By and large I have found Fed Chairman Ben Bernanke to be qualified, informed and vigilant in his position.
Beginning last summer, however, with the onset of the private sector's self-inflicted financial troubles, I have questioned Bernanke's ability to remain objective amidst media attacks.
Two recent pieces in the Wall Street Journal drew my attention to actions by Bernanke which I find to be troubling, and would even label as 'errors.'
The first was the Journal's lead editorial two Fridays ago, on February 29. In that piece, the authors noted that commodities such as gold, food and energy have been hitting record highs lately. Retrospectively, these are typically signs of coming inflation at the consumer level.
Meanwhile, Bernanke and the Fed have rather recklessly cut rates since this summer, attempting to solve a counterparty risk dilemma with lower rates and easier monetary policy.
To date, it's unclear that any of the extra Fed-supplied liquidity has affected the credit markets in a substantial, lasting manner. Instead, equity markets have reacted to the various rate cuts like heroin addict to his latest fix. After the effect wears off, he looks for the next dose, hoping it will be even larger.
The editorial points out that the Fed is notoriously bad at what used to be called "fine tuning." In this case, knowing when to suddenly switch from recession-fighting rate cuts to inflation-fighting rate hikes seems likely to be problematic.
As the Journal editorial put it so eloquently,
"For readers under age 30 who are wondering why they are suddenly paying $3.15 for gasoline and $2 for milk, the answer is that this is what an inflation looks like. Those of us of a certain age remember it well, if painfully, and judging by the noises coming from the Federal Reserve of late we had all better get used to it again.
First, Fed Vice Chairman Don Kohn declared that, while inflation was worrisome, the Fed now views recession as the more urgent danger to fight. Then on Wednesday, Fed Chairman Ben Bernanke told Congress that the Fed will do whatever it takes to stop the credit squeeze from becoming a recession. That's about as close as a central banker will get to saying that he's thrown price stability to the wind. If inflation rises -- as it now surely will -- then the Fed will worry about that later, after the economy is safely past the credit crunch."
Personally, I could not care less about Humphrey-Hawkins, the poorly-designed Senate law which foolishly commands the Fed to pursue both price stability and full employment.
The Journal concludes by noting,
"Then as now they were also dismissing such forward-looking price signals as gold and oil and instead focusing on such misleading indicators as "core inflation" and the money supply. Mr. Mishkin may be seen as a monetary wizard at the Fed, but to investors around the world he is beginning to look more like a high-class inflationist.
The people who aren't being fooled by all this are the American people. They don't pay their bills with "core" dollar bills, and they know those dollars buy less with each passing month. This explains their rising economic anxiety -- and anger -- better than trade or job losses do, especially since the job market has remained relatively healthy. Inflation is the great thief of the middle class, as even Americans who don't recall the 1970s are learning. With its all-in reflation bet, the Bernanke Fed is gambling with their money."
I have to admit, I am not happy with Bernanke. Rather than insulate himself from external critics and have the courage Paul Volcker did when he wrung inflation out of our economy over 25 years ago, Bernanke seems to actually be afraid of the Congressional Committees before which he must periodically appear.
As if all of this were not bad enough, yesterday's Journal reported that in Bernanke's recent speech to a conference of bankers, he said,
"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure" than reducing the interest rate."
Meaning unilateral loan forgiveness under quasi-duress from the Federal government. In other language, this would known as a "taking-" the unlawful seizure of property without compensation. For the record, Barney Frank was thrilled to welcome Bernanke aboard his ideological investment confiscation train.
Reactions to Bernanke's sudden socialist uttering included,
"Reducing the principal rather than the interest rate is a "very different framework for thinking about the problem," said Andy Laperriere, an analyst at ISI Group, a brokerage firm. He said with so many borrowers under water, "any proposal that helps them will be very expensive for either the financial institution or the taxpayer," and a large program would potentially sweep in millions of borrowers who weren't going to default anyway.
Industry reacted coolly to Mr. Bernanke's proposal. The American Securitization Forum, which represents participants in the market for mortgage-backed securities -- pools of mortgages originated and sold by banks and other lenders -- said it had already developed procedures for modifying loans, including through principal reduction. To reduce principal, firms that service MBS pools on behalf of the end investors need "a clear basis for concluding that the related borrower is unable...rather than simply being unwilling" to repay."
No kidding! Doesn't Bernanke realize to what this sort of reward for an ultimate moral hazard- buying a home you can't afford- this will lead? Potential borrowers will never again take loss of their equity via foreclosure seriously. They'll simply wait to be part of a massive wave of subprime borrowing, the better to be part of those receiving the resulting Federal largess of loan forgiveness.
At a time when Congress complains that the Federal government is living beyond its means, but won't cut its own budget, we see it now demanding lenders allow US consumers to live beyond theirs, too.
I'd pay some extra tax dollars if it were targeted at bringing Tall Paul back out of retirement to lead the Fed for a few years. Not that I don't think Bernanke had been doing a good job until recently. Or that he doesn't understand the various aspects of his job. I just think Volcker was a Godsend whose discipline is now sorely missed, and will be, much more, I'm afraid, before too much longer.
