Who’s Winning the Clean Energy Race? 2012 Edition
Source: Pew Charitable Trusts
In less than a decade, clean energy transitioned from novelty products to the mainstream of world energy markets. The sector emerged not so much in a linear fashion as episodic—in fits and starts associated with the worldwide economic downturn, continent-wide debt crises, national policy uncertainty, and intense industry competition. Through it all, however, the clean energy sector moved inexorably forward, with overall investment in 2012 five times greater than it was in 2004.
This report examines key financial, investment and technological trends related to clean energy in the Group of Twenty (G-20), the world’s leading economies. It documents the continued growth and dynamism of clean energy investment in these economies. Countries that succeed in attracting investment can realize the economic, security and environmental benefits of the global race to harness clean, renewable energy sources.
Who’s Winning the Clean Energy Race?Who’s Winning the Clean Energy Race: 2012 Edition documents how the old order is changing technologically and geographically. Clean energy is gaining ground in the global energy mix. Even as several pioneering countries have stumbled, new markets have opened, and the center of gravity for clean energy investment has shifted from West to East.
CREW Releases New Report Examining the Influence of High Frequency Traders in Washington
Source: Citizens for Responsibility and Ethics in Washington (CREW)
Today, Citizens for Responsibility and Ethics in Washington (CREW) released a new report, Rise of the Machines, detailing the growing political influence of high frequency traders in the nation’s capital. High frequency trading, a complicated and controversial method of securities trading, has begun drawing scrutiny from government regulators, prompting skyrocketing lobbying spending and campaign contributions by the industry.
CREW studied the lobbying and campaign contribution records of 48 companies that specialize in high frequency trading. Between the 2008 and 2012 election cycles, these firms’ campaign contributions soared by a staggering 673 percent, up from $2.1 million during the 2008 election cycle to $16.1 million during the 2012 cycle. Over this time period, these firms contributed more than $21 million to federal candidates, party committees, PACs, and super PACs.
Additionally, since 2008, these firms have spent more than $10 million lobbying Congress, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. These companies’ total lobbying spending jumped 93 percent between 2008 and 2012, from $1.4 million to $2.7 million. The biggest single-year increase came between 2009 and 2010, while Congress debated heavily lobbied provisions of what would eventually become the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Despite strong gains in the stock market over the past year, and the Dow Jones Industrial Average’s reaching record highs in the past month, stock ownership among U.S. adults is at its lowest level in Gallup trends since 1998, essentially unchanged from a year ago. Just over half of Americans, 52%, now say they personally, or jointly with a spouse, own stock outright or as part of a mutual fund or self-directed retirement account.
“Characteristics of the Population With Consumer-Driven and High-Deductible Health Plans, 2005–2012,” and “Retirement Plan Participation and Asset Allocation, 2010”
Source: Employee Benefit Research Institute
Characteristics of the Population With Consumer-Driven and High-Deductible Health Plans, 2005–2012
- Generally, the population of adults within both high-deductible (HDHP) and traditional health plans have been split 50–50 between men and women. In contrast, differences in gender have been found between consumer-driven health plan (CDHP) enrollees and those with traditional coverage.
- In most years, CDHP enrollees were less likely than those with traditional coverage to be between the ages of 21 and 34, and the CDHP population was more likely than traditional-plan enrollees to be in households with $150,000 or more in income in every year except 2009 and 2010.
- CDHP enrollees were roughly twice as likely as individuals with traditional coverage to have college or post-graduate educations in nearly all years of the survey.
- CDHP enrollees have consistently reported better health status than traditional-plan enrollees, exhibiting better health behavior than traditional-plan enrollees with respect to smoking and (except for 2010 and 2011), exercise, and sometimes obesity rates.
Retirement Plan Participation and Asset Allocation, 2010
- The likelihood of a working family head participating in a retirement plan increased with the size of his or her employer. In 2010, among family heads working for employers with 10–19 employees, 22.4 percent participated in a plan, compared with 67.2 percent of family heads who worked for employers with 500 or more employees.
