Business

American Society / Business / Economics / Financial / Political — 0 Comments
2
Sep 10

The Economy at Street Level

While we have examined macroeconomic issues extensively, rarely do we focus on the micro. We need to look at what is happening to real people.  Examining economics at street level is not as scientific or as mathematically precise as our econometric brethren would be.  We would probably fail the basic intro econ course at a prestigious academic institution.  Nevertheless, the timeless philosopher, Yogi Berra, says it well: “you can observe a lot by just watching.”

Walking

The best way to learn what is going on somewhere is to walk, not drive.  I live in a small city, a bedroom community for a larger city.  The median family income is $62,000 and the per capita income $35,000.  The city is racially diverse and attempts to cater to its upscale resident consumers.  Dropping my car for service at the local auto dealer (there are Porsche, Volvo, Mercedes, Lexus, Subaru and Buick dealers within walking distance),  I politely declined the courtesy shuttle and, to observe business conditions, walked home.   Covering about a mile through one part of our retail  and commercial district, I observed the following:

  • Ten retail establishments were vacant.
  • Each of several small office buildings had “space available” signs.
  • Each of the apartment buildings and garden apartment complexes I passed advertised one and two bedroom apartments for rent.
  • An office building which started construction six months ago has not progressed.
  • Almost every retail establishment had sales in progress, and restaurants advertised specials.
  • A major wind and rain storm hit our city in March.  Several damaged city trees have not been removed and badly buckled sidewalks have yet to be repaired.

Listening

The economy continues to impact friends, neighbors and family.  Here is what the Washington beltway political elites are not hearing:

  • One question, I regularly ask: on a percentage basis how much has your income declined from your most recent peak earnings year?  Other than one medical specialist who said his income has not declined, the response is a decline of 25-50%.
  • For an over-fifty executive, attorney, senior information technologist or finance specialist the job prospects are almost nil.   These are highly trained, experienced competent individuals who have been out of work from one to two years.  Unarticulated age discrimination is endemic in our system.  This type of candidate probably has a better chance of getting hit by a meteorite than getting a full time position with a firm.
  • Sending a high school senior to the state university has come back in vogue.  In the past, State U lacked the cache of the Ivy League or better private schools.  Suddenly this option has gained new luster.
  • Instead of the direct path to graduate school, new college graduates, even Ivy League grads, are scrambling for jobs.  Many new alumni of prestigious universities are interning with no pay or $10 per day stipends.  The entire economic value of graduate and even undergraduate degrees is under question.
  • Overseas vacations are out and domestic, and automobile vacations are in.  And we’ve all recently heard a new word:  staycation.
  • Since the banks have tightened lending requirements, the re-sale house market is virtually dead.  Sellers cannot find qualified buyers.
  • Small business owners and professionals have had their credit lines reduced, which de facto has cut back on business expansion.
  • Friends who are doctors and dentists are finding that they cannot fill their weekly schedules and are going to 3 and 4 day workweeks. Even in large firms, attorneys are having difficulty generating billable hours.
  • Home equity lines have been slashed, further undercutting spending plans.  I question why some of my high earning friends were using these lines for luxury expenditures in the first place.

It May Not Be Science but It Is Real Life

Again I have presented “street level” anecdotal information on the real economy.  I believe this anecdotal information more accurately presents the state of the economy, compared to the endless cheerleading from financial media and the Administration.

Perhaps some of the elite should bring their own cars in for service, avoid the courtesy shuttles, and walk home.    Rather than this cheerleading, what Yogi might say about our current recession is the real truth for many people: “it ain’t over until it’s over.”

GD Star Rating
loading...
  • Share/Bookmark
American Society / Business / Philanthropy / Political / Tax Policy — 0 Comments
30
Aug 10

Memes of the Rich and Famous

Memes (as in “creams”) are cultural ideas that are transmitted through media.  Memes are the cultural analog of genes.  We have numerous transmitters: social networking sites, television, blogs, and print media.  Our focus on the rich and their separation from the rest of American society is a growing meme.  Recent articles have raised the question of whether or not America is becoming two societies, the rich and everyone else:

Voyeuristic focus on the rich has always been an American obsession.  “Lifestyles of the Rich and Famous” obsessively peered into the lifestyles of wealthy athletes, entertainers and business people.  The show ran for eleven years.   The rich are now objects of scorn: hedge fund managers making money from the housing collapse; bankers, on the brink of bankruptcy, awarding themselves huge bonuses thanks to government loans and guarantees; and corporate executives receiving gigantic severance packages after corporate wrongdoing. See, e.g. Following the Hurd

We have moved beyond voyeurism and scorn.  Our anger at the rich suggests economic and political upheaval.

The Rich Separate from Us

Michael Lind’s article in Salon, Are the American People Obsolete? appears to be the genesis of this meme:

Have the American people outlived their usefulness to the rich minority in the United States? A number of trends suggest that the answer may be yes.