Friday, March 07, 2008
Thursday, March 06, 2008
More on Marking To Market
Last week I wrote this post regarding the hazards of applying 'mark to market' to every balance sheet in sight. In the post, I asked,
"Why should a firm be forced to keep its balance sheet on a 'breakup' valuation basis? If the firm doesn't plan to sell itself or liquidate, why must every scrap of every asset be current-valued?
What about industry sectors in which substantial investment is required in assets whose value will grow with time, such as cable, mining, or technology? Or commercial banks which legitimately desire to be portfolio lenders to the housing sector, and, thus, are not affected by performing loans whose values are temporarily depressed due to market or credit conditions?"
I guess I'm in good company, because in yesterday's Wall Street Journal, Holman Jenkins echoed my post and sentiments in a column entitled "Mark to Meltdown?"
Jenkins wrote,
"Overstating the importance of accounting rules is, indeed, the essential error that leads to excessive twiddling with accounting rules. Whether a company values its assets at historic cost or market value or a value derived by some other formula, investors still have to make their own forecasts and judgments. A thermometer is equally useful whether it says water freezes at 0 degrees or 32 degrees -- though it still doesn't tell what the temperature will be next week.
But loose as well is a fear that exaggerated writedowns in the current credit crunch are rapidly chewing through the banking system's capital cushion. Banks will be forced to dump assets at fire-sale prices, leading to yet more writedowns and more fire sales. At best, banks will have to keep shopping cheap equity to foreign potentates to keep themselves afloat. At worst, massive regulatory insolvency lies ahead.
This horror show, we hasten to add, has proven more theoretical than actual, but it plays a key role in the meltdown scenarios of NYU economist Nouriel Roubini, which he recently retailed for a congressional hearing. And it's hard to doubt that fears of accounting-prompted distress sales are partly behind the melodramatic yields now available in the corporate and municipal bond markets."
Which is pretty much what I further opined in my earlier post,
"It's one thing to force market valuations on assets which are purposefully traded frequently, such as bond or equity funds. But forcing firms which own significant amounts of assets that are not intended to be liquid seems silly, especially if the 'market' for those assets temporarily dissolves, creating an apparent value of zero."
We therefore have the Law of Unintended Consequences extracting perverse, severe penalties from today's credit markets. Somewhat arbitrary accounting rules are now governing the behavior of financial service firms to issue margin calls and trigger the unwinding of highly-leveraged positions in credit instruments, which is causing further, temporary cratering of values of otherwise-performing assets.
As Mr. Jenkins informs us,
"Mark to market was a gift to the world from SEC Chief Richard Breeden in the early '90s. With the help of accounting mavens, he argued that requiring banks and other companies to account for financial assets at current market prices, as if the institutions were being sized up for liquidation, would provide a rough-tough discipline for the edification of investors, regulators and managers.
A rose would smell as sweet if it were called skunk cabbage -- so we always maintain when somebody predicts either dire or utopian results from a mere accounting change. Still, many questioned Mr. Breeden's initiative at the time, among them Fed Chairman Alan Greenspan and Bank of America's Richard M. Rosenberg. Particularly notable were their warnings that the new rule, when combined with risk-based capital standards, might lead banks to hold fewer loans on their own books, packaging more of them as complex securities for sale to investors.
Overlooked, too, was a phenomenon we perhaps understand better today -- the propensity of the speculators who provide much of the market's day-to-day liquidity to go on strike during moments when their services are most needed. "Mark to market" then becomes something else, because markets no longer exist for many of these abstruse securities. Banks are left oxymoronically trying to estimate what market prices would be if markets existed."
Which, again, echoes something I've written about many times in the past year- the tendencies of younger trading mavens to fail to understand that sometimes markets simply cease to exist, in the classical sense of the definition. If you hold such instruments with borrowed money, you are in a bind. If you are forced to mark such positions to market in the face of a non-existent 'market,' you are also in a bind.
Mr. Jenkins closes his piece with this passage,
"But the best argument was articulated by the late Citibanker Walter Wriston, and it applies equally to most of the accounting innovations with which the world has been oversupplied in recent decades: "Consistency of accounting treatment is always more useful to managers and investors than the latest fad of accounting aficionados." "
Just so. And perhaps we should allow for context, too. As I asked at the end of my prior, linked post, why isn't this a subject on which FASB should rule? Have they been attending to it since, oh, last June, when the effects of this accounting policy began to send credit markets in a downward valuation spiral of 'devalue-sell-devalue-sell-devalue-sell-writedown-close?'
I think the much, much larger issue now is to consider, for the entire financial services sector, the contexts in which mark-to-market makes little sense, and should be suspended, versus when it is appropriate.
As I began to suggest in my earlier post, businesses and companies in the business of trading and investing with the constant expectation of selling and buying securities should probably mark their assets to market daily. If that causes them to use less leverage or avoid exotic structured finance instruments, so be it.