- In 2010, 18.9 percent of family heads who participated in an employment-based retirement plan had a defined benefit (DB) plan only, while 65.0 percent had a defined contribution (DC) plan only, and the remaining 16.1 percent had both a DB and a DC plan. This was a significant change from 1992, when 42.3 percent had a DB plan only, and 40.8 percent had a DC plan only.
- Asset allocation within a family head’s retirement plan seems to be affected by his or her ownership of other types of retirement plans. Those who own an IRA are more likely to be invested all in stocks if they also own a 401(k)-type of plan. Those who own a DB plan and a 401(k)-type plan are less likely to allocate their DC plan to all interest-earning assets.
P/C Insurers’ Profits Rose in 2012, But Profitability Lagged Long-term Norm as Sandy Losses and Drop in Invest ment Gains Hit Results
Source: Insurance Information Institute
Despite the impact of Superstorm Sandy and smaller investment gains, private U.S. property/casualty insurers’ net income after taxes grew to $33.5 billion in 2012 from $19.5 billion in 2011, with insurers’ overall profitability as measured by their rate of return on average policyholders’ surplus climbing to 5.9 percent from 3.5 percent. At 5.9 percent, insurers’ overall rate of return lagged their 8.9 percent average rate of return for the 54 years since the start of ISO’s annual data in 1959.
Insurers’ pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — rose to $33.3 billion in 2012 from $15.4 billion in 2011.
Improvement in underwriting results drove the increases in insurers’ pretax operating income, net income after taxes, and overall rate of return, with net losses on underwriting dropping to $16.7 billion in 2012 from $36.2 billion in 2011. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 103.2 percent for 2012 from 108.1 percent for 2011, according to ISO, a Verisk Analytics company (Nasdaq:VRSK), and the Property Casualty Insurers Association of America (PCI).
The decline in net losses on underwriting is attributable to premium growth and a drop in net losses and loss adjustment expenses (LLAE). Net written premiums climbed 4.3 percent in 2012 to $457 billion, and net earned premiums grew 3.4 percent to $449.4 billion. Conversely, net LLAE fell 2.8 percent in 2012 to $335 billion. The decline in net losses on underwriting would have been bigger if not for increases in underwriting expenses and dividends to policyholders, which both rose last year.
The improvement in underwriting results was partially offset by a drop in net investment gains, a decline in miscellaneous other income, and higher taxes. Net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell $2.3 billion to $53.9 billion in 2012 from $56.2 billion in 2011 as miscellaneous other income dropped $0.2 billion to $2.3 billion from $2.5 billion and insurers’ federal and foreign income taxes rose $3 billion to $6 billion from $3 billion.
New GAO Report
Source: Government Accountability Office
401(K) Plans: Labor and IRS Could Improve the Rollover Process for Participants. GAO-13-30, March 7.
Source: United States Senate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs
JPMorgan Chase & Company is the largest financial holding company in the United States, with $2.4 trillion in assets. It is also the largest derivatives dealer in the world and the largest single participant in world credit derivatives markets. Its principal bank subsidiary, JPMorgan Chase Bank, is the largest U.S. bank. JPMorgan Chase has consistently portrayed itself as an expert in risk management with a “fortress balance sheet” that ensures taxpayers have nothing to fear from its banking activities, including its extensive dealing in derivatives. But in early 2012, the bank’s Chief Investment Office (CIO), which is charged with managing $350 billion in excess deposits, placed a massive bet on a complex set of synthetic credit derivatives that, in 2012, lost at least $6.2 billion.
The CIO’s losses were the result of the so-called “London Whale” trades executed by traders in its London office – trades so large in size that they roiled world credit markets. Initially dismissed by the bank’s chief executive as a “tempest in a teapot,” the trading losses quickly doubled and then tripled despite a relatively benign credit environment. The magnitude of the losses shocked the investing public and drew attention to the CIO which was found, in addition to its conservative investments, to be bankrolling high stakes, high risk credit derivative trades that were unknown to its regulators.
The JPMorgan Chase whale trades provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system. They also demonstrate how inadequate derivative valuation practices enabled traders to hide substantial losses for months at a time; lax hedging practices obscured whether derivatives were being used to offset risk or take risk; risk limit breaches were routinely disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory oversight was too easily dodged or stonewalled; and derivative trading and financial results were misrepresented to investors, regulators, policymakers, and the taxpaying public who, when banks lose big, may be required to finance multi-billion-dollar bailouts.
