Tag Archives: financial

Why Collect Art?

google-search-art-collector

Art collectors have probably been around since humans first started scribbling, painting, casting and throwing (clay). Some collect exclusively for financial gain or to reduce their tax bills. Others accumulate works to signal their worth and superiority over their neighbors or to the world. Still others do so because of a personal affinity to the artist. A small number use art to launder money. Some even collect art because of emotional attachment to the art itself.

A new book entitled Possession: The Curious History of Private Collectors by Erin Thompson, delves into the art world and examines the curious mind of the art collector. Thompson is assistant professor of art crime at the John Jay College of Criminal Justice at the City University of New York. Parts of her recent essay for Aeon are excerpted below.

From Aeon:

The oil billionaire J Paul Getty was famously miserly. He installed a payphone in his mansion in Surrey, England, to stop visitors from making long-distance calls. He refused to pay ransom for a kidnapped grandson for so long that the frustrated kidnappers sent Getty his grandson’s ear in the mail. Yet he spent millions of dollars on art, and millions more to build the Getty Museum in Los Angeles. He called himself ‘an apparently incurable art-collecting addict’, and noted that he had vowed to stop collecting several times, only to suffer ‘massive relapses’. Fearful of airplanes and too busy to take the time to sail to California from his adopted hometown of London, he never even visited the museum his money had filled.

Getty is only one of the many people through history who have gone to great lengths to collect art – searching, spending, and even stealing to satisfy their cravings. But what motivates these collectors?

Debates about why people collect art date back at least to the first century CE. The Roman rhetorician Quintilian claimed that those who professed to admire what he considered to be the primitive works of the painter Polygnotus were motivated by ‘an ostentatious desire to seem persons of superior taste’. Quintilian’s view still finds many supporters.

Another popular explanation for collecting – financial gain – cannot explain why collectors go to such lengths. Of course, many people buy art for financial reasons. You can resell works, sometimes reaping enormous profit. You can get large tax deductions for donating art to museums – so large that the federal government has seized thousands of looted antiquities that were smuggled into the United States just so that they could be donated with inflated valuations to knock money off the donors’ tax bills. Meanwhile, some collectors have figured out how to keep their artworks close at hand while still getting a tax deduction by donating them to private museums that they’ve set up on their own properties. More nefariously, some ‘collectors’ buy art as a form of money laundering, since it is far easier to move art than cash between countries without scrutiny.

But most collectors have little regard for profit. For them, art is important for other reasons. The best way to understand the underlying drive of art collecting is as a means to create and strengthen social bonds, and as a way for collectors to communicate information about themselves and the world within these new networks. Think about when you were a child, making friends with the new kid on the block by showing off your shoebox full of bird feathers or baseball cards. You were forming a new link in your social network and communicating some key pieces of information about yourself (I’m a fan of orioles/the Orioles). The art collector conducting dinner party guests through her private art gallery has the same goals – telling new friends about herself.

People tend to imagine collectors as highly competitive, but that can prove wrong too. Serious art collectors often talk about the importance not of competition but of the social networks and bonds with family, friends, scholars, visitors and fellow collectors created and strengthened by their collecting. The way in which collectors describe their first purchases often reveals the central role of the social element. Only very rarely do collectors attribute their collecting to a solo encounter with an artwork, or curiosity about the past, or the reading of a textual source. Instead, they almost uniformly give credit to a friend or family member for sparking their interest, usually through encountering and discussing a specific artwork together. A collector showing off her latest finds to her children is doing the same thing as a sports fan gathering the kids to watch the game: reinforcing family bonds through a shared interest.

Read the entire article below.

Image courtesy of Google Search.

The Six Percent

Google-search-trailer-park

According to the last US census, around 6 percent of the population — that’s 20 million people — live in trailer parks. This is a startling and significant number, and it continues to grow; economic inequality and financial hardship hits those on the lowest rungs of the socio-economic ladder the hardest. And, of course, this means that trailer park owners, typically people at the other end of the economic ladder, are salivating over increased share, higher rents, greater revenue and better profits.

