Explaining Southern California's economy

Mitt Romney and Bain Capital: He did what he had to do

Republican presidential hopeful Mitt Rom

JEWEL SAMAD/AFP/Getty Images

Mitt Romney has been taking it on the chin from the unlikeliest of places: his fellow Republican candidates, especially Newt Gingrich, have claimed that Romney's time at private-equity firm Bain Capital was all about killing jobs, not creating them. Mitt says he "created" 100,000 jobs. Not so fast, say his detractors.

At the Huffington Post, Robert Lipton explains why this he-said/he-said doesn't entirely make sense:

The reality is both more simple and more complex than all those allegations would have one believe. It is simple because the function of Bain and other private equity funds has no planned relation to job creation or job losses. It is more complex, because the activities of Bain do tell us something about Mitt Romney -- having nothing to do with jobs. Let's look at how Bain and other private equity companies actually operate.

The business goal of private equity companies is to make profits for investors in the equity funds they manage. The greater the profits for the investors, the larger the take of the fund managers, who typically receive a base management fee of about 2 percent plus a portion of the fund profits, generally around 20 percent. If the fund manager is very successful then the manager's participation in profits may run as high as 30 percent, which investors may be prepared to accept just to be able to invest with that manager. We're told that Bain was very successful in creating very high returns on investment for its investors, said to be an astounding 88 percent per year, to the point where it could get 30 percent participation in profits. One tax advantage of the fund mangers is that although their business is to get paid by creating values, unlike other payment for services, which is taxed as ordinary income, their return for their services is treated as capital gain and taxed at the lower capital gains rate.

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France gets credit rating downgraded, joins USA

World Leaders Gather In Cannes For The G20 Summit

Dan Kitwood/Getty Images

CANNES, FRANCE - NOVEMBER 03: US President Barack Obama is welcomed by the French President Nicolas Sarkozy to the G20 Summit on November 3, 2011 in Cannes, France. World's top economic leaders are attending the G20 summit in Cannes on November 3rd and 4th, and are expected to debate current issues surrounding the global financial system in the hope of fending off a global recession and finding an answer to the Eurozone crisis. (Photo by Dan Kitwood/Getty Images)

The world's ninth largest economy is now joining the first largest in the unhappy doghouse of Standard & Poor's downgrades. Just as the U.S. was busted down from AAA (S&P's highest rating) to AA+, so, too will France see its "credit score" fall.

This is from Bloomberg:

A downgrade by S&P signals that the latest pledges by European leaders to clamp down on deficits and step up cooperation won’t be enough to end the region’s debt crisis and curtail the rise in France’s borrowing costs. The country’s benchmark 10-year bonds now yield 130 basis points more than debt of AAA rated Germany.

A downgrade of France may further complicate Europe’s efforts to stem the crisis by threatening the rating of the region’s bailout fund. The European Financial Stability Facility, which is funding rescue packages for Greece, Ireland and Portugal partially with bond sales, owes its AAA rating to guarantees from the euro region top-rated nations. A French downgrade may prompt investors to demand higher rates on the fund’s debt.

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The Facebook Effect and the problem of California's budget

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

What exactly is the "Facebook Effect" and why could be both a boon and bane for California's budget crisis? According to the Legislative Analyst's Office, it's the massive amount of money that will be infused into California's sagging revenues when Facebook launches its anticipated IPO later this year.

Facebook isn't even going to sell that many shares to the public — it will probably continue a trend of "low float" IPOs in tech offerings, designed to elevate valuations (fewer shares equals higher demands equals higher prices). But it's still expected to raise $10 billion and achieve, overnight, a market valuation of $100 billion.

The capital gains from the creation of all those new Facebook millionaires will bring...well, billions to the state's coffers. As Bloomberg (via the San Francisco Chronicle) reports, Gov. Jerry Brown is estimating that 2012 will see $96 billion in total capital gains earned as income. The LAO figures rather less: $64 billion. 

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CES: Will 2012 be the Year of the Windows Phone?

2012 Consumer Electronics Show Showcases Latest Technology Innovations

Kevork Djansezian/Getty Images

LAS VEGAS, NV - JANUARY 10: The Nokia Lumia 900 Windows Phone is displayed at the 2012 International Consumer Electronics Show at the Las Vegas Convention Center January 10, 2012 in Las Vegas, Nevada. CES, the world's largest annual consumer technology trade show, runs through January 13 and is expected to feature 2,700 exhibitors showing off their latest products and services to about 140,000 attendees. (Photo by Kevork Djansezian/Getty Images)

You can feel it in the air. Or just read about it on various websites and blogs. Microsoft, long considered a bit of an also-ran in the wild new world of mobile computing and devices, is setting up for an great 2012.

At the core of the enthusiasm is the Windows Phone, which is evidently blowing everyone away at the Consumer Electronics Show (CES) in Las Vegas. There are two smartphone producers who are rolling out Windows Phones in conjunction with Microsoft: Nokia and HTC. Hopes are high, but this is Microsoft. But it's not exactly springtime in Redmond just yet.

Wired offers this roadmap:

Critics may be smitten, but Microsoft still has work ahead in winning the hearts of consumers.

[An analyst who follows Microsoft say] there are four main things Microsoft needs to tackle to ensure that Windows Phone builds momentum in 2012: significant investments in quality marketing efforts; winning “flagship” positioning with carriers for several devices over the course of the year; offering a range of devices on each carrier network; and convincing salespeople that Windows Phone is just as good as iOS and Android.

It looks like Nokia, at least, plans to instigate a heavy marketing campaign to make sure the 900 gets time in the spotlight.

CES has never been a completely accurate indicator of what’s going to succeed in the year to come. What journalists and bloggers fawn over, consumers may end up shunning in favor of something else.

However, with smartphones in recent years, the “most hyped-about” phones have generally ended up faring well with mobile phone buyers. And if that’s any indication, Windows Phone stands a good chance of fulfilling our expectations.

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Faster foreclosures and loan mods mean less money for homeowners

U.S. Foreclosure Rates Rise As Bank Repossessions Soar

Kevork Djansezian/Getty Images

The LA Times has a story today about the accelerating foreclosure process. The bottom is that banks are ramping up their foreclosure activities, after allowing them to lag for various reasons over the past few years. 

There's a day-of-reckoning quality to this. Absent some kind of massive federal assistance program to homeowners who are either losing or about to lose their houses — beyond what's already been enacted — this means that the housing market will soon be hit with a large number of "real estate owned" (REO) properties. 

I blogged recently about a Federal Reserve white paper that proposes a solution to this foreclosure crunch, in the form of investor-owned rentals. The rental market is picking up and there's a need for more single-family residences, which shouldn't be surprising given all the families that are losing their homes to foreclusure. 

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