voluntaryXchange

Uh Oh (LDS Church Edition)

The LDS Church collects contributions from members (which is fine).

And it invests some of those contributions, and earns income from them (which is also fine).

And any church can accumulate a nest egg for some period of time to fund larger tax exempt ventures down the road.

But a non-anonymous IRS whistleblower alleges that the LDS church’s investment arm, Ensign Peak Advisors, has never made a charitable contribution, and in fact has twice offered no strings financial support to private businesses in the 9 to 10 figure range.

This is a very big deal.

While accumulating this wealth, Ensign has not directly funded any religious, educational or charitable activities in 22 years …

…

“If you have a charity that simply amasses a war chest year after year and does not spend any money for charity purposes, that does not meet the requirements of tax law,” …

IRS rules dictate that a nonprofit organization must carry out charitable activity that is “commensurate in scope with its financial resources” to maintain its tax-exempt status.

…

… $2 billion from Ensign has been used over the past decade to bail out a church-run insurance company and a shopping mall in Salt Lake City that was a joint venture between the church and a major real estate company.

BTW: I like that mall very much, but I could see how it might too nice be anything but a money pit.

The article also intimates that support for that insurance company may have been done through a chain of church enterprises. If that was track covering, that’s a big no-no too.

The big problem here is that it’s not enough for the Church to have funded charitable activities. In this case, it has created a separate entity that it claims is charitable too (which is fine), but which is alleged to have never engaged in charitable activity of its own (they can’t, at this point, double count charitable work from elsewhere in their enterprises).

While the church may argue Ensign contributes to a broader religious and charitable mission, as a separate corporate entity, it must show that “it furthers a charitable purpose exclusively on its own,” Hackney said.

“Once that money comes in, it’s gotta go back out,” he said. “They have to come up with a justification based on the entity alone. …

The article does take pains to explain that the church’s accumulation of investments are consistent with its millenarian beliefs. So, there is an argument that since end times have not arrived that the church’s behavior is OK. But the two payments to the private firms, and zero to charitable enterprises, are an absolutely killer legal position against that.

In sum, I think the phrase “big deal” is not strong enough. There is no precedent for a church getting away with behavior like this, and there is a sense that this is very, very, large in the history of questionable financial/tax issues (even those done by those big corporations everyone blames for bad dealings).

************************

Do note two things that the faithful may say in defense of their faith.

• The whistleblower has left the church, and therefore may be disgruntled.
• The whistleblower is entitled to a share of fines if the church is found to be in the wrong.

Both of those are true, and provide some real defense.

Having said that, even if they are both true, the complaint can still be true as well.

Infographic: The World’s Money and Markets

This is good but not great. (All my comments are up here because the image is so large, here is the original in its own web page with comments). I have 3 big complaints. There’s also a fourth group of stuff to love because we don’t often see it elsewhere.

• There’s some crossover between different categories, so some things are double-counted. Some examples are:
• Several of the “Biggest Companies” biggest shareholders are listed in the “50 Richest People”.
• The “Fed’s Balance Sheet” includes the USA sub-category under “Currency”. And BTW: which side of the Fed’s balance sheet is shown there, or is it both (or do the visualizers not have that straight in their own heads?)
• There’s some mixing of stocks and flows. For example:
• The category “50 Richest People” (in the world) is followed by “California’s GDP”. But the former is a stock and the latter is a flow. A way to think about this is that they are related by a rate of return. Assume that’s 10%/year to make things simple. Thus, the flow of income coming of the wealth of the 50 richest people is about 2 blocks. When compared to the flow of California’s GDP of 26 blocks (yes, there’s a mistake in the chart there) it doesn’t look so big. Even better, California’s flow of GDP is generated by a stock of wealth that’s 10 times as big, so an appropriate comparison is the 19 blocks for the “50 Richest People” to the 260 blocks of wealth in California.
• But that comparison is insightful because the size of the sub-category “United States” under “Stock Markets” is only 73 blocks. Figure about 10 of those are in California. So somehow, California has 260 blocks of wealth of which just 10 are the market’s net worth of corporations. This tells us that most of what is productive in our world is not in corporations, which begs the question of why on earth so many politicians are so concerned with limiting them.
• They need to be careful about what are assets, what the liabilities are, and what net worth (the difference between the two) is. For example:
• They only have some portions of assets listed (e.g., “Gold”, “Currency”) but then they show a much more inclusive and comprehensive “Global Debt” category. This makes debt look too large.
• They also show capitalization of “Stock Markets” which is a net figure. What are the assets and liabilities associated with that?
• The same thing goes for derivatives. They talk about the zero-sum nature of most of those, but they don’t actually show it.
• This is a good example of the “balanced reporting” and “what passes for expertise” problems from my Why Is Macro So Hard lectures. In the sidebar about derivatives, they quote Dr. Richard Sandor (why does he get a title if it isn’t important to the position he takes?), Warren Buffet, and Jeff Greene. So what you have there is a guy who markets derivatives, a guy who’s rich mostly from non-derivatives, and a guy who got rich from derivatives. Any expertise there on the history of derivatives, why we have them, or why they’re useful??
• Most people who are buggy about money being backed by something think it has to be gold (in Fort Knox!!). The sub-category “Central Banks & IMF” shows how small that component actually is.