Financial service businesses intending to hold assets, whether they be whole loans, exotics, or what have you, beyond a pre-determined duration, should probably be able to value those assets on the basis of performance, rather than immediate market value.
As I wrote here in September of last year,
"Could it be that, rather than a uni-directional march toward market pricing and underwriting, credit markets are, in reality, about to swing between extremes? Moving from all-bank balance sheet valuation and warehousing, to heavily market-priced and securitized, and now back toward the original pole of bank-sourced and distributed credit instruments?
It's not something I've read anyone else hypothesizing. Even I just assumed that banks had pretty much become a mere origination platform for credit.
Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?"
More than anything else, it seems that commercial banks began behaving like investment banks, and have effectively eliminated an institution which used to anchor the US economy- the bank that judges credits based upon the prospect of actually holding them to maturity.
"Why should a firm be forced to keep its balance sheet on a 'breakup' valuation basis? If the firm doesn't plan to sell itself or liquidate, why must every scrap of every asset be current-valued?
What about industry sectors in which substantial investment is required in assets whose value will grow with time, such as cable, mining, or technology? Or commercial banks which legitimately desire to be portfolio lenders to the housing sector, and, thus, are not affected by performing loans whose values are temporarily depressed due to market or credit conditions?"
I guess I'm in good company, because in yesterday's Wall Street Journal, Holman Jenkins echoed my post and sentiments in a column entitled "Mark to Meltdown?"
Jenkins wrote,
"Overstating the importance of accounting rules is, indeed, the essential error that leads to excessive twiddling with accounting rules. Whether a company values its assets at historic cost or market value or a value derived by some other formula, investors still have to make their own forecasts and judgments. A thermometer is equally useful whether it says water freezes at 0 degrees or 32 degrees -- though it still doesn't tell what the temperature will be next week.
But loose as well is a fear that exaggerated writedowns in the current credit crunch are rapidly chewing through the banking system's capital cushion. Banks will be forced to dump assets at fire-sale prices, leading to yet more writedowns and more fire sales. At best, banks will have to keep shopping cheap equity to foreign potentates to keep themselves afloat. At worst, massive regulatory insolvency lies ahead.
This horror show, we hasten to add, has proven more theoretical than actual, but it plays a key role in the meltdown scenarios of NYU economist Nouriel Roubini, which he recently retailed for a congressional hearing. And it's hard to doubt that fears of accounting-prompted distress sales are partly behind the melodramatic yields now available in the corporate and municipal bond markets."
Which is pretty much what I further opined in my earlier post,
"It's one thing to force market valuations on assets which are purposefully traded frequently, such as bond or equity funds. But forcing firms which own significant amounts of assets that are not intended to be liquid seems silly, especially if the 'market' for those assets temporarily dissolves, creating an apparent value of zero."
We therefore have the Law of Unintended Consequences extracting perverse, severe penalties from today's credit markets. Somewhat arbitrary accounting rules are now governing the behavior of financial service firms to issue margin calls and trigger the unwinding of highly-leveraged positions in credit instruments, which is causing further, temporary cratering of values of otherwise-performing assets.
As Mr. Jenkins informs us,
"Mark to market was a gift to the world from SEC Chief Richard Breeden in the early '90s. With the help of accounting mavens, he argued that requiring banks and other companies to account for financial assets at current market prices, as if the institutions were being sized up for liquidation, would provide a rough-tough discipline for the edification of investors, regulators and managers.
A rose would smell as sweet if it were called skunk cabbage -- so we always maintain when somebody predicts either dire or utopian results from a mere accounting change. Still, many questioned Mr. Breeden's initiative at the time, among them Fed Chairman Alan Greenspan and Bank of America's Richard M. Rosenberg. Particularly notable were their warnings that the new rule, when combined with risk-based capital standards, might lead banks to hold fewer loans on their own books, packaging more of them as complex securities for sale to investors.
Overlooked, too, was a phenomenon we perhaps understand better today -- the propensity of the speculators who provide much of the market's day-to-day liquidity to go on strike during moments when their services are most needed. "Mark to market" then becomes something else, because markets no longer exist for many of these abstruse securities. Banks are left oxymoronically trying to estimate what market prices would be if markets existed."
Which, again, echoes something I've written about many times in the past year- the tendencies of younger trading mavens to fail to understand that sometimes markets simply cease to exist, in the classical sense of the definition. If you hold such instruments with borrowed money, you are in a bind. If you are forced to mark such positions to market in the face of a non-existent 'market,' you are also in a bind.
Mr. Jenkins closes his piece with this passage,
"But the best argument was articulated by the late Citibanker Walter Wriston, and it applies equally to most of the accounting innovations with which the world has been oversupplied in recent decades: "Consistency of accounting treatment is always more useful to managers and investors than the latest fad of accounting aficionados." "
Just so. And perhaps we should allow for context, too. As I asked at the end of my prior, linked post, why isn't this a subject on which FASB should rule? Have they been attending to it since, oh, last June, when the effects of this accounting policy began to send credit markets in a downward valuation spiral of 'devalue-sell-devalue-sell-devalue-sell-writedown-close?'
