Friday, June 20, 2008

The New Socialism

Missouri Democratic Senator Claire McCaskill is busy abrogating the rights of shareholders of Anheuser-Busch this week.

As I wrote in these recent posts, here and here, Busch would do their shareholders a favor by selling to InBev.

Now, McCaskill is weighing in to try to block any purchase of the ailing, underperforming brewer by the international beer giant.

Is this a member of the same US Senate that squawks about shareholder democracy and voting on CEO compensation?

So it's okay to strip shareholders of their right to a better return by selling the company to an acquirer offering a higher price than the inept Busch family can deliver. That, evidently, is not abrogating shareholder democracy principles.

Sounds like another bout of federal government socialism to me. Of course what McCaskill really wants is to preserve jobs in St. Louis, no matter how that affects the actual owners of the Anheuser-Busch company.

Yesterday, on Fox News, I saw an interview with a Democratic House member from New York who actually called for all US oil refineries to be nationalized, so that,

'the people of America can decide how much gasoline they want to produce.'

Can it get any scarier than that?

At a time of US recovery from financial excesses in the mortgage market- which, we now learn, was abetted by the apparent bribery of Democratic Senators Dodd and Conrad by Angelo Mozillo of Countrywide- and a softening of growth, why does anyone think that bureaucratic functionaries and politicians in Washington know anything more about how to run businesses, create jobs and/or wealth than the millions of Americans who actually do that everyday throughout the country?

From the Senate witch hunt among the American oil company CEOs to their desire to bail out the very mortgage companies who bribed Senators, with taxpayer money, it seems that we are suddenly in the grip of a big wave of socialism in our federal government.

Hopefully, American business will survive this round of flirtations with the creeping socialism of our economy, but I'm getting worried.

Thursday, June 19, 2008

About Oil, Futures, Governmental Mandates & Speculation

It's a strange month when Fox News' Bill O'Reilly and uber-liberal Illinois Democratic Senator Dick Durbin agree on something- anything.

This month, both of them have called for the severe restraint of, if not total prohibition against, investor trading in oil commodity futures.

Durbin wants trading in oil futures curtailed so that if you buy oil on the open market, you must take physical delivery. O'Reilly calls for substantially higher margins to be put down on oil future trading.

Both accuse 'speculators' of driving the price of oil up to the $130 neighborhood. I don't know what Durbin's estimate is, but O'Reilly makes a big deal out of the cost of oil when pumped out of the Arabian peninsular sands, and alleges that most of the rest of the price of a barrel of oil is what 'OPEC charges.' Further, he calls for governmental mandates to force American automakers to produce a certain amount of flex-fuel vehicles.

I like a lot about O'Reilly, but I don't agree with him on this issue.

First, I don't think the current price of oil is being manipulated by a group of speculating investors. Rather, it's the natural result of oil refiners gradually tightening capacity to match demand, after decades of losing money on the downstream business due to grossly excess capacity.

Second, OPEC does not 'charge' a price. Oil is bought and sold in competitive financial markets. It's the right of the owner of a non-renewable commodity to decide how much of it they will sell at what price they take. O'Reilly is wrong to castigate those owners of petroleum for exercising their right to decide how much to sell.

Third, if oil prices were being manipulated artificially by speculators, I would expect to see a lot of selling of oil futures by large hedge funds. Contrary to what a friend in institutional money management alleges about banks not extending credit to short sellers, those shorting equities don't need loans. And derivatives aren't equities. They dwarf the equity markets in terms of commodities.

It bothers me that both Durbin and O'Reilly demonize American oil companies as if they should be punished for doing well for their shareholders in a world in which they are slowly being squeezed out of ownership of the resource they refine.

As to governmental mandates for building flex-fuel vehicles, that's nonsense. Washington's artificial 'fuel economy standards' have put the American automakers in the poor house by forcing them to pump out cheap, unprofitable, largely-unwanted small cars to offset sales of the SUVs and pickups that Americans actually bought. Requiring flex-fuel cars will just do more of the same.

If Americans want flex-fuel cars at prices that Detroit can build them, they'll sell. As Dick Armey notes, whenever government mandates something, it means the public won't buy it any other way.

Both Durbin and O'Reilly are mistaken, in my opinion, in their rush to legislate large-scale governmental mandates to what is a passing economic situation. Do they both really believe some governmental functionaries will do a better job than American entrepreneurs and businessmen motivated by profit?

I can believe that Durbin really believes they will, but I think O'Reilly has just temporarily let his anger overrule his common sense.

All we will get out of governmental interference will be predictable graft, corruption, and favoritism of selected businesses by civil servants, instead of truly market-tested solutions to energy challenges.

My Saga of Ken Lewis' Awful Retail BofA: The End

Beginning about a month ago, I wrote two posts concerning my appalling treatment at the hand of Ken Lewis' Bank of America, here and here.

Now I can write the end of that sad story of Ken Lewis' hapless, gigantic money center bank.

