Score One for the Good Guys

Prime capitalist institution, BB&T, has asserted itself as a healthy, thriving bank amidst a sea of faltering behemoths. Now, as the economy starts to show signs of life, the bank is breaking out of the gate and gobbling up its weaker competitors who made destructive lending decisions back in the day.

On Friday, BB&T acquired most of Colonial Bank Corp.'s deposits and assets through the FDIC's seizure of the bank. (Don't get me started on that whole process.) This will make BB&T the 8th largest bank in the US by deposits. That's good for us shareholders. (Incidentally, size of a company is most certainly not always a determinant of success, but with a company like BB&T, added market share means more opportunities to apply its winning strategy.)

Important to all friends of Objectivism, however, is the heightened profile of the bank. Take, for example, this WSJ article about the purchase, which mentions capitalist ubermensch John Allison, as well as Objectivism. Here's a slice:

Before Friday, BB&T had about $152 billion in assets, 29,000 employees and operations in more than 11 states. It will purchase an additional $22 billion in assets in the Colonial deal. Mr. Allison, an adherent of Objectivism as practiced by author Ayn Rand, shaped the bank's behavior around his philosophical outlook.

"BB&T Values," a 30-page guide to the company's 10 core principles, written by Mr. Allison, asks employees to practice "reason," justice," "productivity" and "independent thinking."

Employees are encouraged to adopt these principles at the nearby BB&T University training center.

The bank also has long opposed government intervention in the private sector, refusing to lend to any landowner who acquired property via eminent domain. BB&T did accept federal bailout money last year, but was among the first to pay it back. The day the company got approval to return the capital, executives, including Mr. King, cheered.

Other than the fact that the authors neglect to mention that BB&T was forced to take the money, this is very good coverage for the bank, Allison, and the philosophy. It implies that the bank's guiding philosophy put it in a position to be able to succeed in the current business environment.

Very positive stuff.

The West Bank Has A Stock Exchange?

This is a really heart-warming op-ed from the WSJ written by the Israeli ambassador to the United States. It's called "The West Bank Success Story," and in it, Ambassador Oren discusses the progress that the West Bank has made economically just in the last year. I want to include an extended excerpt here, because I think what he says is extremely important.

Since 2008, more than 2,000 new companies have been registered with the Palestinian Authority in the West Bank. Where heavy fighting once raged, there are now state-of-the-art shopping malls.

Much of this revival is due to Palestinian initiative and to the responsible fiscal policies of West Bank leaders—such as Prime Minister Salaam Fayyad—many of whom are American-educated. But few of these improvements could have happened without a vastly improved security environment.

More than 2,100 members of the Palestinian security forces, graduates of an innovative program led by U.S. Gen. Keith Dayton, are patrolling seven major West Bank cities. Another 500-man battalion will soon be deployed. Encouraged by the restoration of law and order, the local population is streaming to the new malls and movie theaters. Shipments of designer furniture are arriving from China and Indonesia, and car imports are up more than 40% since 2008.

Israel, too, has contributed to the West Bank's financial boom. Tony Blair recently stated that Israel had not been given sufficient credit for efforts such as removing dozens of checkpoints and road blocks, withdrawing Israeli troops from population centers, and facilitating transportation into both Israel and Jordan. Long prohibited by terrorist threats from entering the West Bank, Israeli Arabs are now allowed to shop in most Palestinian cities.

Considering the state the West Bank has existed in for half a century under the tyranny of religious rule, this is amazing news. For anyone familiar with the region, or who has even gone there and seen what the West Bank looked like (I was there at the end of 1999), the concept of shopping malls, movie theaters, foreign cars, and even a stock exchange is baffling.

I also find it to be an interesting example of how important the rule of law is. For years, the Palestinians have wavered somewhere between fascist centralized control and a sort of anarchic psychopathocracy. Introducing a consistent protection of individual rights, those of the Palestinians as well as the Israelis, is integral to forging an economic relationship between the two peoples. The possibilities for peace that arise from the scenario are enough to bring tears to one's eyes.

Oren also notes the contrast with Gaza, where the psychopaths continue to reign supreme, spending their money on rockets instead of shopping malls. Perhaps one day, if the West Bank pursues a pro-capitalist policy, enforcing property rights, the two regions on either side of Israel will become another study in opposites like East and West Germany or North and South Korea.

Honda, Who Knew?

I needed to look up something about Honda's Indiana plant for work, and this popped up in front of me when I opened the indiana.honda.com website:

The Human Being is born as a free and unique individual with the capacity to think, reason, and create--and the ability to dream. "Respect for the Individual" calls on Honda to nurture and promote these characteristics in our company by respecting individual differences and trusting each other as equal partners.
-Honda Philosophy

It's always nice to see reason and individualism promoted by a large corporation, even if inconsistently.

A Quick Thought About SEC Fines

In reading an article in the WSJ today about how the SEC has reworked its rules to allow confiscating executives' pay, even if the executives are not accused of any wrongdoing, something occurred to me. The SEC was founded in the 1930s to act as a protector of shareholders' rights. (Go ahead, laugh.) The idea was that businesses had become so large that their management was effectively kept hidden from the view of their owners. Theoretically speaking, there is nothing wrong with appointing a group of people to enforce laws against corporate fraud. Defrauding one's investors is a violation of their rights, and it is the government's job to defend against such injustice.

This, however, is not what the SEC did then or does now. The SEC concocts a bunch of hoops for managers to jump through, lest they be fined or thrown in jail, ranging from the grotesquely immoral to the just plain silly. The penalty for fraud is typically a corporate fine, paid to the SEC for some reason, and sometimes personal fines and/or jail time for executives depending on the crime. Similar punishments are doled out at the state level by rabid attorneys general like Elliot Spitzer.

What occurred to me is that the crimes are supposed to be violations of shareholders' rights, via mangerial fraud. And the punishment is a fine, which will be paid by who? That fine is coming right out of the shareholders' bottom line. So shareholders get screwed twice: once by the fraudulent management, and then again when the SEC fines them. This is, of course, assuming that any fraud existed in the first place, which may or may not be true.

This is just a little ammunition if you're ever in an argument and someone maintains that the SEC is necessary to protect innocent shareholders from unscrupulous executives.

Green Jobs

I've been working on a "green jobs" article the past few days for my job. I read way too many state and non-profit reports on the "green economy" and "green jobs," and then wrote up a comparison of different approaches. I will say it has been interesting to see the different methods used, and the different ways to define the ubiquitous, and too-often malleable, concept of the green economy. That said, the process has been as infuriating as it has been enlightening. A few thoughts:

For one, no study that I read mentioned any downside to the "greening" of the economy, as it is called. Going green is universally acknowledged as the saving grace of the US economy, the thing that will launch us into the 21st Century. This in spite of the fact that even the most optimistic studies put green jobs at somewhere between 3 and 4 percent of total employment. Since green is universally good then, these researchers never seemed to meet a green proposal they didn't like. No mention of opportunity costs, no mention of profitability lost by diverting resources to money-suck projects like wind farms. Certainly no mention of individual rights. What are you, crazy?

Second, the identification of a green job is difficult. Is the term limited to those employed at "green firms" like solar power manufacturers? Or does it include workers at non-green firms that perform green functions, like updating production lines to be more environmentally friendly, whatever that means. This creates discrepancies in final jobs totals on a scale of about 3.

Third, identifying a particular job activity as green is suspect. One study I looked at found hundreds of glaziers to be "energy efficient" jobs. This data was reported by employers in a survey. Glaziers, for those of you who've never worked on a house, are the people who apply glazing to windows. Glazing is the stuff that forms a seal on the outside of the window between the glass and the wood of the frame. Since it's used on wood frames, it's typically used on older houses. Nevertheless, I had a difficult time understanding how this job, one that's been around basically since glass windows were invented, could be anything but green. By keeping the pane in place, you are necessarily increasing "energy efficiency." Not much regard for marginal effects in this study.

What I'm trying to say is that the green economy consists of two components: economic activity that adds value by saving people and businesses money on energy, and economic activity that couldn't exist without coercing people into supporting it. This means that the policy implications are none for the former, since it will occur just fine on its own, and "stop, stop, for the love of god stop!" for the latter, since it shouldn't occur, EVER.

Not Very Accomodative Islamists

There's an interesting op-ed in the WSJ today by a gentleman named Sadanand Dhume. He is writing about the American hotel bombing in Indonesia. Specifically, he makes the case that American hotels are signs of Western influence that Islamists want destroyed. The writer makes the refreshing argument that Islamists' preference for attacking Western hotels is based on deeper premises than the sheer practicality of sneaking weapons into a place designed to be accomodating. He writes:

For Islamic radicals, who seek to order all aspects of 21st century life—from banking to burqas—by the medieval precepts enshrined in Shariah law, the secular nature of a hotel is galling enough. But perhaps this would not matter as much if it weren’t appealing to local elites. In a place like Peshawar or Kabul, and to a large degree even in Jakarta or Mumbai, a five-star hotel represents an island of order and prosperity in a sea of squalor. It hints at the prosperity promised by free markets and a culture of individual liberty. It is living proof that the worldly can successfully be split from the divine.