The JPMorgan Chase whale trades provide another warning signal about the ongoing need to tighten oversight of banks’ derivative trading activities, including through better valuation techniques, more effective hedging documentation, stronger enforcement of risk limits, more accurate risk models, and improved regulatory oversight. The derivatives overhaul required by the Dodd-Frank Wall Street Reform and Consumer Protection Act is intended to provide the regulatory tools needed to tackle those problems and reduce derivatives-related risk, including through the Merkley-Levin provisions that seek to implement the Volcker Rule’s prohibition on high risk proprietary trading by federally insured banks, even if portrayed by banks as hedging activity designed to lower risk.
See also: Exhibits (PDF)
Proxy Monitor Report — Winter 2013 — Political Spending, Say on Pay, and Other Key Issues to Watch in the 2013 Proxy Season
Source: Manhattan Institute
In recent years, a subset of shareholder activists has sought to advance social or political causes by proposing shareholder resolutions on proxy ballots presented at corporate annual meetings. To study this phenomenon, the Manhattan Institute in 2011 launched its Proxy Monitor project, centered on the ProxyMonitor.org online database, the first publicly available, searchable resource that catalogs shareholder proposals submitted to large corporations (now updated to include the 250 largest U.S. publicly traded companies by revenue, as ranked by Fortune magazine). The ProxyMonitor.org database also includes shareholder-advisory votes on executive compensation, now required at least triennially for all publicly traded companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
This, the 16th in a series of reports and findings published under the auspices of the Manhattan Institute’s Proxy Monitor project, previews the 2013 proxy season—the period between mid-April and late June when most public companies hold annual meetings.
Part I of this report looks at the 2012 shareholder-proposal record, including submission trends, proposal subject matter, proposal sponsors, and proposals receiving majority support. This analysis contains shareholder-proposal data for all 250 companies in the ProxyMonitor.org database as well as a broader assessment of shareholder-proposal submissions that did not make proxy ballots, as determined through a company survey. A special-focus section examines shareholder proposals seeking further corporate disclosure of political spending, as well as recent regulatory efforts and litigation designed to achieve that end.
Part II surveys executive-compensation advisory vote results for 2012 and discusses a wave of 2012 shareholder litigation based on companies’ executive-compensation advisory vote disclosures. A special-focus section examines the executive-compensation record of the largest proxy-advisory firm, Institutional Shareholder Services (ISS), by tracking its 2011 recommendations against subsequent share-price movement.
Part III looks forward to the 2013 proxy season, with a recap of early shareholder-voting results for companies holding annual meetings in the first six weeks of 2013.
Source: International Monetary Fund
African bond markets have been steadily growing in recent years, but nonetheless remain undeveloped. African countries would benefit from greater access to financing and deeper financial markets. This paper compiles a unique set of data on corporate bond markets in Africa. It then applies an econometric model to analyze the key determinants of African government securities market and corporate bond market capitalization. Government securities market capitalization is directly related to better institutions and interest rate volatility, and inversely related to the fiscal balance, higher interest rate spreads, exchange rate volatility, and current and capital account openness. Corporate bond market capitalization is directly linked to economic size, the level of development of the economy and financial markets, better institutions, and interest rate volatility, and inversely related to higher interest rate spreads and current account openness. Policy implications follow.
Source: Congressional Research Service (via Federation of American Scientists)
This report presents current data on estimated ownership of U.S. Treasury securities and major holders of federal debt by country. Federal debt represents the accumulated balance of borrowing by the federal government. To finance federal borrowing, U.S. Treasury securities are sold to investors. Treasury securities may be purchased directly from the Treasury or on the secondary market by individual private investors, financial institutions in the United States or overseas, and foreign, state, or local governments. Foreign investment in federal debt has grown in recent years, prompting questions on the location of the foreign holders and how much debt they hold.
This report will be updated annually or as events warrant.
