Saturday, February 28, 2009

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.

Friday, February 27, 2009

What I Have Found About CEO Pay

There was a pretty good op-ed in the Wall Street Journal the other day describing how the amount of CEO pay is not the problem, and how we should be concerned more with the method of payment. The writers seem to imply the government should get involved, but other than that, their observation of the problem in executive compensation is pretty true, namely that executives are not compensated for long-term corporate performance, even though they are supposed to be.

I wrote my senior thesis on this topic, and what I found was that "long-term compensation" does not have any relation to long-term thinking or performance. This does not mean the government should get involved, but it does mean that boards need to get off their asses and design original ways to compensate their employees.

An interesting phenomenon I found was that pay packages that included goal-based remuneration tended to yield more manageable results amid the present financial crisis than did flat-out grants of stock or stock options. Objectivist business scholar Edwin Locke has produced excellent research on the positive performance effects of setting goals.

This is an area I intend to research more deeply over the years. It is unjust to provide employees (executive or otherwise) with vague goals, compensate them for something totally different, and then chastise them for not achieving a more specific goal you never laid out. Rational achievers will not want to work under such conditions. Providing specific goals, and linking pay to achievement of said goals, is not a sign of distrust in the executive, it is a clear signal that you know what you want, and you trust the executive to come up with some way to achieve it.

I will write much more on this topic over time.

Wednesday, February 25, 2009

What Happens When You Let Jim Taggart Run Your Company

As I sat in my Management class this morning, wavering from side to side and staring out of focus due to lack of coffee (I was running late) I glanced down at my Wall Street Journal and at the beginning of this front page article, I spied these nauseating sentences:

In a recent phone call with a senior government official, Citigroup Inc. Chief Executive Vikram Pandit revealed who's on top in the new world of American finance.

"Don't give up on us," Mr. Pandit said, pleading with the official not to push out top management. "Give us a chance to execute."

If I might channel John Stossel for a moment, "Give me a break!" Really, Pandit? "Don't give up on us"? "Give us a chance"? What a little whiny bitch. Is this what business in America has become? Apparently, if you accept the Journal's estimation in the first paragraph. Reading about Citigroup or GM or Chrysler, I can just hear the voices of Jim Taggart or Orren Boyle screeching from the pages of Atlas Shrugged: "Give us a chance!" "It's not fair!" "We need a chance to succeed too!"

What, I wonder, would giving up on Citigroup constitute exactly? Letting them fail? Not a terrible proposition. Breaking them up into little Citipieces? An even better idea. It seems that Pandit, on behalf of his shareholders, is intent on perpetuating the illusion that Citi is still a private enterprise. News flash: it isn't. Honestly, and yes this is me saying this, I would prefer all out nationalization of Citi to this farcical capital injection Beckett-esque production. Maintaining a nominally private institution just to serve as a vehicle for politicians' policy fantasies is worse than the government taking over a bank. The government takes over insolvent banks and turns them over all the time. On the other hand, the former situation is exactly what transpired with Fannie Mae and Freddie Mac. And look how well that turned out.

Bottom line: If you can't run a successful (aka profitable) business on your own without begging feckless bureaucrats to "give us a chance," then you do not deserve to be in business. End of story. Pathetic displays like this one only perpetuate the government and the public's perception that businessmen are bungling idiots (don't get me wrong, some are). Meanwhile, the remaining capitalist heroes are too busy attempting to navigate the socialist waters to stand up for basic principles. That's our job.

Monday, February 23, 2009

Accounting Bitch #2

John Allison's superb speech that I posted on a few days ago raises an accounting issue I would like to bitch about now. The issue is "Fair Value Accounting," and Allison discusses it in depth. I cannot add much to what Allison said, but I can try to sum it up and provide a brief explanation of why this particular accounting requirement is evil, both morally and epistemologically.

The rule in question is one which states that certain assets must be regularly marked down in value to accurately represent their "Fair Market Value," or the value at which they could sell it today if they had to. In most firms, this kind of accounting is limited to what are called "tradable securities," those securities a firm owns, but actively trades. These can be contrasted with available-for-sale securities and hold-to-maturity securities. These are not "marked to market" normally. Typically, these assets do not constitute a large portion of a firm's balance sheet, and the effect is negligible. In fact, this use of mark-to-market is actually quite appropriate.

In finance, however, for the last two years, banks have been required to mark their asset-backed securities to market value. This violates a fundamental principle behind the mark-to-market tool, namely that management must be intending to sell the asset in question. Allison points out that it is dishonest to write down an asset as though it were to be sold when management intends to hold it and collect its cash flows.

Now, this was not much of a problem until the market for mortgage-backed securities dried up and no one wanted to buy them. By law, banks must write down these assets to fire-sale prices because those are the only prices people are willing to pay. This is ludicrous, though, as Allison points out, because a market requires both a willing buyer and a willing seller.

So, you might be saying "Ok, it's a pain, but investors understand that these assets are still bringing in cash and are worth a lot more. They'll price that in. What's the big deal?" Normally, your logic would be correct. However, this is America, where we have laws to make sure logic is never correct. If a bank's equity drops below a certain percentage of capital (say, due to massive write-downs of its assets) it has to go to the capital markets and raise new capital. If it cannot, it must shut down, by regulatory fiat, even though it might still be generating positive cash flow. Another delightful aspect of the combination of accrual-based accounting and bumbling regulators.

Enter bailouts. Enter systemic risk and crisis. Enter his Obama-ness, fixer of things, bringer of change.

Sunday, February 22, 2009

Following the Yahoo! Story

Yahoo! CEO Carol Bartz, whom I discussed on this blog earlier this month as a capitalist to watch, looks to be shaking up Yahoo! right from the get-go. From the sound of this article, it seems like she has a clear vision for where she wants to take the company, but at the same time is staying attentive to the ideas of employees who have grown with the firm. This is sound management at its best: Leading through a strong vision, but keeping details open to input from the trenches. It will be interesting to see if these changes can pull the company around.

