GoodFellas Motors

There's a great scene in GoodFellas when a bar owner asks local mob boss Paulie Cicero to be his partner, if only to protect the bar from Paulie's goons. Paulie claims to know nothing about the bar business, but what the hell, it might be fun. So, Paulie takes a piece of the bar and, um, we know what happens next.

Paulie's crew guts it from the inside.

They steal inventory, they use the place as a front, they force the original owner to borrow money against the bar, which they also steal. And when there's no money or product left to steal, Paulie's boys torch the place to collect the insurance. And no one can stop them because they're the mob and they make the rules.

Courtesy of the WSJ's intrepid reporters, what RSP and many others predicted has now been documented. Congress is feasting on GM because it can. Welcome to the new GM, better known as GoodFellas Motors.

Before Anonymous has a hissy fit, I know the analogy isn't perfect. Congress isn't doing anything illegal, there are no threats of violence, they're not literally going to burn GM down for the insurance, but the theory is similar enough. Congress makes the rules, Congress put up the money, so individual members demand GM serve the needs of their individual constituents. GM is now merely a conduit, through which public money flows to this or that politically powerful stakeholder. Of course, the MoC will pretend there was no undue pressure, that the sought after outcome was only the result of "a constructive dialogue" with the company. Just like the mob, you don't have "a constructive dialogue" with a Senator. You do what you're "asked" to do or the next call is from the IRS, or oversight committee counsel or the Paymaster Czar's office.

Normally businesses only succeed when they serve customers. Those days are long gone at GoodFellas Motors.

I've Never Been So Right So Quickly

Day four of Congress keeping its hands off of GM.

535 Automaker CEOs

Congress will definitely be able to keep its hands off of GM.

Move Along, Folks, No Expropriation Risk Here.

Without joining those who seek Tim Geithner's head on pike or burning AIG CEO Ed Liddy in effigy and without arguing the legality or propriety of the so-called bonuses dispensed by the company allow me to wax a bit on the implications of expropriation risk. I understand the politics, optics and emotion. As a trader, little makes me angrier in business than a trader's failure rewarded. But as a trader, I also believe only two things separate humans from lower mammals: the sanctity of contracts and opposable thumbs.

However, now that the House has decided to tax some bonuses at some TARP recipients at 90%, we ought to consider the ripple effects. Actually, the House should have considered them before voting, but this is Congress after all where E Pluribus Unum translates not as "Out of Many, One" but "Ready, Fire, Aim!"

When firms invest, among the many things they consider is the prospect of ex post confiscation by government. Want to build a cellphone tower in the Democratic Republic of the Congo? No problem, but if the investor believes, even incorrectly, there's a 50% chance the profit will be extricated without due process, the NPV calculation must factor in this probability. If the assumption is incorrect, over time less pessimistic investors will step in and profit. Provided the less pessimistic assumption stays true, the return requirements will come down, which is good for investors, customers, employees, taxpayers and so on (of course bubbles can form if return requirements come down too much, but that's a different matter and expropriation isn't a good solution).

A simplified explanation for all non-MBA geeks (i.e., those w/MBAs are geeks, author included): Hypothetically, Mr. Cellphone won't invest in any project returning less than 10% net of tax. The tower costs $100.00 and will generate earnings for six years. Given those constraints, the project must produce $142 over those six years or Mr. Cellphone will build elsewhere. As the perception of expropriation risk goes up, up goes required return and down goes the likelihood of investing, down goes employment, down go tax receipts and so on. Rational investors with sunk costs adjust to expropriation risk, too. If Mr. Cellphone has already built his tower and the perception of expropriation risk increases, Mr. Cellphone must decide if it's worthwhile to stay in business or just bailout mid-project (please don't interpret this as a defense of supply side economics. I'm just riffing on expropriation).

Our Constitution's prohibition of ex post facto legislation is a key protection for all kinds of behavior, financial and otherwise. Weakening it, or appearing to weaken it comes at an extraordinary, but often invisible, cost. So, while we pat ourselves on the back for sticking it to AIG's scumbags, consider if investors will bother to determine that a rational Congress meted out a rational response to those who deserved it, or if Congress just makes up the rules as it goes along.

Frank Is Not McCarthy, According to Frank

"I'm not morphing into Joe McCarthy..."
Rep. Barney Frank (D-MA) at a conference on 3/12/09 about the prospect of criminal prosecutions in the ongoing financial crisis.

"I will convene the committee to vote for a subpoena for the names." (emphasis mine).
Rep. Barney Frank prior to Congressional hearings 3/18/09 about AIG's bonus payments.

Fair enough Congressman. Here's a list of names for you.