Having had no acceptable follow-up from any BofA employee in the wake of their unexplained loss of sensitive customer data and related issuance of new debit/ATM cards, I had proceeded to open a new account with the new branch of an old, small local commercial bank.

When I balanced my BofA account this week, there was a new $12 'monthly account maintenance fee.' That did it.

It had been my intention to retain the BofA account, in case there was a reason to switch back. But when I saw them engaging in high-handed, extraneous fee-charging, I knew I had to act fast.

The next day, I wrote a check for the bulk of the balance of my account and deposited the check in my new account at the other bank. Then I visited the local BofA branch in Summit to close my personal account there.

Upon finally catching the eye of one of the platform officers, as his loud guffaws on an obviously personal phone call filled the cavernous old 1930s, echo-chamber style marble building, I announced in a loud voice that I had come to close my account.

Amidst some discussion of account numbers, drivers license IDs, etc., he informed me that I'd have to wait until all outstanding checks had cleared. I replied that, since his bank was now charging me monthly maintenance fees, I had absolutely no intention of allowing that to happen.

He must process my request now and close the account. With a defiant look, he said he couldn't, because he didn't know how much was left in the account. I told him I had just drained most of the funds into my new account at the other bank, and he then triumphantly claimed that now he'd have to wait for that to clear, unless I happened to know the amount of the check.

"Of course I know the amount. It's $382," I calmly replied.

With a scowl, the junior bank officer turned to his screen and typed in some figures, announcing a final, cleared balance, adding,

"Of course, that's not precise. The actual number might be slightly different."

"It had better be precise," I said, "I've been a VP at Chase, so I think I know that one of the basic, core functions of a bank is to know exactly what a customer's balance is."

More scowling from the bank employee, who heatedly said,

"I don't need your attitude!"

"Would you like to call your branch manager over here now?" I coolly replied.

"That's your choice," he said.

"No, it's yours," I responded, "but I think your manager would be surprised to hear you, in his presence, repeat your statement that your bank can't give me an exact accounting of my balance in the account at your branch."

More frowns and huffy breaths. Then the officer announced a final balance, had me sign a withdrawal, and disappeared for a few minutes to retrieve my cash.

When he returned, he handed me the envelope, printed an account closing confirmation document, and wished me well.

Memo to Ken Lewis, CEO of BofA:


Nowhere in this process did your junior bank exec in the Springfield Avenue branch of your super-giant-sized bank ever ask me why I was closing my account. Or what, if anything, he or his manager, or anyone at BofA, could do to retain my business.

Instead, your young platform officer, having been forced to end his jocular personal call to attend to my business, merely performed the account closing as efficiently as possible, even dispensing some free attitude of his own to a departing customer.

A departing customer with a brain and mouth, Ken. Who has friends in the community, Ken.

Truth is, in the weeks since my first post, I helped two other members of my fitness club decide to close their BofA accounts, too.

How easy it would have been, Ken, for your bank to have flagged my account, so that if/when I came to close it, I would have been immediately sent to the branch manager's office to discuss how your bank might retain my account and business.

That might have caused me to think your employees and, by extension, you, actually cared about my business. But you don't. And they don't.

And it shows. It showed from the first ham-handed form letter from "Gordon Rains" announcing you had probably compromised some of my personal financial information, so you needed to send me a new ATM card.

No wonder why your bank is in such trouble Ken.

Best of luck sorting out this mess. Everyone knew you were overmatched when you tried investment banking. The Countrywide debacle isn't looking so good, either, lately. All those bribes Angelo allegedly gave to his Fannie Mae and Democratic Senate friends in the form of sweetheart jumbo mortgage loans.

At least we all thought you and your crew knew how to run a simple, basic retail bank branch business.

Well, we were all wrong.

Wednesday, June 18, 2008

Brian Wesbury On Change In America

Last Wednesday's Wall Street Journal featured an editorial by one of my favorite economists, Brian Wesbury, entitled "Change We Can Believe In Is All Around Us."

Wesbury's piece was nearly a full half-page in the Journal, so I won't go into excruciating detail. The headline themes will suffice for my purposes.

Partway through his piece, Wesbury wrote,
"Look at the chart nearby. America's manufacturing output, as measured by the Federal Reserve, is up seven-fold since 1950, but manufacturing jobs as a share of all jobs have fallen to 10% from 30%. Your grandfather and father may have worked for General Motors (and joined the UAW), but it's likely that you don't and won't.

The problem, if it really is one, is not foreign competition or evil financiers. It is technology and productivity. In the 10 years ending in 2007, durable goods manufacturing productivity averaged an annual growth rate of 4.8%. In other words, if real growth is less than 4.8%, the sector needs fewer workers year after year.