Source: Congressional Research Service (via Federation of American Scientists)
Given its relatively low savings rate, the U.S. economy depends heavily on foreign capital inflows from countries with high savings rates (such as China) to meet its domestic investment needs and to fund the federal budget deficit. The willingness of foreigners to invest in the U.S. economy and purchase U.S. public debt has helped keep U.S. real interest rates low. However, many economists contend that U.S. dependency on foreign savings exposes the U.S. economy to certain risks, and some argue that such dependency was a contributing factor to the U.S. housing bubble and subsequent global financial crisis that began in 2008.
China’s policy of intervening in currency markets to limit the appreciation of its currency against the dollar (and other currencies) has made it the world’s largest and fastest growing holder of foreign exchange reserves, especially U.S. dollars. China has invested a large share of these reserves in U.S. private and public securities, which include long-term (LT) Treasury debt, LT U.S. agency debt, LT U.S. corporate debt, LT U.S. equities, and short-term debt. As of June 2011, China was the largest holder of U.S. securities, which totaled $1.73 trillion. U.S. Treasury securities constitute the largest category of China’s holdings of U.S. securities—these totaled $1.16 trillion as of September 2012, but were down from their peak of $1.31 trillion in July 2011.
China’s large holdings of U.S. securities have raised a number of concerns in both China and the United States. For example, in 2009, Chinese Premier Wen Jiabao stated that he was “a little worried” about the “safety” of China’s holdings of U.S. debt. The sharp debate in Congress over raising the public debt ceiling in the summer of 2011 and the subsequent downgrade of the U.S. long-term sovereign credit from AAA to AA + by Standard and Poor’s in August 2011 appears to have intensified Chinese concerns. In addition, Chinese officials have criticized U.S. fiscal monetary policies, such as quantitative easing by the U.S. Federal Reserve, arguing that they could lead to higher U.S. inflation and/or a significant weakening of the dollar, which could reduce the value of China’s U.S. debt holdings in the future. Some Chinese analysts have urged the government to diversify its reserves away from U.S. dollar assets, while others have called for more rapid appreciation of China’s currency, which could lessen the need to hold U.S. assets.
Many U.S. policymakers have expressed concern over the size of China’s holdings of U.S. government debt. For example, some contend that China might decide to sell a large share of its U.S. securities holdings, which could induce other foreign investors to sell off their U.S. holdings as well, which in turn could destabilize the U.S. economy. Others argue that China could use its large holdings of U.S. debt as a bargaining chip in its dealing with the United States on economic and non-economic issues. In the 112th Congress, H.R. 2166 and S. 1028 would seek to increase the transparency of foreign ownership of U.S. debt instruments, especially China’s, in order to assess if such holdings posed potential risks for the United States. The conference report accompanying the National Defense Authorization Act of FY2012 (H.R. 1540, P.L. 112-81) included a provision requiring the Secretary of Defense to conduct a national security risk assessment of U.S. federal debt held by China. Many analysts argue that China’s holdings of U.S. debt give it little leverage over the United States because as long as China continues to hold down the value of its currency to the U.S. dollar, it will have few options other than to keep investing in U.S. dollar assets. A Chinese attempt to sell a large portion of its dollar holdings could reduce the value of its remaining dollar holdings, and any subsequent negative shocks to the U.S. (and global) economy could dampen U.S. demand for Chinese exports. They contend that the main issue for U.S. policymakers is not China’s large holdings of U.S. securities per se, but rather the high U.S. reliance on foreign capital in general, and whether such borrowing is sustainable.
If Congress and the President can’t reach an agreement on the federal budget by the end of the year, the simultaneous increase in taxes and cuts to entitlement programs will send the U.S. over a so-called “fiscal cliff” at the start of 2013. The effects of such an occurrence will be stark and sweeping, and a distinct and cohesive group of wealthy Americans that has emerged in recent years is preparing for austerity and risk aversion. Given the potential impact the fiscal cliff may have on this group, coined as the Mass Affluent in a recent Nielsen report, many have educated themselves on the subject and taken their opinions to the Web to opine on this rapidly evolving drama.
