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.