From the Guardian:

The number one rule is stated twice, once in the classroom and once on the bus: “Don’t make fun of the residents.” Welcome to Mobile Home University, a three-day, $2,000 “boot camp” that teaches people from across the US how to make a fortune by buying up trailer parks.

Trailer parks are big and profitable business – particularly after hundreds of thousands of Americans who lost their homes in the financial crisis created a huge demand for affordable housing. According to US Census figures, more than 20 million people, or 6% of the population, live in trailer parks.

It is a market that has not been lost on some of the country’s richest and most high-profile investors. Sam Zell’s Equity LifeStyle Properties (ELS) is the largest mobile home park owner in America, with controlling interests in nearly 140,000 parks. In 2014, ELS made $777m in revenue, helping boost Zell’s near-$5bn fortune.

Warren Buffett, the nation’s second-richest man with a $72bn fortune, owns the biggest mobile home manufacturer in the US, Clayton Homes, and the two biggest mobile home lenders, 21st Mortgage Corporation and Vanderbilt Mortgage and Finance Company. Buffett’s trailer park investments will feature heavily at his annual meeting this weekend, which will be attended by more than 40,000 shareholders in Omaha.

Such success is prompting ordinary people with little or no experience to try to follow in their footsteps.

On a bright Saturday morning, under the Floridian sun, Frank Rolfe, the multimillionaire co-founder of Mobile Home University who is the nation’s 10th-biggest trailer park owner, conducts a tour of parks around Orlando, Florida. A busload of hopefuls, ranging in age from early 20s to late 70s, hangs on his every word.

As the tour approaches its first stop, Rolfe repeats a warning which earlier flashed on to a screen in a conference room of the Orlando airport Hyatt hotel: “When we are on the property, don’t make fun of the residents, or say things that can get us in trouble or offend anyone. I once had a bank come to a mobile home park and say in front of my manager, ‘Only a white trash idiot would live in a trailer.’”

Then comes a second, more unexpected warning: “Now, guys, I’ve got to tell you this park, I believe, is a sex-offender park. Everyone in here is a sex offender. I could be wrong, we’re going to find out, but I think that’s the deal on this one. So stay together as a herd.”

He’s not wrong. Signs at the entrance to Lake Shore Village, on the north-eastern outskirts of Orlando, warn: “Adults only. No Children.” The park is described on the owner’s business cards as “sex offender housing” and a “habitat for offenders”.

On the forecourt the owner, Lori Lee, tells Rolfe’s students she dedicated the park to sex offenders 20 years ago – and hasn’t looked back.

“We were a family park when we first started. [But] about 20 years ago, I couldn’t get on the property because a drug dealer had separated from his girlfriend in the park across the street … and there was a long line of cars because she was undercutting her boyfriend.”

Lee, 70, says she was advised that if she took in sex offenders the drug dealers would leave. “So, I started taking in sex offenders, and I have a very clean property. Sex offenders are watched by the news media, the TV, the sheriff’s department, probation, the department of corrections … so when they are in there, the drug dealers and the other people don’t like to be around.”

Sex offenders have been good for Lee financially, with park occupancy running at “1,000%”. She rents trailer pad spots for about $325 a month. The trailers are either owned by the tenant or rented from a third party. Many trailers are divided into three bedrooms, for which tenants are charged $500 a month per room.

Lee claims she was once offered $5m for Lake Shore Park, which is home to about 50 trailers.

“Last year I bought a park down the street, got rid of all the families, the drug dealers, the prostitutes, and brought in convicted felons. And then I bought the property across the way,” she says. “Once you’re into it and you’re making money it’s easy to say, ‘One more, one more’.”

She has her eyes on a fourth park, “but then I’m through. I’m 70 years old and I don’t want to own any more”.

Asked by an eager investor how regularly tenants leave her parks, Lee says: “When they die. [They] stay forever, they have no place to go.”