The Mass Affluent, which now account for 11 percent of all U.S. households, generally believe the expiring tax measures, commensurate rate hikes and expected volatility in the marketplace associated with the fiscal cliff will have notable financial repercussions for them.
In preparation, this group may be modifying their financial portfolios and investment strategies–tactics that may shift preferences for financial products and services.
Source: Harvard University
From Executive Summary (PDF):
Subsidies for retirement savings are among the largest tax expenditures in the United States and other developed economies. This fiscal year, the estimated cash-flow expenditure on retirement savings accounts such as 401(k)’s and IRA’s exceeded $100 billion in the U.S. (JCT 2012). The goal of these subsidies is to increase national saving and income security in retirement. Our study evaluates whether these subsidies accomplish this goal. Do tax subsidies encourage families to save more or do they induce them to shift money they would have saved anyway into tax-advantaged retirement accounts, with no net increase in savings?
Despite extensive research over the past three decades, we do not have a conclusive answer to this question because of a lack of high quality data on household wealth in the U.S. (Bernheim 2002). We therefore turn to data from Denmark, where we obtain 45 million observations on household balance sheets from administrative tax records. The Danish data provide useful insights for policy in the U.S. for two reasons. First, the structure of retirement savings plans in Denmark is broadly similar to the U.S. Second, savings decisions within retirement accounts – where good data are available in the U.S. – are similar across the two countries. Hence, we expect savings decisions outside retirement accounts – where the Danish data are of much higher quality – to be similar as well.
We begin by studying a reform in 1999 that sharply reduced the tax subsidy for contributing to retirement accounts for those in the top income tax bracket in Denmark. We find that the subsidy change had small impacts on total savings for two reasons. First, only 15% of individuals reduced retirement savings when the subsidy was reduced; the remaining 85% of individuals did not change their pension contributions at all. Second, the 15% who reduce pension contributions shifted nearly all the money they withdrew from pensions to other non-retirement accounts. Combining these two effects, we estimate that each $1 of government tax expenditure on retirement savings raises total national saving by 1 cent.
If subsidies have little impact on retirement saving, are there other policies that are more effective? Recent studies have shown that “nudges” such as automatic enrollment or defaults – which have no fiscal cost to the government – increase pension contributions (e.g., Madrian and Shea 2001, Thaler and Sunstein 2008). Again, however, it is unclear whether automatic contributions raise total savings or just induce individuals to save more in pensions while running down their balances in non-retirement accounts, leaving total saving unchanged.
We study the impacts of automatic contributions on total savings using two quasi-experimental approaches. First, we track individuals’ savings rates when they switch to jobs with higher or lower employer retirement contributions. These contributions are automatic in that they require no active choices by individuals. We find that increases in employer contributions substantially increase total savings: most individuals do not change their savings in non-retirement accounts at all when their employers contribute more to their pensions. Second, we study the impacts of a mandatory government savings plan that required everyone to automatically contribute 1% of their earnings to a retirement savings account from 1998-2003. Again, we find that this policy raised total pension savings and did not reduce savings in other accounts.
Why are automatic contributions so much more effective at raising savings than price subsidies? We find that there are two types of people in the economy: 15% are “active” savers who plan for retirement and respond to incentives, while 85% are “passive” savers who are not focused on their retirement savings and do not pay attention to policy changes. Price subsidies induce active savers to shift assets across accounts but have no impact on passive savers’ behavior. In contrast, automatic contributions raise the savings of passive savers. Passive savers tend to be less wealthy and financially prepared than active savers. As a result, automatic contributions not only have larger effects on aggregate savings than price subsidies, but also do more to increase the savings rates of those who are least prepared for retirement.
In sum, the findings of our study call into question whether tax subsidies are the most effective policy to increase retirement savings. Automatic enrollment or default policies that nudge individuals to save more could have larger impacts on national saving at lower fiscal cost.
