Author: philg

I was just about to recycle the annual report that I received from Brookline Bancorp, a small savings and loan here in Massachusetts that is presumably typical of an old-school bank. Then I thought it might be interesting to see how the sleepy old way of doing business fared in 2008.

The bank had assets of $2.6 billion. Of that, more than $2 billion was money that it expected to get repaid on loans it had issued to borrowers. As long as the Massachusetts real estate market does not collapse, this money should continue to flow in. The bank allows only $28 million for expected loan losses, roughly 1% of the total owed to them. Loans that had been sold upstream and converted into cash had been invested almost exclusively in government-guaranteed securities (some of them Fannie Mae and the like, which were not explicitly guaranteed until recently).

Profit before taxes was $21 million. Roughly 40 percent of that profit was paid in taxes, leaving $12.8 million for investors, down from $21 million in 2006. (I.e., an investor in Brookline would give up roughly 50 percent of his or her profits to the government through the corporate tax and then through state and federal income tax on dividend payments.)

How did the employees do? They were paid $21 million in 2008, up from $19 million in 2006. The 74-year-old CEO was paid more than 10 percent of the total received by all 220 full-time employees. Richard P. Chapman, Jr. earned $2.24 million in 2008 (100X what a teller earns), $2.2M in 2007, and $1.7M in 2006. Was it necessary to pay the guy this much to prevent another bank from hiring him away? Presumably not, as his letter to shareholders indicated that he felt that he was too old to continue as CEO and would be retiring this year.

How does a guy at the end of a long career in local banking see our prospects? “All the risks in 2009 seem on the down side,” writes Mr. Chapman.

[Could the Board have gotten someone to manage 220 people for less than $2.24M? Consider Gary Kelly, the 52-year-old CEO of Southwest Airlines. He earned about $1M in 2008 (source) while managing an enterprise with $11 billion in revenue and more than 35,000 employees. Gary Kelly works in a much more challenging industry and is at much greater risk of having to work evenings or weekends, especially if there is a problem with one of Southwest’s more than 500 Boeing 737s.]

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I flew with my first helicopter instrument student today (ink still wet on my Helicopter CFII). He drove all the way to Boston from Dayton, Ohio to fly with us because he hadn’t been happy with the instructors in his region. The guy was a reasonably good instrument pilot but somewhat befuddled with the big challenges of doing approaches. His instructors had taught him to start a timer at the final approach fix, even on an ILS in case the glide slope failed and they wanted to turn it into a localizer approach. He was supposed to use a timer to hold, and a timer for procedure turns, even though his previous trainer aircraft had a Garmin 430 GPS. They hadn’t taught him to use more than the most basic features of the Garmin.

I pointed out that the new FAA Practical Test Standards required an applicant to use a moving map if available. I noted that a professional crew of two airline pilots would not try to salvage an ILS into a localizer approach if the glide slope were to fail. Since they did not brief the LOC approach they would go missed, ask for delay vectors, brief the LOC approach and come back to do it. Why would a general aviation pilot by himself try to do something that an airline crew wouldn’t do?

What about timing? The Garmin shows you where to hold, how to enter the hold, where to start procedure turns, when you’ve reached the missed approach point. Why would you run a timer to second-guess the Garmin? If the Garmin fails, ask for vectors from ATC.

I told him that I had recently passed an ATP checkride where I timed nothing, telling the examiner that I was going to turn off my brain and rely on the Garmin. Why was he making his instrument checkride tougher than my ATP ride?

He is doing great and I think he’ll be ready for a checkride in another week or so. I said “As soon as you can do all of this with about 20 percent of your attention, you’re ready. You need to save the other 80 percent to watch for and handle the unexpected.”

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The April 9, 2009 BusinessWeek has an interesting article on Jack Bogle, the founder of Vanguard, which pioneered low-fee index funds. Some excerpts…

U.S. family wealth plummeted 18% last year, the most since the 1930s; $9 trillion in stock market value has vanished since 2007 … the financial services industry took home some $500 billion in fees last year. “What the hell for?” he thunders. “If they looked after other people’s money with the same care they look after their own, we wouldn’t have to be bailing out banks.”

“This is the most troubling economy and the worst bear market I’ve ever seen….Our system has failed.”

