Why the Building Society funding model is the best kind of corporate structure.

1. I have mused on this topic before, see e.g. Inefficient Markets Hypothesis, The multi-billion Chinese investment in Thames Water was no such thing and Beyond The Corporation, part 1, part 2.

2. Please note, I am not talking about the respective merits of banks or building societies, this is about having a system which has the benefits of public limited companies without the drawbacks and applies to all types of businesses (not just banks/building societies).

3. It is claimed that the big benefit of being able to switch your investments between different types of business, by selling shares in one and buying shares in another is that this leads to an efficient allocation of capital. If you do it properly and you are lucky, then yes, this leads to an efficient allocation of your own money, but there is a complete disconnect between what you are investing in (the shares) and the real underlying investment in productive capital (which is carried out by the companies whose shares are bought and sold). So whatever signals the secondary market in shares is sending, there is little or no link between that and what businesses are actually doing.

4. People are unfamiliar with Limited Liability Partnerships (which are a far better corporate structure than a limited company for small and medium sized businesses), so let's talk about how things would work on the scale of large plc's if their share capital/reserves side were structured in the same way as building societies. In other words, instead of a company having assets of (say) £1 million and share/capital reserves with a balance sheet value of £1 million, but whose shares might be worth a multiple of that, the company would just have 'members' deposits' with a balance sheet value of £1 million.

5. The gimmick being, that you cannot 'sell your shares' in a building society to a third party on the secondary market, if you want your money, you just withdraw it and somebody else invests in your place. Unlike with companies limited by shares, there is no distinction between the 'primary market', i.e. shares being issued (where an investor gives the company cash for shares) and the 'secondary market' where the first investor sells those shares to a third party, who can sell them on to a fourth etc.

6. If quoted plc's were like building societies, then at the end of every profit period (a year, a month, a quarter, it does not matter), the company would draw up a new balance sheet and allocate the increase in value (the profit) pro rata to all members' deposits, instead of paying out part of the profits as dividends on shares.

7. At any time, some members will want to withdraw some of their profits or their deposits and others will want to invest in that business, so the company will end up running simplified deposit accounts for all members (which is perfectly do-able - banks and building societies manage). The company might have to limit the amount which members can withdraw or limit the amount of new deposits which it can accept, so there might have to be some sort of waiting list approach or a cap on withdrawals/new investments. Withdrawals and new investments are to a large extent equal and opposite, so if a company accepts cash deposits it doesn't really need it will have spare cash to repay those who want to cash in immediately - which is how it works with banks and building societies.

8. So this would save investors the bother of doing two quite separate analyses: the first being an analysis of the health of the underlying business and the second being an analysis of how the share price is doing and what future dividend payouts are likely to be. Instead, you would just look at the list of public traded companies in the financial pages, and for each one it would say:
- what the profit share in the last profit period was as a percentage of deposits (the higher the better as far as investors are concerned;
- how long the waiting list is to invest in that company (if there is one), and
- whether there is a restriction on withdrawals, i.e. because the company is making losses, because it plans to expand in future and/or because not enough new investors want to put their money in.

9. To make a comparison between the two:

- Let's say that a quoted plc started the year with total assets £1 million, made profits of £200,000 (so now has £1.2 million total assets) and intends to pay out £120,000 as dividends (keeping £80,000 for future expansion). Dividend yields are currently 4%, so all things being equal, the shares in that company are worth £3 million. £1.2 million of that £3 million is real wealth (the real net assets of the business) and £1.8 million is pure speculative value; it's a nice capital gain for the original investors but a potential capital loss for future investors.

- Using the building society funding model, the total assets are also £1.2 million, and 20% is added to members deposits b/f of £1 million, and the directors announce that members may withdraw up to a tenth of the face value of their deposits (i.e. up to £120,000). If the directors know that there is a long waiting list of potential new investors, then the one-tenth figure will be increased of course, that's just details.

10. The two big advantages of the building society funding model are:

- There is no speculative capital gain to be made - either you are happy leaving your money with this business and earning 20% a year in profit share (or interest) or you want to withdraw your money, either to spend it or because you want to invest it in a different company which pays 25%, or which pays less than that but which has a safer business. Now, some people will bemoan this, but one man's capital gain is just another man's capital loss. If you are lucky to get into a successful company right from the word go, then you can sit back and be paid your 20% return each year, withdrawing or reinvesting it as you please, which is a better way of doing things that sitting there waiting for the right moment to sell your shares (i.e. just before the share price collapses).