Lee’s strategy impresses Rolfe’s students.

“I thought it was a brilliant idea, brilliant,” says Mitch Huhem, who is looking to buy a trailer park with his wife, Deborah. “These people need a place to live, and they don’t want to mess around.

“They’ve got to live somewhere, so you combine them in a certain place. They don’t go out to hurt people. I think it’s a community service, because if not they will be in your neighbourhood. Now they’re all in one place, you can watch them all in one place. And they pay well and won’t mess things up. I mean, why would you not? I think it’s a brilliant idea.”

Rolfe, who with his business partner Dave Reynolds owns about 160 parks across the midwest, is unsure about taking in sex offenders. But he is certain Lee could make even more money if she raised the rent.

“She could definitely raise the rent,” he says, as the tour group gets back on the bus. “She’s got a definite niche, but she is definitely under the Orlando rent; she might be under by $100 a month, maybe.

“Raising the rent is typically part of the day one purchase, because often the ‘mom and pop’ [previous, family-run owner of a park] has not raised the rent in years so it’s far below market.

“[The rents] do not go down, that’s one thing that’s a safe bet in the trailer park world. Our rents do not go down.

“We traditionally raise our rents by an average of 10% a year or something like that, and it’s pretty much true for the industry. Our world record [rent increase] went from $125 to $275 in one month.”

Rolfe, who bought a pistol for personal security when he bought his first park, 20 years ago, says he sent a letter to every tenant at that park in Grapevine, Texas, telling them the rent was going to more than double but was still below the market rate of $325.

“If you don’t like this or you think you can do better, here’s a list of all the other parks in Grapevine and a list of the owners,” he said in the letter. “Go ahead, call them if you want to move. How many customers do you think we lost? Zero. Where were they going to go?”

Rolfe, who started Mobile Home University seven years ago and now runs boot camps every couple months in cities across the country, tells his students they can easily increase the rent even at parks that are already charging market rates, because there is so much demand for affordable housing and local authorities are very reluctant to grant permission for new parks.

He quotes US government statistics showing that in 2013, 39% of Americans earned less than $20,000 – less than the government’s poverty threshold incomeof $20,090 for a three-person household.

“That’s huge. No one believes that number – people say: ‘You’re crazy, this is America, everyone is rich.’ [Being on an income of $20,000 or less] means you have a budget of about $500 a month for your housing, but the average two-bedroom apartment is $1,109 a month. There’s not a lot you can do.”

Kenneth Staton, a 58-year-old, disabled tenant at a nearby (non-sex offender) trailer park, knows it.

“It’s a profitable investment, but raising the rent is what hurts because people like myself, we’re on a fixed income and we can only afford so much,” he says, on the dirt road outside his trailer. “I’m on disability, and I go around and collect aluminium cans to see myself through a little bit.”

Asked if he thinks he will see out his days in the trailer park, Staton says: “It kinda looks like it, unless I can find a house somewhere I can afford. I only get $830 a month; $500 goes for rent, about $95 goes for electric. It don’t leave much to live on. Luckily, I get food stamps.”

Read the entire article here.

Image courtesy of Google Search.

Zynga: Out to Pasture or Buying the Farm?

FarmVille_logoBy one measure, Zynga’s FarmVille on Facebook (and MSN) is extremely successful. The measure being dedicated and addicted players numbering in the millions each day. By another measure, Zynga isn’t faring very well at all, and that’s making money. Despite a valuation of over $3 billion, the company is struggling to find a way to convert virtual game currency into real dollar spend.

How the internet ecosystem manages to reward the lack of real and sustainable value creation is astonishing to those on the outside — but good for those on the inside. Would that all companies could bask in the glory of venture capital and IPO bubbles on such flimsy financial foundations. Quack!