In every industrial democracy since the end of World War II, there has been a social contract between the few and the many. In return for receiving a disproportionate amount of the gains from economic growth in a capitalist economy, the rich paid a disproportionate percentage of the taxes needed for public goods and a safety net for the majority. See Are the American People Obsolete?

We have always needed ordinary people as consumers and soldiers.  But now globalization has undercut the first part of this bargain at the nation-state level.  The middle classes in China and India are more intriguing customers than debt-ridden, unemployed Americans. They are also cheap and productive producers.  For the second part, a volunteer professional military undercuts the bargain even further.

Lind points out the economic and political consequences of this new social contract:

If the American rich increasingly do not depend for their wealth on American workers and American consumers or for their safety on American soldiers or police officers, then it is hardly surprising that so many of them should be so hostile to paying taxes to support the infrastructure and the social programs that help the majority of the American people. The rich don’t need the rest anymore.  See Are the American People Obsolete?

Bring Back the Robber Barons

Previously, we discussed the role of the nineteenth and twentieth century American entrepreneur in Bring Back the Robber Barons.   Lind focuses on the same point:

As bad as they were, the robber barons depended on the continental U.S. market for their incomes. The financier J.P. Morgan was not so much an international banker as a kind of industrial capitalist, organizing American industrial corporations that depended on predominantly domestic markets. He didn’t make most of his money from investing in other countries. See Are the American People Obsolete?

The robber barons were integrated into American society, not living in privileged enclaves like Greenwich, Princeton or Palo Alto or foreign equivalents of London, Hong Kong or Singapore.  Thus, it was natural for the robber barons to focus their philanthropy in America.  Our new citizens of the world have a different mindset:

…philanthropists may be inclined to devote most of their charity to the desperate and destitute of other countries rather than to their fellow Americans.  See Are the American People Obsolete?

Implications

Richistan, A Journey Through the New American Wealth Boom and the Lives of the New Rich, describes the rich becoming their own virtual country.  The new rich feel no civic obligation or shared sense of sacrifice.  They can default on mortgages and avoid military service for their children.  We have written about a different time in America where even the scions of the rich and powerful felt obligated to join the war effort to defend the nation. See e.g. A Reputation as Good as Goldman Part II.   Now we hear whining and threats: “if the Bush tax cuts are repealed we will leave the country.”

Unwittingly, the Obama Administration has enabled the petulance of the rich by supporting the banks and Wall Street to the detriment of Main Street.  Faced with threats of emigration, it remains to be seen whether the Administration has the gumption to let the Bush tax cuts expire.  Apparently, the rich are ready to depart the United States if marginal tax rates rise from 35% to 39.6%.  We are not exactly talking about conscientious objectors to the Vietnam War fleeing to Canada.

We have learned much about the new rich, and it is not all to the good. Paraphrasing Sir Winston Churchill, we have already established their virtue; we are only haggling about their price.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Business / Financial / Political — 0 Comments
16
Aug 10

Bring Back the Robber Barons

Bill Gates and Warren Buffet have encouraged wealthy families to give half their wealth to charities, and many have done so.  One year into the effort, Buffet announced that forty families have agreed to pledge more than half their wealth to charity.   Emblematic of our current age, most of these families have made their money in the finance industry.

A Different Time in America

Once upon a time in America there was an entrepreneurial class that did more than shuffle pieces of paper.  They produced real things.  Historians originally referred to this group as “Robber Barons” because the large fortunes they amassed involved ruthless and sometimes uncompetitive business practices.  While some made their fortunes in finance, the overwhelming majority laid the foundation for America’s 20th century industrial dominance:

  • John Jacob Astor  (real estate, fur)
  • Andrew Carnegie (steel)
  • Jay Cooke (finance)
  • Charles Crocker (railroads)
  • Daniel Drew (finance)
  • James Buchanan Duke (tobacco)
  • James Fisk (finance)
  • Henry Morrison Flagler (railroads, oil, the Standard Oil company)
  • Henry Clay Frick (steel)
  • John Warne Gates (steel)
  • Jay Gould (railroads)
  • Edward Henry Harriman (railroads)
  • Milton S. Hershey (chocolate)
  • Mark Hopkins (railroads)
  • J.P.Morgan (banking, finance, steel, industrial consolidation)
  • Henry B. Plant (railroads)
  • John D. Rockefeller (Standard Oil)
  • John D. Spreckels (San Diego transportation, water, media)
  • Leland Stanford (railroads)
  • Cornelius Vanderbilt (railroads)

These individuals were also the backbone of American philanthropy.  For example, think of:  Carnegie (libraries); Rockefeller (University of Chicago, the Rockefeller Foundation) and Leland Stanford (Stanford University).  The Robber Barons not only focused on industrial wealth creation.  They were equally concrete and focused in charitable giving that provided tangible benefit to American institutions and society.

In contrast, the Gates Foundation focuses on world health concerns, a worthy but certainly more amorphous goal.  As an aside, the Gates-funded vaccination and AIDS treatment programs have received criticism for singular focus on certain diseases to the derogation of comprehensive health care and diversion of important medical resources.  Few of the Gates Foundation initiatives benefit Americans.