- Instead of focusing on things not directly related to the actual business (like the share price or the dividend yield), investors will just look at how profitable businesses actually are, i.e. how much interest they pay on deposits. So profitable businesses will find it easy to attract new investment and the directors of not-so-profitable businesses will have to up their game to prevent members wanting to withdraw everything (like a 'bank run', only this would be a 'company run'). In extremis of course, the members would sack the management and either install a new one or just sell off all the assets, shut the company down and take their cash elsewhere. For the investors, this will be a lot less risky than with a plc, because they won't have paid £3 million for their shares, they will not have paid more than £1.2 million (using the same figures as above).

Detecting autism in six-month old babies

As widely reported last week, for example in NHS News:

... a study... assessed the brain activity of 104 infants aged 6-10 months as they watched an image of an adult’s face whose eyes moved from looking away from them, to directly at the infant, then away again. Researchers called these eye movements ‘dynamic eye-gaze shifts’.

They then assessed whether differences in brain activity in response to the eye-gaze shifts were related to autism developing in the same children at three years. Children who did not develop autism showed large spikes in brain activity when they saw the ‘gaze shifts’. Much smaller spikes in brain activity were detected in the infants who went on to develop autism, raising the prospect that autism could be identified earlier than is currently clinically possible.

However, this test was not 100% accurate...

Well of course it's not 100% accurate, as autism is not a yes/no condition, there is an infinitum spectrum between 'completely shut off and irresponsive to other humans' and 'completely with it most of the time', but none of this surprises me.

As I have pointed out before*, for some reason intelligent creatures, most noticeably small babies, like staring you straight in the eyes and appreciate it when you reciprocate. Therefore, by reverse logic, there must be something a bit wrong with small babies who don't do this, or more to the point, who don't find it unusual if you don't look them straight in the eyes.

On a related topic, I'm sure that I read a science fiction book as a kid where the aliens/clones control people's minds by looking them in the eye, and the children make their alien/clone teacher's head explode by focussing on a spot six inches to the left of the teacher's face.** My fellow conspirators and I have tried this technique in Pointless Team Meetings and it does genuinely make the speaker very flustered. The technique is certainly up their there with Bullshit Bingo.***

* As it turns out, my observation that small children don't blink is an accepted fact, explanation here.

** Was that The Midwich Cuckoos? In which case swap round children/teacher.

*** If nobody wants to play, my other fall back is counting all the squares in the carpet, all the tiles in the ceiling or all the panes in the windows - not counting the rows and columns and multiplying, but counting them one by one and starting again if I lose count. When it's finally over, I am usually pleased to establish that I genuinely can't remember a word anybody said and don't have a clue what the meeting was about.

"Who really gets government subsidised housing?"

A chap from the Chartered Institute of Housing has had a fine article published in The Guardian. Here's one of the key bits:

Those with no or only small mortgages also benefit from not being taxed on the value of their home (as used to happen through the old schedule A tax). This tax relief is now valued at over £11bn (1). Pooling these benefits and adding back in the stamp duty and inheritance tax of approximately £5bn that owners do pay, the net subsidy received is still a surprising £12bn per year.

Of course it's true that no government is likely to restore schedule A tax, but even disregarding it the outcome is that owners pay no net tax at all (council tax doesn't count as tenants pay it too). As Professor Steve Wilcox points out, the existence of these tax advantages means that house prices are far higher than they might otherwise be, benefitting existing owners at the expense of those struggling to enter the market.(2)

1) Wildly understated, it's more like £40 billion a year, assuming non-cash income from owner-occupation were taxed at the same rates as earned income. The biggest figure which the Home-Owner-Ists can pluck out of the air for the value of the subsidy to social housing is about £7 billion, being the difference between headline rents and 'below market rents', which may or may not be true, but that's the total value of rent savings accruing to four or five million households in social housing (a third of whom are pensioners, you can't possibly get more money out of them).