John Allison is God

The Ayn Rand Institute finally posted the video from BB&T Corp. Chairman John Allison's January 29th speech on the causes of the financial crisis. I just watched it and it is a concise and yet inclusive depiction of the multitude of factors that culminated in the present financial catastrophuck-up. For the business-educated, the speech provides a panorama of the financial landscape, naming specific culprits, such as Fannie Mae and Freddie Mac, the Fed, the SEC, and several others. The conclusions he draws are so technically obvious by the end, that one wonders how any policy makers could possibly be innocently ignorant in this process.

For the layman, the speech might get a tad technical at times, but Allison explains himself along the way so as to make the material accessible to anyone. For those of you who have only a cursory understanding of the financial and real estate markets and the causes of this crisis, I highly recommend viewing this video. Allison depicts the crisis in a logical, sequential manner, highlighting how a combination of disastrous government policies inflated the housing market, masked riskiness of investments, protected unhealthy but well-connected firms, discouraged prudence and thrift, as well as a number of other undesirable outcomes.

What continues to amaze me, but shouldn't, is how the government repeatedly distorts a market (such as housing) for its own political gain, and then proceeds to prolong, exacorbate, and further distort the market correction that is a direct result of its own interference. The ultimate and most disturbing tragedy of the government's handling of this crisis (there are many others) is the effect it has on the most productive, virtuous members of society. Allison repeatedly mentions how the government's actions discourage banks to be healthy, discourages smart, talented, rational individuals from entering a the industry, and all-around incentivizes people who might otherwise lead successful lives to be lazy, stupid, dependent contradictions of themselves.

The larger grows the state's reach, the more good people at the margin get sucked into moral depravity. (Naturally, by moral depravity I mean that they systematically and consciously destroy their own lives) Every day it requires greater strength and resolve simply to pursue one's happiness.

Lately, I am reminded of a line from Casablanca that I think sums up the despair and sense of futility that government control engenders in people. When Victor Laszlo and Ilsa Lund are meeting with Signor Ferrari in the Blue Parrot seeking an exit visa to Lisbon, Ferrari tells them getting two visas "would take a miracle. And the Germans have outlawed miracles." That is my main fear for the future, that the powers in Washington will steadily and systematically outlaw everyday man-made miracles.

Friday, February 20, 2009

How Capitalist Capital Markets Should Work

Amidst the deafening moans for bailout money issued from across the business landscape, it is refreshing to see just one instance of the good, old fashioned capital markets working again. In the old days, before "bailout" became a source of competitive advantage, firms who needed funds to support operations went to capital markets. Depending on their risk and return, these firms would raise debt or equity cash, and investors would take some form of a stake in the firm. In those days, you had to compete with other firms for funds based on your virtues as a business, catering to the self-interest of investors. Now, you go to the government, hat in hand, and compete with other firms based on your vices, catering to bureaucrats and politicians' sense of pity. Who might have the strategic edge in that race?

As I said, it is refreshing, then, to see the capital markets return once in a while, to remind us what honorable business looks like. As this article describes, Sirius XM has been in dire straights for some time. They have severe cash flow problems, stemming from the worsening economy, and the fact that their business model is shaky at best (Howard Stern notwithstanding). So, as their debt was about to come due this month, rather than ask the government for handouts, they found a businessman, in the form of Liberty Media's John Malone, to take on a large portion of their risk in exchange for a sizable return. Notice, an individual made the choice with his money, eyeing his self-interest, to invest in a struggling enterprise. No one had to be coerced; no one's tax dollars were devoted to a dying cause. If enough dollars think the business is worth saving, they will find their way to that business through capital markets. The government needn't offer its dubious services.

The satellite radio industry is a very interesting one, in my opinion. I did some writing on it over the summer when I was working at The Heartland Institute. At that time, I was defending XM and Sirius' right to merge. Clearly, the merger did not help them get out of their hole much, but if they can stick it out through this downturn, they might be able to rebuild their market in a couple years. The important take-away point is the economic efficiency and moral superiority of capital markets, as compared to bumbling government failure funding. Capital markets reward expected future success with present funds. Governments, when they grace the economy with other people's stolen money, reward expected future failures, leaving successful firms to fend for themselves in a depleted private financing market.

Thursday, February 19, 2009

Chicago Derivative Party?

Some acquaintances posted this video on facebook, and I thought it mighty appropriate to link to it here. I can't show the video on my site, but I highly encourage everyone to watch it. It's only about 5 minutes long. So go watch the video. I'll wait...Go!

Assuming you've watched the video, I'll continue. The sight of a trading floor full of capitalists shouting their disapproval of Obama's attempt to socialize home ownership just warms my heart. Frankly, I think the idea of a Chicago Tea Party, complete with tossing worthless derivative securities into Lake Michigan, is a fabulous idea, and I'm ready to hop in the car right now if they try it. It's good to know that out there, in the financial trenches, capitalists who love freedom and love money still exist, and they are PISSED OFF.

This raises an interesting issue, which is that as mad as we are about the rising tide of collectivism in this country, we do not go on strike (Colorado isn't the inviting wilderness safe from government snooping that it used to be) and we don't fight back. Sure we write op-eds and letters to the editors of major newspapers, but those fall on deaf ears, save for a few exceptions. The reason for this is that as bad as things are, our lives are still better (or at least more stable) than they would be if the country were hurled into all-out revolt. The question then becomes "How much is enough?" How much will the general populace (Objectivists alone would stage a pretty pathetic revolution) put up with before they fight back? Where is the breaking point?