Zynga has been on company deathwatch for a while. Read on to see some of its peers that seem to be on life-support

From ars technica:

HTC

To say that 2013 was a bad year for Taiwanese handset maker HTC is probably something of an understatement. The year was capped off by the indictment of six HTC employees on a variety of charges such as taking kickbacks, falsifying expenses, and leaking company trade secrets—including elements of HTC’s new interface for Android phones. Thomas Chien, the former vice president of design for HTC, was reportedly taking the information to a group in Beijing that was planning to form a new company, according to The Wall Street Journal.

On top of that, despite positive reviews for its flagship HTC One line, the company has been struggling to sell the phone. Blame it on bad marketing, bad execution, or just bad management, but HTC has been beaten down badly by Samsung.

The investigation of Chien started in August, but it was hardly the worst news HTC had last year as the company’s executive ranks thinned and losses mounted. There was reshuffling of deck chairs at the top of the company as CEO Peter Chou handed off chunks of his operational duties to co-founder and chairwoman Cher Wang—giving her control over marketing, sales, and the company’s supply chain in the wake of a parts shortage that hampered the launch of the HTC One. The Wall Street Journal reported that HTC couldn’t get camera parts for the One because suppliers believed “it is no longer a tier one customer,” according to an unnamed executive.

That’s a pretty dramatic fall from HTC’s peak, when the company vaulted from contract manufacturer to major mobile player. Way back in the heady days of 2011, HTC was second only to Apple in US cell phone market share, and it held 9.3 percent of the global market. Now it’s in fourth place in the US, with just 6.7 percent market share based on comScore numbers—behind Google’s Motorola and just ahead of LG Electronics by a hair. Its sales in the last quarter of 2013 were down by 40 percent from last year, and revenues for 2013 were down by 28.6 percent from 2012. With a patent infringement suit from Nokia over chips in the HTC One and One Mini still hanging over its head in the United Kingdom, the company could face a ban on selling some of its phones there.

Executives insist that HTC won’t be sold, especially to a Chinese buyer—the politics of such a deal being toxic to a Taiwanese company. But ironically, the Chinese market is perhaps HTC’s best hope in the long term—the company does more than a third of its business there. The company’s best bet may be going back to manufacturing phones with someone else’s name on the faceplate and leaving the marketing to someone else.

AMD

Advanced Micro Devices is still on deathwatch. Yes, AMD reported a quarterly profit of $48 million in September thanks to a gift from the game console gods (and IBM Power’s fall from grace). But that was hardly enough to jolt the chip company out of what has been a really bad year—and AMD is trying to manage expectations for the results for the final quarter of 2013.

AMD is caught between a rock and a hard place—or more specifically, between Intel and ARM. On the bright side, it probably has nothing to fear from ARM in the low-cost Windows device market considering how horrifically Windows RT fared in 2013. AMD actually gained in market share in the x86 space thanks to the Xbox One and PS4—both of which replace non-x86 consoles. And AMD still holds a substantial chunk of the graphics processor market—and all those potential sales in Bitcoin miners to go with it.

But in the PC space, AMD’s market share declined to a mere 15.8 percent (of what is a much smaller pie than it used to be). And in a future driven increasingly by mobile and low-power devices, AMD hasn’t been able to make any gains with the two low-power chips it introduced in 2013—Kabini and Temash. Those chips were supposed to finally give AMD a competitive footing with Intel on low-cost PCs and tablets, but they ended up being middling in comparison.

All that adds up to 2014 being a very important year for AMD—one that could end with AMD essentially being a graphics and specialty processor chip designer. The company has already divorced itself from its own fabrication capability and slashed its workforce, so there isn’t much more to cut but bone if the markets demand better margins.

Read the entire article here.

Image: FarmVille logo. Courtesy of Wikipedia.

The Diminishing Value of the Ever More Expensive College Degree

graduationParadoxically the U.S. college degree is becoming less valuable while it continues an inexorable rise in cost. With academic standards now generally lower than ever and grade inflation pervasive most recent college graduates are in a bind — limited employment prospects and a huge debt burden. Something must give soon, and its likely to be the colleges.