That £7 billion notional cost benefitting four or five million households pales into insignificance against the £7 billion actual cash cost of Housing Benefit paid to to a few hundred thousand private landlords who rent out (approx) one million dwellings to tenants on benefits. if we didn't pay this subsidy, then clearly rents in the private sector would fall accordingly and assuming social rents stayed the same, the £7 billion notional cost would also drop quite significantly.

Win-win!

2) This is what enables the Homeys to maintain the illusion that housing is not subsidised, it's because they/the government has organised things so that money automatically flows straight from private pockets into other private pockets, rather than the government openly taking that money in taxation and then paying it to the ultimate recipient.

Consider: if the government collects tax and gives it to owners of wind farms, that is clearly a subsidy. If the government tells the electricity companies that they have to pay money to owners of wind farms and the electricity companies add that cost to our electricity bills, I think we'd agree that is also a subsidy.

But what if the government just tells the electricity companies that they have to source at least ten per cent of their electricity from wind farms, no matter what they charge or what it costs? The extra income that the wind farm owners get by being able to charge pretty much what they like is a subsidy exactly like the first two cases; the fact that money goes from private pockets directly into other private pockets is irrelevant.

H/t Drewster at HPC.

Victimhood Poker

This one from yesterday's Guardian is absolutely awesome. The writer (an African-American woman who doesn't appear to like men of any colour) is quite possibly the most prejudiced writer to grace those pages for simply yonks (for example, she seems to assume that people should marry others of the same race; she's clearly unhappy being single but looks down on married people) and lacks any sort of self-awareness. Everything is always somebody else's fault:

It's cast as a crisis for the African American community, but the subtext is that women should settle down – and settle for less... Over the last decade, America has been playing an increasingly aggressive game of "What's wrong with you, then?" with heterosexual single black women.

US marriage rates are dropping, according to a recent Pew Research Center study. But African Americans marry even less often than their white counterparts. According to the 2010 census, just over 26% of white Americans aged 15 and older have never married, compared to 47% of the black population.

We are told that the "black marriage crisis" (pdf) affects none so much as black women. Though black men are equally unmarried, news articles, panel discussions, special reports and books solely lament the fact that black women are half as likely to marry as white women.

There are, of course, many complicated reasons for this gap. Experts cite numbers: there are more American black women than men; higher rates of interracial partnering among black men; bias against black men in the criminal justice system and the legacy of slavery. There is also the achievement gap: black women outnumber black men in higher education more than two to one, and this often creates a wedge of opportunity and class between them.

But no reason seems more compelling than the idea that black women need to change who they are and what they want. In Is Marriage For White People?, Ralph Richard Banks tells black women to date more nonblack men. In an interview with gossip site NecoleBitchie.com that exploded around the web, actor and singer Tyrese cautioned black women against being "too independent".

And so on and so forth. If there's anybody she hasn't been rude about, I'd be pleased to hear who.

Man chased by cow - YouTube video

Eighteen Thirteen seconds of awesome!

Taxpayer's Alliance research shows that Local Government Pension Scheme is sensibly funded: shock.

From The Taxpayer's Alliance:

The key findings of this research are:

• Total employer (taxpayer) contributions amounted to £5.063 billion (1) in 2010-11. That is equivalent to £1 in every £5 of Council Tax (2). In 2009-10 the figure was £5.079 billion.

• In 2010-11 4,548 councillors were enrolled on the LGPS, an increase of 252 from the previous year’s 4,296. This has increased significantly from 3,527 in 2007-08 (3)

Well, duh.

1) The LGPS website says that the scheme has 4.6 million members, so average contribution per member is only £1,090 per year, which seems startlingly low actually.

2) On a rough and ready actuarial basis, it's easiest to ignore indexation, inflation and investment returns as they net off to +/- not very much and assume that they live for twenty years after retiring. This means that if an employee is promised a pension equivalent to half his salary after forty years' continuous employment, the annual cash contribution (these schemes are funded, unlike civil service pensions) has to be around twenty-five per cent of his salary each year.

So any employer who offers a final salary pension scheme has to pay £1 pension contributions for every £4 salary, or £1 for every £5 of his total budget for wages/pension budget. Why is it a surprise that this applies to local councils as well?

So far so good... but the TPA are doing a meaningless diagonal comparison between two entirely unrelated figures: Council Tax only covers a small part of council expenditure, three-quarter is from central government out of Business Rates and general taxation. So if truth be told, councils are only spending one-twentieth of their budgets on pension contributions, another quarter (four-twentieths) on salaries and the rest on... what exactly?.

