Whenever I see Bernie Sanders on TV and hear his proposals for income equality, all I can think is ‘This is what we are going to get if we don’t put something effective in place soon.’

If all I have posited in the Skim and Partial Ponzi is correct, then the road to reform comes through executive compensation.  While this has long been mentioned as a solution, the overwhelming focus has been on purely reducing/cutting it, and/or nebulously tying it to some performance formula.  So far any such changes have clearly not worked, as their has been a huge and continuing wealth transfer in corporate America from the 99.99% to the .01%.

So let’s take a very small step by starting with the people who determine executive pay: The Board of Directors (BOD).  Being a director on a corporate board should be viewed as quasi-volunteer work.  Back in the old days (pre-1980 for a number), serving on a corporate board was viewed as an honor and a responsibility.  It was something a person did for altruistic purposes, to give back to the capitalist system that had served us so well.

Nowadays it is first and foremost a form of remuneration. As highlighted recently in the show ‘Billions,’ the female board member (aka Evelyn Benson) who gets ‘Axed’ from Yumtime’s board, cares most about losing her $200,000 annuity when she’s voted off the board.  It was a completely offhand comment, and that’s because it’s become so ingrained in our system.  Of course $200k is probably a lowball number, cut in half from the average director compensation once all the committee fees and other perks are added in.  Multiply it by 3-4 boards, and I’d say that’s a pretty good way of making a million a year, especially for only 4-6 weeks of work!

Well guess what, there’s still an enormous amount of value in being on the BOD of a major corporation, net of any compensation. Continue reading


While politicians and other critics have focused on stock buybacks being a poor use of cash versus investing in and growing a company, they have completely missed the boat.  As have those in the business press who have concentrated their critiques on the timing and high stock prices paid for these buybacks.  In so doing, all these parties have provided a smokescreen for executives of publicly traded corporations to continue their Chinese water-torture plundering of American’s savings.

Instead, the real charade of stock buybacks is that they have nothing to do with the shareholder and enhancing shareholder value, and everything to do with self-remuneration, as outlined in ‘The Skim and the Partial Ponzi.’

Yet a long time ago, buybacks really were very beneficial to shareholders, as they allowed good managers to take advantage of the inefficiencies and dislocations of the capital markets.  The underlying thesis behind value investing was that if a company’s ability to generate cash wasn’t recognized by the market, that excess cash could be used to buy back stock and shrink the float. If despite this buttressing, the stock price continued to languish, it could be done again and again as cash continued to pile up on a company’s balance sheet (now at an even faster rate due to the buybacks being accretive and increasingly so).  The key ingredient to all this was that the price of the company had to be undervalued.1

Nowadays though, stock buybacks are done indiscriminately, and usually executed very poorly.  The main reason for these “sloppy” buybacks is that they simply have to be done in order to offset dilution from employee stock and stock option awards.  Leading to the question:

What would happen if all publicly traded companies stopped buying back stock altogether? Continue reading

  1. Sure, this is a very discretionary measure.  I could just fallback and use Warren Buffett’s term of “selling for far less than intrinsic value in the stock market.”   But I’d prefer to hone in on a company’s ability to generate excess cash, both currently and going forward []


Let’s start off with the definition of a Ponzi scheme:

“An investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.”

A Partial-Ponzi, is the lower than advertised Return On Capital (ROC)1 that most publicly traded corporations in America are achieving.

Though I previously highlighted a new phenomenon of disappearing earnings (45%), the real story is how money is being skimmed by the executives of corporate America, in return for which the rest of us are not really getting any value-added for this munificence.  While Wall Street gets the blame for financial excess and ruin (and ruinous practices)2, the major driver of income inequality is being led by publicly traded corporations – those supposedly owned by all of us in our savings and retirement accounts. Continue reading

  1. or similarly Internal Rate of Return (IRR), or the derivative but far from identical Return On Equity (ROE),  etc. []
  2. and maybe that’s really their purpose: taking the blame/flack []


Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown

“Sir, if you have a milkshake and I have a milkshake and my straw reaches across the room, I’ll end up drinking your milkshake.” – Senator Albert Fall

Come gather round doctors, lawyers, and accountants and let me tell you the tale of the Skim and the Partial Ponzi.  You won’t hear this story in mainstream publications, largely because it’s not sensationalistic and takes place very, very slowly over a long period of time.  Plus, the documentation and scrutiny required of traditional media makes the subject a non-starter for any editor.  Nevertheless it has a huge impact on 99.99% of U.S. citizens.  So heed the call small-business owners, professors, journalists, students, and retirees.