Courtesy of: Visual Capitalist, via Newmark’s Door.

A Money Quote: Galloway on WeWork

Scott Galloway:

People showed up with this core competency called … math … and said “No!” to this.

The context of this is the implosion of the IPO for WeWork over the last two weeks, and as of yesterday, the push out of its CEO and founder.

*****************************

The details are that WeWork is a company that rents office space to startups without facilities. The founder also had a lot of pie-in-the-sky ideas about how WeWork was going to change the universe. An IPO means that a startup is fully cooked and ready to be presented to the public as a potential investment. It’s also a way for the insiders to turn all their sweat equity into liquidity they can maybe cash out. A lot of potential investors bought into the sales pitch that this one was hugely valuable. And then those emotional investors drew the thinking investors who pointed out that this is just a real estate firm with some frills, they weren’t making money on the real estate part, and the frills were merely … amusing.

Pension Plans and Stochastic Trends

Government funded pension plans are in big trouble in much of the U.S. (Don’t presume this problem is unique to us; it’s a major contributor to fiscal problems in other countries, like Greece, and Brazil).

Getting across the idea of stochastic trends (variables best modeled with unit roots with drift) can be tough sometimes.Here’s an example:

There’s definitely some crafting involved in interpreting something like this, but it’s a fairly safe assumption that any economic or financial data showing an accumulation through time is going to have a stochastic trend.

In this case, not surprisingly, the two variables are shocked by different things (e.g., life expectancy for liabilities or rates of return for assets). And it’s always possible that one is more stable than the other: it’s shocks are probably smaller.

The issue though, is the divergence of assets from liabilities. And the question to ask is if there will be a tendency for them to come back together. Obviously, pension managers and recipients would like to think so.

But the message of stochastic trends is that it’s not 100% that assets are going to go back towards liabilities. Instead, it’s more like 50/50 from their current position. The divergence could even get worse.

(Of course, it’s also 50/50 that liabilities could head back towards assets. But while possible, this isn’t likely to close the gap quickly since the shocks to liabilities are not that large).

Further, a problem with stochastic trends is that managers may not have done anything wrong (or right), and may not do anything wrong (or right). It may just have happened that shocks in 2007-9 took perfectly well-managed plans on a downward path. The problem is that the instinct may then be to change that plan to something that could be worse. On the flip side, maybe they were doing something dumb at that point, and a motivation to change that was a good thing. There’s just no way to tell from a chart like this: you have to think those things through on the basis of first principals.

This post is mostly intended as an example. If you’re interested in more on this issue, read the whole thing entitled “The Long Bull Market Has Failed to Fix Public Pensions ” in the April 10, 2019 issue of The Wall Street Journal.

Cross-posted from SUU Macroblog, which is required reading for my macroeconomics classes.

A De-Banked Country

The Republic of the Marshall Islands (hereafter RMI) is a small country composed of atolls dotted across the central Pacific.†

If you’re a World War II aficionado, some of the island’s names might be familiar to you. Even if not, the imperialist association is important. The islands has non-existent Spanish governance, then German mercantile governance, then Japanese military governance, followed by arguably more beneficial U.S. governance.

This means that domestic banking in the RMI connects to the rest of the world through the U.S. financial system. And increasing complex regulations here have made it unprofitable for U.S. firms to maintain their connection to the RMI. Ostensibly, those regulations are about monitoring and discouraging money movements related to terrorism and organized crime. But the alternative is that countries like the RMI become cash-based, which is good for terrorism and organized crime. Sheesh.

… The IMF and other agencies are now trying to help the Bank of the Marshall Islands get in compliance with the new rules.

“For a little country like this and for the small banking community there, this has been overwhelming,” said Andrew Spindler, president of the Financial Services Volunteer Corps, a New York-based nonprofit that has been working with Marshall Island officials.

“The tide has been rising over the last 10 to 15 years about what banks expect from each other,” said Adam Szubin, who has led efforts to combat terror financing and money laundering at the U.S. Treasury Department. “And that has excluded some peripheral banking systems that just haven’t caught up.” …

For now, there’s one branch of one foreign bank (the Bank of Guam) on one island.

† SUU has some students from the nearby Federated States of Micronesia. Potentially they have the same problems, although the FSM is twice as populous and has about three times the GDP.

Cross-posted from SUU Macroblog, which is required reading for my macroeconomics classes.

This Is More True Than We Guessed

This is more appropriate for 2009 when this was on peoples’ radar screens. It’s still a problem though:

I usually try and track down the dates of these to give a reasonable cite and link, but the search server for this comic has been down for a while.

Women Less Informed About Finance?

I’m sure the title got your attention: I have some troubling data.

For years, in my principles of macroeconomics, I’ve given a pre-test on the first day: ten questions, drawn from the whole semester the students have yet to take (or maybe just pass the first time). It counts towards their grades, so I think they take it seriously. But honestly, I expect them to guess on most questions.

There has never been a male/female pattern in points scored on that quiz.