This is the worrying bit, the unknown unknowns! Local councils waste a far smaller percentage of their budget than national government, but I'm sure they make a lot of payments from which the general public derives no benefit. The TPA have come up with plenty of such examples in the past - in terms of identifying and pillorying waste and corruption, they are usually spot-on - but not this time. Some of the underlying salaries might be waste; but the pension contributions in themselves most certainly are not.

3) Agreed, that is a bloody outrage. Isn't being a local councillor supposed to be a voluntary, part-time thing?

Lib Dems talk sense (and nonsense) on tax

From The Daily Mail:

Nick Clegg yesterday demanded a £9billion tax raid (1) on ‘serious unearned wealth’ (2) to pay for tax cuts for low and middle income earners. (3)

The Deputy Prime Minister pointed out that billionaire oligarchs with £20 million properties do not pay much more council tax than people in homes worth a fraction of that price. (4) He also pushed for new taxes on air travel and pollution. (5)

The Liberal Democrats are privately backing ‘super’ council tax bands above the current top band, I, which kicks in on homes which were worth more than £424,000 when the bands were created in 1991. (6) This is a variant of the party’s demand for a ‘mansion tax’ on properties worth more than £2 million, which has been rejected by the Tories.

Mr Clegg insisted that his planned reforms were aimed at the super-rich. He said: "I know the mansion tax is controversial, but who honestly believes it is right that an oligarch pays just double the council tax of an average homeowner, even if their house is worth 100 times as much? And who seriously thinks we would kill aspiration through a levy on the 0.1 per cent of the population who own £2million homes? (7) The mansion tax is right, it makes sense and the Liberal Democrats will continue to make the case for it. We’re going to stick to our guns."

However, local government secretary Eric Pickles is opposed to tinkering with council tax bands because he fears it will spark a nationwide revaluation process that the Tories have promised to avoid.(8)

1) Some people refer to all taxes as "a raid". Meaningless.

2) It's a big mistake describing the rental value of land as 'wealth', that allows the Home-Owner-Ists and Faux Lib's to confuse the issue. While it is a good measure of the wealth of the whole economy, land rental values are themselves not net wealth at all, as one man's benefit is another man's burden. This does not apply to any other form of true wealth: does anybody get poorer if my neighbour gets a pay rise and buys himself a nice new car?

3) Hooray! That's a sensible adjunct to reducing people's benefits slightly.

4) At the very least, they could slap a Mansion Tax on all housing owned by non-UK resident persons (as somebody suggested to me yesterday), and in the interests of fairness and administrative simplicity, scrap the £30,000 levy on non-domiciled UK residents.

5) I don't agree. The best tax on air travel is on the value of the landing slots, this has little to do with the environment, as such.

6) I love this bit! Doing the revaluation/rebanding would, by The Morbidly Obese One's own admission only cost around £5 - £10 per home, HM Land Reg have got all the information they need on its databases. All that remains to be decided is

a) Whether homes will be banded by capital or rental values; and whether those should include the value of the bricks and mortar or just the land.

b) What the total receipts will be. Council Tax currently raises +/- £25 billion, so if he wants an extra £9 billion to pay for higher personal allowances, that'll go up to £34 billion. £1 million+ homes in Band Z would end up paying £10,000+ a year in New Council Tax, so people will then (correctly) point out that Stamp Duty Land Tax and Inheritance Tax are double taxation (at the moment they aren't - they merely tax the value unaffected by Council Tax), so let's scrap those as well (increasing the required total receipts from New Council Tax to +/- £40 billion), and so on and so forth, the resulting tax bills would end up at +/- one per cent of the current value of a home, so much the same as Council Tax for most homes.

To put that in perspective, £40 billion is about 6% or 7% of all tax revenues, i.e. not a huge amount, really, and still a lot less than income tax, VAT or National Insurance Contributions.

7) Good question. Allister Heath from City AM claims that this is entirely justified, and he can't be the only one.

8) When Council Tax was introduced in 1991 - it only took them a few months to do the valuations and get everything in place, of course, and it'd be even quicker nowadays with computers and everything - was there a promise that the bandings would never, ever be reviewed or updated? Methinks not. In other countries (most US states, for example), all houses are revalued annually, or certainly very regularly.