I think the much, much larger issue now is to consider, for the entire financial services sector, the contexts in which mark-to-market makes little sense, and should be suspended, versus when it is appropriate.
As I began to suggest in my earlier post, businesses and companies in the business of trading and investing with the constant expectation of selling and buying securities should probably mark their assets to market daily. If that causes them to use less leverage or avoid exotic structured finance instruments, so be it.
Financial service businesses intending to hold assets, whether they be whole loans, exotics, or what have you, beyond a pre-determined duration, should probably be able to value those assets on the basis of performance, rather than immediate market value.
As I wrote here in September of last year,
"Could it be that, rather than a uni-directional march toward market pricing and underwriting, credit markets are, in reality, about to swing between extremes? Moving from all-bank balance sheet valuation and warehousing, to heavily market-priced and securitized, and now back toward the original pole of bank-sourced and distributed credit instruments?
It's not something I've read anyone else hypothesizing. Even I just assumed that banks had pretty much become a mere origination platform for credit.
Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?"
More than anything else, it seems that commercial banks began behaving like investment banks, and have effectively eliminated an institution which used to anchor the US economy- the bank that judges credits based upon the prospect of actually holding them to maturity.
Wednesday, March 05, 2008
Green Corporate Subsidies- Another Third-Party Payer Disaster In The Making?
A week ago yesterday, the Wall Street Journal carried an article entitled "Workers Get Incentives to Live Greener," written by Kelly Spors.
The article provides insights into a new trend which goes beyond corporations working to reduce the environmental impact of their business operations. As Spors writes,
"It irked Greg James to see some of his employees roll up to work in hulking, gas-guzzling sport-utility vehicles -- often driving more than 40 miles a day round trip.
So in 2005 he finally did something about it.
The chief executive and founder of Topics Entertainment Inc., a Renton, Wash., DVD and software publisher, Mr. James established an incentive program that offers its 55 employees $1,000 to trade in their automobiles for one with fewer cylinders in the engine. Buying a hybrid or biodiesel vehicle earns them $2,500, while car pooling at least three days a week pays $300 annually split between the ride sharers.
Ten employees have claimed the auto-purchase bonus so far. Mr. James estimates that by getting those new vehicles and boosting their gas mileage an average 10 miles per gallon, employees cut last year's gasoline consumption during commutes by 2,400 gallons."
It sounds pretty harmless, doesn't it? A well-meaning small-business owner does his bit to further his own environmental beliefs by rewarding employees who follow his own precepts?
But wait. Isn't that unfair? What about a handicapped employee who can't drive? Shouldn't s/he be entitled to some offset for not being able to buy a car and earn that bonus?
What about a struggling single mother of a handicapped child who can't afford a new car? Or carpool?
What about employees who live next to the plant and walk to work? Should they be denied eligibility for the carpooling bonus?
Call the Labor Department!!! Call the union!!!!
Spors continues by noting,
"Many companies, large and small, have become greener by reducing office waste and pollution or buying so-called carbon credits, which companies purchase to offset the impact of their pollution. But a growing number of small companies like Topics also are seeing value in encouraging employees to make environmentally friendlier choices as well -- at home, at work and in their commutes.
Among the incentives: giving bonuses to employees who buy more fuel-efficient vehicles and outfit their homes in more energy-efficient ways, as well as helping employees support environmental causes. Even low-cost measures, such as letting employees purchase energy-efficient light bulbs at the employer's bulk price, are making a difference in employees' behavior and energy use.
In an era when more young workers are seeking out employers with a socially responsible mission, such green incentives can help bolster recruitment efforts and foster goodwill. At small companies especially, green benefits can be an easy and effective way to ingrain a workplace's eco-friendly mission."
"Some companies find that the participation of even a few employees can have an impact. Green Mountain Energy Co., an Austin, Texas, renewable-electricity provider, lets employees buy renewable-energy credits to offset their carbon-dioxide emissions. It also matches donations to environmental groups made through payroll deduction, up to $10 per two-week pay period.
In addition, the company hands out prizes like gift certificates based on points that employees rack up by finding alternatives to driving to work, such as biking or taking public transportation.
Though only about 25 of Green Mountain's 150 employees participate in the commuter program, the impact has been substantial, with those people collectively driving about 21,000 fewer miles in 2007, says Gillan Taddune, the company's chief environmental officer."
As I read this example, I was reminded of our current healthcare mess. Didn't we get into this dilemma by creating, somewhat recklessly, in retrospect, third-party payers for necessities?
Do we really want transportation costs of employees twenty years hence dependent upon the whims of employers? What if employers secure a deal for mass transit for their employees, forcing them to commute via bus, and discriminate against those who wish to drive?
Why, in God's name, can't employers just pay employees cash, shares or options, and have done with it? Haven't we learned over the past 100 years that paying employees in kind eventually creates distortions in consumption, improper influence of the corporation into the private lives of its employees, and suspect values impositions?
What if Topic Entertainment's owner was a racist or anti-Semite? What if he awarded bonuses for employees sending their children to single-race schools? Or contributing to the Aryan Nation?