I must admit, it would take a lot for me to want to set aside my long-term personal and professional plans and pick up a gun. It would, in fact, require that those plans become no longer viable. For some people wanting to go into medicine, that point might be fast approaching. For me, the intellectual, I think I have time. Still, with the way our country is progressing, it might not actually be that long.

Tuesday, February 17, 2009

Management Bitch #1

Sorry my writing is beings spaced out a bit more lately. This week is heavy on the exams. Which brings me to my post for today. In studying for my management exam (organizational behavior, to be specific) I find myself forced to memorize a litany of useless, repetitive terms in order to do well on the test. Now, I have a deep respect for management studies in many respects, but the let's-make-ourselves-sound-important vocabulary that management intellectuals devise sends me into convulsions, especially when I am expected to regurgitate it tomorrow morning. Here are some of my favorites; see if you can tell what they are or if they are good or bad:

Efficiency Diversity
Repair Service Behavior
Goal Inversion
Management of Cues
Anchoring and Adjustment
Fundamental Attribution Error (No cheating, this one's obviously bad)

Alright, go memorize these and the quiz will be tomorrow. Don't bother finding out what they mean. I just want you to vomit them onto a sheet of paper like I have to in the morning.

Sunday, February 15, 2009

How Short Our Memories Are

Scanning the Fox Business website (I don't know what I was thinking, either) I stumbled across what I consider to be one of the more evil and pernicious pieces of writing I have seen in a while. The author, one Al Lewis (not to be confused with Grandpa from the Munsters), describes the farce that was the Congressional testimony of major bank chiefs this week, and proceeds to flat-out deny their claim that they were forced to take bailout money. In addition to spreading abject falsehoods, Lewis' article reads like a romantic tribute to the efforts of selfless, crusading politicians. A few excerpts for your reading displeasure:

The story goes like this: One dark October day, the U.S. Treasury Secretary pulled CEOs of nine major banks into a room and forced them to accept billions and billions of dollars from the federal government.

Many of these bankers didn't want the money. Didn't think they needed the money. And didn't care to shock their shareholders by taking the money.

The spend-happy Bush administration, as if eager to introduce a virulent new form of socialism, simply rammed all these freshly minted dollars right up their big, fat pneumatic tubes....

Some bankers actually tried to maintain this bizarre myth in their testimony before the House Financial Services Committee on Wednesday.

"At the urging of the U.S. government, Bank of America accepted ... TARP money," CEO Kenneth Lewis told the committee, his eyes bulging like those of a man at a 12-step meeting recounting his helplessness in the face of horrendous abuse....

Barney Frank, the Massachusetts Democrat who chairs the House committee, put a swift end to these absurdities with a generous offer.

"If you want to give back the money, we will take it," he said. "And if there are any obstacles to your giving it back, legally, we will undo those obstacles."

Somehow, nobody volunteered.

What Lewis fails to mention is that a clause in the bailout contract forbids banks from paying back the money until they have raised extra private capital to replace the federal funds. Bah, details! This article is an absolute insult to journalism, flagrantly mocking bankers for telling the truth, as it was documented at the time in the WSJ, the New York Times, and this excellent letter to the editor written by a very conscientious citizen. CEOs of healthy banks were, in fact, forced to take TARP money under threat of arbitrary regulatory vigilance. What is even more depressing about this article than its factual inaccuracy is the facts it does present, namely the statements from bank CEOs. Businessmen today reject the moral foundation of capitalism, their own rational self-interest, and embrace a sort of mealy mouthed altruistic justification:

For Wells Fargo & Co. CEO John Stumpf, it was his patriotic duty to accept this money.

"We're Americans first, and we're bankers second," he told the committee. "So we see this taxpayer investment, first and foremost, as an investment in the future economic growth of our country. We're proud to be an engine of that growth."

Needless to say, this justification does not support an argument for individual rights, and so this happens:

Alabama Republican Rep. Spencer Bachus then asked Stumpf if Wells Fargo was indeed forced to take the money, as earlier reported.

"We've clarified our statements," Stumpf awkwardly replied. "We're happy to have the money."

In adopting an altruist stance on the survival of his bank, Stumpf is forced to deny even real, provable facts that occurred. Without a proper philosophical grounding, these gentlemen are powerless against the ludicrous accusations of Congress. When two sides agree not to think rationally, the most irrational will win.

I encourage everyone to read the article I referenced. It should make clear just how corrupt elements of our society are.

Saturday, February 14, 2009

The Stimulus Silver Lining

Well, Congress finally passed the damn stimulus, in all its spending glory. As it heads to the desk of the one called Obama, there may be a piece of it worth cheering. Now, I know what you're thinking, and no I haven't switched over to the dark side. Hear me out. This WSJ article describes what I'm talking about. Here's a slice:
The giant stimulus package that cleared Congress Friday includes a last-minute addition that restricts bonuses for top earners at firms receiving federal cash -- including those that already received it -- more severely than the Obama administration's previous pay limits.
I know what you're thinking, but keep reading.

The most stringent pay restriction bars any company receiving funds from paying top earners bonuses equal to more than one-third of their total annual compensation. That could severely crimp pay packages at big banks, where top officials commonly get relatively modest salaries but often huge bonuses.

As word spread Friday about the new and retroactive limit -- inserted by Democratic Sen. Christopher Dodd of Connecticut -- so did consternation on Wall Street and in the Obama administration, which opposed it.

Just wait...
The administration is concerned the rules will prompt a wave of banks to return the government's money and forgo future assistance, undermining the aid program's effectiveness. (Emphasis added)
And wait, there's more:
In speaking to Mr. Dodd, Messrs. Geithner and Summers also expressed concern over another provision he inserted that lets banks and other aid recipients pay back aid more easily. It says banks would no longer have to raise new private capital to replace the government's funds in order to repay it.
Hallelujah! We have found our deliverer, and it is Chris Dodd, the esteemed Senator from the great state of Connecticut (see picture below). With any luck, the healthy banks will bail on the bailout, and the unhealthy firms like Citigroup and Morgan Stanley will be left to wither and die as it always should have been. I have no idea why Dodd added the clause to the stimulus package making it easier for banks to give back the capital. I think it may be that he simply is an idiot. Regardless, that little caveat has turned what would otherwise be an egregious infringement on individual rights and all-around insult to everything good about humanity into an escape hatch for healthy banks suffocating to death in the smothering embrace of the Treasury Department's enormous meddlesome bosom.

