David C
United States
Aurora
Colorado
flag msg tools
badge
Avatar
mb
So, when you read this the whole way through, I have a question for discussion?

"Couldn't Chicago have just raised the parking meter fees, themselves?" and "What if they had, what obstacles would they have faced to do so?"

http://www.rollingstone.com/politics/matt-taibbi/blogs/Taibb...
 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
William Boykin
United States
Texas
flag msg tools
badge
For BJ.....
Avatar
mb
Credit where its due-
MGK turned me onto Matt Taibbi a while back, and I really liked his article on Goldman Sachs.

So thank you, MGK and Bippi for posting this.

There. I can be nice sometimes.

Darilian
4 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Chad Ellis
United States
Brookline
Massachusetts
flag msg tools
designer
publisher
badge
Avatar
mbmbmbmbmb
Taibbi writes as though he's an expert but he frequently displays this sort of finance ignorance:

Taibbi excerpt, discussing the Chicago parking meter deal wrote:
The aldermen are told by CFO Volpe that the reason the deal has to be rushed is that a sudden change in interest rates could cost the city later on, which makes one wonder about Volpe's qualifications for the CFO job — this was in the wake of the financial crash, and interest rates were at rock bottom, meaning the city stood only to lose money by hurrying. Higher interest rates would have allowed them to use the interest on the lump payment to fill their budget gaps, rather than the principal of the payment itself.


The deal is pretty straightforward -- the city is selling the future streams of revenue from its parking meters for a lump sum. Parking revenue is a relatively predictable and low-to-no-growth revenue stream, so from the investor's point of view this is a lot like a bond deal, but instead of relying on Chicago's credit they're going straight to the source of some of its cash flows.

When you're pricing future revenue streams you discount them by the cost of capital -- if the cost of capital is high, you discount them a lot (and the price goes down) and if the cost of capital is low you discount them a little and the price goes up. This means that if you're the seller and interest rates are rock-bottom you absolutely have a risk of delay.

Taibbi doesn't get this piece of Finance 101 and instead thinks that the relevant point is that if interest rates went up they would be better off because they could collect interest on the lump sum and spend that rather than spending parts of the lump sum itself.

From my perspective this means that the article is being written by someone who -- whatever his investigative skills and however engaging his narrative -- doesn't understand the subject matter about which he claims to be expert. Moreover, no one editing his piece is able and willing to correct him. As a result, it's hard to know which of his other assertions are accurate and which are groundless.
8 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Chad Ellis
United States
Brookline
Massachusetts
flag msg tools
designer
publisher
badge
Avatar
mbmbmbmbmb
But wait, there's more:

Quote:
The bigger problem was that Chicago sold out way too cheap. Daley and Co. got roughly $1.2 billion for seventy-five years' worth of revenue from 36,000 parking meters. But by hook or crook various aldermen began to find out that Daley had vastly undervalued the meter revenue.

When Waguespack did the math on that $608,000 he was going to be charged, he discovered that the company valued the meters at about 39¢ an hour, which for 36,000 meters works out to $66 million a year, or about $5 billion over the life of the contract.


Ah, math. $66 million a year over 75 years has a value of $1.2 billion if your discount rate is just north of 5% -- and while I don't know exactly what rates were then, that's historically a pretty low rate for a 75-year bond. Taibbi quotes city inspector David Hoffman as saying that Daly sold the meters for "$974 million too little" but to get that kind of valuation you have to assume 75-year interest rates of less than 3%. Good luck with that.

But wait, there's still more. Waguespack's "$66 million a year" math assumes that every meter is running for 13 hours a day, 7 days a week. Without that, you don't get close to the $1.2 billion value (let alone the $2.0 billion Taibbi/Hoffman assert) but Taibbi and the people he quoted are indignant that the new meter owners want to run them on that schedule instead of 9 hours a day six days a week with holidays off.[/q]

In short, Taibbi wants it all ways -- he wants the company blamed for increasing the hours but he wants the value based on the increased hours and he wants to apply an extremely low interest rate.

It seems like almost every time I read a fact in this article that can be evaluated without a great deal of specific knowledge the fact is either false or makes no sense. Taibbi asserts that, "It was the grand plan of CFO Volpe to patch the budget hole with the interest earned on that big pile of cash. But interest rates stayed in the tank, and so the city was forced to raid the actual principal. In a few years, the money will probably be gone."

Beg pardon? The interest on $1.2 billion was going to plug a hole in a budget of over $3 billion? Even if short term rates had gone up substantially (say, to 5%) which virtually no one expected, the interest income wouldn't be 2% of the budget! Taibbi offers no support for this assertion.