The Over Financialized Economy

The wealthy donors signing on to the pledge are one more reminder of the over financialized American economy.   See The Mirage of a Financialized Economy; The People v. Wall Street.  Today’s fortunes were earned at the expense of the industrial economy, rather than in pursuit of its success.   Two recent commentaries support the deleterious effect of an economy over-focused on the financial:

Boston-based asset manager Jeremy Grantham in Summer Essays criticizes his own profession:

“In 1965, 3% of GDP that was made up of financial services [and that] was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century. We should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that went to pay for financial services by 2007, as the financial services share of GDP expanded to a remarkable 7.5%.

This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5% a year its ability to save and invest, both of which did slow down. This, in turn, should eventually reduce the growth rate of the non-financial sector, which it indeed did: from 3.5% a year before 1965, this growth rate slowed to 2.4% between 1980 and 2007, even before the crisis.”

Professor Steve Keen, an Australian economist and author of Debtwatch believes that the percentage of GDP going to the financial sector should be even lower:

Because of that debt level, bank profits have gone through the roof as a share of GDP. Back before we had a financial crisis—when debt levels were far lower than today—so too were bank profits as a share of GDP. A sustainable level of bank profits appears to be about 1% of GDP.  See Bank Profits a sign of economic weakness, not health

Bring Back the Robber Barons

We need a political and economic re-set button.  The Obama and Bush Administrations have attempted to uncritically favor the financial sector through loan guarantees, TARPs and other artifices.  No one has asked the critical question of why we are favoring this sector that has absorbed a disproportional share of GDP at the expense of a productive reality-based economy that makes real things and employs real people.

No wonder unemployment has remained stubbornly high, and the economy is poised to enter a “double dip” recession.  Perhaps we need a new class of wealthy people focused on creating real wealth and jobs in America.   Maybe it is time for some twenty-first century Robber Barons.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Business / Corporate Behavior / Ethics — 0 Comments
12
Aug 10

Hurd Roundup

DS, a Human Resources Vice President and former colleague, is an expert on organizational behavior, leadership training and executive development.  After reading Following the Hurd,  he provided these comments:

Another aspect of these cases that still continues to amaze me – as a former leadership development guy – is that all of our efforts (and expense) to instill and develop in leaders the decisions, actions and behaviors associated with good and moral leadership is largely ineffective and neutralized in the presence of the self-affirming/aggrandizing bubble (as you describe) that surrounds characters such as Hurd.

The other element at play I believe has to do with emotional age when assuming the top position and tenure in the job.  Back in the day, executives didn’t get tapped for these jobs until they were pushing 60 or so and maybe they would have a run of five years.  Early in their tenure, the leader almost always navigated the first crisis (usually a business crisis, but sometimes personal).   Given their five year window, back then, they almost never had to deal with a second crisis of major magnitude – they went off into retirement, revered.  The next guy then came in and repeated the same process.

But today, executives are quite a bit younger at appointment, imbued with certainty, looking to prove their virility and more easily seduced by power.  Their anticipated tenure could easily exceed ten years.  Likewise, the top jobs are now of such staggering complexity (cognitive, physical and psychological), that few air-breathing humans can actually perform them well, by themselves – thus the trend toward Office of the Chairman, Executive Leader Council and other rickety power-sharing, “star-chamber” arrangements.  The business environment and the operational tempo today almost guarantees that they will experience a major crisis (business or personal) every 18-24 months.  Like their forebears, they’ll handle the first one just fine, for a variety of reasons they will be unable to navigate the second crisis.  The odds and time itself are against them and they are ill-equipped (on many levels) to prevail.

Add that to the dirty water they are swimming in inside the “bubble” and you have a predictable (maybe unavoidable, though I’d hate to concede that) outcome.

Surviving a Crisis

DS’ additional thoughts on CEO crisis management:

The reasons why they handle the first crisis well are at least twofold -

Early in their tenure their sense-making skills are at their peak – primarily because of the novelty of a new job/environment, they are listening to many sources of input, they are open to new ideas and haven’t wall themselves off in the star-chamber and surrounded themselves with sycophants.  Ironically, the fact that they are short on “experience” in the new situation works to their benefit because they avoid the traps that come with believing they are “familiar” with what is going on.  Big ears trump experience!

Second, they make quicker and more confident decisions early on vs. later when their decision-making slows and they become more risk averse.

With the passage of time on the job, the factors reverse themselves – they stop listening and their reaction and decision-making time slows down.  This is ironic since they have had the opportunity to accumulate helpful experience.

Voila!  Train wreck!

Unfortunately, the Mark Hurd saga is not an isolated instance.  American business has seen a spate of ethical lapses and high level departures. See Ethical Lapses Felled Long List of Company Executives.