To start, let me share with you two sets of data:

1. According to a study by Standard & Poor’s equity analysts Todd Rosenbluth and Stewart Glickman, in the 18-month period ending June 30, 2007, 423 companies in the S&P 500 engaged in stock buybacks and repurchased almost 20 billion shares of stock for approximately $700 billion dollars.  Yet the number of shares outstanding for these 423 companies was only reduced by 4.4 billion.  What happened to the other 15.6 billion shares?  Both the study and I conclude that they were simply repurchased to offset the dilution of employee/executive stock and option grants.

2. Companies in the Standard & Poor’s 500 Index were poised to spend $914 billion on share buybacks and dividends in 2014, or about 95 percent of earnings, data compiled by Bloomberg and S&P Dow Jones Indices show. S&P 500 companies will spend $565 billion on repurchases this year (2014), and $349 billion on dividends, based on estimates by Howard Silverblatt, an index analyst at S&P. Profits would reach $964 billion should the 8 percent growth forecast by analysts tracked by Bloomberg come true.

Distilling the above two sets of data, we get the following:

78% of shares repurchased by companies in the S&P 500 have no effect on shrinking the float – they are a complete wash in terms of boosting net earnings. (15.6 billion/20 billion = 78%)

58% of net income for the S&P 500 companies is being spent on stock repurchases ($565 billion/$964 billion)

Finally, we combine the two percentages above to come to the conclusion that if 58% of net earnings are used to repurchase stock, and 78% of that stock is actually going to executives and employees, then:

45% of the total earnings of the S&P 500 are completely fictitious as it pertains to the average common shareholder (78% of 58%).

Yeah, yeah, yeah, there are a lot of holes that can be poked in the above.  One of the most obvious is the timing differences of the two sets of data 2006-7 vs. 20141.  Another that critics might point to is the fact that stock options and particularly stock grants, are already expensed and accounted for in net income. (of course if they are, then why is there 15.6 billion shares in leakage?)2  I’ll leave my detailed rebuttal to these in footnotes, but for the sake of brevity, let’s just slash the 45% number listed above to 25%.  That’s still a pretty jarring cut, and it means that those shares of stock or the equity ETF’s that you hold in your 401K, really only entitle you to 75% of your share of the companies earnings.  Worse, that percentage is slowly going down.

The other 25%, and growing, has been usurped by management.  We’ll detail exactly how that’s occurred in the next few weeks, so stay tuned to The Shadow Banker…

Are Buybacks an Oasis or a Mirage? – “U.S. equity investors in aggregate—contrary to appearances—have not realized a benefit from the recent spate of stock repurchases”

Buybacks That Bite Back – the original Glickman/Rosenbluth article detailing the stock buyback “leakage”

S&P 500 Companies Spend Almost All Profit on Buybacksmore like 58% of profits

Goldman Sachs Partners Reap $175 Million from ’08 Options“In December 2008, Goldman Sachs granted 36 million options in an effort to give top performers an incentive to stay after the bank reduced compensation expense by almost half during the financial crisis” Huh???? In December of 2008, where the hell else were they going to go???

Top 100 CEO Retirement Savings Equals 41% of U.S. Familiesthey’re skimming it from the bottom of the economic pile, and from the doctors, lawyers, and scientists at the top

Why Management Loves Share Buybacks“The conclusion is that what looks like buybacks are actually thinly veiled management-compensation plans”


  1. $565 billion in stock buybacks in 2014, versus an average of $467 billion in 2006/7.  Both periods occurred in a year of large stock buybacks by corporations, as highlighted in both stories below []
  2. I don’t know if this is a critique of my argument, or makes the 45% even worse.  I think it’s due to low balling the option valuations, a continuation of the backdating of option strike price’s (the consultants approved it, now they probably have come up w/ new schemes) and huge stock grants doled out when stock prices are low – think Goldman Sachs’ bonanza to employees in late 2008/early 2009 []


Did you know that 10 out of the 12 largest foundations in the U.S.1 are those of pharmaceutical companies?  And do you know who the beneficiaries of their largesse are? Themselves.  And do you know who the victims of their largesse are?  First and foremost The Upper Middle Class, and secondly America.  Well, maybe it’s the other way around, at least in absolute terms. Nevertheless, the existence of these “foundations” leads to an enormous allocative inefficiency that feeds off the Honeypot Economics of healthcare.