None of this means that the Chicago deal was a good one or that none of Taibbi's points are valid. But he's doing policy analysis from a position of severe ignorance and making sweeping assertions that are either false or unsubstantiated, to say the least.

Edit to fix italics.
8 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Chad Ellis
United States
Brookline
Massachusetts
flag msg tools
designer
publisher
badge
Avatar
mbmbmbmbmb
bippi wrote:
"Couldn't Chicago have just raised the parking meter fees, themselves?" and "What if they had, what obstacles would they have faced to do so?"


Only fair to answer the question, I guess!

This speaks to a lot of the key questions about privatization. Private entities can often make more money out of privatized businesses than their public counterparts but the reasons are a mix. The profit motive will help remove inefficiency and encourage managers to look for ways to improve revenue, which is good. On the other hand, most privatized industries are either semi-monopolies or at the very least have high barriers to entry for competition. This may mean that scarcity simply allows them to charge more -- which may be good for the entity but not necessarily for the community that sold the good.

Looking at the parking example, it's entirely possible that not charging for parking on Sundays and holidays (as well as early morning and late evening) is a net positive for the city, even though it's certainly bad for the parking meter business. If 90% of shoppers pay a few dollars each in parking but 10% stay home or shop elsewhere, that's a pretty bad trade.

(This, by the way, is something Taibbi barely touched on -- another reason I find his piece disappointing.)

On the other hand, it could be that increasing parking revenue is a net benefit for the city but that it would be a political nightmare -- the typical problem that arises when something angers a small minority (who cares enough to make phone calls or vote because of it) and doesn't excite the majority who benefit. In that case the only way the city might be able to do it (and sustain it) is to take the decision out of their hands by selling it to a private concern with the right to make those changes on their own initiative. This sort of action makes up an interesting chapter in any good book on game theory.
6 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Ken
United States
Crystal Lake
Illinois
flag msg tools
badge
Avatar
mbmbmbmbmb
As Chad points out, not exactly a shining example of coverage. Having been in the area when the deal went down, there's no question that it was rammed through pretty damned hastily and without much in the way of public review or debate. That alone raises questions as to the propriety of the deal.

However, the article leaves out some pretty important points, too. The company that took over the meters promptly either upgraded the meters in place or performed repairs the city hadn't done to get more meters working. They also expanded payment systems that allow you to use credit/debit cards to pay for parking and installed more payment terminals for those systems. Finally, they installed meters in locations where the city had planned to add them for years, but hadn't.

I'm not a big fan of most privatization deals, myself, because they tend to create a short-term windfall at the cost of long-term revenue sources. But the finances of this particular deal didn't seem to be bad. What's been really irresponsible is that the city has basically used the funds from privatizing the Skyway and the meters as way to plug immediate budget holes rather than deal with the structural issues of the budget itself. That's a terrible idea. Rather than using the money to make lasting capital improvements or create a real contingency fund, the money's gone to the operating budget right now, meaning that the city is just masking the financial issues it's facing rather than addressing them. I believe that as of this last budget cycle, there's less than $100 million left from the two privatization deals.

The citizenry largely is over the privatization flap. The biggest issues with the deal in the mind of Chicagoans weren't the rate hikes or expanded hours. It was the relative speed of the deal (that kept anyone from looking at it publicly) and implementation glitches that caused just a monstrous number of erroneous parking tickets to get written (which led a judge in the city to basically void any ticket that was challenged in his court for something like 3 months).

The deal wasn't a bad one. The way the city spent the money is a much larger concern.
5 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
William Boykin
United States
Texas
flag msg tools
badge
For BJ.....
Avatar
mb
Thanks for the fact check, Chad.

Darilian
1 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Chad Ellis
United States
Brookline
Massachusetts
flag msg tools
designer
publisher
badge
Avatar
mbmbmbmbmb
As an aside...

Taibbi gained a lot of popularity for his piece on Goldman Sachs. My Dad happens to be about as knowledegable about GS as anyone who isn't a partner (and probably more than most partners), and recently wrote a book about them.

Now Dad and I have somewhat different views of the investment banking profession, with mine being more cynical and cautious. That said, he thought that Taibbi's piece was so recklessly unprofessional that he was dismayed that it was published -- let alone that it was getting such great traction. I haven't read that piece, but now I'm inclined to go back...and if this one is any indication I'm not expecting much. Investment banking is a very complex business, and someone with Taibbi's demonstrated lack of basic financial understanding is simply unqualified to understand a firm like GS.
5 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
William Boykin
United States
Texas
flag msg tools
badge
For BJ.....
Avatar
mb
Does your dad's book go into any substantive coverage of what led to the 2008 meltdown? Or was it completed before that occured?