Final Thoughts

Hurd’s departure has left a void and recriminations.   The acting CEO is desperately trying to reassure customers, Wall Street and employees that all is well and it is business as usual.   The Board is commencing a search for a new CEO.  Given the fast moving nature of the technology industry, Wall Street is openly worried about a delay in finding a successor.  Finally, the Board is miffed that Hurd did no depart quietly, but sought to vindicate his actions and preserve his reputation. See Digits Live Show: Mark Hurd Isn’t Leaving H-P Quietly

Perhaps the Board should spend less time searching for a cost cutting guru or the next creative Steve Job-like creative genius, and more time and thought on the moral character of Mr. Hurd’s successor.

If my colleague is correct, Mr. Hurd will not be the last CEO to exit in an ignominious fashion.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Business / Economics — 0 Comments
3
Aug 10

The Two Americas

Taking a vacation is a great way to expand one’s perspective.   For the past several years our family has vacationed in the Berkshire mountains of western Massachusetts.   There is nothing better than to get away from the congestion of the New York metropolitan area, breathe the clean mountain air and experience cool nights with low humidity.  To expand business perspective, it is also an opportunity to take a break from the mindset of friends and colleagues in the financial industry and observe the other America.

A Look at the Other America

Anecdotal economic observations can be hazardous, but probably no worse than a day watching CNBC for what passes as economic wisdom.   While the folks at CNBC are constantly finding signs of economic recovery, I did not see such signs.  In fact, things in western Massachusetts seem a little worse than last year.  The area is interesting, with some contrasts and paradoxes.  Old industrial America is still in evidence, for example GE Plastics in Pittsfield, which is now SABIC Innovative Plastics, Saudi Arabian owned.  The vacationing financial elites from Boston and New York can enjoy fine restaurants, upscale galleries, museums and cultural events that are active in the summer there, while year-round residents shop for food, clothing and necessities in decidedly middle or lower class venues because there are few others to be found.

Some observations:

  • The Boston Symphony Orchestra performances at The Tanglewood Music Festival were sparsely attended.  In years past tickets had to be purchased months in advance and one would have to arrive hours before a concert to get a picnic spot on the lawn.  We were able to purchase seats and find a central picnicking location near the music shed 45 minutes before the concert.  The shed itself was about half full.
  • Lenox has a large, modern, Super Stop and Shop.  At 7 PM on a Monday night we counted exactly four customers in the store.  We made several food buying trips during the week and each time employees outnumbered customers.
  • Tickets for the summer theater festivals are usually nearly impossible to purchase, as most tickets are reserved for subscribers.  Just hours before curtain we purchased great orchestra seats for two well reviewed shows, Lombardi and After the Revolution.  Both shows are scheduled to open in major venues in New York in the fall.
  • It is back to school shopping season.  Despite large sale postings, WalMart had few customers in the store.  I noticed many of the shoppers using food stamps for grocery purchases.
  • I asked a local clergyman how his congregants were faring during the economic downturn.  His view is that if one is not a doctor attached to the regional medical center or an attorney, it is extremely difficult to earn a living.
  • Previously popular restaurants, that required reservations in advance, invited us to come virtually any time. When we arrived the restaurants were half full.
  • Everywhere we went, high end retail and commercial space was empty and available to lease.

Two Americas

The Bush and Obama administrations made a conscious decision to provide bailouts to Wall Street and the unionized auto industry.  Small business and the middle class have been left behind.   It is not just rumor:   there are two Americas and the other America is seeing no signs of recovery.

Today’s headlines emphasize the divide between these two Americas:

-          Wells Fargo/Gallup Small Business Index Hits Record Low, Future Expectations Dip Below Zero First Time Ever

-          Pending Home (Sales) Fall to Record Series Low in June

-          Personal Income, Spending Flat in June

If western Massachusetts is any indication, the November elections will be quite interesting.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Business / Political / law — 0 Comments
28
Jul 10

Age and Experience

Americans devalue age and experience.  We crave vigor, good looks, innovation, newness and energy.  Missing in our collective imagination is the elder statesman, the seasoned veteran and the battle scarred warrior.  If we translate the foregoing proposition to political or corporate settings, we see that most of these folks have been either booted out of elected office or given an early retirement package.  But right about now, their wise counsel would be invaluable.

Climbing the Corporate Ladder – Circa 1977

As a junior attorney in a large corporation, the presumption was that, like children, one should be seen and not heard.  Prove oneself worthy, and maybe one would be mentored, as older senior managers were expected to impart their wisdom to their younger and more promising charges.  A talented attorney or executive was “developed.” There were no instant promotions or large pay raises.  The expectation was to slowly work one’s way up and “pay dues.”  In my case, and I was typical, the dues were long nights of work, a   constant schedule of unanticipated crises and resolutions, and travel away from home 75% of the time.  If one demonstrated consistently good performance over an extended period, with luck one might be trusted to become a first level supervisor by age 40 or so.  No one succeeded overnight.

Youth and Experience – Mays and DiMaggio

Continuing legal education is usually deadly boring.  However, one of the best educators I ever came across was Irving Younger, who taught evidence and courtroom presentation.  Younger loved to use sports analogies to enliven his lectures.