I'd say that's pretty much on the dot. He also discusses the necessarily secular nature of hotels, as they cannot display any religious preference, lest they lose a sizeable chunk of international clientele to competition.

Here is another example of how globalization is bringing the civility of capitalism to the Muslim world. At the same time, however, the dark ages philosophy prevalent in those societies is growing more and more violent in its resistance.

Shut Out of the Aristocracy of Pull

Well, the Aristocracy has revealed a financial services firm who isn't on their list. CIT, a company I hadn't heard of before this week, looks like it will go under this week barring some big infusion of private capital. The firm is a big lender to small and medium-sized businesses. I didn't think much about it, until I saw this WSJ article: The CEO Left Off the Lifeboat. According to this article:

On June 17, Jeffrey Peek, chief executive officer of CIT Group Inc., spoke at a conference in the nation's capital where the keynote speakers were Federal Reserve chief Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair. His real mission there, Mr. Peek told others, was to raise his profile among Washington's movers and shakers.

This week his politicking foundered, as the U.S. spurned pleas for financial aid from CIT, one of the nation's largest lenders to small and midsize businesses.

Yep.

CIT had been trying for months to improve its connections in Washington. It spent close to $90,000 last year on lobbying, and $60,000 in the first quarter of 2009. It brought onto its board of directors former Congressman Christopher Shays, a Connecticut Republican.

One day I will conduct a study on the use of politicians on boards of directors. It's a really scary trend. And finally, there was a description of CIT's CEO that was one of those paragraphs that makes you double-take, and question you were reading a description of Jim Taggart, a description that is becoming far too ubiquitous:

He installed CIT's top brass in a glitzy office building on Manhattan's Fifth Avenue, eschewing the company's historical base near a big shopping mall in Livingston, N.J., and brought CIT into his high-society orbit as well. CIT became a sponsor of the New York City Opera. Its role as a donor to the Metropolitan Museum of Art may have helped Mr. Peek win a prestigious spot as a museum trustee in 2008.

Mr. Peek threw parties both at the office and in his home. At an Edwardian-themed fete at his home on Valentine's Day 2008, male guests donned top hats provided by the Peeks.

Mr. Peek is a "personable, likable guy" who showed incredible recall for names and personal details, said one former top CIT executive. When he arrived, Mr. Peek criticized CIT's culture, which he deemed too cautious, says the former executive. He hired a psychological-evaluation firm to "understand us," the executive recalled, and used the results to hire hundreds of new sales people who didn't fit the old CIT mold.

Not that there's anything wrong with supporting the opera, but you get the idea. I suppose it's a good development that the Powers have stopped finding "systemic risk" around every corner, but it could simply be that none of them had the requisite number of connections to this guy and his company. I don't really know what to read into this development. The whole situation is just kind of sad.

In other, better news, Mark Cuban is off the insider-trading hook. That's good.

Finance Bitch #1

The Obamanons are rolling out some convoluted derivatives regulation, and there is some discussion over how this might hurt airlines, farmers, and other "real" companies--as opposed to financial firms. Pathological hatred of bankers aside, I want to explain what I think is a very important detail in this discussion, especially as oil prices are rising and the bogeyman of "speculators" comes back. Incidentally, the price of oil dropped last week, so people stopped talking about speculators for a week.

Anyway, I'd just like to make sure all my readers understand the two main reasons that derivatives are used. Derivatives are, as their name suggest, financial instruments that derive their value from other assets. There are several kinds of derivatives, the main categories being futures, forwards, options, and swaps. Futures are standardized contracts that guarantee the delivery of a certain asset--say, oil--for a pre-specified price. Forwards are similar contracts, except that they are not standardized, but rather custom-made. Options give the holder the right, but not the obligation, to purchase or sell an asset for a pre-specified price. This is how stock options work, with the hope that the holder will work to improve the stock price and make it in his interest to exercise the options. Finally, swaps, the much-maligned instruments that AIG used, are actually very useful, and involve the "swapping" of cash flows on different securities.

Now, here are the two main ways derivatives can be used: to hedge or to speculate. Hedging consists of balancing out a long (profit when prices rise) position with a short (profit when prices fall) position. For instance, a farmer who sells corn might sell corn futures so that he can sell his corn at a known price instead of hoping that the price rises when he goes to market. When he grows his corn, he is long, and thus his future creates a balancing short position in corn.

Speculating, contrary to popular political wisom, is not a form of 21st Centural witchcraft. In fact, it is simply the opposite of hedging, whereby the investor takes either a long or short position in an asset, without balancing out the position. If you own stock and don't simultaneously short the stock, you are speculating in that stock. Similarly, if a bank wants to purchase an interest-rate swap to hedge against movements in interest rates, you can speculate in certain interest rate movements by taking the other side of that swap and not hedging yourself. To bring it closer to home, if you buy health insurance, you are shorting your health in order to balance out your automatic long position in your health. The insurance company, on the other hand, is taking an unhedged long position in your health.

Ok. Now you know.

Innovation, If We Let It

Sorry I haven't been blogging in a while. I've been sort of busy. Today's post will be short. I simply have had a thought over the last few days. I've been reading several stories about innovation in the tech sector. Apparently, Google is coming out with its own operating system. At the same time, Microsoft is scrambling to replace the disastrous Vista. Similar movement is happening in the internet browser market. Conversely, Microsoft is trying to chip away at Google's dominance of the search engine market. Microsoft, despite having immense "market power" as the economics buzz word goes, continually has to innovate for fear of losing market share.

It is amid this whirlwind of creativity that the gruesome specter of ANTITRUST rises from its shallow grave like Jacob Marley, complete with ludicrous Dickensian morality. His Majesty's Justice Department understands Antitrust as the club it really is, and intends to use it as such. Microsoft and Google already need to dance around antitrust in hopes they don't compete too well to be labeled "anti-competitive." Obama is sure to extort some rents from them, the same way that the Clinton White House did with Bill Gates in the 90s. Also, hearings are being held on that pimple on the face of our nation known as Capitol Hill, ostensibly to determine the appropriateness of allowing cell phone makers to grant exclusive offering rights to service carriers, a la the iPhone.

I've said this before. After the murderous thugs at the FDA, anyone who would enforce Antitrust should be next in line for tar and feathering. This is a criminal legal quagmire, whose express purpose is to trap every business in its confusion, thus forcing all to bow to the whim of whatever feckless poll-dancer happens to be anointed our Leader. Draw what conclusions you may from that. I'm going to bed!

P.S.: For some excellent discussion of the current application of antitrust, reading any of ARI analyst Alex Epstein's writings on the subject.

Shabbos Banker

Here's an interesting little story I noticed some time ago in the Economist. Apparently this gentleman, Adnan Yousif, has great ambitions for his particular brand of financial innovation. He is trying to rock the Arab financial world with what is currently only a niche industry. "People never thought big here, never thought globally," he says. Sounds good, right? Guess what this innovative service is...

Islamic Finance.

Now, you may be asking, as I did, what makes finance Islamic? According to the article:

Mr Yousif’s ambitions date to the founding of modern Islamic finance. During the 1970s oil boom the Gulf’s Muslim elite needed to put their new-found wealth somewhere, and American government bonds seemed the safest option. Yet Islam prohibits the charging of interest. So some sheikhs bought bonds but let their Western banks keep the interest, in the casual manner of a customer leaving change on a restaurant table. To Mr Yousif, then a young banker at American Express in his native Bahrain, this made no sense. At a time when Muslim countries had imposed an oil embargo over America’s support for Israel why, he wondered, refuse the Americans oil but give them billions of dollars?

So, nominally Islamic finance is about handling money without interest. Really, it's answering the question "How do we stick it to the Americans more efficiently?"

This concept of Islamic Finance--which seems to be simply replacing evil, unholy interest with "fees" and other equally silly price mechanism substitutions--reminds me of the Jewish concept of the Shabbos Goy.

For those of you unacquainted with the endearing habits of the Children of Israel, and please remember I am not making this up, "goy" is Yiddish slang for a gentile. Shabbos is the sabbath. In Jewish law, you are not allowed to do any work on the sabbath, including, but not limited to, turning on lights, starting a car, and even ripping paper (Yes, that includes wiping your ass, unless you have pre-ripped your sheets.

This poses a great problem for modern observant Jews. While, back in the good ol' second century b.c., one could easily avoid turning on lights or ripping toilet paper, such actions have become, to say the least, ubiquitous today. So what's a poor Jew to do? Why, hire a goy to do it for you, of course. Hence the term "Shabbos goy," a gentile who you hire to do all your sinful car starting for you on the sabbath. (Of course, you must pay the goy during the week, because handling money is also forbidden.

Returning to Islamic Finance, then, I find the practice funny--and sad--as it is simply a way for the faithful to pretend they're obeying God's ridiculous edicts, while still getting everything they want. They missed the whole point of being religious, which is the ample amount of suffering God wants you to endure.