Darilian
2 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Chad Ellis
United States
Brookline
Massachusetts
flag msg tools
designer
publisher
badge
Avatar
mbmbmbmbmb
Yes to both. The paperback version has an extra chapter on the financial crisis.
3 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
William Boykin
United States
Texas
flag msg tools
badge
For BJ.....
Avatar
mb
Chad_Ellis wrote:
Yes to both. The paperback version has an extra chapter on the financial crisis.


Thanks-
From the review that I read, it was unclear that that was the case. That will be helpful for the side project I'm working on.

Darilian
2 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
David C
United States
Aurora
Colorado
flag msg tools
badge
Avatar
mb
edit: reading comprehension owns me.
 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Rusty McFisticuffs
United States
Arcata
California
flag msg tools
Avatar
mbmbmbmbmb
Chad_Ellis wrote:
When you're pricing future revenue streams you discount them by the cost of capital -- if the cost of capital is high, you discount them a lot (and the price goes down) and if the cost of capital is low you discount them a little and the price goes up. This means that if you're the seller and interest rates are rock-bottom you absolutely have a risk of delay.

Taibbi doesn't get this piece of Finance 101

Holy crap, that's Finance 101?? I don't get it either. "When the cost of capital is high... let's see, capital is, like, money, right? So when the cost of money is--wait a minute, doesn't money cost... however much it says it costs?"

I had the same problem reading Tooze' The Wages of Destruction. "The basic problem was the uncompetitive exchange rate of the Reichsmark. As we have seen, this fundamental misalignment had first emerged in the autumn of 1931 after the devaluation of sterling." Wait, we saw--but how come--who--ah screw it, let's invade Poland.

I'm going to take what you said to mean I can dismiss this (and his earlier GS piece), as it's pretty depressing stuff.
3 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Chad Ellis
United States
Brookline
Massachusetts
flag msg tools
designer
publisher
badge
Avatar
mbmbmbmbmb
kuhrusty wrote:
Holy crap, that's Finance 101?? I don't get it either.


I'm going to do a short thread on this, as it's pretty important and not that hard once it's been explained.
7 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
David C
United States
Aurora
Colorado
flag msg tools
badge
Avatar
mb
kuhrusty wrote:
Chad_Ellis wrote:
When you're pricing future revenue streams you discount them by the cost of capital -- if the cost of capital is high, you discount them a lot (and the price goes down) and if the cost of capital is low you discount them a little and the price goes up. This means that if you're the seller and interest rates are rock-bottom you absolutely have a risk of delay.

Taibbi doesn't get this piece of Finance 101

Holy crap, that's Finance 101?? I don't get it either. "When the cost of capital is high... let's see, capital is, like, money, right? So when the cost of money is--wait a minute, doesn't money cost... however much it says it costs?"

I had the same problem reading Tooze' The Wages of Destruction. "The basic problem was the uncompetitive exchange rate of the Reichsmark. As we have seen, this fundamental misalignment had first emerged in the autumn of 1931 after the devaluation of sterling." Wait, we saw--but how come--who--ah screw it, let's invade Poland.

I'm going to take what you said to mean I can dismiss this (and his earlier GS piece), as it's pretty depressing stuff.


We are a group of folks that plays some unbelievably obtuse boardgames. I think we're ...game... for understanding this stuff if presented in the context of a board, dice, and cards.
2 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Chad Ellis
United States
Brookline
Massachusetts
flag msg tools
designer
publisher
badge
Avatar
mbmbmbmbmb
bippi wrote:
We are a group of folks that plays some unbelievably obtuse boardgames. I think we're ...game... for understanding this stuff if presented in the context of a board, dice, and cards.


Good point. In Stone Age, the value of a Tool right now is worth more than the value of a Tool a few turns away.
7 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Ken
United States
Crystal Lake
Illinois
flag msg tools
badge
Avatar
mbmbmbmbmb
Games that include costs to upgrade something to improve output/production are also good examples. Worth doing early, but often a waste compared to other alternatives late in the game.
2 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Chad Ellis
United States
Brookline
Massachusetts
flag msg tools
designer
publisher
badge
Avatar
mbmbmbmbmb
perfalbion wrote:
Games that include costs to upgrade something to improve output/production are also good examples. Worth doing early, but often a waste compared to other alternatives late in the game.


I actually don't like that example because the change there isn't due to time value of money but the (artificial in economic terms) end point. You start off trying to build up an economic engine and then work to transform that engine into VPs because your engine isn't worth anything.

From a Finance point of view, the value of investing only changes because the discount rate changes, not because you're at a later point in time.