To demonstrate the errors of youth, Younger related a story from his time as an inexperienced sportswriter at the now defunct NY Herald Tribune.  Returning from an afternoon game at the Polo Grounds he breathlessly described the Giants’ victory.  The older reporters asked who was a better outfielder: Mays or DiMaggio?   Younger replied that Mays had made the most amazing athletic catch, diving, tumbling head over heels, yet holding on to the ball.  The older reporters said DiMaggio was the superior ballplayer.  Younger was incredulous, again touting the superhuman athletic ability of Mays.  Younger said he saw the older DiMaggio play the previous night and he looked like he was hardly moving.  The reporters said, “kid, you don’t get it.  DiMaggio made it look effortless because he knew exactly where the ball was going to be hit and was able to glide to the ball.”  You can’t teach experience.

Youth has Outlived its Usefulness

In her Wall Street Journal article, Youth has Outlived its Usefulness, Peggy Noonan criticizes the Obama Administration for its failed economic policies and lack of bi-partisanship.  Her criticism centers on the over emphasis on youth in politics:

…what I think people miss when they look at Washington and our political leadership? They miss old and august. They miss wise and weathered. They miss the presence of bruised and battered veterans of life who’ve absorbed its facts and lived to tell the tale.

And the lack of elder statesmen is not confined to our country:

Mr. Obama is young, 48, as is British Prime Minister David Cameron (43), with whom he meets next week, and as were Bill Clinton (46 on Inauguration Day) and the somewhat older but still distressingly young George W. Bush, sworn in at 54. Mr. Cameron’s partner in governance, Nicholas Clegg, is also 43. Stephen Harper of Canada is 51, Nicolas Sarkozy of France a youthful 55.

Ms. Noonan lays out the problem of youth and her vision of the remedy:

Youth is supposed to bring vigor and vision. In general, however, I think we find in our modern political figures that what it really brings is need—for greatness, to be transformative, to leave a legacy. Such clamorous needs! How very boring they are, how puny and small, but how huge in their consequences.

What Mr. Obama needed the past 18 months was a wise man…to offer counsel and perspective, a guy who just by walking into the room brings historical context. See Youth has Outlived its Usefulness

Perhaps President Obama’s lack of experience is finally catching up with him.

Send in the Old Guys

Alas, many of the elder statesmen of politics and industry have resigned, been voted out of office or packaged off to early retirement.  When I was mid-career and actually designing some of these early out programs, I often wondered how much experience, perspective and corporate history were we letting walk out the door?  And to what end?  Would the corporation or government really run better without these older wiser voices?

 At the highest levels of government, problem solving requires a blend of both youth and experience.  The enthusiasm of youth needs to be tempered by caution and experience.   Looking at the last several tumultuous years, we could have used more Winston Churchills, Harold McMillans, Konrad Adenauers and Charles DeGaulles to guide the current group of novice leaders.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Business / Corporate Behavior / Political / law — 0 Comments
20
Jul 10

Team Play: How to Lose the Game

Corporations and politicians love to emphasize “team play.”  A whole mythology surrounds the concept.  There are 1,800,000 Google search results under ‘team play.” Websites are devoted to “team building,” “effective team work” and “team play.”  Corporate and political entities adopt sports analogies and metaphors for success: teams that play together as a unit win.  Thus, if we convince independent and sometime maverick executives to sublimate their needs to the “team,” the team will be more successful, that is, win more.

By extension, we obviously must isolate and demonize the non-team players.  Those who have not embraced team play are mavericks, lone wolves, naysayers, whistleblowers or worse.  If we round up these “stray camels” and get them all under the corporate tent, how much better off will we be?

Team Play Sounds Great, Right?

Superficially, ‘team play” sounds like a great concept: everyone on “the same page,” effectively communicating, sublimating individual ego and producing outstanding results.  But there is a more insidious inner lining to team play.  ‘Team play” is a way of quashing independent thought and dissent.  What upper management or senior government officials really want is an employee who will carry out directives from above blindly, without assessing the wisdom or integrity of a particular strategy or project.  This paradigm values adherence to “the program” and loyalty over competence.  Even when some thoughtful criticism can produce a much better result, the team will value mediocre results.

Unfortunately, “team players” get promoted disproportionately, perpetuating the “team play” cycle.  Those not promoted learn an important corporate lesson:  “go along” and “get along” or look for other opportunities elsewhere.

I am not privy to BP succession planning, but I would guess the lead management representative on the Deepwater Horizon rig was the consummate team player.  One has to wonder if common sense came in second place to “team play.”

The Strange Case of Elizabeth Warren

Elizabeth Warren, a Harvard law professor, was named chair of the Congressional Oversight Panel looking into the bank bailout program (“TARP”).   Unfortunately, Prof. Warren had the temerity to grill Secretary Geithner on the AIG bailout and backdoor assistance to Goldman and other banks.  Indeed, by doing this she was questioning the wisdom and integrity of a measure that would ensure that these banks would be paid in full on credit derivative positions with the failed AIG.

Ms. Warren is the champion of establishing a consumer financial protection agency.  The new bill establishes a new Consumer Financial Protection Bureau.  Knowledgeable financial commentators such as Yves Smith and Simon Johnson believe that Prof. Warren would be the right person to head the new bureau.