Basically, all the “donations” from these foundations are used to ameliorate or eliminate the co-pays on the drugs their parent companies manufacture, for those who can’t afford the co-payments.  For example Continue reading

  1. ranked by total giving, not by assets []


Dear Bill,

I have long been an admirer of yours.  It began back in 2003 when I first received a copy of your report on MBIA questioning its triple-A status.  Though a lot of the content and terminology contained in it was unfamiliar and difficult to understand at the time, I immediately  considered it one of the best pieces of research to ever be published on Wall Street.  In closely following your career since then, I have always held in high esteem both your investing acumen, and your comportment. Though some others ridiculed your publicity-seeking nature, I recognized the important role that it played in your advocating for change, and the resulting performance numbers that you attained.  It’s frequently the way things need to get done when investing in many publicly traded companies in the 21st century, and you did it better than most everyone.

In addition to your omnipresence, I also admired your tenacity in fighting established and well-funded corporations.  Whether it be MBIA or Canadian Pacific, you played an essential and influential role in the capital markets, and they are better off for it (though regressing in so many other ways).  I didn’t always agree with some of your investment choices, but if you had a position in a company, I would not even bother taking the other side based on my intuition, knowing that your due diligence was maniacally thorough.

Then came Herbalife.  The thoroughness was certainly evident, and at this point the rest of the investment community (and press) had caught on to your brilliance, and deservedly gave you center stage to announce your thesis.  While there had always been a lot of questions surrounding the company, you brought a new spin to it, which while quantifiable1, also required a regulatory effort to put the nail in the coffin.  This was a perfect mix for your skills.  First, you and your team laid out a succinct road map for public officials and prosecutors to follow in shutting down Herbalife.  Then, you masterfully utilized PR, media, and lobbying to make sure that government agencies and politicians would be incentivized and/or compelled to root out any fraud.

In my quest to understand both sides of this story, I came across John Hempton’s detailed post about visiting a Herbalife nutrition club in Queens.  In reading it, I started wondering if there weren’t considerably more pernicious financial schemes plaguing immigrants and the poor?  While I personally may find the underlying business model of Herbalife distasteful and of no economic value, the American view of huckster-like sales tactics is a mixed one.  Think of P.T. Barnum on the positive side, or maybe the dual impression of the word ‘chutzpah.’  Using my own standards, I may take issue with Disney World helping to part the lower quartile from their money in a less than judicious manner, but I’d never make the case it should be shut down.  Nevertheless if you could convince the authorities to close Herbalife, I wouldn’t shed a tear.

Fast forward almost three years since the beginning of your HLF fight, and I open up my Sunday New York Times in early October and read an article entitled “Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers.”  Heretofore I had always been curious about your long thesis on Valeant, but never had the time to analyze the company closely.  Moreover, I had never seen any VRX presentation where you detailed the thesis as succinctly as say, MBIA.  After reading the NYT story, I understood why:

And consumers like Bruce Mannes, a 68-year-old retired carpenter from Grandville, Mich., are facing the consequences.

Mr. Mannes has been taking the same drug, Cuprimine, for 55 years to treat Wilson disease, an inherited disorder that can cause severe liver and nerve damage. This summer, Valeant more than quadrupled its price overnight.

Medicare will now have to cover about $35,000 for the 120 capsules he takes each month, and he will have to pay about $1,800 a month out of pocket, compared with about $366 he paid in May.

“My husband will die without the medicine,” said his wife, Susan, who is now working a second part-time job to help pay for health care. “We just can’t manage another two, three thousand dollars a month for pills.”

Cuprimine is just one of many Valeant drugs whose prices have spiked as part of the company’s concerted strategy, which has richly rewarded its investors and made it one of Wall Street’s most popular health stocks.