From WSJ:

The American political class has long held that higher education is vital to individual and national success. The Obama administration has dubbed college “the ticket to the middle class,” and political leaders from Education Secretary Arne Duncan to Federal Reserve Chairman Ben Bernanke have hailed higher education as the best way to improve economic opportunity. Parents and high-school guidance counselors tend to agree.

Yet despite such exhortations, total college enrollment has fallen by 1.5% since 2012. What’s causing the decline? While changing demographics—specifically, a birth dearth in the mid-1990s—accounts for some of the shift, robust foreign enrollment offsets that lack. The answer is simple: The benefits of a degree are declining while costs rise.

A key measure of the benefits of a degree is the college graduate’s earning potential—and on this score, their advantage over high-school graduates is deteriorating. Since 2006, the gap between what the median college graduate earned compared with the median high-school graduate has narrowed by $1,387 for men over 25 working full time, a 5% fall. Women in the same category have fared worse, losing 7% of their income advantage ($1,496).

A college degree’s declining value is even more pronounced for younger Americans. According to data collected by the College Board, for those in the 25-34 age range the differential between college graduate and high school graduate earnings fell 11% for men, to $18,303 from $20,623. The decline for women was an extraordinary 19.7%, to $14,868 from $18,525.

Meanwhile, the cost of college has increased 16.5% in 2012 dollars since 2006, according to the Bureau of Labor Statistics’ higher education tuition-fee index. Aggressive tuition discounting from universities has mitigated the hike, but not enough to offset the clear inflation-adjusted increase. Even worse, the lousy economy has caused household income levels to fall, limiting a family’s ability to finance a degree.

This phenomenon leads to underemployment. A study I conducted with my colleague Jonathan Robe, the 2013 Center for College Affordability and Productivity report, found explosive growth in the number of college graduates taking relatively unskilled jobs. We now have more college graduates working in retail than soldiers in the U.S. Army, and more janitors with bachelor’s degrees than chemists. In 1970, less than 1% of taxi drivers had college degrees. Four decades later, more than 15% do.

This is only partly the result of the Great Recession and botched public policies that have failed to produce employment growth. It’s also the result of an academic arms race in which universities have spent exorbitant sums on luxury dormitories, climbing walls, athletic subsidies and bureaucratic bloat. More significantly, it’s the result of sending more high-school graduates to college than professional fields can accommodate.

In 1970, when 11% of adult Americans had bachelor’s degrees or more, degree holders were viewed as the nation’s best and brightest. Today, with over 30% with degrees, a significant portion of college graduates are similar to the average American—not demonstrably smarter or more disciplined. Declining academic standards and grade inflation add to employers’ perceptions that college degrees say little about job readiness.

There are exceptions. Applications to top universities are booming, as employers recognize these graduates will become our society’s future innovators and leaders. The earnings differential between bachelor’s and master’s degree holders has grown in recent years, as those holding graduate degrees are perceived to be sharper and more responsible.

But unless colleges plan to offer master’s degrees in janitorial studies, they will have to change. They currently have little incentive to do so, as they are often strangled by tenure rules, spoiled by subsides from government and rich alumni, and more interested in trivial things—second-rate research by third-rate scholars; ball-throwing contests—than imparting knowledge. Yet dire financial straits from falling demand for their product will force two types of changes within the next five years.

Image: college graduates. Courtesy of Business Insider.

Fate Isn’t All That It’s Cracked Up to Be

If you believe in the luck of the draw, the turn of a card, the spin of a wheel; if you believe in the leaves in your teacup, the lines on your palm, or the numbers in your fortune cookie; if you believe in fate or a psychic or the neighbor’s black cat, then you are all the poorer for it — perhaps not spiritually, but certainly financially.

From the Telegraph:

Strange as it sounds, a serious study has been undertaken by academics into the link between people’s propensity to trust in luck, or fate – and their financial success.