Warren is the obvious choice to head the otherwise-guaranteed-to-be-a-joke consumer financial services agency due to set up its shingle at the Fed. She has been a tireless consumer advocate, is trusted and well liked by the public at large, an effective communicator and a respected legal scholar, and is willing to stare down political opponents. All those qualities make her hugely threatening. Banksters and their lobbyist allies have been saying loudly and clearly that they are firmly opposed to having Warren head the new consumer agency. So, predictably, Geithner acts as their water-carrier. See Elizabeth Warren in Treasury Crosshairs Again

Mr. Geithner has proved to be a toady for the big banks and Wall Street firms. Of course, he would like to block  Ms. Warren’s appointment.  He instead wishes to install a “team player” such as his pro-bank rubber stamp lieutenant, Michael Barr, Assistant Treasury Secretary.  Mr. Barr’s bona fides are set forth:

This Administration has acted quickly and aggressively to confront the economic challenges facing our economy and the housing market. See Elizabeth Warren or Bust, I’m Drawing the Line

No comment is required.

Afflicting the Comfortable

Humans are tribal. We are comfortable with our own tribe and team.  Along comes an individual of integrity, conviction and unquestioned competence like Elizabeth Warren.  Those individuals attack “group think,” upset the powers that be and make some  a little uneasy.  Suddenly, the name calling comes out and Prof. Warren is called a “commie” or a “weirdo” because she questioned the overly cozy relationship between the Administration and the banks.   Moreover, perhaps hidden in the discomfort is the fact that she is a female in the largely male world of banking and the Treasury.

Undercutting the maverick in a corporation is a little more subtle:  is the person sound, can we rely on him in a pinch, or isn’t he a little different from us?

For the sake of the country, we need more more mavericks like Prof. Warren.   Sometimes it is good to afflict the comfortable.

GD Star Rating
loading...
  • Share/Bookmark
Business / Financial / Pensions / Regulation — 0 Comments
15
Jul 10

Pension Insecurity

Substantial recent financial media focus has been lavished on subprime mortgages, credit derivative bets on a decline in the residential housing market, flash crashes in the stock market, bank insolvencies, major corporate bankruptcies, and sovereign debt defaults. They have paid less attention and provided less insight into the perilous state of pension funds.

Both public and private pension funds face an emerging crisis.  We need to examine some disturbing trends in both sectors.

New Jersey Pension Fund Crisis

In No Garden-Variety Pension Crisis, Andrew Briggs asks hard questions about the funding of New Jersey’s public pension plans.  If the state used private sector pension accounting, the underfunding would rise from an already horrendous $46b to a mindboggling $170b.  This deficit is more than five times the 2011 $29.4b state budget.

The real question is, when will the plan run out of money?  Assuming the plan can earn 8%, which may be an aggressive assumption in the current environment, the plan would run out of money in 2019.  However, NJ has increased its risk profile for the fund.  The state has moved 60% of its pension assets into riskier alternative investments, such as hedge funds and private equity.  Thus, there is a 25% chance the fund can run out of money as early as 2017.

The article concludes that NJ is not alone.  Connecticut, Indiana, Illinois and other states are due to run out of money before the end of the decade.  (See Bailout Nation Lives: Revisited, a Short Update).

Diageo

And while we are worried about risky funding strategies utilizing hedge funds and private equity, pension funding creativity reaches new heights with a plan by the Diageo Corporation. This beverage conglomerate intends to “fund” its plan with more than 2 million barrels of scotch whiskey.

Diageo said … it would transfer ownership of £430 million, or $645 million, worth of whiskey to a pension funding partnership. Diageo employees would not receive their pensions in whiskey rather than cash, but the move does give them a guarantee that they would not walk away empty-handed should the company default.

“A pension funding partnership will be formed, which will hold maturing whiskey spirit as assets,” ….

As part of the deal, Diageo agreed to pay the pension partnership £25 million a year as it sells the recently distilled whiskey once it matures after three years and replaces it with new stock. The agreement would expire after 15 years, at which point Diageo would buy back the whiskey, which comes from distilleries such [as] sic Oban on the west coast of Scotland. See Diageo Uses Scotch to Plug Gap in Pension Plan.

I personally love Diageo products.  Talisker, Lagavulin, Oban and others are some of the finest whiskies in the world.  See Tis’ the Season for Deflation and Update on Deflation. In my prior posts on Diageo, I pointed out that some of their premium products were in dramatic price decline.  Now it becomes clear that weak pricing power and pension underfunding for Diageo are connected.  If Diageo had pricing power, it would have sufficient profits to fund its pension plan with cash.  In a deflationary world, should their pension plan beneficiaries hope to count on the future price of scotch whiskey in order to receive their benefits?

GM, A Cautionary Tale

We have seen innovate funding techniques before.  In 1993, GM asked federal pension regulators to approve an innovative plan to meet a $24b pension deficit.