(One of the things I like about Industrial Waste is that it connects your engine with VPs so that you're rewarded for improving your engine regardless of whether the game is close to ending or not.)
4 
 Thumb up
0.01
 tip
 Hide
  • [+] Dice rolls
Ken
United States
Crystal Lake
Illinois
flag msg tools
badge
Avatar
mbmbmbmbmb
Not sure if I agree there, Chad. Let's pretend we're talking about infrastructure investment (something we're way behind on as a nation). Investing in stuff that helps you make/do/support other stuff looks like money down the drain, until you try tying it to other things. So if the investment costs X over Y years but presents benefit Z every year after completion, then there's a financial analysis that's interesting.

The investment may not produce VP as an immediate result, but if investing 10 whatevers now nets you an additional 12 VP over time, there's a calculable benefit. And while it's not strictly time value of money, it's still worth thinking about.

Or is that finance 110?
3 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Chad Ellis
United States
Brookline
Massachusetts
flag msg tools
designer
publisher
badge
Avatar
mbmbmbmbmb
I'm not saying your point isn't useful but I don't like it as an example of time value of money because it's distorted by the end-game victory conditions.

In a normal finance sense, if the world in five years is similar to the world of today (i.e. same discount rate) then it should be just as good a decision to invest money for future cashflows then as it is now. All that matters in determining the relative value of a future cash flow is how far away it is and what the discount rate is.

By contrast, in many games future cash flows are worthless past "year" (or turn) X because the game is over. Part of what makes them strategically interesting is the judgment required to decide when to stop investing in productive capability and to start harvesting. It's not a question of X years and Y% interest but, "There's only two Provinces left so I'm not going to get another turn -- time to buy that Estate!"
4 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Ken
United States
Crystal Lake
Illinois
flag msg tools
badge
Avatar
mbmbmbmbmb
You need to get a copy of Pax Britannica, then.
2 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Ben Vincent
United States
Ridgefield
Washington
flag msg tools
Avatar
mbmbmbmbmb
And there are lots of games where money is worthless at the end, so you bid ridiculous sums for an incremental advantage that wouldn't make sense if it weren't the last turn. (I'm thinking of Age of Steam as an example).

The benefits from public infrastructure improvements aren't typically measured in income however. Rather we're looking at things like accident reduction or travel time reduction (in the transportation arena). Those are fairly easy to talk about in terms of dollars, by calculating the societal costs of accidents and delay. When calculating a benefit/cost ratio for highway safety projects we typically look at a 20 year span to determine in the project is cost effective.

Other projects, like retrofitting bridges to better withstand earthquakes, are much more difficult to calculate a benefit for. It's more like insurance against a catastrophic event. I'm struggling to think of a game equivalent.
2 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
United States
flag msg tools
badge
Avatar
mbmbmbmbmb
Chad_Ellis wrote:
I'm not saying your point isn't useful but I don't like it as an example of time value of money because it's distorted by the end-game victory conditions.

In a normal finance sense, if the world in five years is similar to the world of today (i.e. same discount rate) then it should be just as good a decision to invest money for future cashflows then as it is now. All that matters in determining the relative value of a future cash flow is how far away it is and what the discount rate is.

By contrast, in many games future cash flows are worthless past "year" (or turn) X because the game is over. Part of what makes them strategically interesting is the judgment required to decide when to stop investing in productive capability and to start harvesting. It's not a question of X years and Y% interest but, "There's only two Provinces left so I'm not going to get another turn -- time to buy that Estate!"


I really wanted to tip this as well, but your Dominion reference ruined it.
1 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
J
United States
Hawaii
flag msg tools
badge
Avatar
mbmbmbmbmb
Chad_Ellis wrote:
perfalbion wrote:
Games that include costs to upgrade something to improve output/production are also good examples. Worth doing early, but often a waste compared to other alternatives late in the game.


I actually don't like that example because the change there isn't due to time value of money but the (artificial in economic terms) end point. You start off trying to build up an economic engine and then work to transform that engine into VPs because your engine isn't worth anything.

From a Finance point of view, the value of investing only changes because the discount rate changes, not because you're at a later point in time.

(One of the things I like about Industrial Waste is that it connects your engine with VPs so that you're rewarded for improving your engine regardless of whether the game is close to ending or not.)

Goa, Power Grid: Factory Manager, and Agricola do the same.
2 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
David C
United States
Aurora
Colorado
flag msg tools
badge
Avatar
mb
http://www.star-telegram.com/2011/02/04/2823930/myth-sold-as...

Basically an independent area shows Chicago got the short-end of the stick.
 
 Thumb up
 tip
 Hide
  • [+] Dice rolls
Front Page | Welcome | Contact | Privacy Policy | Terms of Service | Advertise | Support BGG | Feeds RSS
Geekdo, BoardGameGeek, the Geekdo logo, and the BoardGameGeek logo are trademarks of BoardGameGeek, LLC.