And it has concluded the less faith someone places in luck, fate or some other “external factor”, the more wealth they are likely to accumulate.

Some might say the conclusion is commonsense but the report – produced by three academics at the University of Mebourne in Australia – even came up with a figure of AUS$150,000 (£82,000), which was the difference over four years between “households who believe fate will determine their future” and “households that believe they can shape their own destiny.”

The report, here, titled “Locus of control and savings”, splits psychological profiles into two groups, those with either an “internal” or “external” “locus” of control. The latter are people who believe that fate, or luck – or other people – are the determining force in shaping their lives. Those with an “internal locus of control” are those who are “strong believers in their ability to shape their own destiny.”

The survey then linked pshychological measures of behaviour to national savings data. “We find that households in which the reference person has an internal locus of control save more both in terms of levels and as a percentage of their permanent incomes than do households with external reference persons.”

It arrived at a precise financial measure, saying: “over a four year period households with a strong sense of shaping one’s destiny are on average $150,000 better off, and save 7.7% more of their income.”

The authors claimed that although their work relied on Australian data, it would reflect trends in other developed economies.

The work is one of a growing number of studies into what motivates saving, the type of people most likely to save – and how governments can stimulate more saving.

Read the entire article here.

Crony Capitalism

We excerpt below a fascinating article from the WSJ on the increasingly incestuous and damaging relationship between the finance industry and our political institutions.

[div class=attrib]From the Wall Street Journal:[end-div]

Mitt Romney’s résumé at Bain should be a slam dunk. He has been a successful capitalist, and capitalism is the best thing that has ever happened to the material condition of the human race. From the dawn of history until the 18th century, every society in the world was impoverished, with only the thinnest film of wealth on top. Then came capitalism and the Industrial Revolution. Everywhere that capitalism subsequently took hold, national wealth began to increase and poverty began to fall. Everywhere that capitalism didn’t take hold, people remained impoverished. Everywhere that capitalism has been rejected since then, poverty has increased.

Capitalism has lifted the world out of poverty because it gives people a chance to get rich by creating value and reaping the rewards. Who better to be president of the greatest of all capitalist nations than a man who got rich by being a brilliant capitalist?

Yet it hasn’t worked out that way for Mr. Romney. “Capitalist” has become an accusation. The creative destruction that is at the heart of a growing economy is now seen as evil. Americans increasingly appear to accept the mind-set that kept the world in poverty for millennia: If you’ve gotten rich, it is because you made someone else poorer.

What happened to turn the mood of the country so far from our historic celebration of economic success?

Two important changes in objective conditions have contributed to this change in mood. One is the rise of collusive capitalism. Part of that phenomenon involves crony capitalism, whereby the people on top take care of each other at shareholder expense (search on “golden parachutes”).

But the problem of crony capitalism is trivial compared with the collusion engendered by government. In today’s world, every business’s operations and bottom line are affected by rules set by legislators and bureaucrats. The result has been corruption on a massive scale. Sometimes the corruption is retail, whereby a single corporation creates a competitive advantage through the cooperation of regulators or politicians (search on “earmarks”). Sometimes the corruption is wholesale, creating an industrywide potential for profit that would not exist in the absence of government subsidies or regulations (like ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back). Collusive capitalism has become visible to the public and increasingly defines capitalism in the public mind.

Another change in objective conditions has been the emergence of great fortunes made quickly in the financial markets. It has always been easy for Americans to applaud people who get rich by creating products and services that people want to buy. That is why Thomas Edison and Henry Ford were American heroes a century ago, and Steve Jobs was one when he died last year.

When great wealth is generated instead by making smart buy and sell decisions in the markets, it smacks of inside knowledge, arcane financial instruments, opportunities that aren’t accessible to ordinary people, and hocus-pocus. The good that these rich people have done in the process of getting rich is obscure. The benefits of more efficient allocation of capital are huge, but they are really, really hard to explain simply and persuasively. It looks to a large proportion of the public as if we’ve got some fabulously wealthy people who haven’t done anything to deserve their wealth.