Under the plan announced today, GM would contribute shares of its class E common stock to the pension plan. The value of that stock is tied to the performance of a wholly owned subsidiary, Electronic Data Systems. Its closing price today on the New York Stock Exchange was $31; based on that price, the total value of the contribution would be $5.7 billion.  See G.M.Acts to Secure Pension Using Stock.

Regulators acceded to the GM request.  The rest is economic history:   GM recently went bankrupt, and the plans remain massively underfunded.

Poverty Follows Financial Innovation

In its time of pension deficit, Diageo is not the only creative funder. The UK is rife with new schemes:

The British supermarket chain J Sainsbury said earlier this year it would transfer property into a pension vehicle, while Whitbread agreed to hand over a share in its portfolio of restaurants and hotels. The investment firm Man Group moved some hedge fund assets into a trust as a security for its British pension plan in March.

“We’re seeing a huge growth in the use of non-cash funding,” Marc Hommel, leader of the pensions practice at PricewaterhouseCoopers in London, said. “There are big pension deficits and sponsors are cash-strapped. These mechanisms provide security for the pension plans in exchange for less cash.”  See Diageo Uses Scotch to Plug Gap in Pension Plan.

Mr. Hommel probably did not intend to be humorous, but one must ask whether these new methods of providing  “security” make the funds more or less secure.  I would submit that when one has to innovate and pull financial “rabbits out of the hat” both equity holders and pensioners of these companies face a lot more risk.  And so do we, the taxpayers and funders of our enormous public pension funds and guarantors of private pensions through the Pension Benefit Guaranty Corporation.

In this current age of funding gimmicks, maybe we should refer to pensions as a social insecurity system.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Business / Municipal Finance — 0 Comments
14
Jul 10

Distortions

One theme we have explored in past posts is the negative role government has played in the economy.  See e.g., Let it Be and Can You Invest in the US Equity Markets? Government intervention in a capitalist economy distorts economic behavior.  Further, government anoints winners and losers without subjecting market participants to the rigors of a free marketplace.  See Government Intervention and Bowmar Brains.  Interventions occur on both state and federal levels.  Let’s examine some of the recently reported inevitable distortions.

Federal Employment

Andrew Briggs and Jason Wine examine the disparity between federal employee and private sector pay.  Federal employees with the same experience and education as private sector employees make 24% more.  Federal employees also receive generous health and pension benefits.   See The Government Pay Bonus.

In addition to compensation and benefit advantages, federal workers are shielded from layoffs and terminations.  Finally, I have extensive experience working with federal employees.  Do not expect that your phone call will be returned after 5 PM.

State Contractors

Illinois, like many other states, has out of control budget deficits and massive pension underfunding.  Michael Shedlock highlights the overweening sense of entitlement displayed by highway construction workers whose pay scale is determined by the state prevailing wage laws for public projects.  While making $50-$68 per hour, these workers are threatening to strike to increase their wages 5% per year to offset increased health care costs.  In contrast, hundreds of unemployed applicants have besieged Walmart to obtain $9.50 per hour positions in newly opened stores in the Chicago area.

Saving the Favored Banks

Amazingly, the top six banks’ holding companies made $51b in 2009 while the other 980 banks lost money:

Focus hard on this shocking Wall Street reality: The top six bank holding companies earned an aggregate of $51 billion in pretax income in 2009. We’re talking about JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Citigroup and Wells Fargo.

All of this pretax income can be attributed to their trading revenues of $59.7 billion. The proprietary trading operations of an oligopoly of banks, saved from disaster by Uncle Sam’s largesse and subsidized with cheap money from the central bank, was the single driving force behind the restoration of their fortunes and the renewed surge in their stock prices.

For those willing to go long when the outlook was the bleakest, they’ve banked a double in JPMorgan Chase, scored a quadruple in Citigroup and nearly a quintuple in BofA.

Some of the other 980 bank holding companies–like Bank of New York Mellon, PNC Financial Services, U.S. Bancorp and M&T Bank–lost an aggregate of $19 billion for the 2009 year. Bank of New York Mellon had the seventh-largest trading revenue–it was just 1.6% of the total. By comparison, Goldman Sachs had 36.2%, Bank of America 18.8%, JPMorgan Chase 15.4%, Morgan Stanley 11.3%, Citigroup 6.9% and Wells Fargo 4.2%. See Six Giant Banks Made $51 Billion Last Year; The Other 980 Lost Money

I suspect that much of the vaunted trading revenue came from Federal Reserve borrowing at 0-.25% interest rates, and then buying higher yielding treasury securities.  Would you call that investing or just “shooting fish in a barrel” courtesy of the US taxpayer?

Government Intervention and Economic Recovery

Distorting economic incentives is one factor retarding economic recovery.  Crony banks are guaranteed profits while eschewing Main Street lending.  Private sector employees face insecurity in the workplace;  that does not translate into robust discretionary spending.  Further, while not currently a problem, and with abundant surplus labor, private sector employers ultimately will compete with government compensation packages 24% higher than the private sector.

