August 23, 2015

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Craig Pirrong at Streetwise Professor continues his Elon Musk skepticism.

… There are some major cracks beginning to show in the Musk facade. The most telling is the fact that one Musk entity-SolarCity-sold $165 million in bonds (that are backed by the cash flows from SCTY’s solar installations) to another Musk entity, SpaceX (which just experienced an embarrassing spacecraft malfunction.) When money is taken out of the left pocket to put into the right pocket, eyebrows should be raised. Especially when the explanation is this lame:

So why is SpaceX buying these up? According to SolarCity’s Vice President of Financial Products, Tim Newell, the answer is “very straight forward.” The bonds offered SpaceX an attractive rate of return for a one-year investment compared to other investment options out there. SpaceX carriers a fair amount of cash at times, noted Newell, and the company wanted to put that cash to work in the short term with a high degree of reliability

Sure. If it’s offering such a great rate of return, why isn’t anyone else buying it? And why does it have to offer a better rate than “other investment options out there”? A more plausible story is that the bonds weren’t selling, or that they would only sell at yields Musk didn’t want to pay, so  he had to use one of his companies to prop up another. Those kinds of shell games can only last so long.

Moreover, some executives have left, most recently the head of service, who is taking a leave of absence. This follows the departure of the CFO (announced in June).

Then there is the recent Tesla earnings report, which showed that despite the massive subsidies it has received, it still can’t earn a GAAP profit and, is burning cash at a hellacious rate, $565 million in the last quarter alone. …




One of our country’s best writers, Malcolm Gladwell, reports on studies of Katrina post-partum New Orleans neighborhoods.

The first time that David Kirk visited New Orleans after Hurricane Katrina was at the end of 2005. His in-laws were from the city. Kirk and his wife visited them at Christmas, just four months after the storm hit, and then went back again on several more occasions throughout 2006. New Orleans was devastated. Thousands had fled. “I’ll admit I’d drive around the Lower Ninth, taking it all in, feeling a little guilty about being the gawking tourist,” Kirk said not long ago. “It made an impression on me. These neighborhoods were gone.”

Kirk is a sociologist at the University of Oxford. He trained at the University of Chicago under Robert Sampson, and, for Sampson and the small army of his former graduate students who now populate sociology departments around the world, neighborhoods are the great obsession: What effect does where you live have on how you turn out? It’s a difficult question to answer because the characteristics of place and the characteristics of the people who happen to live in that place are hard to untangle. As Kirk drove around the Lower Ninth, however, he realized that post-Katrina New Orleans provided one of those rare occasions when fate had neatly separated the two variables. In the course of bringing immeasurable suffering to the people of New Orleans, Katrina created what social scientists call a “natural experiment”: one day, people were in the neighborhoods where they had lived, sometimes for generations. The next day, they were gone—sometimes hundreds of miles away. “They had to move,” Kirk said. What, he wondered, were the implications of that? …

… Kirk’s idea was to look at convicted criminals from New Orleans who had been released from prison after Katrina. As a group, they were fairly homogeneous: largely black, largely poor. For years, their pattern was to return to their old neighborhoods after they were released: to their families, homes, social networks. But for some, by the most random of circumstances, that was now impossible. Their neighborhoods—the Lower Ninth, New Orleans East—had been washed away. How did the movers compare with the stayers? …

… One of the tragedies of Katrina was that so many of New Orleans’ residents were forced to move. But the severity of that tragedy is a function of where they were forced to move to. Was it somewhere on the Salt Lake City end of the continuum? Or was it a place like Fayetteville? The best answer we have is from the work of the sociologist Corina Graif, who tracked down the new addresses of seven hundred women displaced by Katrina—most of them lower-income and black. By virtually every measure, their new neighborhoods were better than the ones they had left behind in New Orleans. Median family income was forty-four hundred dollars higher. Ethnic diversity was greater. More people had jobs. Their exposure to “concentrated disadvantage”—an index that factors in several measures of poverty—fell by half a standard deviation.