In all, this is probably a good development, as the more integrated backwards religions get with civilized life, the more people decide, "you know what? This is stupid," and just junk the whole process. That's what happened to me when I attempted to keep kosher when I was young and naive. I thank God I grew out of that. If it weren't for him, I might never have turned atheist.

Fighting Back by Opting Out (Or Going Galt, If the Term Appeals to You)

It looks like Amazon.com is battling encroaching tax hikes the only way companies can these days, by withdrawing their business. The WSJ reports that Amazon threatened California legislators that they would end marketing affiliations with anyone in California if a proposed online sales tax is implemented. They made similar threats in North Carolina and Hawaii. They argue that the law is unconstitutional, and I think they're trying to preempt a court battle, which they aren't likely to win. Apparently, they and Overstock.com are fighting a similar sales tax in New York in court. Since the courts are basically useless these days, the only option is to cease business in any economically viable manner. Hopefully, the threat will make some in Sacramento stand up and take notice of the value that their tax victims provide to the state.

In other news, as anyone with a modicum of reasoning power should have been able to predict, financial firms are having trouble attracting top executive talent. While many hot-blooded capitalists would jump at the chance to revitalize troubled institutions, the prospect of being a government bureaucrat has a tendency to temper enthusiasm. I like this description:

At Citigroup, Jerry Grundhofer, the former chief executive of regional bank U.S. Bancorp who recently joined the New York company's board as part of a government-driven shake-up, is viewed as a strong potential successor to Vikram Pandit.

But Mr. Grundhofer, 64 years old, has expressed concern about the relatively low pay that likely would come with the job, along with the difficulty of leading a company that is so entangled with the U.S. government, according to people familiar with his thinking. The government soon will own as much as 34% of Citigroup.

Yeah, I don't blame you, Jerry. Who would want that job? No one worthwhile, as would be expected.

Governance Issue at Apple

Recently, Apple has provided a very good example of why CEO succession planning is so important. According to the WSJ, Steve Jobs recently underwent a liver transplant. We all knew he was sick, and he's been away on leave for a little while. Apparently his #2, COO Tim Cook, has been running the day-to-day business in Jobs' absence, and now it appears he's being groomed to replace Jobs. This is a very good idea, and it's lucky that Jobs got a second chance to do this before exiting Apple completely.

In any corporation, but especially in one as large and innovative as Apple, well-done CEO succession is vital. Leadership is everything in a business where extraordinary vision is required simply to stay with the competition. Because there wasn't an heir apparent at Apple, when Jobs got sick, shareholders were rightly perturbed that his health was being kept a close secret. Frankly, the fact that they could keep a liver transplant secret for so long amazes me. Shareholders need to be sure that their company will transition into capable hands in the event of a CEO's sudden departure, as well as in the event of a planned departure. It's just as important as the Presidential line of succession, at least to the firm's shareholders.

Now, here's the really interesting part. As some very intelligent Kelley School of Business professors (I'm not biased) found in this paper, inside directorship (placing top executives on the board) is a very common and useful funnel for selecting a firm's next CEO. Accordingly, the WSJ article says that Cook is likely to be placed on Apple's board. So, it's pretty clear that he's the next in line. However, thanks to Sarbanes-Oxley, inside directorships have been limited, and now the average number of non-CEO executive board members in the Fortune 500 is less than 1. This makes it much more difficult to groom a capable successor. Thanks again, government.

Hopefully Apple will be able to navigate through Jobs' eventual exit. They seem to be taking the appropriate actions to ensure that now, albeit a little late.

Bullshit

Yesterday, His Majesty said in an interview that he aspires to a "light touch" when it comes to government intervention into the financial industry (article). Apparently, Larry Summers, one of The Chosen One's top economic advisors said in a speech the other day, "No, we're not socialists." It is in this type of scenario when one might say that actions speak louder than words. That is, except when your words get as much media attention as The Obama's.

Obama said, "The only real regulatory approach I've been interested in is raising fuel-efficiency standards so we can wean ourselves off dependency on foreign oil. Beyond that, the last thing I want is to be running a car company..." That, and little things like hand-picking members of the executive team and board of directors, but those aren't such a big deal.

Team Obama seems to have a pretty good system worked out. Instead of making a philosophical case to the nation for their policies, they simply carry out their policies and publicly deny that they're doing anything out of the ordinary. Observe:
1. Control a car company
2. "We don't want to control car companies"
3. Control a second car company
4. "We don't want to control car companies"
5. Give car companies more money
6. "We had to, otherwise they'd go bankrupt
7. Organize out-of-court bankruptcy
8. "We had to, otherwise the bankrupcty would be messy"

The concept of an "orderly" bankruptcy is a funny one, and yet administration apologists have been throwing it around a lot lately. "Orderly" is code for "make sure our friends don't get the short end of the bankruptcy stick, even though their claims are subordinate to those belonging to people who aren't our friends."

Just another example of the bullshit that is obfuscating our path to destruction. But otherwise, I guess it's been a good week.

Thank Goodness for Congressional Democrats

You heard me. In the ongoing war between politicians' evil and their stupidity--that is, between their desire to control and their complete inability to get even that right--Congress slipped some language into the bill limiting executive pay at TARP-receiving banks that essentially made it easier for banks to pay back the money sooner. The Treasury wanted to hold onto those claims for, well, let's just say awhile. Congress did this in order to justify slapping onerous restrictions on how banks do business. I think they honestly convinced themselves that all the banks needed the money.

So, happily, our benevolent overlords at Treasury announced yesterday that ten banks would be allowed (did you catch that, "allowed") to repay the TARP money that most of them didn't want in the first place. Hallelujah. Naturally, BB&T, The Money Speech's favorite bank bar-none, was one of the ten. Kelly King, their new CEO had a good quote:

This is an important achievement for BB&T....Repaying the government's investment will give us greater flexibility to benefit significantly from future opportunities that will be available as we emerge from this recession. In addition, we will become even more focused on the business of serving our clients, rather than dealing with government distractions.

That's over-regulated businessman speak for "Get the fuck off my lawn, government." A BB&T spokesman had another good line: "I haven't seen anybody swinging from the chandeliers yet, but obviously this was the result we wanted." These quotes are getting more than proportional press time, and I think it's due to the fact that the other spineless bank executives won't call the government out. Regardless, I must say I feel much safer as a BB&T shareholder, safer in the knowledge that the bank will, more or less (it is a regulated institution, after all) be run with my financial interests at heart.

Indiana Pension Fund Stands Up for Bondholders' Rights

In what might end up being a stunning blow to Obama's constant efforts to annihilate the concept of individual rights, the Supreme Court has put a stay on Chrysler's sale to Italian car maker Fiat. The suit was brought by Indiana pension funds, major Chrysler bondholders, who are claiming that the Administration's orchestrated bankruptcy plan for Chrysler elevates junior debtholders above secured, senior debtholders. This claim is quite true.

The Obamanons have been involved in a systematic reorganization of justice in this country, whereby the deserving subsidize the undeserving. If you saved money and didn't go into reckless debt, sorry. Obama's upping your credit card fees and your mortgage rates so that deadbeats aren't "unfairly" punished in debt markets. Did you run your business well over the past decade, building goodwill and a reputation for sound business practices? New regulations will make sure that your claim to any strategic advantage over your competitors is wiped out, and by the way, you need to take government money so your faltering competitors won't look bad to the capital markets.

Hopefully, the Supreme Court will rule that the Chrysler deal is invalid, and Chrysler is liquidated, rewarding senior debtholders first, as any minimal recognition of property rights demands. Encouraging is the penion funds' lawyer commenting that GM bondholders have contacted him about working on a similar suit for them. Hopefully, both groups will get the bankruptcy proceedings they merit as debtholders, and not the pandering backroom dealing we've come to expect from His Majesty.

Update 6/10: The Supreme Court gave the Chrylser sale the go-ahead. So much for bondholder justice.

A Couple Newsworthy Items

As part of the U.S.'s continuing endeavor to accumulate more czars than a Russian graveyard, His Royal Highness has appointed yet another overseer to make sure that we, the people, don't make too many decisions on our own. Yes, that's right, it's now time for the nation's first "Pay Czar" to take center stage. You heard me; a gentleman by the name of Kenneth Feinberg is going to be named to "interpret" the many conflicting TARP pay package restrictions that the foaming-at-the-mouth Congress passed in the last nine months. He's going to make sure that greedy capitalists who took (read: had foisted upon them) public money aren't taking too much home. What is too much, you ask? Shut up! Stop asking questions. Actually, I shouldn't call him a czar. The title being floated by the Administration is--I shit you not--"Special Master for Compensation." Honestly, sometimes I don't think they realize how often they parody themselves.

On a happier note, Amity Shlaes, the author of the magnificent Great Depression history, The Forgotten Man, has a good article on Bloomberg.com about Atlas Shrugged, its relevance, and its influence in today's culture. If you haven't read her book, stop what you're doing and go get it. Especially today, when the Obamanons appear dead-set on repeating the mistakes of the Roosevelt administration, it is crucial that people educate themselves on what really happened in the 1930s. In the Bloomberg article, Shlaes at one point compares Shwarzenegger to one of the politicians from Atlas. It's pretty dead-on.

