Some Opening Comments And A Bit About Social Security Reform

This is the inaugural post of this blog, and I hope it will be one of many to come. As you might surmise from the blog's name and subtitle, this blog will be grounded in common-sense, no-spin reality--a quality I find increasingly rare in the blogsphere as well as in our broader media and social discourse. A bit about me: I am in my late 30's, a resident of New York City, and the founder and president of a Manhattan-based asset management firm. I have a BA from a top-ten university and an Ivy League MBA. I'm a lifelong conservative with a strong independent streak. I'm also a student of history and hope to utilize that knowledge and interest here often. As a sidenote, please excuse the barebones appearance of the graphics on this site; that will change as time allows.

Let's get right to it with some comments on the debate over Social Security. There is some excellent in-depth analysis on the web from many sources including Josh Marshall, National Review Online, and Nouriel Roubini, so I'll try to offer a unique anecdotal perspective. Through my job, I have frequent contact with insiders of public companies, both inside and outside the financial industry. This week, I spoke to an executive at a large publicly-traded technology firm. We talked about the state of his business, the outlook for the future, and the performance of his company's stock. One issue he is extremely concerned about is the FASB-required expensing of employee stock options, which will become mandatory for all public companies later this year. This new accounting rule will have the effect of making the stock of many companies that are profitable appear far more expensive from a price to earnings ratio perspective, and those companies that have no earnings at all--many of which are tech companies--will become even more unattractive to asset managers like me.

This executive sees one shining beacon in the fog of increasingly strict accounting standards and a difficult business environment: The prospect of Social Security reform. He told me that he and many of this colleagues at other companies favor the creation of private accounts, because a new source of demand for his stock will help compensate for the increasing unattractiveness of his company from an investment perspective. This executive also made it completely clear (albeit in casual, friendly terms--which is perhaps the only way he would have voiced this sentiment at all) that he looked forward to private accounts "picking up the slack" that the new accounting rules and increasingly difficult business conditions in general will create. He did not have to explain this to me. He works at one of thousands of public companies that rely heavily on options grants (which ultimately lead to insider selling as options are converted to common stock) to attract and retain employees. He depends personally on options grants as well; according to SEC filings, in the past few years he has sold tens of millions of dollars of stock converted from options. In the absence of any new source of demand for its stock, his company will have to either increase its buyback of stock in the open market--yes, personal stock he is selling-or, all else being equal, watch as the stock falls and employees like him convert large options grants and sell into a weak market at a lower price.

Make no mistake about it: This executive wants private accounts that invest in the stock market and his stock in particular. He sees private accounts as transferring risk from him to the public--risk, he surely knows, that is already being transferred through instruments such as IRA's, 401K's, and the explosion of mutual funds over the past decade. He's profited handsomely from that transfer of risk. From a corporate perspective he wants that transfer to continue, and from a personal one he needs it to continue to support his lifestyle.

One other short anecdote: This week I also spoke to a former co-worker of mine, who works at one of the largest investment banks in the world. We had a brief conversation about the private accounts issue. Predictably, there was no beating around the bush here; executives of investment banks and brokerages are known for direct, often crass language. He said: "I want that dumb public money coming across my desk." It's debatable whether that money would come across HIS desk as well as how much the financial industry in general would benefit from private accounts, but his expectation is clear. And just like my friend at the technology company, my former co-worker is employed by what is considered a "blue chip" company, which would presumably fall under the rubric of "safe" equities in which a private account program would invest.

Where do I stand on this issue? When Bush was first elected four years ago, I was ecstatic because I knew he favored private accounts, and from sources close to his new administration I knew he would make this issue a priority. 9/11 and Iraq put it on the rear burner. Generically, I have long favored private accounts. But recently I've become ambivalent. Perhaps it is the cynical, pure self-interest of friends of mine in the business and brokerage community, or the ham-fisted use of the same "crisis" rhetoric that justified the war in Iraq, or the fact that President Bush refuses to actually put forth a specific plan. This latter point amazes me. What exactly IS Bush's plan to reform Social Security, beyond the creation of private accounts? He won't tell us, and when asked he simply repeats the bromide that he refuses "to negotiate with myself." When you are proposing a radical overhaul of the most popular government program in this nation's history, you must do better than that. If the President believes in the merits of this then he must put his cards on the table, get specific about what he is actually proposing, and trust the public to follow him. Bush's unwillingness to do so shows a lack of leadership, makes him seem cynical, and gives his opponents rhetorical ammunition by allowing them to focus on the few concrete statements he IS willing to make such as the fact that the crisis is decades away--which is not going to make anyone stand up and demand action on this issue now.

One last point: In addition to my belief that Bush's "ownership society" is, at least in the examples of my two friends above, in many ways a program to transfer risk from the "owners" to the public, I have another misgiving about private accounts. I strongly believe that the last thing we need is for the stock market to become an even greater national priority. I believe this on a political, fiscal, monetary and spiritual level. With an even greater public focus and reliance on the stock market, the political pressure to take extraordinary, unconventional measures to boost stock prices--pressure that already exists--will be overwhelming. Contrary to what some might think, constantly rising stock prices are most certainly NOT a good thing, as we learned after the stock bubble burst in 2000. Private accounts cannot repeal the natural business cycle, which includes periodic recessions as malinvestment clears. But when voters' retirements are at stake, I don't trust politicians to let the natural business cycle play out, particularly if the bottom of a cycle inconveniently appears near an election. Stock prices are merely manifestations of an underlying business and larger economy; they are not meant to be a means to a political or fiscal end.

More to come on this and other issues, but enough for a first post.