What if the owner of a firm was a Southern Baptist, and provided cash bonuses for every employee who attended a Southern Baptist church each week?
Would we think that such an imposition of values by a business owner on his employees was proper?
Who is to judge when an owner's values are appropriate, and when they are not? What is laudable mobilization of society's members for a desirable goal, and what constitutes improper manipulation of workers by their employer in an illegal manner?
I loved the article, and found it important in a very unexpected manner.
In 2008, after nearly 100 years of an organized labor movement in this country to protect workers' rights, we still see business interfering in the private lives of its employees. Creating yet more entanglements between workers' consumption patterns, affordability of choices, and employer funding.
Will we ever learn?
The article provides insights into a new trend which goes beyond corporations working to reduce the environmental impact of their business operations. As Spors writes,
"It irked Greg James to see some of his employees roll up to work in hulking, gas-guzzling sport-utility vehicles -- often driving more than 40 miles a day round trip.
So in 2005 he finally did something about it.
The chief executive and founder of Topics Entertainment Inc., a Renton, Wash., DVD and software publisher, Mr. James established an incentive program that offers its 55 employees $1,000 to trade in their automobiles for one with fewer cylinders in the engine. Buying a hybrid or biodiesel vehicle earns them $2,500, while car pooling at least three days a week pays $300 annually split between the ride sharers.
Ten employees have claimed the auto-purchase bonus so far. Mr. James estimates that by getting those new vehicles and boosting their gas mileage an average 10 miles per gallon, employees cut last year's gasoline consumption during commutes by 2,400 gallons."
It sounds pretty harmless, doesn't it? A well-meaning small-business owner does his bit to further his own environmental beliefs by rewarding employees who follow his own precepts?
But wait. Isn't that unfair? What about a handicapped employee who can't drive? Shouldn't s/he be entitled to some offset for not being able to buy a car and earn that bonus?
What about a struggling single mother of a handicapped child who can't afford a new car? Or carpool?
What about employees who live next to the plant and walk to work? Should they be denied eligibility for the carpooling bonus?
Call the Labor Department!!! Call the union!!!!
Spors continues by noting,
"Many companies, large and small, have become greener by reducing office waste and pollution or buying so-called carbon credits, which companies purchase to offset the impact of their pollution. But a growing number of small companies like Topics also are seeing value in encouraging employees to make environmentally friendlier choices as well -- at home, at work and in their commutes.
Among the incentives: giving bonuses to employees who buy more fuel-efficient vehicles and outfit their homes in more energy-efficient ways, as well as helping employees support environmental causes. Even low-cost measures, such as letting employees purchase energy-efficient light bulbs at the employer's bulk price, are making a difference in employees' behavior and energy use.
In an era when more young workers are seeking out employers with a socially responsible mission, such green incentives can help bolster recruitment efforts and foster goodwill. At small companies especially, green benefits can be an easy and effective way to ingrain a workplace's eco-friendly mission."
When I read this, I felt vaguely uneasy. Recollections of being taught about the personally intrusive methods of the late Henry Ford came to mind. And company towns in the coal fields of Kentucky and West Virginia.
Didn't Walter Reuther and company fight large corporations in the 1930s to stop corporate America from controlling employees' private lives?
Wasn't society eventually repulsed by Ford's in-home audits of the families of his employees, whereby his auditors assessed the extent of a family's abiding by a code of conduct of Ford's own making? If I recall correctly, employees were paid extra for scoring highly on the assessment.
The article mentions near its conclusion,
"Some companies find that the participation of even a few employees can have an impact. Green Mountain Energy Co., an Austin, Texas, renewable-electricity provider, lets employees buy renewable-energy credits to offset their carbon-dioxide emissions. It also matches donations to environmental groups made through payroll deduction, up to $10 per two-week pay period.
In addition, the company hands out prizes like gift certificates based on points that employees rack up by finding alternatives to driving to work, such as biking or taking public transportation.
Though only about 25 of Green Mountain's 150 employees participate in the commuter program, the impact has been substantial, with those people collectively driving about 21,000 fewer miles in 2007, says Gillan Taddune, the company's chief environmental officer."
As I read this example, I was reminded of our current healthcare mess. Didn't we get into this dilemma by creating, somewhat recklessly, in retrospect, third-party payers for necessities?
Do we really want transportation costs of employees twenty years hence dependent upon the whims of employers? What if employers secure a deal for mass transit for their employees, forcing them to commute via bus, and discriminate against those who wish to drive?
Why, in God's name, can't employers just pay employees cash, shares or options, and have done with it? Haven't we learned over the past 100 years that paying employees in kind eventually creates distortions in consumption, improper influence of the corporation into the private lives of its employees, and suspect values impositions?
What if Topic Entertainment's owner was a racist or anti-Semite? What if he awarded bonuses for employees sending their children to single-race schools? Or contributing to the Aryan Nation?
What if the owner of a firm was a Southern Baptist, and provided cash bonuses for every employee who attended a Southern Baptist church each week?