Wise Words from Governor Daniels

A few days ago, I found myself trolling around the state of Indiana's website, and I discovered the transcript from the commencement speech Governor Mitch Daniels gave at Rose-Hulman Institute of Technology (In case you are unaware, this is one of the premier engineering schools.) I've often found that Daniels has a pretty good head on his shoulders, and when I met him he did express admiration for Ayn Rand and her works, occasional pragmatist though he is.

This commencement address surprised me, then, in its defense of talent, skill, production, and rationality, grossly uncharacteristic of a politician's speech. Here are a few of my favorite snippets:

"Amid grade inflation, dumbed-down SAT tests, and stagnant academic performance across most of American education, you chose the harder path. Your self-esteem was hard earned, not conferred as an exercise in social work. If any graduates in America today are ready for the tough world of a prolonged recession, you are."

"The Marines once had a recruiting slogan: "No one wants to fight, but somebody better know how." Today as never before, winning the world economic combat depends on someone knowing how to do the hard work of innovating, enhancing, designing and redesigning new goods and services, creating the kind of value some purchaser is willing to pay for."

"In case that's not already too heavy a load to lay on you, here's more. Even while you're designing, devising, and deploying the innovations that make tomorrow better, I hope you will make time to be active, vocal citizens. Our nation can no longer afford the luxury of its best scientific minds tending to their technical knitting and leaving major public decisions to the lawyers and career politicians.

The U.S. Congress contains eight times as many lawyers as scientists and engineers. In the Indiana General Assembly, only five of one hundred fifty members have a technical background. There is an endearing, but risky tendency for people of science and engineering to concentrate so passionately on the work of invention that they absent themselves from major debates on which their expertise is sorely needed.

I had a dream. A revolution erupted and the mob took all the most talented people to the guillotine. They put a banker in the stocks, but the blade didn't drop and, under the prevailing custom, they had to let him go free. Then they put a star athlete under the blade, but the same thing happened. Then they brought a Rose-Hulman graduate to the scaffold, and as he put his head beneath the knife he looked upward and said "Wait! I think I see your problem!"

We have passed the time when our best scientific minds can devote themselves solely to their chosen work, or to solving huge, avoidable problems after others have caused them. The issues that now face our country often require a technical understanding, or a grasp of statistics, or cost-benefit analysis, or an appreciation of the scientific method with which the general public is not equipped, and which our politicians neither understand nor particularly want to. People like those Rose-Hulman produces must increasingly challenge not just the design of the guillotine but the policies that would put it there in the first place."

Pretty nice, huh? Finally, he went on a screed about the pseudo-science behind global warming:

A relentless project has inundated Americans for years with the demand that we must drastically reduce the carbon dioxide we emit as a society. It is asserted that the earth is warming; that this warming would have negative rather than positive consequences; that the warming is man-made rather than natural; that radical changes in the American economy can make a material difference in this phenomenon; and that utility bills in Indiana must double because no better, less expensive alternative to this policy is discussable.

Well. All these contentions may be correct. It may be that they will all be borne out over the coming decades. But the average citizen has no way to be sure of that for now. Although there are scientists, and scientific studies, that are deeply skeptical of all these claims, they are rarely heard in what passes for public debate. The debate, so far, has been dominated by "experts" from the University of Hollywood and the P.C. Institute of Technology.

Joining this discussion will require more than technical competence; it will take courage, too. In what has become less a scientific than a theological argument, anyone raising a contrary viewpoint or even a challenging question is often subjected to vicious personal criticism. Any dissident voice is likely to be the target of a fatwa issued by one Alatollah or another of the climate change theocracy, branding the dissenter as a "denier" for refusing to bow down to the "scientific consensus."

Ayatollah Gore. I like it.

Out of the courtroom and into the back room

I've been reading a little about Obama's Supreme Court pick, Sonia Sotomayor. She's not great, obviously, but she's probably not the worst result we could have gotten from Obama's "empathy" litmus test. Tom Bowden at ARI has a good blog post on why Sotomayor is unfit for the Court because of her opposition to objective judicial interpretation. (Does denial of its existence count as opposition?) Even so, a judge without principles is basically a broken clock, and ends up ruling well now and then due to sheer happenstance.

So, in reading about this woman, I came across a tidbit of information that troubled and saddened me. In the WSJ's article about Sotomayor's ruling history, this paragraph described one case of investor fraud:

In another pro-plaintiff ruling, Judge Sotomayor allowed a shareholder class-action suit against Merrill Lynch that alleged fraud. A unanimous Supreme Court in 2006 overruled Judge Sotomayor's Second Circuit opinion. The high court found that federal law assigned enforcement to the Securities and Exchange Commission, leaving no room for lawsuits under state fraud laws.

Ignoring the fact that legal philosophy has deteriorated in this country to the point that you're either pro-plaintiff or pro-defendent, I want to draw your attention to the Supreme Court's ruling in this case. As free-marketers, we always talk about how, without the SEC, investors could sue their management for fraud. This, and other vehicles of management's rational self-interest, make sure investors' interests are looked after. What we don't mention enough, I think, is that whent the government removes from the marketplace the competitive advantage that is integrity, investors are at the mercy of the SEC to protect their property rights, a charge the SEC also executes with broken-clock precision. For more on this type of issue, read Alan Greenspan's article in Capitalism: The Unknown Ideal called "The Assault on Integrity". (Greenspan's apostasy notwithstanding)

As in my previous post on regulation, in general, I stress that regulatory bodies like the SEC remove strategic advantages from firms, and drown all interested parties in a sea of mediocrity and subjective selection.

Successful Succession at Xerox

Xerox CEO Anne Mulcahy is stepping down in July, but will remain on as Chairman. Her hand-picked successor, Ursula Burns, Xerox's current president, will lead the company. Incidentally, she will become the first black woman to lead a Fortune 500 company.

Mulcahy was an excellent CEO by almost any standard. She took over the company when it was on the verge of bankruptcy and mired in an accounting scandal. She downsized, reducing the workforce by over 20,000 people. She led the firm in a new direction, making it more competitive in a world where copiers are becoming obsolete. The market capitalization of Xerox today is not far above what it was when she took the company over in 2001, however that can mostly be attributed to the market downturn. It is not far-fetched to suggets Xerox might not even have much of a market cap today if it were not for Mulcahy.

Mulcahy has been grooming Burns for this job, and the succession process looks to be almost seemless. It will be interesting to see how Burns leads the firm through its latest trials and tribulations. Here is an article on Mulcahy and Burns, and here is one on the "model" succession process.

More on CEO Pay

On ARI's blog, Voices for Reason, Don Watkins has a nice post about CEO pay, and how it is a challenging thing to get right, even in a free market. As he writes:

It requires a tremendous amount of thought and judgment. What should be the mix between base salary and incentive pay? What kinds of incentive should be offered–stock options, restricted stock options, stock appreciation rights? How should those incentives be structured–over what time frame and using which metrics? And what about a severance plan? What kind of plan will be necessary to attract the best candidate? And on and on. The mere fact some people make their living as executive-pay consultants illustrates how challenging the task is.

Now, it is sometimes difficult to determine what exists because of its competitive advantage, and what exists to comply with or avoid regulation. (Topic for a study, maybe?) Nevertheless, I think viewing CEO pay as a source of competitive advantage, rather than as merely an administrative, HR-ish issue, has interpretive benefits. It allows us to see that what the Obamanons, and the Bushies before them, are doing is waging all-out war on success. This goes way beyond the tax code. With regulation, you don't just take away the products of success, you force people to all do the same thing, thus ensuring that success in that area is impossible. This helps those firms who would never stay competitive on their own, and hurts those firms who innovate and create.

Put into CEO pay language, being able to appropriately pay an executive for his or her successful effort is a major strategic issue for companies (it better be, otherwise I'd need to switch majors). This is mainly because almost no one has any idea how to do it. Regulating CEO pay takes away any strategic elements, and "levels the playing field," so to speak.

"And the trees are all made equal
by hatchet, axe, and saw."

(Allow me one Rush reference every now and then.)

He's Real and He's Tall

Yesterday, I had the opportunity to bask in the golden glow of capitalist He-Man John Alison. He was speaking at the Chicago Club, in an event hosted by FreedomWorks (Dick Armey's organization) and The Heartland Institute, where I interned last summer. Alison was speaking on the causes of the financial crisis, and gave a presentation almost identical to the one I linked to on this blog that he did back in January in D.C. Still, it was fun to see him talk in person.

It is also worth mentioning that BB&T, the bank which Alison led for over twenty years, has applied to pay back its TARP money, money they were forced to take in the first place. They have to raise new capital to do so, unfortunately, and that requires raising new equity, as well as temporarily cutting their dividend. This was especially difficult for them, because they pride themselves on not having cut their dividend in thirty-some-odd years. Now-CEO Kelly King made an excellent justification in his letter to shareholders, though, in which he stated that even though they hate to do it, the interests of shareholders are better served by getting out from under His Majesty's TARP thumb than by keeping the dividend high this quarter.

