Eliminate Tax Incentive for Leverage

The rich, as Voltaire said, require an abundan...Image by Renegade98 via Flickr

Steve Randy Waldman makes a case for eliminating the tax incentive for corporate and individuals to borrow. I think it is a fair argument but I would not eliminate it but reduce it to a point where the marginal cost of bankruptcy is greater than the marginal benefit to borrow. Of course determining the point of inflection is hard as it is difficult to gauge the ability to quantify the above cost-benefit structure by managers of businesses. Here is a excerpt from his post, which I thought outlined the theory of his argument:

According to canonical financial theory a firm’s debt/equity split, or “capital structure“, should have no effect on overall firm value. It’s just different ways of slicing up the same money pie, in a common metaphor. But if you introduce tax deductions for debt payments, the equation changes. Then the theory predicts that a rational firm should load up on debt financing, in order to capture the benefit of the “interest tax shelter“. If bankruptcy were not an issue, rational firms would move to ~100% debt financing in order to extract the largest possible subsidy. With bankruptcy a possibility, a rational firm loads up on debt until the marginal increase in bankruptcy risk outweighs the marginal benefit of the subsidy. But if imperfect managers underestimate bankruptcy risk during periods of stability, they may unwittingly (or purposefully, if there are agency problems) bring firms close to the brink, provoking traumatic failures when the gales of an untamed business cycle blow strong and hard. By covering a large fraction of corporate interest payments, the government effectively subsidizes financial risk-taking that serves no operational purpose but generates real social costs.

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Taleb goes to Congressional committee hearing

View of Capitol Hill from the U.S.Image via Wikipedia

Nicholas Nassim Taleb discussing the Financial Crisis causes and solutions with the US Congress. His advice is quite simple:

  1. De-leverage the system
  2. Stop transferring debt from private sector to public sector through bailouts
  3. Do not do deficit spending i.e. Stop printing money
  4. Reduce the size of banks, have many banks and remove the Too Big To Fail syndrome
  5. Do not pass laws thinking you understand or stop Risks to the system, because we don’t understand Risk as we live in a Complex world. Putting rules to stop bad behavior in this complex world is naive thinking.

I agree with Mr.Taleb…

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Its official – accepted into the PhD program in University of Iceland

So it is official now! I have been accepted into the PhD program in Economics in University of Iceland. My advisor is Dr.Helgi Tomasson. I need to ask him to update his profile in English. Anyway, we have been working on a paper to analyze the Icelandic Krona. I have written about it in my previous posts. We are simulating a Diffusion Process to model the white noise and map that to the empirical data of the ISK-USD exchange rate. This would be our first stab at this approach… as part of my thesis I will be using more sophisticated methods and generalize the conclusions to influence policy choices in Iceland.

10 things Great Companies and Great Investors do…

Sand Hill Road sign from 280 north. "KTVC...Image via Wikipedia

Given that I have been thinking about starting out a Venture Capital company, I have been reading the blogs of veteran VCs
and Entrepreneurs. I like
Fred Wilsons blog and here he talks about what 10 things great companies do, to counter that Matt Blumberg has written about what 10 things great investors do. I thought both were worth noting.

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The Healthcare debate in the US

I saw a very interesting status posting request in Facebook by couple of my friends. It read :
” No one should die because they cannot afford health care, and no one should go broke because they get sick. If you agree, please post this as your status for the rest of the day.”
I agree with the message… I don’t believe anyone will disagree, let me rephrase that majority will agree. I am seriously confused about the debate. I think we are mixing the overall goal with the process and method. I don’t think even the cold hearted Insurance Companies, Big Pharma or AMA will disagree with the above statement. I don’t think it is a fair argument that Big Pharma, insurance companies etc are there only to make money.
I think many of them actually have Good Vision statements that drive them. Just to clarify I went to their websites to see what they set out as their vision, here are some excerpts:

Pfizer: We dedicate ourselves to humanity’s quest for longer, healthier, happier lives through innovation in pharmaceutical and consumer health products.

Our Mission

We will become the world’s most valued company to patients, customers, colleagues, investors, business partners and the communities where we work and live.

Eli Lilly: Lilly makes medicines that help people live longer, healthier, more active lives

Three long established core values guide Eli Lilly and Company in all that we do:


We conduct our business consistent with all applicable laws and are honest in our dealings with customers, employees, shareholders, partners, suppliers, competitors, and the community.


We pursue pharmaceutical innovation, provide high-quality products, and strive to deliver superior business results. We continually search for new ways to improve everything we do.

Respect for People

We maintain an environment built on mutual respect, openness, and individual integrity. Respect for people includes our concern for all people who touch or are touched by our company: customers, employees, shareholders, partners, suppliers, and communities.

Ok with that said, yes, mistakes are made by Pharma companies of course it is exasperated because of the sector they are part of. I don’t believe the Government can solve anything, it all comes down to the people. Government should GOVERN, not OWN, MANAGE or CONTROL businesses. I would say set parameters for the Insurance companies and pharmaceutical companies to work under. You don´t have to do that by launching a Governmental Insurance Company! If the issue is Insurance companies need to cover people with pre-existing conditions make that  a law, let the market decide what should be the price for such a service. Artificially subsidizing all the case through a pseudo government insurance plan makes the quality of health care go down.

I want to see the entire plan proposed by the White house because I see a lot of chatter and not much facts. Will post my finding after I read the proposal.