The women weren’t going to Fayetteville but, rather, to places like Houston. “For low-income people in the South, Houston is a pretty darn great place,” Hendren said. “It’s not a beacon of phenomenal upward mobility like Salt Lake City. But it’s kind of the Salt Lake City of the South.” The odds of going from the bottom to the top in Houston are 9.3 per cent, which puts it fifteenth out of the top fifty U.S. metro areas.

“I think that what’s happening is that a whole new world is opening up to them,” Graif said. “If these people hadn’t moved out of the metro area, they would have done the regular move—cycling from one disadvantaged area to another. The fact that they were all of a sudden thrown out of that whirlpool gives them a chance to rethink what they do. It gives them a new option—a new metro area has more neighborhoods in better shape.”

That is, more neighborhoods in better shape than those of New Orleans, which is a crucial fact. For reasons of geography, politics, and fate, Katrina also happened to hit one of the most dysfunctional urban areas in the country: violent, corrupt, and desperately poor. A few years after the hurricane, researchers at the University of Texas interviewed a group of New Orleans drug addicts who had made the move to Houston, and they found that Katrina did not seem to have left the group with any discernible level of trauma. That’s because, the researchers concluded, “they had seen it all before: the indifferent authorities, loss, violence, and feelings of hopelessness and abandonment that followed in the wake of this disaster,” all of which amounted to “a microcosm of what many had experienced throughout their lives.”

Katrina was a trauma. But so, for some people, was life in New Orleans before Katrina. …

… The way New Orleans handled public education after Katrina was very different. New Orleans had one of the worst-performing public-school systems in the country: the year before the storm, sixty-two per cent of public-school students in the city were enrolled in a school rated F by the state of Louisiana. The government decided to start over. All of the city’s public-school teachers were fired. Public education was changed—in the words of one city official—from “a school system” to “a system of schools.” In the most radical educational experiment in the country, students were allowed to apply anywhere they chose throughout the city, principals were given wide autonomy, and countless school buildings were renovated or rebuilt. The educational system, in the wake of a hurricane that battered its buildings, doubled down and finished the job itself. …

… At the same time, however, Katrina reminds us that sometimes a clean break with the past has its advantages. The fact that you may have lived in a neighborhood for generations, or become attached to a set of long-standing educational traditions, does not mean that you should always return to that neighborhood if you are displaced, or reconstruct those traditions. The schools of New Orleans made a necessary and painful sacrifice: they extended the pain of Katrina in order to build a better future for the city’s children. Those who chose to stay in Houston made the same hard choice. The calculations done in the Chetty-Hendren-Kline-Saez study concern the benefits of good neighborhoods for the children of the people who move. The child who moves from Central City to Salt Lake City at the age of five or six gets the benefit of all of his or her education in a better school, an adolescence largely free of violence and crime, and an early adulthood in a place with jobs and opportunities. The benefits are less obvious for the parents: they leave behind their networks and family ties and the pleasures of crawfish. In the past ten years, much has been said, rightly, about the resilience and the spirit of those who chose to rebuild the neighborhoods they had lost. It is time to appreciate as well the courage of those who, faced with the same disaster, decided to make a fresh start. 




NY Times OpEd calls on universities to stop hoarding money.

WHO do you think received more cash from Yale’s endowment last year: Yale students, or the private equity fund managers hired to invest the university’s money?

It’s not even close.

Last year, Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment.

In contrast, of the $1 billion the endowment contributed to the university’s operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at four other endowments I researched: Harvard, the University of Texas, Stanford and Princeton. …

… But the amount universities pay to private equity reveals the deeper problem: We’ve lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university’s endowment. The private-equity folks get cash; students take out loans.

As part of the reauthorization of the Higher Education Act expected later this year, Congress should require universities with endowments in excess of $100 million to spend at least 8 percent of the endowment each year. Universities could avoid this rule by shrinking assets to $99 million, but only by spending the endowment on educational purposes, which is exactly the goal. …