This is a smattering of the distorted economic incentives in the world of Obama, Geithner and Bernanke and their state counterparts.   Their constant meddling and direct interference in the private sector guarantees that we will have plenty of distortions  in the future.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Business / Corporate Behavior / Economics / Financial / Political / Regulation — 0 Comments
8
Jul 10

The Tragedy of the Commons Part II: Modern Finance and BP

In Part I, we discussed the “tragedy of the commons” paradigm.   Financial excess in the housing market was a major factor leading us into the current financial crisis.  Finance is not the only area of concern.  Let’s turn our attention to BP.

BP, the Gulf of Mexico and the Eastern Seaboard

We are now approaching 80 days after the BP Deepwater Horizon oil rig spill.  Up to 100,000 barrels of oil are still spilling into the Gulf of Mexico.   The government now believes that by August 2010 there is an 80% chance that the spill will reach Miami coastal waters.  Once the oil slick starts moving up the Atlantic coast, some experts believe it will damage the fishing industries as far away as the Chesapeake Bay and even the Grand Banks off Newfoundland. See BP’s Crude Politics and the Looming Environmental Mega-Disaster

A dynamic tension exists among private profit, America’s need for oil, especially domestic oil, the government’s need for lease and tax revenue from the industry, and environmental concerns.  Despite campaigning against lax Bush Administration enforcement of oil drilling limits the Obama Administration ignored an environmental warning contained in a DC Court of Appeals decision.  Citing financial necessity, the Administration was able to overturn the ruling:

Less than four months after President Barack Obama took office, his new administration received a forceful warning about the dangers of offshore oil drilling.

The alarm was rung by a federal appeals court in Washington, D.C., which found that the government was unprepared for a major spill at sea, relying on an “irrational” environmental analysis of the risks of offshore drilling.

The April 2009 ruling stunned both the administration and the oil industry, and threatened to delay or cancel dozens of offshore projects in Alaska and the Gulf of Mexico.

Despite its pro-environment pledges, the Obama administration urged the court to revisit the decision. Politically, it needed to push ahead with conventional oil production while it expanded support for renewable energy. Obama Decried, Then Used Some Bush Drilling Policies.

The Risk of a Pro-Drilling Policy

A pro-drilling policy with minimal governmental supervision set the stage for the Deepwater Horizon tragedy.  Macondo History Before the Blowout provides a full analysis of the mistakes made at Deepwater Horizon.  First, Congressional investigators documented that BP took numerous short cuts: a cement log was not run, a lockdown sleeve was not used, they failed to circulate a sufficient quantity of mud, instead of a more sturdy liner they used a weaker production casing, and 6 rather than the recommended 21 centralizers were used.   While these shortcuts most likely contributed to the problem, the author focuses on human error.  The BP drilling engineer in charge ignored four major well events, referred to as “kicks” in the industry.  These are warning events.  One can surmise the engineer was trying to complete an over budget drilling project, quickly.  Drilling engineers are trained in mandatory safety courses to recognize “kicks” and take appropriate action.  Perhaps in a desire to expedite the project, he chose or was pressured to disregard obvious safety warnings.

Blowouts are a strong possibility when drilling. They are not rare events.  The author goes on to state “it is inexcusable that BP should have been so completely unprepared for the aftermath. BP should have had the containment built and tested ahead of time.”  By contrast, the Shell Corporation had a system on standby.

In pursuing its private interest in increasing shareholder value, BP despoiled a very large “commons.”  Avoiding an obvious extra expense, BP did not have a containment system on standby.  If the worst happens, BP will have fouled fishing grounds as far north as Newfoundland, and part of the Gulf region will become uninhabitable.  Of course, if BP goes bankrupt,taxpayers again will be asked to shoulder the clean up expense.

Private Interests, Public Policy and Protection of the Commons

The message and lesson of the Tragedy of the Commons is that there are dangerous activities requiring strict, intelligent and active regulation.  Neo liberal economists believe that regulation should not hinder the free market.  They assert that the free market will always self correct.  But in a technologically advanced and interconnected world, the stakes are far higher.  Unfettered capitalism can literally collapse the financial system as demonstrated by the recent financial crisis, or the eco system as demonstrated by the ongoing BP oil spill.

No one would question the right to limit private profit made through the sale of anthrax or nuclear materials.   We know that some activities are so inherently dangerous that the state should intervene and carefully control usage.   We are now learning that previously deemed “safe activities” can now have horrendous and unacceptable societal cost.

Nothing would please me more than for the financial industry to pursue whatever risky schemes they wish to engage in.  Just be prepared to bear your own losses.  Unfortunately, we learned that when it all explodes, we deem it a national crisis requiring domestic intervention to save the banks, insurance companies and industrial companies with finance arms (GE and GM).   In a parallel analogy, we have learned that an oil spill could paralyze an entire region of the country and perhaps the entire eastern seaboard.

We cannot afford too many more tragedies in our commons.  If we find ourselves privatizing profits and socializing losses, proactive and aggressive government regulation and intervention is going to be required.  At issue now is the viability of society itself, and that outweighs private gain anytime.

GD Star Rating
loading...
  • Share/Bookmark