(Here we see Chris Dodd during his audience with Her Majesty, the Queen of England)

In other stimulus news, Governor Mark Sanford of South Carolina seems to be the only sensible governor out there. He spent months fighting the stimulus bill, and may now reject any of its funds for his state. He's a favorite to run for president in a few years. That's one to watch out for. He'll probably disappoint, but it doesn't hurt to hope. Thanks to Steve for the link to Sanford's article on

Thursday, February 12, 2009

Who Knew I Was Rich?

Last night I did my taxes and discovered, to my shouting, cursing chagrin, that I owed Barack Obama and his government $400. This astounded me, considering I would have thought my meager $8,000 income last year to be below the bottom tax bracket. What I found, however, is that if you get income from interest, dividends, capital gains, and scholarships, as I did most of mine, your income is treated quite differently than if you received the same amount in wages. That, children, is because only evil rich capitalists get dividends, and only greedy Jewish bankers receive interest. In case you were not aware, the deck is massively stacked in this country against frugal individuals such as yours truly, who save their money and invest it, with the hope of one day being wealthy. The government has no desire for you to become wealthy, and would rather you spend yourself into one day requiring a bailout.

Now, this incident got me thinking. I contend that I have no moral obligation to pay taxes, only a legal obligation, under threat of fine and imprisonment. On the other hand, I do take advantage of public services, such as education, so I should pay for those, right? I only feel justified in consuming government product because I, or my parents, paid for it in taxes.

This leads me to my main point: the greater government's involvement in people's lives, the more difficult it is to act morally. Rand may have commented on this; I can't remember. Nonetheless, as Objectivists, we often talk about how capitalism is the only system that enables man to act morally (i.e., in his rational self-interest) This makes sense, since only the individual can decide what is in his interests, that individual must be free to make that decision. But it also applies to how we pursue our self-interest around others. Most of us would delight in never living for another's sake or asking another to live for ours, as the oath goes. The more government taxes us, however, the more we are obligated to. As the government taxes us, we are coerced into engaging in a trade we do not want. But should we then foresake the benefit from the trade?

If you have the means, you might be better off just paying taxes and avoiding any further government contact. For most of us, though, this option is too expensive. It is too expensive for many to pay property taxes for one child to go to school and then pay more tuition for their own children to attend school. So, we reluctantly take the upside of the involuntary government trade and get sucked further into the black hole of the welfare state. Even if we want to avoid living off the state, the growth of the state's influence makes doing so almost impossible. There are select few (two or three, probably) colleges that do not take any government funding, and these are liberal arts colleges. So what is the alternative? Don't attend college? There really is no option but to take the government bait and deal with it.

This is the situation we live in, one in which moral action is slowly being made illegal. Maybe we can do something about it. It will take a lot of work, though.

P.S.: Sorry about the morose post. I just did my taxes, what do you expect? I'll try to be more upbeat in the future.

Wednesday, February 11, 2009

A Few Comments on Previous Posts

Treasury Secretary Timothy Geithner had one job, as far as I was concerned in my post on the matter. The one good thing he could have announced yesterday regarding the O-ministration's plan to "save" the financial industry was that this was it. No more Bush-esque flying by the seat of our pants; we're picking a method and that's going to be it. More than taxes, regulation, or anything in between, the market hates ambiguity. FDR prolonged the Depression mainly through making investors scared to put their money in anything, for fear that Delano would change his mind about something next week.

So naturally, what does Geithner announce? He declares a broad-based plan the administration has devised, involving capital infusions, public-private partnering to buy toxic assets, and lots of other wastes of taxpayer money. The one thing missing from Geithner's announcement? CLARITY. Due to a lack of details, the market, especially financials, took a long, wet bath yesterday. What investors know, and what Obama may or may not know he is divulging, is that the guys with guns have no clue what they're doing, and are ready to try anything. Anything, that is, except nothing. Thank goodness Bush is out of office, right? Mmm...that's good change.

In other news, I am making a commitment now, as an incentive to generate comments, to respond to any thought-provoking comments or questions on this blog in post form. As such, I would like to respond to some comments Mitchell made on my Accounting Bitch #1 post. Mitchell writes:
Accrual based accounting works better in some instances. For example, if I sell an ad for a year on my blog, I get paid all at once, but the revenue is really earned over a 12 year period.

And as for accounting being a privately designed system... That would just make it be very inconsistent and manipulated. Every company could inflate their assets like Enron and there wouldn't be anything to stop them, then investors would get screwed.

First, regarding accrual based accounting: yes, in some instances accrual based accounting is more appropriate than cash-based. The idea inherent in Mitchell's example is called the "matching" principle, an accounting principle that states that revenues and expenses should be matched and recorded according to when they are earned. This is a valid concern, as cash results can make a company appear less profitable or more profitable than they really are. However, we must ask ourselves what the purpose of accounting is, and the main purpose is to represent the health of the firm. Mitchell's example could misleadingly make his website look secure, showing steady revenues over the course of the year, when in fact he is burning through cash and won't be able to replenish his reserves until the end of the year. A profitable firm can go bankrupt simply because of the timing of its cash flows. Something to consider.

