it’s time for another hit. Rate cute anyone?
Great advice from Julie Alexandria on WallStrip to all the big thinkers in Davos who are Scornful of US Policies and worried about the impact of the fall of the "wounded giant." To you, Julie says "Eh screw it. Let’s dance."
I loved George Soros’ quote: "“The current crisis is not only the bust that follows the housing boom. It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.” Is the US finally having it’s post-Edwardian England moment?