Aging, Financial Literacy, and Fraud
Source: Social Science Research Network
We use a unique dataset to examine the financial literacy of older Americans and its importance for their financial decision making. The aging of the population and the shift to individual retirement accounts make this topic of growing importance to individual and societal well-being. First, we test how cognitive changes associated with aging impact financial literacy. We find that a decrease in cognition is associated with a decrease in financial literacy. A decrease in cognition also predicts a drop in self-confidence in general, but importantly, it does not predict a decrease in confidence in managing one’s own finances or in one’s financial knowledge. In fact, a decrease in cognition predicts increased overconfidence about one’s financial knowledge. Second, we test the hypothesis that overconfidence is a significant risk factor for being victimized by financial fraud. Financial fraud is a major threat to older Americans that is growing rapidly. We find that overconfidence in one’s financial knowledge is a significant predictor. A one standard deviation increase in overconfidence increases the odds of falling victim to fraud by 38%. The overconfidence of fraud victims is further demonstrated by their increased propensity to hold a concentrated investment. Our results suggest that increasing the financial awareness of older Americans is likely to help protect them against becoming victims of financial fraud.
Source: Congressional Research Service (via Federation of American Scientists)
The financial crisis implicated the over-the-counter (OTC) derivatives market as a major source of systemic risk. A number of firms used derivatives to construct highly leveraged speculative positions, which generated enormous losses that threatened to bankrupt not only the firms themselves but also their creditors and trading partners. Hundreds of billions of dollars in government credit were needed to prevent such losses from cascading throughout the system. AIG was the best-known example, but by no means the only one.
Equally troublesome was the fact that the OTC market depended on the financial stability of a dozen or so major dealers. Failure of a dealer would have resulted in the nullification of trillions of dollars worth of contracts and would have exposed derivatives counterparties to sudden risk and loss, exacerbating the cycle of deleveraging and withholding of credit that characterized the crisis. During the crisis, all the major dealers came under stress, and even though derivatives dealing was not generally the direct source of financial weakness, a collapse of the $600 trillion OTC derivatives market was imminent absent federal intervention. The first group of Troubled Asset Relief Program (TARP) recipients included nearly all the large derivatives dealers.
The Dodd-Frank Act (P.L. 111-203) sought to remake the OTC market in the image of the regulated futures exchanges. Crucial reforms include a requirement that swap contracts be cleared through a central counterparty regulated by one or more federal agencies. Clearinghouses require traders to put down cash (called initial margin) at the time they open a contract to cover potential losses, and require subsequent deposits (called maintenance margin) to cover actual losses to the position. The intended effect of margin requirements is to eliminate the possibility that any firm can build up an uncapitalized exposure so large that default would have systemic consequences (again, the AIG situation). The size of a cleared position is limited by the firm’s ability to post capital to cover its losses. That capital protects its trading partners and the system as a whole. Swap dealers and major swap participants—firms with substantial derivatives positions—will be subject to margin and capital requirements above and beyond what the clearinghouses mandate.
Swaps that are cleared will also be subject to trading on an exchange, or an exchange-like “swap execution facility,” regulated by either the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC), in the case of security-based swaps. All trades will be reported to data repositories, so that regulators will have complete information about all derivatives positions. Data on swap prices and trading volumes will be made public.
The Dodd-Frank Act provides exceptions to the clearing and trading requirements for commercial end-users, or firms that use derivatives to hedge the risks of their nonfinancial business operations. Regulators may also provide exemptions for smaller financial institutions. Even trades that are exempt from the clearing and exchange-trading requirements, however, will have to be reported to data repositories or directly to regulators.
This report describes some of the requirements placed on the derivatives market by the DoddFrank Act. It will be updated as events warrant.
Source: Congressional Research Service (via Federation of American Scientists)
The international investment position of the United States is an annual measure of the assets Americans own abroad and the assets foreigners own in the United States. The net position, or the difference between the two, sometimes is referred to as a measure of U.S. international indebtedness. This designation is not strictly correct, because the net international investment position reveals the difference between the total assets Americans own abroad and the total amount of assets foreigners own in the United States. These assets generate flows of capital into and out of the economy that have important implications for the value of the dollar in international exchange markets. Some Members of Congress and some in the public have expressed concerns about the U.S. net international investment position because of the role foreign investors are playing in U.S. capital markets and the potential for large outflows of income and services payments. Some observers also argue that the U.S. reliance on foreign capital inflows places the economy in a vulnerable position.