The objective changes in capitalism as it is practiced plausibly account for much of the hostility toward capitalism. But they don’t account for the unwillingness of capitalists who are getting rich the old-fashioned way—earning it—to defend themselves.

I assign that timidity to two other causes. First, large numbers of today’s successful capitalists are people of the political left who may think their own work is legitimate but feel no allegiance to capitalism as a system or kinship with capitalists on the other side of the political fence. Furthermore, these capitalists of the left are concentrated where it counts most. The most visible entrepreneurs of the high-tech industry are predominantly liberal. So are most of the people who run the entertainment and news industries. Even leaders of the financial industry increasingly share the politics of George Soros. Whether measured by fundraising data or by the members of Congress elected from the ZIP Codes where they live, the elite centers with the most clout in the culture are filled with people who are embarrassed to identify themselves as capitalists, and it shows in the cultural effect of their work.

Another factor is the segregation of capitalism from virtue. Historically, the merits of free enterprise and the obligations of success were intertwined in the national catechism. McGuffey’s Readers, the books on which generations of American children were raised, have plenty of stories treating initiative, hard work and entrepreneurialism as virtues, but just as many stories praising the virtues of self-restraint, personal integrity and concern for those who depend on you. The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin. Little of that has survived.

[div class=attrib]Read the entire article after the jump.[end-div]

[div class=attrib]Image: The Industrial Revolution brought about the end of true capitalism. Courtesy: Time Life Pictures/Mansell/Time Life Pictures/Getty Images.[end-div]

 

Corporate Corruption: Greed, Lies and Nothing New

The last couple of decades has seen some remarkable cases of corporate excess and corruption. The deep-rooted human inclinations toward greed, telling falsehoods and exhibiting questionable ethics can probably be traced to the dawn of bipedalism. However, in more recent times we have seen misdeeds particularly in the business world grow in their daring, scale and impact.

We’ve seen Worldcom overstate its cashflows, Parmalat falsifying accounts, Lehman Brothers (and other investment banks) hiding critical information from investors, Enron cooking all their books, Bernard Madoff marketing his immense Ponzi scheme, Halliburton overcharging government contracts, Tyco executives looting their own company, Wells Fargo and other retail banks robo-signing contracts, investment banks selling questionable products to investors and then betting against them, and now ever more recently, Barclays and other big banks manipulating interest rates.

These tales of gluttony and wrongdoing are a dream for social scientists; and for the public in general, well, we tend to let the fat cats just get fatter and nastier. And, where are the regulators, legislators and enforcers of the law? Well, they are generally asleep at the wheel or in bed, so to speak, with their corporate donors. No wonder we all yawn at the latest scandal. However, some suggest this undermines the very foundations of western capitalism.

[div class=attrib]From the New York Times:[end-div]

Perhaps the most surprising aspect of the Libor scandal is how familiar it seems. Sure, for some of the world’s leading banks to try to manipulate one of the most important interest rates in contemporary finance is clearly egregious. But is that worse than packaging billions of dollars worth of dubious mortgages into a bond and having it stamped with a Triple-A rating to sell to some dupe down the road while betting against it? Or how about forging documents on an industrial scale to foreclose fraudulently on countless homeowners?

The misconduct of the financial industry no longer surprises most Americans. Only about one in five has much trust in banks, according to Gallup polls, about half the level in 2007. And it’s not just banks that are frowned upon. Trust in big business overall is declining. Sixty-two percent of Americans believe corruption is widespread across corporate America. According to Transparency International, an anticorruption watchdog, nearly three in four Americans believe that corruption has increased over the last three years.

We should be alarmed that corporate wrongdoing has come to be seen as such a routine occurrence. Capitalism cannot function without trust. As the Nobel laureate Kenneth Arrow observed, “Virtually every commercial transaction has within itself an element of trust.”