In a nutshell, what’s good for Valeant, is really bad for Bruce Mannes -  and anyone else in his position. Upon finishing the article, I wasn’t sure that buying other pharmaceutical companies and greatly boosting prices on the newly acquired drugs was the sole rationale behind Pershing Square’s thesis to take an enormous position in Valeant, but it was enough for me to have no further interest in the company.  In the back of my mind I had a feeling I wouldn’t like what I saw, but it left me with a nagging question “How does Bill Ackman reconcile his moral crusade on Herbalife, with his championing of the management and strategy of Valeant?” Continue reading

  1. roughly ‘what % of revenues were sold internally to distributors?’ []


The precipitous drop in oil prices creates a huge, once-in-a-lifetime opportunity for every person or group that is fighting the energy industry over environmental issues.  Before I reveal what that opportunity is, let me tell you that I followed and researched energy companies, primarily in North America, for almost two decades in my past job as a portfolio manager.  Thus I witnessed firsthand the growth of what some people call the shale ‘revolution’.  As a focused area of investment, my angle was to always be on the lookout for any disaster that could halt this growth, and the supposed profitability of shale. In doing so, I never encountered an environmental ‘smoking-gun’ that was so alarming that it could be used to sway public opinion, say in the manner of a nuclear meltdown.  Nevertheless, I was certainly aware of all the less-than-catastrophic destruction going on.

I was also amused watching the environmental and political fight over the XL pipeline last year.  Once again there really wasn’t a smoking-gun that could get anyone but those already in the environmental camp energized, plus a few farmers in a remote part of the country.  Several months ago I read how the real aim behind the fight to stop the pipeline was Tom Steyer’s desire to halt the importation and use of heavy oil from Canada, and the extraction and processing business in Western Canada as a whole. That sounds admirable, and he and others threw a lot of money and passion into it.  But in my mind what I really think killed it were the economics: between competing pipeline alternatives and logistical oil gluts, the companies pushing for it stopped pushing so hard once their profit motive turned worse.

I don’t mean to pooh-pooh in anyway the efforts of those fighting fracking and climate change, I just think it’s an uphill battle against those with greater resources and a profit motive, namely the energy companies, and the understandable unwillingness of citizens to care about the long-term consequences of that which they cannot see as they try to get on with their daily lives.  Throw in the argument that shale drilling keeps a lid on energy prices, true, and your job becomes almost insurmountable.

Fortunately, from the excesses of capitalism, comes the huge opportunity to which I alluded.  Because with gas prices way below $3 a gallon, now is the time for Continue reading


No one is going to sing Kumbaya for someone earning $200,000, $400,000, $600,000 a year, but that doesn’t mean you lay down and accept the pummeling.  Before I get to an action plan, I’m going to sum up the “Crushing of the Upper-Middle Class” (UMC) to fire you up.  Political policy over the decades has led to a redistribution of wealth in the middle class, taking from those who make $250,000 a year and giving to those who make $150,000, and taking from those who make $400,000 a year and giving to those who make $50,000.  This pancaking of the middle classes has largely left the two extremes, the poor and the very wealthy, untouched.  Furthermore, the flattening has occurred in a stealthy and complex way, 1 and through so many different tax, revenue, and rejiggering schemes that it’s hard to place the blame on a single source.  Why is so much pain targeted towards and incurred by a specific economic segment?

Well, if we learned anything from the 2012 presidential election, Continue reading

  1. Just think of the tax policymakers surrounding George W. who were fully cognizant that the highly touted reduction to the dividend and l-t capital gain down to 15% wouldn’t hold true for the UMC after they were put through the AMT.  For revenue neutral reasons, they opted not to put through a patch, thus delivering a screwing to a particular group []


Woe be he who decides to die in NYC.  Though the reality is many people choose to move to low inheritance tax states for lifestyle purposes, why should one feel compelled to not live where they want to at the end of their lives?  Sadly, there’s one strata that once again gets crushed again by not doing so: the upper-middle class.  Originally everyone over a certain threshold could not escape the state estate-tax noose, but in recent years CPA’s have found a work around for the extremely wealthy, leaving the few who can’t access the loopholes subjected to very high marginal tax rates to make up the difference. Continue reading


Just when you think you have gotten through that last hurdle and finally vaulted your genes out of the upper middle class and into the truly wealthy, they crush you with estate taxes.  Though this tirade is really for the upper part of the upper middle class, the targeting of this particular segment, above one economic threshold but below the higher ones, is the same injustice that all my previous ones were.  In fact it could be my number one “crushing” if I had to rate them in terms of egregiousness.