This year, for the first time, I also gave FINRA’s 6 question Financial Literacy Quiz under similar conditions. I think this has broad applicability to macroeconomics too.

Here’s the disturbing results. In a simple regression of test scores on a dummy variable that took a value of one if the student was femaile (and an intercept term), I got the following estimate for the coefficient on that dummy from the “comprehensive” pretest:

-0.21 (s.e. = 0.32, t = -0.67)

So, no evidence of a gender difference. But for the FINRA quiz I got:

-0.42 (s.e. = 0.20, t = -2.13)

This indicates that not only did my female students average fewer correct (on a 6 question quiz), but the standard error is smaller indicating that for this material the estimate is sharper. The overall class average was 4.4 out of 6, so a difference of –0.4 is pretty large.

This is a disturbing result. The FINRA quiz is supposed to measure basic financial literacy needed by adults. My “comprehensive” pretest serves as a decent control, suggesting that this FINRA is picking up weakness in the finance scores of female college students.

Technorati Tags: finra,6,question,financial,literacy,quiz

The Nonsense of Shareholder Resolutions

Activists use shareholder meetings to propose … hmmm … unusual ideas for how corporations should behave.

Anyone who holds $2K worth of stock can go to an annual shareholders meeting, and propose just about anything they like. So if an activist group can hold their nose and make a little investment, they can raise some media attention that may be worth far more than $2K.

Until 1970, the SEC had a rule that companies could exclude from proxy ballots any shareholder resolution introduced “for the purpose of promoting general economic, political, racial, religious, social or similar causes.” The agency’s rule followed the seminal case of Dodge v. Ford Motor F 4.02 % Company (1919) in which the Michigan Supreme Court declared that “a business corporation is organized and carried on primarily for the profit of the shareholders.” …

…

Last year, according to the Manhattan Institute’s ProxyMonitor.org database, 47% of all shareholder resolutions on the proxy ballots of the largest 250 American companies by revenues involved social or policy concerns unrelated to share value. The issues included corporate political spending, environmental issues and animal rights. Since 2006, these companies have faced 1,150 such proposals …

Still, the SEC should revisit its broader rules about social or policy questions on corporate proxy ballots. Not one of the 1,150 shareholder proposals concerning social or policy issues since 2006 got the support of a majority of voting shareholders over board opposition. [emphasis added]

I added that emphasis for a reason: if these resolutions are never passed, then it’s not just that they are made to garner attention, but that they are only made for the free media attention.

Here’s an example:

Public-employee pension funds headed by elected partisan officials—most notably, those for New York City and state, respectively led by comptrollers Scott Stringer and Thomas DiNapoli—exploit the proxy process to browbeat companies into leaving trade associations and other groups that the officials view as unhelpful to Democratic Party interests.

This needs to end: can you imagine if corporations were allowed to submit proposals on live TV at the Democratic Convention? I didn’t think so.

The Manhattan Institute maintains a database of shareholder resolutions. at proxymonitor.org.

Read the whole thing, entitled “Get the Politics Out of Proxy Season”.

Technorati Tags: shareholder,resolution,proxy,monitor

More Financial Regulations than Ever Before

We’ve had 5 years now to recognize that Dodd-Frank is not going to make our boo-boos all better.

You can’t say it was for lack of trying, legislative assistant edition:

Under no conditions should it ever be permissible to argue that financial markets are underregulated ever again.

Via Carpe Diem.

Technorati Tags: dodd,frank,pages,financial,regulation

Credit Union Welfare

Credit unions are like banks. That’s at least the way they seem to most consumers.

But they’re not like banks to regulators. Banks are for-profit, while credit unions are non-profit.

For-profits wear the black hats, while not-profits wear the white hats.

It’s sad but true.

Yet both operate as corporations. This means that, roughly, they bring in revenue, they subtract out costs, and what’s left is profit.

Banks get taxed on that profit.

Credit unions, as non-profits, manage their business to get that profit number to zero.

How do they do this? Well, either by reducing revenue, or increasing costs. But no one ever seems to reduce revenue, so increasing costs is most it.

So when, say:

MidFlorida, the fifth largest credit union in the state—with $2.1 billion in assets—paid an undisclosed amount for the naming rights to an amphitheater in Tampa while developing some of the most lavish office spaces and branches throughout the state.

Make no mistake: a bank could do this. But a bank is far less likely to do this because its goal is to maximize what’s left over, not make sure nothing is left over. Of course, the credit union could just give the money back to its members, but that would also be tax free at this level.

In other posts, I’ve defined welfare as a voluntary exchange in which 1) you get more than you give up, and 2) one of the the other parties is the government.

This makes credit unions the recipients of corporate welfare: a bank doesn’t pay more for naming rights than they’re worth, but they can be outbid by a credit union because the government has its back.

Oh … and … regulators don’t force credit unions to make loans in bad neighborhoods.

In fact, think about it, when did you ever see a credit union that wasn’t in a richer, whiter, neighborhood? Here we go again with the rich people co-opting the political system to collect welfare.

Technorati Tags: credit,union,bank,profit,non-profit,community,reinvestment