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On Saturday morning, I flew a helicopter sightseeing tour over Boston. The passengers were Matt, his friend Dave, and his girlfriend Shannon. Unbeknownst to Shannon, Matt’s friends and family had hung a few signs in the windows on the 52nd floor of the Prudential Center: see the photo.

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A friend visiting from Berkeley had recently completed his taxes. As a Millionaire for Obama, he complained that he didn’t pay a very high percentage of his income in tax. Most of his money came from dividends paid by U.S. public corporations and the tax rate on “qualified dividends” is only 15 percent, so he thought he hadn’t done his fair share for our new Washington-run command economy (and more importantly that other fatcats hadn’t paid their share). I explained that, as an investor in these companies, his profits had already been taxed at some of the highest rates in the world (source) through state and federal corporate profits taxes. The final 15 percent tax at the personal level was just an icing on the cake that gave the federal government close to a 50 percent share of any profits earned by a U.S. corporation. Not to mention California state income tax at 9.3 percent.

“It should be more,” he noted. How much more could it be before the company would move offshore? Or stop paying a dividend and use the money to repurchase its shares (thus driving up their value for eventual cashing in as a capital gain)? “Tax rates used to be a lot higher on guys like me,” he noted. thinking of himself as a truly rich guy. Back in the FDR days, the top rate was indeed high, but it started at $5 million per year in annual income, equivalent to a $75 million/year salary today (AIG wages! (source)).

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To see how various federal government economic initiatives compare in size, check out the graphic at the bottom of http://www.theatlantic.com/doc/200905/map-federal-reserve (click to enlarge and then zoom in).

[One good thing about all of this new federal spending is that it takes Boston’s Big Dig project out of the penalty box. Having cost $15 billion and taken years longer than expected, the Big Dig was formerly one of the first things that came to mind when people wanted an example of government waste. Now that $15 billion looks like a bargain. The taxpayers actually got something for their money, i.e., an additional tunnel to Logan Airport and a cosmetically improved downtown.]

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I can’t figure out why we pay $500 billion per year in taxes to support our military and yet American ships are subject to piracy off the coast of Somalia. In a city where things have gotten out of control, the military imposes a curfew and shoots anyone who is found out on the street after dark. How come the combined military forces haven’t imposed a curfew on this stretch of the ocean? Legitimate merchant ships would register at www.iamnotapirate.com. Instead of expensive and slow destroyers, the military would use cheap and fast AC-130 airplanes. If the airplane crew saw a suspicious-looking and unregistered boat, it would sink it with a few rounds from 4000′. It is a big area and presumably they’d miss some, but you’d think a 10 percent daily chance of being sunk would be enough to deter any unauthorized vessels.

A simpler idea would be to impose the curfew on boats going in and out of Somali ports. Restrict unregistered boats to within 6 miles of the beach. Fly two AC-130s in opposite directions up and down the coast, approximately 10 miles offshore, sinking any suspicious-looking and unregistered boat.

An argument against this approach is that these are international waters, traditionally open to all. However, these are extraordinary times. What is wrong with saying these international waters are going to be open only by permission of a group of navies? International waters are already subject to some restrictions. One cannot drive up alongside a battleship in the open Atlantic. Why can’t a battleship say “I am operating near Somalia for a while and I don’t want any uninvited company?

What’s wrong with the curfew idea? Must we really continue to (1) pay 5% of our GDP to support our military, and (2) simultaneously read every day about our ineffective struggle against Somali teenagers?

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Here’s an idea for Sunday…

If you’ve ever wondered why that expensive Italian “extra virgin” olive oil didn’t taste so great, recall the recent New Yorker magazine story where it was revealed that bottles labeled “Italian olive oil” are most often Turkish hazelnut oil mixed with some other stuff. Stop at Formaggio Kitchen in West Cambridge to pick up a three-liter box of real olive oil. This “Arbequina D.O.P. Siurana” oil comes from Spain, where they haven’t figured out the hazelnut oil trick yet, and is in a box with an internal plastic bladder, like box wine. This keeps the oil from going slightly rancid after the container is opened (oil from an opened bottle, even if stored in the dark, tends to change in taste after a week or so). The box is cardboard, so it protects the oil from light even if kept on the counter. The cost is $50 for three liters, about the same as other good olive oils. [If you don’t live in Boston, you can get similar oil at Whole Foods in a 0.5L glass bottle for about $15. Look for the “Unio” brand. To find the boxed olive oil in your region, check the importer’s Web site, miguelvalentino.com]

Continue west on Route 2 to Lincoln, Massachusetts to the Gropius House. This was supposedly the greatest suburban house built in the U.S. in the 1930s. The architect was such a genius that it cost 4X as much per square foot to build as the average American house and consequently… had virtually no influence on how houses in the U.S. were built going forward.