It is far too rare in business that leaders embrace uncomfortable reality head-on, and do what's best for shareholders in the long-run. The leadership of BB&T deserves much praise and respect.

Published

It's official, I am now a published scholar. The Michigan Journal of Business, the only major undergraduate academic business journal to my knowledge, has published my paper on executive long-term compensation in its latest issue. Here's the link for the journal and for my paper. In my paper, I found that in a sample from the fifty largest U.S. banks, "long-term" compensation had no effect on either of two metrics of long-term thinking.

This is especially pertinent, if I do say so myself, because His Majesty has lately been talking about issuing new royal decrees governing compensation of all bank executives of the realm, TARP-receiving or not. Here's an article on the subject. A nice excerpt:

Few companies that would be affected by a federal crackdown on compensation would publicly discuss the options being considered by administration and regulatory officials, which include trying to more closely match pay with long-term performance. The wait-and-see response also reflects nervousness about openly challenging the Obama administration on an issue that has become a flashpoint for anger over Wall Street's culpability for the financial crisis and recession.

That's nice, Barack. What I love about this whole charade, other than the blatant violation of individual rights, of course, is that, as I show in my paper, that "long-term" compensation crap is bullshit. Throwing stock options at someone does not a long-term incentive make. This is just more of His Highness' Royal Circus.

So yeah, go me.

No More Drunk Driving at Anheuser-Busch

I don't drink Budweiser (because I'm an elitist snob who likes "craft" beer), but I have friends who do, and so I have a bit of an interest in the progress at Anheuser- Busch. Some of you may remember that several months ago Belgian brewer InBev approached A-B several times offering a merger, only to be turned away several times, and threatened with defensive tactics, such as buying dead-weight companies to scare InBev off (That would have been stellar strategy.) In the end, A-B's board couldn't say no to their European wooers, and caved, much to the chagrin of jingoistic Amer'can protectionists everywhere (mostly in St. Louis).

At the time, many wondered (myself included) how InBev could justify spending $52 billion on a giant, low-growth company. Well, now we know, and it looks like this deal might have been a stroke of genius.

In the business world, we always like to talk about synergies when discussing mergers. According to this WSJ piece on the merger's progression, there were no synergies with A-B. InBev intended to make them.

Since taking over the company, InBev has been attempting to change the culture at A-B from that of an extravagant, perk-pumping employment mill to that of a lean, mean, profit-generating machine. Consider just these changes:

After InBev swooped in last fall with a $52 billion takeover, it sacked about 1,400 employees in the U.S., equal to 6% of the U.S. work force before the merger, and 415 contractor positions. These followed 1,000 employee buyouts accepted at Anheuser-Busch just before the merger.

InBev has overhauled the U.S. division's compensation system for salaried employees, as part of what an internal memo called "an increased focus on meritocracy." In the future, the company will pay salaried workers 80% to 100% of the market rate for comparable jobs, "and any increases above that require special justification and approvals," said the memo. That changed a system in which "high performers...might have seen fewer rewards as dollars were spread more evenly."

Dollars do not spread well. The compensation system is just one change, but I think it is one of the most important, as it lines up incentives when done properly. This can remove the need for a lot of other expensive measures down the road. This little detail is great:

Anheuser-Busch InBev in November gave a total of 28 million stock options to about 40 executives companywide, as an incentive to combine InBev and Anheuser-Busch successfully and lower corporate debt. The executives will be able to cash in the options, potentially worth tens of millions of dollars to each recipient, if the company reduces its debt-to-income ratio by about half in five years.

Meanwhile, the company will halt contributions to its pension plan for salaried employees in 2012. And in January, it will stop providing retiree life insurance.

Stock options are really tricky things, and are usually done wrong, but this idea seems really interesting. Normally stock options are pretty worthless as an incentive because most employees have very little influence on stock price, and thus on whether their options will make money. This vesting criteria of halving debt/income, on the other hand, sets a clear objective that every employee can help affect, through both raising revenue and cutting costs/borrowing.

And providing retiree life insurance is just dumb. Good going InBev. However, your beer still sucks. Work on that.

Croaking Class of Persons

Every now and then I read a quote that makes me want to shout out "Yes, that's exactly what I want to say, and damn does it sound good!" I've been reading historian Burton Folsom's book Entrepreneurs vs. The State (With a title like that, you know it's good. I think it's out of print now, but I think his The Myth of the Robber Barons is very similar if not the same). It's a very entertaining and enlightening read, and I recommend it if you get the chance.

Anyway, he has a chapter devoted to the founders of Scranton, PA. They were the Scranton brothers and their associates, who started the Lackawanna Iron and Coal Company as well as the Delaware, Lackawanna, and Western Railroad. Some of these men were great capitalists who amassed a fortune, as well as built and planned the city of Scranton.

In this chapter, Folsom discusses how the local farmers were not too keen on these city boys buying nearby land and building factories on it (although they did not complain about the easy freight access). They did not want "the 'machine' [to] transform their 'garden' into an industrial community." It's easy to see that these farmers were anti-capitalist Luddites of the oldest and most enduring breed. Folsom then presents the reader with a quote from a Lackawanna Valley historian, Horace Hollister, describing the farmers. No description would do justice to this quote, so just read:

There were then, as there are yet, and as there always will be, a debilitated, but croaking class of persons who by some hidden process manage to keep up a little animation in their useless bodies, who gathered in bar-room corners, and who, with peculiar wisdom belonging to this class while discussing weighty matters, gravely predicted that "the Scrantons must fail!"

Substitute "capitalism" for "the Scrantons" and you've got a description of every whiny, lazy, self-hating moocher now crowing for government to lead them and tell them what to do. "Croaking class of persons;" I love it!

To Clarify My Point

I feel I should respond to Kendall's comment on my previous post, because he makes a few excellent points. Yes, the government's new and expanded ownership of GM and Chrysler is a very bad thing, existentially speaking. The Obamanons will have no problem lavishing favors on their new territories, attempting to stifle any competition from Ford (unless it, too, starts hurtin' for some gov'ment lovin') as well as all the foreign producers. Americans may be left with no financially sound choice but to purchase environmentally friendly, unoffensive, unsafe, Yugo-esque government-issue wagons.

When I stated that I thought this development was a good thing, I meant that in a more PR-ish way. I prefer the open tyranny of socialist ownership of business to the silent tyranny that has been running rampant. The secret blackmailing of bank executives, followed by the public excoriation of said executives for doing exactly what they were forced to do. The public "aid" for auto manufacturers accompanied by increased fuel-efficiency regulations, which I'm sure help with that cash flow problem. Maybe my optimism about the open federal ownership of these companies is simply due to my weariness from the underhanded backroom dealings that have become governance-as-usual.

Right now I'm optimistic that out-and-out socialist government ownership of GM and Chrysler can shock people into opposition. When I have no option but to drive a tin can on wheels that can only run on corn juice, I will probably lose said optimism.

Thanks for the comment, Kendall. And, of course, Boilermakers are always welcome on this site, even thought IU is better.

20th Century Motor Company, Anyone?

Okay, so today, GM announced its plan for how it's going to emerge from its current dilemma. Here is what the brains trust has produced:

Under the plan, GM is asking the Treasury Department for an additional $11.6 billion in loans, on top of the $15.4 billion it has already received. It envisions giving the government at least half ownership of the company as payment for half of the loans.

At the same time, GM said it would use stock instead of cash to pay off half the $20.4 billion it owes a United Auto Workers fund to cover retiree health care. That stock would leave the union owning about 39% of GM.

Um...what? So, if the Obamanoms own over half of the company (making it a government agency, right?) and the union owns 39%, what exactly is GM? Apparently 11% is left for whatever brain-dead shareholders want to go along for Mr. Car Czar's Wild Ride.

Believe it or not, I see this development as a good thing. GM abandoned maximizing shareholder value (the only valid purpose of a firm) as its guiding purpose long ago, in favor of a "stakeholder" position. This was not the shareholders' fault, really. The government has forced GM to comply with almost as many regulations as the financial industry must contend with. And labor makes sure that what little money GM makes from cars goes directly to them. This new arrangement simply makes explicit what has been the case for years.

In the same vein, Chrysler has now agreed to cede a majority share to the UAW, with big Gov taking a 10% stake. So, basically, the inmates are running the asylum. May U.S.G.M. and U.S. Chrysler get exactly what they've bought, I say.

As a side note, Ron Gettelfinger, the UAW's chief executive, is a graduate of the Indiana University School of Business. Thus, I'm sure he'll be more than capable of guiding these firms to success. Right? I guess it could be worse. He could be from Purdue.

What I want to know is, if the union is going to own Chrysler, and the government owns GM, who will the workers threaten to strike against?

Consult Your Regulator to See if Twitter is Right for You!

In yet another example of how regulators exert unfathomable control on business, this WSJ article describes how corporations are wary of disseminating information to investors via Twitter and blogs, lest they incur the wrath of the SEC. Here's a quote:

But even some tech-savvy companies remain wary. Intel Corp. in May will be among the first companies to allow shareholders to ask questions via the Web and vote online during its annual meeting. But the chip maker avoids blogs and Twitter for investor issues, because it fears violating SEC disclosure rules or inviting public criticism in a company-hosted forum, says Kevin Sellers, vice president of investor relations.