My main beef with accrual-based accounting, however, is the haphazard, upside-down, rules-based way the government forces it on all public companies. Principles-based accounting versus rules-based accounting is another discussion topic altogether, but basically if the government is going to enforce any accounting regime, it necessarily must become rules-based. This is analogous to the difference between common law and statutory law. A written statute enforces rules, not principles. This pertains to Mitchell's second point, which is that companies would inflate their earnings. Again, there is a link to common law versus statutory law. Shareholders can always sue for fraud. The problem comes when it becomes impossible to prove fraud, because financial statements, misleading though they may be, are technically in accordance with federal statute. All sorts of private rating systems exist, from J.D Power and Associates to Underwriters Laboratories to the Good Housekeeping Seal of Approval. All of these systems rely on the reputation of the raters, and they guard those reputations very closely. Private accounting systems would be no different.

Side note: In an excellent book I've reference before, The Forgotten Man by Amity Shlaes, the author recounts a delightful story of how a female executive of Good Housekeeping, while a guest at the Roosevelts' home during the Depression, expressed great frustration with the President for undermining her business by strengthening the FDA. You just don't hear stories like that anymore.

Monday, February 9, 2009

Yahoo! Bets on a Capitalist

Last month, Yahoo!, the company that owns that search engine none of us use anymore, appointed Carol Bartz as CEO to succeed founder and former CEO Jerry Yang. Mr. Yang will returned to his previously held position as the appropriately named "Chief Yahoo." This article in The Economist offers a brief glimpse into Ms. Bartz's life. I had never heard of her before Yahoo named her CEO, but certain traits mentioned in the article grabbed my attention. Consider this short bio:

She was born in Minnesota but lost her mother when she was a child, so her grandmother raised her in a small town in Wisconsin. This early setback appears to have left Ms Bartz with insecurities that would forever motivate her to achieve. She became a homecoming queen and a mathematics star in high school. She worked her way through college by serving cocktails, maintaining a Spartan exercise regime in order to fit into the uniform—a red miniskirt and black fishnet stockings.

Ms Bartz then went to work at 3M, one of America’s blue-chip companies, in the 1970s. But when she requested a transfer to headquarters, she was told that “Women don’t do these jobs.” She walked straight out of 3M and into the computer industry. Eventually this led to her big break, when she was appointed chief executive of Autodesk. But there was a catch.

Just as she began her new job, Ms Bartz was diagnosed with breast cancer. She was 43 at the time, and decided to fight on all fronts. She took a single month off work for a mastectomy and reconstruction, and then went back to her new job full-time, while having chemotherapy for seven months on the side. She defeated her cancer, gained weight and lost it again, and launched Autodesk into a period of astonishing growth.

Her discipline was iron—and possibly excessive. To keep her family in Atherton, she commuted to the office, which required a long, traffic-clogged drive across the Golden Gate Bridge. To regain these lost hours each day, she spent the whole time behind her chauffeur reading and working, often stopping several times along the way to throw up out of carsickness. Her driver knew all the best places to pull over along Highway 101.

The article stipulates that, since Autodesk, while very successful, is much smaller than Yahoo, and since Ms. Bartz has no experience in Yahoo's market, the main reason Yahoo picked Bartz for the top spot is simply that she is one tough bitch (my words, not theirs). In addition to her perseverence and drive, she exhibits a rare quality a good capitalist must have to be successful, appreciation of ability in others. Consider this:
Unlike a lot of men in her position, Ms Bartz kept her power in perspective. She had groomed a successor at Autodesk and became worried that he might leave if she stuck around too long. So she made way for him and became Autodesk’s chairman. “There is a real difference between managing and leading,” she once said. “Managing winds up being the allocation of resources against tasks. Leadership focuses on people. My definition of a leader is someone who helps people succeed.”
I would say this characteristic makes her unlike a lot of people in her position, but I won't split hairs. In his book, The Prime Movers, Objectivist business scholar Edwin Locke devotes an entire chapter to the absolute necesity of nurturing human ability if you are a CEO. Poorly planned CEO succession can be absolutely devastating to a corporation. (See: Oh, let's start with GE and work our way down by market value)

It will be very interesting to see if Bartz can salvage Yahoo and turn it into something decent for its shareholders. If she can manage a successful turnaround, or even a beneficial sale of the company, she might earn herself a place in the business history books.

Voldemort, Feng Shui, and A Not-That-Terrible Idea from the White House

Three note-worthy stories that made the WSJ's front page today:

The first concerns Voldemort, by which I of course mean General Motors. Just when we thought GM couldn't get slimier, this story breaks out. Apparently, Voldemort is still reeling, despite the government's attempt to reverse overwhelming wisdom. (Damn, and I really thought it would work this time.) It seems that people really just don't want to pay for cars made with $70/hr labor and subjected to ludicrously costly CAFE standards. Go figure. Anyway, rather than sell of pieces of the company or close up shop, this indispensable American institution has determined that the obvious solution to its problems guessed it: more bailout money.

But asking for more money would be difficult in the current anti-big business climate, so GM's brilliant plan around this hurdle is to become even "too big to fail"-er. Yes, that's right, GM wants to take back part of Delphi, the auto parts manufacturer it spun off several years ago, in an effort to convince the U.S. to pony up more dough. This is the state of business today, if you're a failing corporation, don't downsize, don't attempt to return to profitability; just acquire an even worse company, a bankrupt company, in the hope that you'll look even needier and more pathetic. This is the shortest of short-range perspectives. How taking on Delphi's burdens and getting a few extra worthless federal handouts will carry GM more than an extra week eludes me. American corporatist myopia has reached a new low.

On the other side of the world, mysticism is thriving in one of the world's freest cities as the threat of financial insecurity turns wealthy investors into quivering sheep at the foot of the nearest witch doctor. Today's featured school of voodoo: feng shui. Yes, the masters of wind and water are making a killing on scared, stupid, and scared stupid investors. Some of the most delightful insights

"The incoming U.S. president and [Treasury] secretary were both born in the Year of the Ox," said one client. "Is that a problem?"
Mr. Yeo's answer: Yes. The pair of oxen in charge of the U.S. economy could be an accident waiting to happen. Hold out until after January 2010 before investing in the U.S., he advised.