Have a sandwich at Verrill Farm in Concord for lunch.

To see what happens when an architect who understands construction methods and costs builds a modern house, visit an open house at One Hawk Hill Road (web site; Boston Magazine article), from 1-3 pm (Sunday, April 19). The architect is selling the place himself, so he’ll be on site to explain how things were made. It is a beautiful light-filled 4 BR house with balconies off the bedrooms. It is just off Conant Road and Old Conant Road, one of the nicest neighborhoods in Lincoln, and across the street from Valley Pond, which has a swimming beach and boating club.

Turn left from Conant Road onto Route 117 and Dairy Joy is on your left for soft ice cream, hot dogs, and other delicious junk food (high prices; no public restroom).

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On Friday I went up to Concord, New Hampshire for my Helicopter ATP and CFII checkrides with the FAA’s designated examiner, Joe Brigham. The Airline Transport Pilot certificate, which I already have for airplanes, is required for the captain of a huge helicopter used in scheduled air carrier service, and tests one’s ability to fly precisely solely by reference to instruments. The CFII enables one to teach helicopter instrument students, a much calmer environment than teaching primary helicopter students.

I had prepared for the checkride by practicing instrument flying while wearing a hood, to simulated cloudy weather, and doing some moderately crazy maneuvers such as autorotations under the hood (simulating an engine failure in the clouds).

After 3.7 hours of flying, mostly under the hood, I was feeling moderately heroic. Joe had chosen the New England airport with the bumpiest weather that day, winds gusting to 26 knots over the nearby hills and mountains. There were 1000 foot-per-minute updrafts and downdrafts at times. Somehow I didn’t manage to scare Joe too badly, exceed any aircraft limitations, or wander outside of the ATP standards (+/- 50′ of altitude), so I came back with two temporary certificates in my wallet.

Once back at Hanscom Field, I decided to linger and prepare the helicopter for a friend who would be doing a night flight. I had removed the left seat controls for the solo flight back from New Hampshire and was reinstalling them when a retaining pin for the cyclic handle slipped out of my hand, fell on the floor, and rolled into a hole behind the left seat’s right antitorque pedal (something that had never happened to me in five years of flying helicopters). Now the dual cyclic could not be installed and who knew whether the loose pin in the belly would interfere with anything critical. I grounded the helicopter, reflecting on Dirk Laukien’s observation that “pilots are notoriously stupid.” Then I noticed that the Gulfstream G-IV with which we share a hangar had its door open. I found Duane, the mechanic who lives with the Gulfstream, and asked him if he could think of any clever way to get the pin out. Duane brought out a magnet on a stalk and tested it with the pin from our other R44 to confirm that the pin would stick to the magnet. Then he slid the stalk into the hole behind the rudder pedal and came back up with the pin seconds later.

I’ve added myself to our helicopter instrument rating page. I probably should ground myself from monkeying with the removable controls, though…

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… turns out to be $100,000 per hour. Here’s an ABC News story about the U.S. military trailing a potentially hostile Cessna 172 (weighs less than an old VW Beetle) coming in from Canada. The plane was tailed by two F-16 fighter jets for five hours and we evacuated the Wisconsin State Capitol building. The article notes that each F-16 costs $50,000 per hour to operate (remember that this is a single-engine airplane whose acquisition cost is half that of a Gulfstream; let’s not ask what it will cost the USAF to operate the new F-22 fighter jet!).

I’m surprised that the F-16s were able to stay aloft, especially at such a low (fuel-inefficient) altitude, for so long.

The real story here is probably what we can expect as the government takes over ever larger sectors of the economy. Suppose that an average citizen had decided to intercept and follow a Cessna 172. He or she would have hopped in a Mooney or a Bonanza, both substantially faster than the 172, and spent $100 per hour on gas and overhaul reserve. When the government tries to accomplish the same task, it does a more thorough job (2 planes, armed), but it costs 1000 times as much.

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