Would we think that such an imposition of values by a business owner on his employees was proper?
Who is to judge when an owner's values are appropriate, and when they are not? What is laudable mobilization of society's members for a desirable goal, and what constitutes improper manipulation of workers by their employer in an illegal manner?
I loved the article, and found it important in a very unexpected manner.
In 2008, after nearly 100 years of an organized labor movement in this country to protect workers' rights, we still see business interfering in the private lives of its employees. Creating yet more entanglements between workers' consumption patterns, affordability of choices, and employer funding.
Will we ever learn?
Tuesday, March 04, 2008
GE CEO Immelt's 2007 Compensation: The Comedy Continues
It's nearly spring, and just about a year since the Wall Street Journal last published GE's disclosure of its underperforming CEO's, Jeff Immelt's most recent annual compensation. My post on his 2006 compensation may be found here. In that post, to reprise history, I wrote,
"So, the news today is that Immelt received $8.3MM in "salary and bonus."... that makes a total of roughly $23MM in cash Immelt has now managed to loot from his employer since late 2001, when he began his reign as a failing CEO at GE. If the firm meets certain (fairly low-ball, as I recall from earlier articles) revenue, earnings and cash generation targets, and meets some stock price performance relative to the S&P, Immelt will receive as much as $18.6MM in 2007.
Immelt's base salary was $3.3MM in 2006, to which was added, unbelievably, a cash bonus of $5MM,"citing Mr. Immelt's 'offensive portfolio moves' and GE's 15% earnings-per-share growth in 2006."
Offensive indeed. It's another black day for corporate governance and responsible boards of directors."
Did anything change this year?
Well, according to today's Wall Street Journal,
"Chairman and Chief Executive Jeffrey Immelt received a salary and bonus totaling $9.1 million last year, a 9.6% increase over 2006, but GE's board granted him less new equity than in the prior year.
In 2007, Mr. Immelt exercised 180,000 stock options that were about to expire and acquired 79,000 shares of previously restricted stock. Together, those shares were valued at $5.9 million; Mr. Immelt retained all the shares, except those used to pay taxes."
So, did GE's CEO do as well for his shareholders as they did for him, via the always-generous GE board?
This year, GE's stock price performance, and the S&P500 Index, are depicted in the Yahoo-sourced chart on the left. The company's share price peaked in October, finishing the past twelve months lower than it started, and effectively tied with the S&P.
For a longer-term perspective, I've included 2- and 5-year charts of the same two series in the next two Yahoo-sourced charts.Looks like the shareholders lost in 2007- again. For one and two years, GE's share price tied and under ran the S&P's. Over five years, a much more fair time period, allowing for more variance in economic conditions, the index clearly and handsomely outperformed Immelt's pathetic leadership of the closed-ended-fund cum diversified industrial giant.
Of course, these are just price charts. How about total returns? How did GE do when dividends are included?For this view, I went to my Compustat data and analyzed GE's performance on some of the key variables which I have found distinguish consistently superior from other large-cap firms. The nearby table may be enlarged by clicking on it to open it in a separate window.
In a 
word, GE's performance since Immelt took over in late 2001 has been anemic. Average annual revenue growth was just 3.4%, while NIAT has grown only 4.4% per anum, on average. GE's average annual total return for the period is a -2.4%, while the S&P's average annual total return for the same period is a healthy 9.5%, almost its long-term average of over 11%.
word, GE's performance since Immelt took over in late 2001 has been anemic. Average annual revenue growth was just 3.4%, while NIAT has grown only 4.4% per anum, on average. GE's average annual total return for the period is a -2.4%, while the S&P's average annual total return for the same period is a healthy 9.5%, almost its long-term average of over 11%.
The same data, in chart form, appears here. Again, clicking on it will open it in a separate window for a better view.The green and red lines representing, respectively, revenue and NIAT growth, display jagged, inconsistent paths. Total return for GE, while initially shadowing that of the S&P, departed downward precipitously in the past few years of Immelt's reign.
Once again, GE's board has shown gross insensitivity to the idea of corporate governance, paying Immelt more than $9MM in cash, while telling shareholders.
"GE spokesman Gary Sheffer said the board gave Mr. Immelt more cash and less equity because Mr. Immelt is already heavily invested in the company. Mr. Immelt owns 1.36 million shares and has options and restricted-share grants for millions more; he has pledged not to sell any shares while he leads the company."
Amazing, isn't it? As I have written in previous posts, when a CEO has been paid north of $10MM in cash, does anyone think he really cares what happens to the company's stock price anymore? Added to Immelt's prior $23MM of cash compensation, GE has now paid him over $30MM in just six years. He can't have spent or paid so much in taxes to not have at least $15MM remaining. Then there are the share grants.
So Immelt has underperformed the S&P500 for yet another year, and for the period in total during which he has been CEO. How does GE's board justify paying more than $15MM total compensation to a guy who can't outperform a passive index? According to the Journal article, by announcing,
"The board of directors' compensation committee stated it "believes Mr. Immelt performed very well in 2007," having met or exceeded targets for growth in GE's earnings from continuing operations, revenue and cash flow, among other targets. The board said his performance "in a difficult economic environment" helped the company keep risk at "acceptable levels" and maintain its triple-A bond rating.