"This year, with the economy and the stock market so bad, I wanted to come and ask about the future," said Mr. Lee, who says he still has substantial holdings in the stock market. "It can't hurt to hear another opinion, right?"

"Investors used to trust banks and mutual funds," says Liu Qiao, a professor at Hong Kong University who studies behavioral finance. "Now, people see professional bankers making very stupid mistakes, and I think that explains why so many people are going in different directions, to see feng shui masters or pray at temples."

So let me get this straight. Investors lost money because of irrational expectations about the future, so now they are consulting the stars to tell them which stocks to pick? Forgive me father, for I have invested in Fannie and Freddie. How do you feel about biotech?

I suppose I shouldn't be surprised. In times of crisis, the weak and desperate cling to their favorite rabbit's foot, praying that it will do their thinking for them. That said, I must say I enjoy the characterization of Obama and Geithner as oxen.

Finally, I cannot at this time unequivocally declare my hatred for the Obama administration's financial system bailout plan. Geithner will present the specifics tomorrow, but it looks like the government is planning to use a private-sector partnership to buy banks troubled assets. Normally, I would be against a private-public partnership (see: Fannie Mae and Freddie Mac), however, considering all the other horrible measures the government has in its arsenal, this seems fairly tame. It would provide a market for bad assets (albeit a distorted one) and banks and investors would reach an equilibrium for which assets would leave banks' balance sheets and which would stay, and at what price they would sell.

More important, however, is the big difference between Obama and Bush in the bailout department. Bush's ad hoc approach to the financial services industry made the market apopleptic. As Amity Shlaes poins out in her excellent history of the Great Depression, The Forgotten Man, what did more to prolong the Depression than any other measure was Roosevelt's haphazard experimenting with the market. Markets like to know what the government is going to do even more than they like it to stay the hell out of their business. The O-ministration seems to understand this, and has taken some time to present one plan (the last, with any luck) that is supposedly comprehensive. If they keep their word, the market can price in all the changes, and our economy can finally start to move forward with new investment. That's a big "if," though.

Sunday, February 8, 2009

Accounting Bitch #1

Occasionally, for the benefit of my non-business-educated readers, I will post on a specific element of business life that defies all logic, and thus creates endless frustration for me. For while at its root business, in all its creative and adaptive brilliance, is a beautiful phenomenon, there are parts of it that could drive an improperly equipped rational person insane. Naturally, most, if not all, of these stem from some kind of government influence, whether tax-, regulation-, or lawsuit-related. Needless to say, I doubt the well will ever run dry on this topic. So, without further ado...

Today's stupid business topic is accounting, and so is titled "Accounting Bitch #1." My first bitch with accounting is a general one. Accounting is "accrual-based" and not "cash-based." Allow me to explain. Most people think you record revenue when someone pays you for something and you record an expense when you pay someone for something. This might be true for some very small businesses, but any business that must report financial results must do so with an accrual-based method. The method is known as GAAP, or "Generally Accepted Accounting Principles." (This, of course, is a misnomer because GAAP consists more of rules than principles, and pretty much everyone hates them) These rules are enforced by the FASB, or Financial Accounting Standards Board, a "non-governmental" agency. I use quotes because once FASB has settled on standards, they are religiously enforced by a batallion of government bureaucrats.

GAAP has evolved over several decades, but today's bitch focuses on the fact that it uses "accrual-based" accounting, whereby revenues and expenses are recognized based on when they are earned, rather than on when cash is exchanged. In theory, there is not much wrong with this approach, and it makes sense in several industries. However, since the rules are enshrined in regulatory stone, all accrual-based accounting does is offer companies legal ways to obfuscate their results. Cash is cash, and it is impossible, without committing fraud, to be misleading about how much cash has come in or gone out, and how much sits in the company coffers. As an example of how accrual-based accounting can be misused, consider that Enron recorded millions of dollars in revenue on unsure projects that had not brought in a dime. Such a practice was completely legal, however, because they had secured the contract. That cash never came in, by the way.

Accounting is a necessary component of capitalism. It is the language of business, the common understanding that enables those with capital to find those with initiative and to create profitable ventures. The more the accounting system loses objectivity (it's been on a steady decline and has been accelerating recently) the more stagnant our economy will become because investors will not trust the numbers they are presented.

Ideally, accounting would be a privately designed system (or competing systems) for keeping track of assets, liabilities, revenues, and expenses. Short of privatization, the government should at least adopt a cash-based system and junk FASB's accrual-based nightmare. More on this in my next accounting bitch: Mark-to-Market rules

Saturday, February 7, 2009

Notable Quote

In the course of my research for my thesis on executive compensation in the banking industry, I stumbled across a quote I just couldn't exclude from my paper. The irony was too perfect. In his book, A Banker's Life, George S. Moore, the former president of Citibank, writes:
Speaking from a perspective of sixty years in banking and in business, I have to say that banking is the surest, safest, easiest business I have seen or known….If you’re not actually stupid or dishonest it’s hard not to make money in banking.
Now, a few preliminary comments about this quote. Moore ran Citibank in the 1960s, when banking, like most businesses, was considerably simpler. It was far more regulated, far less exciting, and consisted of, as my Money, Banking, and Capital Markets professor put it, "Fat men in suits playing golf." Since the 80s, banking has grown more interesting and more complex. Part of this can be tied to the proliferation of securitization of assets and the competition for financing. Nevertheless, even though the specifics of banking may have changed, the fundamentals are pretty much the same: Take in money, lend out money, take in more money, lend out more money.

Also, he is obviously understating the importance of intellect in banking. It is the "surest, safest, easiest business" if you have the business acumen to spy good investments. It seems easy to those who can do it.