The second concern is valid, although I think Intel would get over it. The fact that disclosing more, and more easily accessible, information would violate SEC disclosure rules boggles the mind. This shows the pointlessness, in addition to the more obvious violation of individual rights, inherent in corporate regulation. Regulations are statutory, they are static, while the business world is dynamic and ever-changing. Companies should not have to ask the SEC's permission every time they want to improve service to their shareholders.

For another example of regulatory abuse, see the ongoing saga regarding how Paulson and Bernanke forced Ken Lewis to betray Bank of America's shareholders "for the good of the country." (To be blogged on once more details have trickled in.)

Time for a Morale Booser...Asian Style

Last week's Economist had a nice little feature on Yuzaburo Mogi, the leader of Kikkoman. You know, the soy sauce people. I had never heard of this gentleman before, but apparently his family was one of the founding families of the company, which "traces its origins to the early 17th century." I'm a sucker for some good soy sauce, so this story's got some special meaning for me. Regardless, it's a great business article all-around.

Mr. Mogi, apparently, is not afraid to break with tradition when it comes to growing his firm. In the fifties, Kikkoman marketed their sauce as an "all-purpose seasoning" so as to attract June Cleaver and her friends. They introduced terriyaki sauce in the U.S., designed for U.S. consumers as a barbecue glaze (I had no idea), and are now eyeing South American tastes, "such as a soy sauce that can be sprinkled on rice--something that is not done in Japan." They're also trying to sell soy sauce in China (which seems like selling cheese in Wisconsin). In the land of cheap knock-offs, Mogi is planning to sell his usually mainstream product as a premium brand.

Read the article. It'll make you feel good about the world for a few minutes.

His Royal Barackness, King of Corporations

Holman Jenkins writes the "Business World" column for the WSJ, and he always has some pretty humorous and generally useful insights. Today's column pokes fun at the fact that Barack is acting like a monarch, and discusses the debacle of GM in this context. The article is worth reading for its descriptions of the various ways Barack is ensuring GM's abject failue under the guise of helping it along. But I particularly enjoyed the jabs at His Majesty. Like this picture:

wsj.com

I also enjoyed this paragraph:

King Barack could take a leaf from St. Jimmy the Simple, who faced a collapse of the railroad industry. He signed the Staggers deregulation law, returning power to the industry itself to decide what services to provide and which customers to chase. What had previously been an industrial basket case, halfway nationalized already, fixed itself almost overnight.

That would be Jimmy Carter, in case you didn't know.

Financial Innovators

Gordon Crovitz had a decent column on financial innovators in the WSJ on Monday. He compares financial innovators to other, more physical innovators, who have provided incalculable value to civilization. I particularly like this passage:

The innovators who thought up the elevator, the cotton gin and space travel didn't intend to kill or injure people as they perfected the technologies. Likewise, today's financial engineers never imagined their miscalculations could result in a global recession.

Now, as any thinking person understands, their miscalculations resulted in a global recession because they assumed a normal level of risk in the system, as opposed to a government-subsidized, fucktardedly high level of risk. Regardless, the appreciation for innovators is welcome. Crovitz discusses how sometimes failure is necessary to learn how to do something right. A good lesson, and I think there's a Thomas Edison quote to that effect that I'm sure I've mentioned before.

On the other hand, Crovitz goes on to quote Robert Murton, a famous Harvard economist who's screwed up quite a few times. He produced this gem back in '94: "any virtue can become a vice if taken to extreme, and just so with the application of mathematical models in finance practice."

No, Bob, if your virtue becomes a vice when taken to extreme, YOU'RE DOING IT WRONG! Still, the article is worth a read.

Accounting Bitch #3

Here's an aggravating link from my good friend Billy over at UT Austin. The article discusses Goldman Sachs' change of their calendar, a move that just happens to leave the disastrous month of December as a footnote in their financial statements, enabling them to show quasi-healthy profits this quarter.

What's aggravating is the sheer meaninglessness of corporate financial reporting. As I've said before, the best option for an investor is to look at cash. Look at the cash a firm generates. Poor cash management is what typically brings down corporations, and the current myriad accounting rules only serve to hide poor cash management. On the other hand, the rules can also mask a good cash position, such as in the case of mark-to-market, where banks were forced to write down assets to ridiculously low levels, even though those assets were still generating cash.

Look to cash. Always look to cash.

How Absolute Power Is Obtained Today

I would like to comment briefly on what I see as the new form of power grab that the Obama administration has begun to employ. It used to be that the government caused some problem by distorting markets, blamed the non-existent free market for those problems, and grabbed even more power as a result. This method has worked very well for them over the years.

Now, however, Obama is employing a new, quasi-European form of power grab. I find it interesting, because they are abusing people's respect for an old and valid principle in order to destroy that same principle. (Rand said something about undermining the meaning of concepts, didn't she?)

What I am referring to is the involuntary infusion of capital into private firms, the imposition of rules and oversight on the basis that the government is a legitimate stakeholder, and finally the refusal to accept the money back. People respect the government's increased role because they see the infusion of capital as a legitimate claim. The refusal of repayment, as well as the involuntary nature of the loans in the first place, destroy this concept, but naturally they are all done very secretly.

It should be clear to anyone who knows the facts that the purpose of this facade is to grant Obama and his cohort absolute control over the actions of individual banks and auto firms, as well as whatever other poor companies have the misfortune of catching the King's eye.

You're Damn Right "Survival of the Fittest"

Okay, that last post was depressing, so how about something positive? On the front page of today's WSJ, I spotted this feature. It tells a heart-warming tale of a well-run business taking advantage of other firms' shortcomings in an economic downturn, seizing opportunity wherever it appears, even if the article's author sounds like he would have supported the "Anti-Dog-Eat-Dog Rule." It starts like this:

Roy Calcagne offers a simple explanation for why, in the midst of a grueling downturn, his company is selling more sofas and love seats than before."

We're stealing market share," says the chief executive of Craftmaster Furniture Inc., a maker of upholstered pieces with two large factories here.

Huh, imagine that. While I hardly think Mr. Calcagne really thinks of his firm's actions as theft, the article's author seems to take those words to heart. The tone of the piece implies that existing firms have a right to their market share, and that there's something unwholesome about Craftmaster's attempts to unseat their larger rivals, like they should be gracious in their limited success.

Nevertheless, this is still a story to provide some more intellectual ammunition for those of us who respect business as value creation, and want to know that that practice still exists in this country.

You Want I Should Exchange Our Convertible Bonds for Equity, Boss?

Sorry I've been so intermittent with the posts lately, I've been extremely busy. Here's a couple of posts to catch us all up on what's happening in business.

First, I saw this on the cover of the WSJ yesterday, and I honestly felt a chill down my spine. It's a feature article about the TARP's "chief investment officer." Before getting into philosophical analysis of the situation, just look at the guy! He looks like one of Jack Nicholson's low-level enforcers from The Departed. To make it worse, although any moderately rational individual could have seen this coming, he acts like it too:

Tall, bald and blunt, Mr. Lambright has gained a reputation within the government for his tough negotiating style, which at times has irked those seeking aid and ruffled the feathers of some colleagues. Some have criticized Mr. Lambright for demanding too many concessions, including restrictions on executive compensation. Some of his own colleagues have urged him to cool his rhetoric.

"He's unbelievably tough, and sometimes needs to be reminded that the job is to save the financial system," says former Treasury Secretary Henry Paulson, who hired Mr. Lambright at the Treasury.

Paulson thinks he's tough! This Stanford thug makes Paulson look like Mr. Clean. Ladies and Gentleman, I give you the new power center of our economy: a smart, well-dressed version of an underworld hit man. Well, we knew it would happen some day.

Drucker

Today's Profile in Contradiction comes to you from the foremost guru of management, Peter Drucker. Since I'm going to be joining the ranks of the management academe, I felt I should educate myself as to the musings of the great Drucker. And so, perusing his Concept of the Corporation, I came across this excerpt:

Though we have largely abandoned it in legal and political practice, the old crude fiction still lingers on which regards the corporation as nothing but the sum of the property rights of the individual shareholders. Thus, for instance, the president of a company will report to the shareholders on the state of "their" company. In this conventional formula the corporation is seen as transitory and as existing only by virtue of a legal fiction while the shareholder is regarded as permanent and actual. In the social reality of today, however, shareholders are but one of several groups of people who stand in a special relationship to the corporation. The corporation is permanent, the shareholder is transitory. It might even be said without much exaggeration that the corporation is really socially and politically a priori whereas the shareholder's position is derivative and exists only in contemplation of law.

He doesn't ever really say what makes the shareholder view "crude," but then who ever does? This "stakeholder" theory of business is old news today, and is typically paid lip service in any business ethics context. Thankfully, most of business academia is still focused on maximizing shareholder value. Which is good, because how exactly does a business exist without owners? Providing capital and getting return on investment is an indispensable element of capitalism.

