More Random Thoughts from the Road

Parked in JFK with 3 hours to kill. But hey, heading home!

– The worst Chinese food in this galactic quadrant has been identified: food court, Jet Blue terminal, JFK. The sad part: I ate about half of it before the ‘what the heck are you doing!?’ self-preservation alarms went off. Living, however briefly, dangerously.

– One additional ‘there are two kinds of people:’ pseudo-insights – there are people who reflexively think like business people, and people who don’t. In the imaginary Venn diagram of ‘how people think’ in my mind, there’s a huge overlap of ‘experimental hard scientists’ and ‘business people’ – both are trying to make something work, both are adjusting to feedback on the fly, and both are on the lookout for things that will ruin the experiment/business venture.

A lot of the reactions of business people to wacky political proposals has to do with the business people’s default mode of analysis: I’m trying to get something done here, how will this course of action/proposal/idea affect my efforts? So: knee-jerk reaction to taxes on business activities: bad bad bad! Taxes make it harder for me to get it done. More regulation? Bad bad bad! Same reason.

Business people are also very attuned to incentives. They – especially sales and marketing types – understand that people generally do things (like spend money or work hard to earn money) because of what they believe it will get them. Whenever I’m making small talk with business people, the topic of incentives almost invariably comes up under one guise or another.  Here’s an example: in my industry – equipment finance – companies called lessors buy equipment solely to lease it out to other companies called lessees. Because lessors often lease out a piece of equipment – we’re talking things like MRIs or mining equipment, items worth a lot of money and essential to the lessee’s business –  for about all of its useful life to one lessee, leases often look a lot like merely lending money to the lessee to buy the equipment. The lessor never really expects to get the equipment back.

Gripping stuff. With me so far? One thing people who don’t think like business people often miss: what shows up on a company’s books is very important, life and death to the company, even. In the big picture, investors and banks look at ‘the books’ in the form of quarterly and annual reports to determine if they will lend money to those businesses, and under what terms.  Therefore, boards of directors tend strongly to tie the compensation of chief executives to how the books look. The CEO, in turn, ties his executive team’s compensation to how the books look as well – the underlings get paid for good looking books, the CEO gets paid, the board is happy, banks lend money and bond buyers buy bonds at terms favorable to the company with the good-looking books.

Now, back to the ‘real’ lease versus the ‘loan faking it as a lease’.  The Financial Accounting Standards Board, or FASB, which sets the rules for how things look on the books, has set rules governing how a lessor needs to show on its books a really-truly true lease  versus a pretty much a loan to the lessee lease. Turns out the loan thing looks a bit better on the books than the real lease.

It’s important to note that the actual economics often favor the truly-true lease. What this means: it’s better for the lessor, the lessee or both that the lessor provide the lessee with a lease rather than a fake lease loan. But: the FASB rules, coupled with the Board’s insistence of good looking books each and every quarter, provide a strong incentive for lessors to put ONLY fake lease loans on their books. Every lessor is now incented to 1) do the economic right thing; yet 2) make sure whatever they do LOOKS like a loan.  This results in millions of dollars and hundreds of thousands of  man hours (at least!) to be spent each year making sure, as far as possible, that every transaction that hist the books is a fake lease loan thing.

This kind of stuff drives business people nuts. It also means that the typical business person is far more attuned to the unintended consequences a law/proposal/idea will have on people’s behavior. That’s their world, after all.

Are business people often greedy? Sure. What’s not clear is that they are any more likely to be greedy than anyone else. Either way, it is wrong to imagine that every time a business type opposes some political idea it is *only* greed that motivates him. It could be that he sees that the course of action – socialism, say – will hopelessly and terribly skew *incentives*, and that the unintended consequences will be terrible.

Author: Joseph Moore

Enough with the smarty-pants Dante quote. Just some opinionated blogger dude.

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