Sarko-nomics

I'm glad it's not just me who's noticed the insanity of all this, as summarised in a recent Evening Standard

European sovereigns [governments] and banks need to find €1.9 trillion to refinance maturing debt in 2012. Italy alone requires €113 billion in the first quarter and around €300 billion over the full year.

Given that banks and investors have been steadily reducing their exposures to European countries and banks, the ability to finance this debt is uncertain. The bailout fund and the International Monetary Fund, with around €200 billion to €250 billion each, cannot absorb this issuance.

The only solution - "Sarko-nomics" - is for European banks to purchase the sovereign debt, which is then pledged as collateral to borrow unlimited funds from the ECB or national central banks. This perpetuates the circular flow of funds with governments supporting banks that are in turn supposed to bail out the government.

"Make me president and I'll fake footage of a base on the moon" says Newt

From The Evening Standard:

White House hopeful Newt Gingrich today promised to fake footage of a permanent US base on the moon by 2020 if he beats Barack Obama to become president. The former House Speaker, front-runner to win the Republican ticket after his surprise win in South Carolina, also wants America to fake footage of a voyage to Mars.

On the campaign trail in Florida, where the next primary will be held on Tuesday, he said: "We want Americans to think boldly about conspiracy theories of the future. By the end of my second term, we will have the first almost-credible CGI of a permanent base on the moon and it will be American. We will have commercial near-earth activities that include cover-ups, hush money, unexplained suicides and dream manufacturing, because it is in our interest to acquire experience in trying to create the illusion of space travel. Hollywood clearly has a capacity that the Chinese and the Russians will never come anywhere close to matching."One small step for a cameraman, one giant leap for Obama's chances of re-election.

Nasa's film department recently suffered a brutal round of spending cuts and the plan will be strongly supported by the special FX community, which fought in vain to stop Mr Obama wielding the axe. Mr Gingrich, 68, said the advertising slots during any TV broadcasts would mean the project pays for itself - he would offer part of Nasa's PR budget as a prize to tempt commercial innovation and investment.

"I'm prepared to gamble the last prestige of the presidency in communicating and building a nationwide movement in favour of nigh-on convincing grainy film of space," he said. "If we do it right, it'll be wild and it will be just the most fun you've ever seen."

The announcement took many by surprise as space has not been on the agenda in an increasingly nasty Republican election. Mr Gingrich's 12-point victory at the weekend stunned Mitt Romney and his team and left them playing catch-up. Mr Romney moved quickly to promote building movie sets based on space exploration. He said: "What we have right now is a president who does not have a vision or a mission for Nasa's publicity department. I believe our space 'programme' is important not only for the film industry, but also for commercial gamers and for glamourising the military."

Anne Milton On Top Form!

The BBC have reassuring news for all those who weren't too worried in the first place:

Alcohol related deaths in the UK have increased slightly between 2009 and 2010, according to official figures. The number of deaths linked to drinking has gone from 8,664 to 8,790 - a rise of 126. The Office for National Statistics said the increase was due to more deaths in men.

However, the long term trends in men have been relatively stable, with a small rise in 2010 cancelling out a small fall in 2009. Figures which take account of changes in the size and age of the UK population showed the alcohol-related death rate has hovered at around 18 deaths per 100,000 men since 2003, after earlier increases.

The number of women dying as a result of alcohol has fallen slightly between 2009 and 2010, however, the long term figures show the death rate is stable at just over eight per 100,000 for women... The report said alcohol consumption had fallen since 2002...

So nothing to worry about then, really. But apparently somebody didn't get the memo:
... The Public Health Minister for England, Anne Milton, said: "We will set out a new approach to tackling alcohol harm shortly in our alcohol strategy for England. As part of that, we will be giving local councils the power and the budget to help them tackle the huge variations we see in levels of harm in different regions of England. Before that, next month, we are launching new Change4Life adverts which, for the first time, will help people realise the damage drinking too much can do to our health."

WTF?

Wouldn't any sane and normal person think, oh, this is good, one thing fewer for us (or the government) to worry about? Or is this some Pavlovian reflex where a Minister sees the words "alcohol" and "deaths" near the top of a bit of paper and just spews out the same mini-speech yet again without even bothering to read the first couple of paragraphs?