The proxy said Mr. Immelt received $396,267 of "other compensation," including $260,980 for personal use of company aircraft."
I won't go on ranting about this clear example of corporate excess and pay for non-performance. You can read my earlier comments on Immelt's lush overcompensation by reading posts on this blog under the "Immelt" label.
For this post, I'll just restate my belief that Immelt is in a job that shouldn't exist, as CEO of a corporation that no longer has economic justification. Until GE is split apart by private equity firms, which looks less likely anytime soon in this credit environment, he'll continue to effectively steal literally tens of millions of dollars of compensation from his shareholders while providing absolutely no added value over what they would earn by simply buying the Vanguard S&P500 Index fund.
Monday, March 03, 2008
Scale vs. Concentration Risk in US Commercial Banking
Have we unwittingly invited looming disaster in our commercial banking sector?
Declining prices and margins for banking services have driven consolidation for several decades.
The share of deposits among the top 5-6 banks is much greater now than a decade ago, and certainly much more than two decades ago. BofA is at the point of being prohibited from further acquisitions, without some careful accommodations, due to its deposit share bumping up against single-bank limits.
Surely a great benefit of this consolidation has been the expansion of consumer and housing credit, as well as more competitive and competitively priced asset management services.
But the flip side of these low cost, ubiquitous products and services is concentration of banking risk in only 5-6 firms.
Now, one large mistake has a much greater impact on US deposits, loans, money trading, etc.
Have we unwittingly gone to far in fostering consolidation, while also removing Glass-Steagall?
Wouldn't it be ironic if Sandy Weill, a non-banker, and not even an investment banker, at that, but merely a low-end retail brokerage 'consolidator,' was the ultimate cause of severe risk in the US commercial banking system?
By forcing the repeal of Glass-Steagall with his merger of Travelers and Citibank in the 1990s, Weill removed a major barrier to risk concentration in the US banking sector.
Was that really wise?
Would the current credit crisis have become so serious if the commercial banks, notably Citi and BofA, were not allowed to engage in securitization of their loans to customers, but, per Glass-Steagall, were prohibited from engaging in anything resembling investment banking and the issuance of such securities?
If those two banks had been forced to either be portfolio mortgage lenders, or package their loans through Fannie or Freddie, would the SIV debacle have occurred? Would they have engaged in subprime lending or issuing or holding suspect CDOs?
My long-ago mentor at Chase Manhattan Bank, then-SVP of Corporate Planning & Development, Gerry Weiss, was fond of saying, when asked about working to remove Glass-Steagall, something like,
'Are you kidding? We'll just find some new ways to lose a lot of money on badly risk-managed positions. Not to mention that, being commercial bankers, once we get into these businesses- M&A, underwriting, equity trading- we'll cut prices to gain share and ruin the business' profitability for all concerned.'
Judging by the behavior of Citigroup and BofA in last summer's CDO, SIV and other fixed income messes, I'd say he was right on the money, as it were, as usual.
Commercial banks appear to be no better off in terms of profitability, risk management or total return after the repeal of Glass-Steagall.
I'll go so far as to say that, for the safety of our banking system, we probably should reinstate the law. Because, at the rate the large commercial banks are making risk-management mistakes, it's only a matter of a few years before one of the big five - Citi, Chase, BofA, Wachovia, Wells Fargo- commercial banks blows a hole in its balance sheet to large to self-repair, and will require Federal intervention to stabilize it and sell the remnants.
Declining prices and margins for banking services have driven consolidation for several decades.
The share of deposits among the top 5-6 banks is much greater now than a decade ago, and certainly much more than two decades ago. BofA is at the point of being prohibited from further acquisitions, without some careful accommodations, due to its deposit share bumping up against single-bank limits.
Surely a great benefit of this consolidation has been the expansion of consumer and housing credit, as well as more competitive and competitively priced asset management services.
But the flip side of these low cost, ubiquitous products and services is concentration of banking risk in only 5-6 firms.
Now, one large mistake has a much greater impact on US deposits, loans, money trading, etc.
Have we unwittingly gone to far in fostering consolidation, while also removing Glass-Steagall?
Wouldn't it be ironic if Sandy Weill, a non-banker, and not even an investment banker, at that, but merely a low-end retail brokerage 'consolidator,' was the ultimate cause of severe risk in the US commercial banking system?
By forcing the repeal of Glass-Steagall with his merger of Travelers and Citibank in the 1990s, Weill removed a major barrier to risk concentration in the US banking sector.
Was that really wise?
Would the current credit crisis have become so serious if the commercial banks, notably Citi and BofA, were not allowed to engage in securitization of their loans to customers, but, per Glass-Steagall, were prohibited from engaging in anything resembling investment banking and the issuance of such securities?
If those two banks had been forced to either be portfolio mortgage lenders, or package their loans through Fannie or Freddie, would the SIV debacle have occurred? Would they have engaged in subprime lending or issuing or holding suspect CDOs?