Before I get started and lay out the numbers, let me just state for the record that I am all for an estate tax1, just not one that overwhelmingly inflicts its greatest pain on the upper-middle class …once again.

Ok, let’s lay out the thresholds and define the “targeted” segment.  At the federal level, a 40 percent tax is levied at death on estates of more than $5.25 million for an individual or $10.5 million for a couple2.  That cuts out everyone below this level.  Pretty straightforward and simple, and seemingly very generous in terms of eliminating most people from the estate tax and focusing solely on the affluent.

The higher threshold, or where that 40% rate starts to get rolled back, is much tougher to define.  As a general guesstimate, I would say somewhere between fifty and hundred million.  Before I get to “why” it disappears, let’s put a face to the number in the middle of this death blow.  Joe is a cardiologist/partner in a law firm/small businessman making $500,000/750,000/1,000,000 a year.  From this he prudently saves $50,000/100,000/200,000 a year for 35 years of working and averages an 8% annual return over that period. Thanks to the power of compounding he will have $14/28/56 million in the bank when he retires.

Sounds like a nice stash right?  It is, and deservedly so considering the long hours he worked and lifestyle sacrifices he made.  Hopefully he’ll have a lengthy retirement to enjoy and spend it, at the end of which the federal government will take the aforementioned 40% of everything over $10.5 million3.  So be it.

At some level though, it doesn’t have to be.  That’s because tax accountants and lawyers have created, or lobbyists have lobbied for, and/or congressmen have legislated, special exemptions and vehicles that only make economic sense if you are extremely wealthy.  Given acronyms such as CLAT’s and GRAT’s, or Jackie O. Trusts or just plain “holding companies,” those that can avail themselves of the structures can greatly bypass the 40% rate altogether.  I won’t get into the details of “how” they do this, but it’s pretty easily explained in the articles I link to below, a quote from which I will tease you with as it summarizes the higher threshold:

“I hate to say it, but the very rich pay very little in gift and estate tax,” said Jerome Hesch, a lawyer at Berger Singerman LLP in Miami who reviewed some of the Walton family’s trust filings for Bloomberg. “At the Waltons’ numbers, the savings are unbelievable.”

More relevant to this story, is that they are very expensive to set up and somewhat costly to maintain, let’s say $1 million in cash up front and $100,000 a year going forward.  Not a bad price to pay if you’re stashing a billion or two, …or even a 1/2 or a 1/4, but for Mr. 14/28/56 it’s almost the same price, and is a big chunk of the overall percentage.  Moreover, these vehicles require one to lock up their money for decades.  That’s easier to do if we’re talking billions and hundreds of millions, less so for Dr. 14/28/56.

“So,” you say once again “the inheritance tax is just the right one pays to live your life in this country.”  No argument.  But as outlined below, the wealthiest get to bypass it, and if you believe that the collection of taxes are a zero-sum game, than the shortfall has to come from those who do pay it -> you!  Without these uber-wealthy tax avoidance schemes, maybe the overall rate could be lowered to 20% for everyone over $10.5 million?

No, that would be too fair, so once again the upper-middle class takes the hit.

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How Wal-Mart’s Waltons Maintain Their Billionaire Fortunes – “America’s richest family, worth more than $100 billion, has exploited a variety of legal loopholes to avoid the estate tax, according to court records and Internal Revenue Service filings”  Ok, so we’ve figured out the very highest recipient, but how low does the high threshold go?  Beats me!

Accidental Tax Break Saves Wealthiest Americans $100 Billion – “These tax shelters may have cost the federal government more than $100 billion since 2000, says Richard Covey, the lawyer who pioneered the maneuver. That’s equivalent to about one-third of all estate and gift taxes the U.S. has collected since then.”  If the wealthiest Americans saved $100 billion, who made up the difference?  That one I know – the next wealthiest!

  1. Without going into great, unenlightening detail as to why, I’m just in the camp that sees tax collection overall as a zero-sum game, and doesn’t buy the argument that the estate tax alone is “double taxation.”  Everything is double/triple taxation, get over it []
  2. for the purposes of this argument I am not including estate taxes assessed by the 50 states right now, but will touch upon it further down []
  3. assume he’s married …these guys always are []