That said, I find this quote hilarious for the obvious reason that so many bankers seemed to fall into the "stupid or dishonest" category in recent years. (Dishonest with themselves, and therefore stupid with their businesses) If I had to venture a guess as to the reason for the prevalent stupidity, I would blame the growing trend of business to align itself with the government at the upper level. For evidence, see Robert Rubin, the former Treasury Secretary who served on the board of Citigroup after his tenure in the Clinton administration until his recent resignation in disgrace. Also see Angelo Mozilo, the former CEO of Countrywide Financial who abetted Fannie Mae and Freddie Mac in their affordable housing binge in exchange for favors.

Putting government pull-peddlers at the tops of corporations sets the corporation up to serve the government, not its shareholders. That is exactly what happened in the mortgage crisis, and now the government, with its increased role in bank decision-making, is trying to repeat that catastrophe.

Lesson: If you want to run a business the way business is supposed to be run, don't stuff your boardroom or your corner office with "Men from Washington" whose only strategic advantage is that they have lots of "friends."

Friday, February 6, 2009

Salary Caps and The Brainless Voting Mob (The Sequel)

Kyle raises an important point in his comment on the previous post, which incited me to ponder the issue a bit more in depth for the benefit of my readers. First to reply to Kyle, who wrote:
If an employee's cash payment is capped, but his overall compensation package is constant, then these guys get paid stock options. So, while you're right in that their total pay won't be changed, their interests will align more with the company's future, which in theory could be a good thing.
While theoretically, this should hold, there are a few mitigating circumstances. For one, stock really only provides incentives if it isn't a gratuitous grant. If the CEO doesn't feel like he's earned it, he'll treat the stock like a windfall, and not like an investment. The phenomenon is similar to people who win the lottery, and then blow it all in a year. I've spent about nine months studying CEO compensation in the banking industry, and I've found that "long-term" compensation, by itself, completely fails to spur long-term strategic thinking. Obama's pay caps simply hamper boards' ability to compensate for long-term results.

This brings me to my second point. At all but the largest banks, stock constitutes a less important portion of total pay. Cash incentives, both short-term and long-term, play a larger role, as this WSJ article points out.

Regional banks, which are one notch below the big nationals like JPMorgan Chase and BofA, stand to be hurt the most if this rule is expanded to encompass them. Several of these banks employ some kind of long-term incentive program, which uses a combination of cash and equity grants to reward executive for achieving or exceeding preset multiyear performance goals. This is the best compensation measure I have found, because it holds the executive to objective standards, as well as forces the board to specify exactly what kind of results it expects from management.

I am not sure if the Obama plan's loophole for "other long-term compensation" allows for this component (If it does, the plan will have even less effect than I previously thought.) If it excludes this type of plan, the consequences to those banks who know how to use cash compensation effectively will be dire.

Wednesday, February 4, 2009

Salary Caps and the Brainless Voting Mob

When politicians speak, idealists like me typically vacillate between two alternatives, either the politicians is evil, or he's stupid. Rarely does an elected official say something so bashing-my-head-against-the-wall stupid that you can be sure he doesn't believe it. In that case, he's just plain evil.

I had such a moment when I read President Obama's statement that he intended to impose a $500,000 cap on executive salaries at those firms who accept "extraordinary assistance." (I'm not sure what "extraordinary" means, but that fact that any assistance is "ordinary" pisses me off.) Disregarding the utterly arbitrary nature of the $500,000 benchmark, the salary cap will be, like the upcoming stimulus package, impotent at best.

Typically, government wage control sends talent fleeing. The way that firms get around this is that they invent new forms of compensation not controlled by Uncle Sam. During World War II, in order to retain talent under wage controls, firms began offering health benefits to their employees, giving us the wonderful third-party payer system we enjoy today. (Thanks, FDR!) In the early 1990s Congress got their adult diapers in a bunch over CEO compensation (it's like crack to them) and they capped the available tax deduction of CEO salaries at $1,000,000. As a result, salaries were cut to $1,000,000 or less usually, and stock options became far more popular. Total CEO compensation skyrocketed over the years. Score one Congress.

This brings me to Obama's decision to cap executive comp. at extraordinarily bad companies. Anyone who has ever looked at a proxy statement knows that salary makes up about 5% or less of these guys' total pay. Under Obama's plan, the executive can still get stock options. Since Obama is not in a coma, he understands this. There is no ambiguity about any of this. He has to know just how pointless this measure is. If it will do anything, it might scare companies from taking more TARP money. If that happens, then I am greatful to Mr. Obama for his politicking.

In this instance, we can be absolutely sure that Obama is not stupid. Someone had to know that this measure will change nothing. It's not stupidity this time; it's just good old fashioned "voters'll believe anything we tell them" politics.

Tuesday, February 3, 2009

The CEO Mentality

The front page of the Wall Street Journal featured an interesting article on CEOs' second chances, focusing on one CEO in particular. The article raised, perhaps inadvertently, some issues of what kind of person becomes a CEO and what the market for top jobs is like. Here are a few key excerpts:

When Joseph Galli Jr. got forced out as chief executive officer at Newell Rubbermaid Inc., he was certain he would brush himself off and try for another CEO job. From his father, a school dropout who built a successful scrap yard near Pittsburgh, Mr. Galli learned to work hard and never give up.

But the lessons that propelled Mr. Galli to the top of the corporate world proved less useful in selling himself to a new employer. Instead, he encountered a paradox known to many out-of-work CEOs: Though they are driven like few others to succeed, once they fail, many don't get a second chance to run a public company.

Mr. Galli is an exception....He endured a year of humbling unemployment and self-reflection before returning to the corner office, this time as the CEO of Techtronic Industries Co., a Hong Kong-based manufacturer of Ryobi power tools, Homelite outdoor products and Hoover and Dirt Devil vacuum cleaners.