The parade of financiers accused of misdeeds, booted from the executive suite and even occasionally jailed, is undermining this essential element. Have corporations lost whatever ethical compass they once had? Or does it just look that way because we are paying more attention than we used to?

This is hard to answer because fraud and corruption are impossible to measure precisely. Perpetrators understandably do their best to hide the dirty deeds from public view. And public perceptions of fraud and corruption are often colored by people’s sense of dissatisfaction with their lives.

Last year, the economists Justin Wolfers and Betsey Stevenson from the University of Pennsylvania published a study suggesting that trust in government and business falls when unemployment rises. “Much of the recent decline in confidence — particularly in the financial sector — may simply be a standard response to a cyclical downturn,” they wrote.

And waves of mistrust can spread broadly. After years of dismal employment prospects, Americans are losing trust in a broad range of institutions, including Congress, the Supreme Court, the presidency, public schools, labor unions and the church.

Corporate wrongdoing may be cyclical, too. Fraud is probably more lucrative, as well as easier to hide, amid the general prosperity of economic booms. And the temptation to bend the rules is probably highest toward the end of an economic upswing, when executives must be the most creative to keep the stream of profits rolling in.

The most toxic, no-doc, reverse amortization, liar loans flourished toward the end of the housing bubble. And we typically discover fraud only after the booms have turned to bust. As Warren Buffett famously said, “You only find out who is swimming naked when the tide goes out.”

Company executives are paid to maximize profits, not to behave ethically. Evidence suggests that they behave as corruptly as they can, within whatever constraints are imposed by law and reputation. In 1977, the United States Congress passed the Foreign Corrupt Practices Act, to stop the rampant practice of bribing foreign officials. Business by American multinationals in the most corrupt countries dropped. But they didn’t stop bribing. And American companies have been lobbying against the law ever since.

Extrapolating from frauds that were uncovered during and after the dot-com bubble, the economists Luigi Zingales and Adair Morse of the University of Chicago and Alexander Dyck of the University of Toronto estimated conservatively that in any given year a fraud was being committed by 11 to 13 percent of the large companies in the country.

[div class=attrib]Read the entire article after the jump.[end-div]

[div class=attrib]Image: Mug shot of Charles Ponzi (March 3, 1882 – January 18, 1949). Charles Ponzi was born in Italy and became known as a swindler for his money scheme. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo.. Courtesy of Wikipedia.[end-div]

The Corporate One Percent of the One Percent

With the Occupy Wall Street movement and related protests continuing to gather steam much recent media and public attention has focused on 1 percent versus the remaining 99 percent of the population. By most accepted estimates, 1 percent of households control around 40 percent of the global wealth, and there is a vast discrepancy between the top and bottom of the economic spectrum. While these statistics are telling, a related analysis of corporate wealth, highlighted in the New Scientist, shows a much tighter concentration among a very select group of transnational corporations (TNC).

[div class=attrib]New Scientist:[end-div]

An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study’s assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

The idea that a few bankers control a large chunk of the global economy might not seem like news to New York’s Occupy Wall Street movement and protesters elsewhere (see photo). But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world’s transnational corporations (TNCs).

“Reality is so complex, we must move away from dogma, whether it’s conspiracy theories or free-market,” says James Glattfelder. “Our analysis is reality-based.”

Previous studies have found that a few TNCs own large chunks of the world’s economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy – whether it made it more or less stable, for instance.

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company’s operating revenues, to map the structure of economic power.

The work, to be published in PLoS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What’s more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world’s large blue chip and manufacturing firms – the “real” economy – representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a “super-entity” of 147 even more tightly knit companies – all of their ownership was held by other members of the super-entity – that controlled 40 per cent of the total wealth in the network. “In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network,” says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

[div class=attrib]Read the entire article here.[end-div]

[div class=attrib]Image courtesy of New Scientist / PLoS One. The 1318 transnational corporations that form the core of the economy. Superconnected companies are red, very connected companies are yellow. The size of the dot represents revenue.[end-div]