My long-ago mentor at Chase Manhattan Bank, then-SVP of Corporate Planning & Development, Gerry Weiss, was fond of saying, when asked about working to remove Glass-Steagall, something like,
'Are you kidding? We'll just find some new ways to lose a lot of money on badly risk-managed positions. Not to mention that, being commercial bankers, once we get into these businesses- M&A, underwriting, equity trading- we'll cut prices to gain share and ruin the business' profitability for all concerned.'
Judging by the behavior of Citigroup and BofA in last summer's CDO, SIV and other fixed income messes, I'd say he was right on the money, as it were, as usual.
Commercial banks appear to be no better off in terms of profitability, risk management or total return after the repeal of Glass-Steagall.
I'll go so far as to say that, for the safety of our banking system, we probably should reinstate the law. Because, at the rate the large commercial banks are making risk-management mistakes, it's only a matter of a few years before one of the big five - Citi, Chase, BofA, Wachovia, Wells Fargo- commercial banks blows a hole in its balance sheet to large to self-repair, and will require Federal intervention to stabilize it and sell the remnants.
Will Commodity Prices Trigger Higher US Inflation?
CNBC's Rick Santelli had a very interesting debate with another regular commentator on the networks Squawkbox program one morning last week.
Santelli holds that commodity prices are soaring because producers are selling larger quantities of gasoline, upscale food, etc., to formerly third-world countries which are now growing significantly wealthier. Thus, their consumption is adding pressure to demand for grains, beef, oil, and other basic commodities.
The other fellow on the program that morning, whose name I forget, alleged, mostly, that because US product costs are predominantly labor, which is not getting more expensive, we won't see inflation.
Who is right? It's an important question.
Personally, I believe Santelli.
First, my own experience working with company-level cost data for over two decades leaves me believing that labor costs have become much smaller components of total costs in the average US firm. Due to investments in capital, in the form of tools, information, technology, etc., the productivity of the average US worker has remained high, relative to the rest of the world. Employment levels and, thus, costs, haven't grown at the same rates as they may have in prior decades.
In fact, one commentator opined that there isn't currently a lost-jobs-based recession yet because after the economic troubles of 2001-02, businesses didn't go on a hiring binge. By carefully retaining productivity levels and using fewer new workers, they aren't having to lay the workers off so quickly now.
Further, it's very believable to me that the world's commodity producers, operating, as they typically do, in an environment of either boom or bust, try not to produce too much excess supply. Thus, the rather sudden, relatively unexpected, in the West, rise of demand for energy and pricier food inputs in Asia have caught those commodity producers flat-footed. As demand outstrips supply, for a while, prices have nowhere to go but up, to clear the markets.
As an anecdotal example, I bought some pasta-based processed food products for my children recently. As recently as last fall, the item cost $1/box at retail. This past week, it was $1.5/box.
Sure, only 50 cents more. But a 50% rise in consumer-level price. Milk, baked and processed products using wheat or corn are the same.
If Santelli's debate opponent were correct, I doubt I'd be seeing these price increases. Instead, Santelli's logic already seems to be finding its way onto the prices of items on US grocery store shelves.
Santelli holds that commodity prices are soaring because producers are selling larger quantities of gasoline, upscale food, etc., to formerly third-world countries which are now growing significantly wealthier. Thus, their consumption is adding pressure to demand for grains, beef, oil, and other basic commodities.
The other fellow on the program that morning, whose name I forget, alleged, mostly, that because US product costs are predominantly labor, which is not getting more expensive, we won't see inflation.
Who is right? It's an important question.
Personally, I believe Santelli.
First, my own experience working with company-level cost data for over two decades leaves me believing that labor costs have become much smaller components of total costs in the average US firm. Due to investments in capital, in the form of tools, information, technology, etc., the productivity of the average US worker has remained high, relative to the rest of the world. Employment levels and, thus, costs, haven't grown at the same rates as they may have in prior decades.
In fact, one commentator opined that there isn't currently a lost-jobs-based recession yet because after the economic troubles of 2001-02, businesses didn't go on a hiring binge. By carefully retaining productivity levels and using fewer new workers, they aren't having to lay the workers off so quickly now.
Further, it's very believable to me that the world's commodity producers, operating, as they typically do, in an environment of either boom or bust, try not to produce too much excess supply. Thus, the rather sudden, relatively unexpected, in the West, rise of demand for energy and pricier food inputs in Asia have caught those commodity producers flat-footed. As demand outstrips supply, for a while, prices have nowhere to go but up, to clear the markets.
As an anecdotal example, I bought some pasta-based processed food products for my children recently. As recently as last fall, the item cost $1/box at retail. This past week, it was $1.5/box.
Sure, only 50 cents more. But a 50% rise in consumer-level price. Milk, baked and processed products using wheat or corn are the same.
If Santelli's debate opponent were correct, I doubt I'd be seeing these price increases. Instead, Santelli's logic already seems to be finding its way onto the prices of items on US grocery store shelves.
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