I encourage everyone to read the full article to learn the details of Mr. Galli's life, but if you don't, these paragraphs represent the essence of the man:

During an overnight stay at the 26-acre Galli farm in Maryland, Mr. Pudwill asked Mr. Galli to run Techtronic's roughly $450 million floor-care division...

Mr. Galli was prepared. He brought Mr. Pudwill to his basement and handed him a one-page summary of a 15-page strategic plan for expanding Techtronic. He scribbled details on a whiteboard. Mr. Galli proposed moving the company into South America, among other things, and trying to dominate the market for cordless power tools. They talked until nearly dawn.

In November 2006, Mr. Galli took over Techtronic's ailing floor-care unit. He and colleagues say he cut costs, shifted U.S. production overseas, strengthened management and sped introduction of new products. The unit lost money in 2007 but turned profitable in the first half of 2008.

I like this article, because this scenario is so representative of the kind of capitalist hero that Objectivists admire. These individuals do exist, and a disproportionate number of them work in the corner office. The drive to succeed, the singular vision, and the constant idea-generation are rare traits among the general populace, but are more common among CEOs, as the article mentions. Many people, if they had fallen from the top spot at Newell Rubbermaid, would have taken what was left of their wealth, given up, and felt miserable the rest of their lives. It is so refreshing to read about Mr. Galli scribbling grand ideas on a white board in his basement for the Chairman of a public company. I know nothing about Mr. Galli other than what I read in the article, so I cannot say I endorse everything about him. Based on what I do know, however, I don't think I would mind sharing a drink with him.

The article raises another issue I think people often fail to understand. CEOs exist in an unusual job market. If you're in demand, you can demand exorbitant pay for your services. That only applies to the best and best-known, however. Far more CEOs get one shot, and if things do not go as planned, they are very likely to be let go, and never hired as CEO again. It is an incredibly stressful position, and most take the stress in stride.

Slimeballs exist in every profession, and chief executives are no exception. Nevertheless, to climb to the top of a corporation requires talent, drive, and a fundamental rationality most people never achieve. Those of us who understand the value of productive work can take solace in the knowledge that, despite the big names' behavior of late, many CEOs still display the virtues their position demands.

Monday, February 2, 2009

Happy Birthday Ayn

I often wonder in these trying times how Ayn Rand would comment on the current goings on in business and politics. I imagine something north of a conniption fit, infused with flawless logical rhetoric, of course. Since Mama Bear is not around for us to pick her brain (she died in 1982, for those of you keeping score) and since today marks the 104th anniversary of her birth, I thought I would offer some pertinent bits of her timeless wisdom, taken from this blog's namesake, Francisco's Money Speech. Here are a few to settle your stomach while you're digesting the latest news out of Washington:

It is not the moochers or the looters who give value to money. Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow....Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money.

Money is made before it can be looted or mooched--made by the effort of every honest man, each to the extent of his ability. An honest man is one who knows that he can't consume more than he has produced.

Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you virtue and it will not redeem your vices. Money will not give you the unearned, neither in matter nor in spirit. Is this the root of your hatred of money? (I dedicate this quote to Citibank, AIG, GM, Ford, Chrysler, and all the rest of the boys)

Men who have no courage, price, of self-esteem, men who have no moral sense of their right to their money and are not willing to defend it as they defend their life, men who apologize for being rich--will not remain rich for long. They are the natural bait for the swarms of looters that stay under rocks for centuries, but come crawling out at the first smell of a man who begs to be forgiven for the guilt of owning wealth. They will hasten to relieve him of the guilt--and of his life, as he deserves. (Emphasis added, in case Warren Buffett is reading.)
And finally, a quote that all conscientious individuals should remember, both for its eloquence and for its chilling accuracy:

Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.
Too many of these conditions are becoming reality. Congress is threatening to force banks to lend, even though no one wants to borrow. Businesses can't move without asking for permission. It is important never to forget these words of wisdom, lest they become prophetic. This February 2nd, go pick up your copy of Atlas Shrugged, or buy one for a friend, and flip through the pages, just for your own benefit. In trying times such as ours, art can give us the resolve to march on, no matter how bleak the future might look.

Happy Birthday Ayn, and thanks.

P.S.: Feel free to post your favorite money speech excerpt if I've failed to include it.

Sunday, February 1, 2009

Super Bowl Commercials

I don't watch the Super Bowl for the football unless the Bears are playing, so this year I'm solely looking at commercials. Here's a compilation of some of the best, as I see them.

Hyundai: Screaming BMW and Lexus executives, "Win one award, and suddenly everybody gets your name right"--Screaming Germans and Japanese businessmen: always funny

E*Trade: I really like this company, and only last year it was on the verge of collapse what with the financial markets imploding. I grant near total credit for the firm's recovery on the E*Trade baby commercials from last Super Bowl, and the company is continuing them this year (3% interest on savings account might also have helped its recovery). That baby is awesome; I vote him for Treasury Secretary. Asian guy doing William Shatner impression. Awesome. (I'm still using Expedia, though)

Coca-Cola: I am so glad they got rid of the slogan "The Coke Side of Life." I mean, what marketing genius came up with that? Now it's "Open Happiness." As a devout Coke drinker, I have to agree. Also, the commercial with all the bugs stealing the Coke to tune of "Peter and the Wolf" was just adorable. Everyone has felt, at one point or another, that their job consisted of staring at a moose's ass. Ok, this beat Monster, I think. Punching koalas with glasses. That's all I need to say.

Miller: High Life! As any Objectivist will tell you, this is not a good investment. Keep your gold. I'm talking to you, Ed McMahon

Hulu: Alec Baldwin can turn my brain to mush any day of the week.

Finally, the Pespi commercial with McGruber was good, but Pepsi sucks, so it gets no points.