Now, Drucker's not perfect, but he understands a few basic points. For one thing, he isn't exactly a stakeholder theorist in the way many closet Marxists are. He's more of a corporation theorist, basically holding that the corporation is an end in itself and all effort should be directed toward the betterment of the firm. (Incidentally, one wonders what this means if not maximizing shareholder value.) So, I feel I should present a more present quote of his from the preceding page:

Survival as an organization is the first law of the corporation as of any institution; and ability to performs its own purpose, to produce goods with the maximum economic return, is its first yardstick of achievement.

Sounds like maximizing shareholder value to me, but hell, what do I know?

Where was this the last eight years?

Congressman Paul Ryan from Wisconsin had an op-ed in the WSJ today outlining the Republicans' alternative budget for this year. Ryan's a good egg, a very small-government Republican, not perfect but a saint by Congressional standards. He is now the ranking Republican on the House Budget Committee, a position long overdue him. I'd like to see him try to run for President.

Anyway, most of the alternative budget is garbage just like Obama's budget, and keeps spending pretty constant, but there is a nice little component on tax reform:

- Tax Reform. Our budget does not raise taxes, and makes permanent the 2001 and 2003 tax laws. In fact, we cut taxes and reform the tax system. Individuals can choose to pay their federal taxes under the existing code, or move to a highly simplified system that fits on a post card, with few deductions and two rates. Specifically, couples pay 10% on their first $100,000 in income (singles on $50,000) and 25% above that. Capital gains and dividends are taxed at 15%, and the death tax is repealed. The proposal includes generous standard and personal exemptions such that a family of four earning $39,000 would not pay tax on that amount. In an effort to revive peoples' lost savings, and to create an incentive for risk-taking and investment, the budget repeals the capital gains tax through 2010 for all taxpayers.

On the business side, the budget permanently cuts the uncompetitive corporate income tax rate -- currently the second highest in the industrialized world -- to 25%. This puts American companies in a better position to lead in the global economy, promotes jobs here at home, and strengthens worker paychecks.

My, that sounds nice. Too bad Republicans these days are about as powerful as a solar-powered night light. Where the hell was this budget when you guys ran the show? Two-tiered flat tax? (Well, it's flatter than the current system) 25% corporate rate? Repealed capital gains tax? (True, only for a year, but hey, it's a start) Republicans make me sick. They only get principled when the know none of this shit will get passed.

Proposing a budget like this now when they had eight years to easily slide it through Congress is a welcome change, but it is really disingenuous considering it has -500% chance of beating Obama's budget. "A" for effort, though, boys.

The Big Engine That Couldn't

Hi all. Sorry I haven't posted in a few days. I've got three exams this week, and I need to revise a paper for publication by Friday (More on that later). Today I am discussing Rick Wagoner, who last night was fired by Barack Obama from his job as Chairman and CEO of General Motors. Yes, the President asked for his resignation, and he granted it. Someone please tell me why we even have business anymore? Here's the article: demise of a douchebag.

I wish I could feel an ounce of sympathy for Wagoner, but I can't. He asked for this fate. He managed a company for eight years on the principle that profitability is a relative term (only economists actually believe that). When cash ran thin this year, he and his Detroit buddies went crawling to Mommy to bail them out. And because GM is Amer'can, whatever that means these days, it got the money. Shockingly, the money ran out, and they needed more money. Finally, the government had had enough of GM's incompetence, and last night they ousted the captain and replaced him with the first mate of the GM Titanic, the current COO. I'm sure it'll be roses and gumdrops from here on.

And sure enough, with optimism rivaling Stalin, the administration announced that it is "prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future."

We all know the political lessons to glean from this scenario, but I think the less obvious lesson is the business one that really drove the nail into GM's coffin. Other than the political pandering, the environmentalist bullshit, the labor appeasement and pacification, the financing shenanigans, the shitty, unprincipled management, and the all-around bad karma, what finally killed GM was poor cash flow management.

Lots of companies rely on short-term borrowing to fill holes in their cash inflow, so that they can meet their expenses. GM, however, tried to ride that debt horse into the credit crisis, and we know how well that turned out. Generating cash from sales is crucial for navigating rough waters like we face today, especially when you face the galactic labor costs GM does. In the auto industry, it's difficult to keep cash coming in reliably from sales, but maybe, then, a smaller, leaner auto manufacturer might be a preferable business model to the stumbling golem model we enjoy today.

Just a thought.

The Only Friendly Skies

Finally, I have found some good news in the business world to report. Amidst the game of Jenga that is the U.S. economy, it's nice to see that Southwest Airlines is still doing pretty well. Gary Kelly, CEO since 2004, is interviewed in this article and seems to have a pretty fair strategic outlook. A few encouraging remarks:

The airline's chief executive is adding flights to heavily trafficked domestic airports and seeking cross-border alliances with foreign carriers. He's also considering adding on-board Internet surfing and more-extensive wine and coffee service.

But Mr. Kelly says adding full-scale meals remains off the table. And Southwest, the largest U.S. discount carrier by revenue, remains steadfast against charging customers for checking in suitcases and using pillows, as rivals have done.

"Adding fees is not the way to grow the airline," Mr. Kelly says in an interview at the company's headquarters here. "Customers hate that stuff."

Oh, you noticed that, huh?

Last week, true to discount roots dating to 1971, Southwest launched a summer fare sale on domestic flights, with one-way prices as low as $49. As in the past, major competitors were forced to follow suit.

By keeping costs low with simple operations, Southwest has booked 36 straight years of profit and flies more passengers within the U.S. than anyone else. Southwest is the only major U.S. airline to enjoy an investment-grade credit rating.

What I love about Southwest is that they succeed repeatedly by responding to market reality, while their competitors repeatedly fail and run to either bankruptcy court or worse, the government. They foresaw the spike in oil prices last year, and hedged against them (of course, that same hedge hurt them when oil prices plummeted in the fall.)

Basically, it's just nice to see successful firms come out of what is a mind-bogglingly success-starved industry.

And Now for Something Completely Different

I've been harping on about a lot of big ticket issues: bailouts, bonuses and such. So, when I noticed a much smaller atrocity on the front page of the WSJ today, I thought I should bring it to your attention. Basically, a small businessman is attempting to get an Asian skin treatment technique to catch on in the U.S. He uses fish to defoliate people's feet. At first it sounds kind of gross, but read the article. It's not so bad. The guy bought these little dead-skin-eating fish about the size of sardines, and he constructed individual plexiglass foot baths to keep them in. And the idea is starting to spread. So, naturally, this happens:

Until Mr. Ho brought his skin-eating fish here from China last year, no salon in the U.S. had been publicly known to employ a live animal in the exfoliation of feet. The novelty factor was such that Mr. Ho became a minor celebrity. On "Good Morning America" in July, Diane Sawyer placed her feet in a tank supplied by Mr. Ho and compared the fish nibbles to "tiny little delicate kisses."

Since then, cosmetology regulators have taken a less flattering view,insisting fish pedicures are unsanitary. At least 14 states, including Texas and Florida, have outlawed them. Virginia doesn't see a problem. Ohio permitted fish pedicures after a review, and other states haven't yet made up their minds. The world of foot care, meanwhile, has been plunged into a piscine uproar. Salon owners who bought fish and tanks before the bans were imposed in their states are fuming.

The issue: cosmetology regulations generally mandate that tools need to be discarded or sanitized after each use. But epidermis-eating fish are too expensive to throw away. "And there's no way to sanitize them unless you bake them for 20 minutes at 350 degrees," says Lynda Elliott, an official with the New Hampshire Board of Barbering, Cosmetology and Esthetics. The board outlawed fish pedicures in November.

I think the concept of "cosmetology regulators" pretty much sums up the absurdity of this whole scenario. Granted, Ho's original plan to keep the fish in a communal bath that people would use simultaneously sounds pretty unsanitary, but I'm guessing customer sentiment would have led him to create the individual washable tanks pretty quickly if regulators hadn't forced him. Just another example of a promising business model being trodden over by peabrained regulator thugs.

Ho, I salute you!

Book Recommendation

I just finished reading P.J. O'Rourke's Eat the Rich, and I really enjoyed it. It's a humorous introduction to economics, complete with scenes from countries at all corners of the economic landscape. He discusses what makes Wall Street different from Albania (please, hold your snide jokes until the end), Sweden from Cuba, Hong Kong from Tanzania (You've heard of Hong Kong). O'Rourke's a free-market guy with a likeable cosmopolitan wit. And he hates the Clintons, to boot. Here's a couple of my favorite exerpts.

A belief in the free market means a belief that people have an innate right to the fruits of their endeavors, and the right to dispose of the fruit the way they see fit, as long as other people don't get pasted in the face with a rotten peach or something.

Accepting the free market allows us to avoid the political abuse and financial mismanagment inherent in trying to design an economy that's fair. It also allows us to see that economies can't be designed. Economics is the measurement of how human nature affects the material world. The market is "heartless." So are clocks and yardsticks. Saying that economic problems are the result of the free market's failure is like gaining twenty pounds and calling the bathroom scale a bum.

There's a bunch more comments like these throughout the book, but I won't spoil it for you. Go out and buy it! (Incidentally, I got my copy for a dollar at a library book sale. Being poor is fun.)

What Moral Hazard? This Is News to Us.

AIG is a fantastic example of how good the government is at running corporations. The government owns 80% of inflated insurance giant AIG, a greater level of ownership than most institutional investors own in anything. As such, it has a genuine interest in seeing the firm turn profitable, right?

Oh yeah, Barney Frank doesn't care what happens to taxpayers' investments since...that tax money keeps rolling in no matter how well AIG performs. Okay, so under that paradigm, it makes sense that the government's management style consists of forking over an ass load of money, and then running in the other direction to worry about something more important, like hand out even more money, but to people who vote.

This reminds me of Alan Greenspan saying "I am so surprised that the self-interest of banks did not restrain them from taking excessive risks," when he spent half a decade telling banks "Free Risk! Free Risk! Come take my risk! Hey Nonny Nonny Hey!. What Alan Greenspan did to the markets was force feed it steroids and then say "Oh my, how did those testicles shrink like that?"

And this is basically what has been done with AIG. If Barney Frank could speak human, his words would say "We gave them tons of money for driving a once-great company into the ground, and now they've spent some of that money on bonuses. How could this have happened?"

Happy St. Patty's everyone. I need a drink.

Tax Bitch #1

Apparently I'm a rich college student, because I owe Barack Obama $400 this year! Most of this is due to a couple scholarships I received which counted as "Other Income" and "Self-Employment Income" (Don't ask, I don't know how that works, either).

In the course of attempting to find ways to escape his Highness' tax collectors, my Dad and I came across a few delightful nuggets of information you might not have known about the tax system in this country.

For instance, if your child has been kidnapped, the residency requirement for child exemptions will be waived, and you can still consider that child a dependent. Phew! I guess it's good you aren't taxed for having your kid snatched.

Also, you can take the child exemption for any child born alive, even if that child dies soon after birth. You cannot, however, take the exemption for stillborn children. Thanks for plugging up that loophole, boys. I can just see a bunch of rich bastards knocking up their wives and then whacking them in the gut with 2x4s just for the tax savings.

Finally, and I am sure I will expand on this much in the future, double taxation of dividends is one of the most evil components of the tax system, not only for its distortion of reality, but also for the perverse incentives it establishes for corporate management. Terrible.

Rand in the Journal

Dr. Yaron Brook, President and Executive Director of the Ayn Rand Institute had an op-ed printed in the WSJ today. Here's the link. It's a very good, very concise explanation of why Rand has become so popular recently, and what her major contributions are to the national discourse. I think Brook really gets it, more than his intellectual predecessors, that pushing an ethics of rational self-interest in the context of the current crisis is the way to go. As opposed to getting up in front of a group and talking about Objectivism as a whole, talk to businesspeople and related audiences about what they know: their own interests. Then, when they're ripe, you can talk about metaphysics and the rest.

Go me!

Some events may have happened in business today; I don't really know. Alan Greenspan wrote an atrocious op-ed in the WSJ in which he attempts to absolve himself of his meddling role in the credit crisis. I think Freddie Mac lost an unconscionable amount of money...again.

All of that pales in comparison, of course, compared to the most important thing that happened to the business community today: I was accepted to the PhD program at the Kelley School of Business to study Strategic Management. I know, I know. I'm awesome. One day this momentous occasion will be recorded in the history books.

That's all. Go celebrate in my honor, now.

Could Not Have Said It Better Myself

The WSJ had a great quote in its "Notable and Quotable" section today. It is from The Times of London from 1846. What I want to know is, why don't newspapers write like this anymore?

The greatest tyranny has the smallest beginnings. From precedents overlooked, from remonstrances despised, from grievances treated with ridicule, from powerless men oppressed with impunity, and overbearing men tolerated with complaisance, springs the tyrannical usage which generations of wise and good men may hereafter perceive and lament and resist in vain.

At present, common minds no more see a crushing tyranny in a trivial unfairness or a ludicrous indignity, than the eye uninformed by reason can discern the oak in the acorn, or the utter desolation of winter in the first autumnal fall. Hence the necessity of denouncing with unwearied and even troublesome perseverance a single act of oppression. Let it alone, and it stands on record. The country has allowed it, and when it is at last provoked to a late indignation it finds itself gagged with the record of its own ill compliance.

Yep, I think that about sums it up. See, London was cool once.

Barney Frank, VP of Marketing

In another development that reminds me just how much I would like to see certain politicians disemboweled, their entrails used as hippopotamus dental floss, Congressman Barney Frank (pictured below), Chairman of the House Financial Services Committee, has been getting his man-panties in a twist over banks sponsoring sporting events. His Rotundity, Duke of Fathead, feels that banks receiving (a.k.a. forced to receive) TARP funds should not be "lavishly" entertaining clients with expensive golf sponsorships.



Well, apparently, after a phone call (a.k.a. campaign contribution) from the Commissioner of the PGA Tour, Barney Frank has softened his stance on the sponsorships, while remaining "skeptical" of their benefit. Anyone who might have thought the capital injection was necessary to unfreeze credit markets should plainly be able to see at this point that the medicine is far worse than the disease. Congressman of the worst breed are acting as marketing directors for banks, deciding which advertising expenditures are justified.

The bright spot in all this is that, one by one, banks are seeing the endgame, and are rushing to pay back the TARP money, eager to get out from under Barney Frank's thumb. As the article states, after a stern letter from Barney, Northern Trust announced they would return the $1.5 billion they received from the government, which they did not need or want in the first place. Good for them. I hope BB&T follows suit.

If you want to see where our government is headed in terms of its involvement in business, I think this quote from the esteemed Congressman says it all:

I'm not ruling out sponsorship, especially since tournaments support charities. But the entertainment aspect is problematic.

I cannot express how deeply I want to see a galactic bikini-clad Carrie Fisher strangle him to death with a metal chain during a Congressional hearing. God, that would be cathartic.

Prediction Markets and the Wisdom of Crowds

Here's an article in the Economist that caught my eye (I recently subscribed to the Economist, does it show?) It caught my eye because it mentions Koch Industries, the founder of which funded the Charles G. Koch summer fellowship that I participated in last summer. Koch Industries is a fascinating company, and their CEO is a big fan of Austrian economics and free markets. One day I'll probably write a post on him and his company.

Anyway, true to form, Koch Industries has apparently been using prediction markets within their company for a few months to determine the course of various outcomes, from commodity prices to bailouts. Prediction markets, for those who don't know, are markets one sets up in which people buy shares in a particular outcome. As an outcome becomes more popular (people think it is more likely) the price goes up. Koch, as well as some other firms, have been using these internal prediction markets to forecast.

I find the idea of prediction markets really interesting. On the one hand, few of these people have any considerable knowledge of the subject in question. On the other hand, the law of large numbers suggests that if you pool enough people, you'll get something resembling the right answer. Koch says it has been working pretty well. I think something like commodity prices would require at least some area of expertise, but assuming that, I think running a prediction market can be a really effective way to create incentives for accurate forecasting.

I Can't Decide How I Feel About This Quote

I ran across this beauty while reluctantly reading my management text:

The things that make a good leader are being open-minded, having a willingness to really ask for and accept advice, showing a sense of humility, and putting the right people in the right seats. -Hank Paulson, CEO, Goldman Sachs (Prior to his stint as Treasury Secretary)

I'm not really sure what to think about this. Either he followed his own advice and failed anyway, which is funny, or he ignored his own advice and failed, which is funny too. All we can be sure of is that he failed. Some of this advice is valid, I think, especially the part about putting the right people in the right seats, which Paulson definitely didn't do. The part about humility is, well, you know. Businesspeople tend to use the word humility to refer to rationality and honesty in the face of unpleasant reality. If he's using it that way, he definitely didn't follow his own advice on that one.

The point of this is that Paulson is a douche, in case that wasn't apparent already.

In Times of Economic Peril, Invest in the Rights to Atlas Shrugged

A delightful little article in this week's Economist discusses a phenomenon obsessive Objectivists like me have already noticed: sales of Atlas Shrugged have been increasing steadily, spiking with each new government intervention. This month, Atlas climbed to 33rd on Amazon's bestseller list, briefly surpassing Obama's The Audacity of Hope. I suppose this is the one bright spot about the current crisis. Since we knew it would happen one day, at least this time the American people are armed with a moral defense of capitalism they lacked the last time the economy took a nosedive and a charismatic leader tried to shove a bunch of government programs and economic hurdles down their throats.

Now is an excellent opportunity to take advantage of the attention on Rand and Objectivism and write in to radio shows and newspapers, extolling the Objectivist perspective in your area of interest. I plan to submit a guest op-ed to Indiana's student paper next month.

In other book news, Rainelle and I went to the local library's used book sale yesterday, and in addition to copies of Friedman's There's No Such Thing as a Free Lunch and P.J. O'Rourke's Eat the Rich, I found a good-condition, hardcover copy of George Reisman's epic economics tome, Capitalism, for $1. This book retails for $95. I cannot express how excited I am.