For the economy as a whole, overall U.S. business productivity rose 2.7% at an average annual rate during the decade ending in 2007, 1.7% in the decade ending in 1997 and 1.4% in the 10 years through 1987. Change is everywhere, and it's accelerating."
Wesbury thus notes that if you want change, baby, you're already getting it- in spades! As with rapid economic and social change throughout the centuries, this sort of change can actually make politicians fearful of blood running in the streets.
Back in the 1920s and '30s, when Schumpeter was writing about creative destruction, the hot economic topic of the day was whether unbridled American capitalism would destroy itself by depressing wages so low as to create social unrest and overthrow of our economic and governmental systems. Socialism was perceived as the greatest threat, and it actually came in the person of FDR and his many ill-considered New Deal programs- NRA, court packing, etc.
In a manner similar to Milton Friedman's and Anna Schwartz' "A Monetary History of the United States," Wesbury goes on to view American history as a collision of productivity and innovation with populism which has tried- and still tries- to control that economic vitality,
"This has happened before – in the Industrial Revolution – where the political environment bred America's first real populists, people like William Jennings Bryan and Theodore Roosevelt. Bryan was perhaps the best orator of American political history, and like Mr. Obama, he could affect people emotionally. Roosevelt, like Mr. McCain today, was a true American hero and one tough guy. History may not be exactly repetitive, but it sure seems to move to similar rhythms.

Unfortunately for the American economy, the populist movement of the late 19th and early 20th centuries led to a rapid growth in government intrusion into business activity. The populists didn't like the gold standard and demanded more government regulation.

In 1913, the Federal Reserve System was created and the income tax was introduced to pay for a growing government. And then, during the Great Depression – which was caused by the new Fed, trade protectionism and tax rate increases – a massive expansion in government took place.
Forty years later, in the malaise of the late 1970s and early 1980s, the U.S. finally figured out what it was doing wrong. By returning to hard money under Paul Volcker, and lower taxes and less regulation under Ronald Reagan, the high-tech leg of the Industrial Revolution began.

The fruits of this are plain to see. Rather than watching the sun set on the U.S., as many believed would happen in the early 1980s, the U.S. has experienced one of the greatest booms in wealth creation in world history. And the impact of our technological innovation has helped lift untold numbers out of poverty."
So to Wesbury, the American experiment has been a revolving door between economic wealth creation and lifting of all incomes by resulting economic expansion, and governmental attempts to restrain this vitality, tax it and use the proceeds to misallocate resources to 'the poor.'
Wesbury continues in that vein, noting,
"This technology has created massive amounts of change. Like the Industrial Revolution before it, the current transformation is anything but pain-free. It's what Joseph Schumpeter called creative destruction. Google, Craigslist and Microsoft have been prospering. General Motors, United Airlines and the New York Times have not. In the midst of layoffs in the newsroom, it's hard to see anything good happening in the rest of the economy.
Americans have had it so good, for so long, that they seem to have forgotten what government's heavy hand does to living standards and economic growth. But the same technological innovation that is causing all this dislocation and anxiety has also created an information network that is as near to real-time as the world has ever experienced.
Decades ago the feedback mechanism was slow. The unintended consequences of the New Deal took too long to show up in the economy. As a result, by the time the pain was publicized, the connection to misguided government policy could not be made. Today, in the midst of Internet Time, this is no longer a problem. So, despite protestations from staff at the White House, most people understand that food riots in foreign lands and higher prices at U.S. grocery stores are linked to ethanol subsidies in the U.S., which have sent shock waves through the global system.

This is the good news. Policy mistakes will be ferreted out very quickly. As a result, any politician who attempts to change things will be blamed for the unintended consequences right away."
Thus, Wesbury notes that because of recent rapid change, originally economic-based, in information technology, boneheaded governmental changes will be quickly penalized in the next election cycle, rather than, as in the last century, 30-40 years later.
This is important as both Presidential candidates and Congress have turned increasingly protectionist, focused on meddling in American business, and provincial with respect to US energy policy and the global energy situation.
Thus, Wesbury concludes,
"Both Mr. McCain and Mr. Obama view the world from a legislative perspective. Like the populists before them, they seem to believe that government can fix problems in the economy. They seem to believe that what the world needs is a change in the way government attacks problems and fixes the anxiety of voters. This command-and-control approach, however, forces a misallocation of resources. And in Internet Time this will become visible in almost real-time, creating real political pain for the new president.

In contrast to what some people seem to believe, having the government take over the health-care system is not change. It's just a culmination of previous moves by government. And the areas with the worst problems today are areas that have the most government interference – education, health care and energy.

The best course of action is to allow a free-market economy to reallocate resources to the place of highest returns. In the midst of all the natural change, the last thing the U.S. economy needs is more government involvement, whether it's called change or not."
Consider Mr. Wesbury's points when you read about Obama's desire to tax and spend millions on government-directed technology. Or McCain's neo-environmentalistic refusal to let private enterprise drill for oil within sensible parameters for protecting said environment.
We've had great, productive change in America since the reversal of the economic malaise that ended with the Carter era. If we want it to continue, creating wealth and jobs for Americans who want to work and accept the American proposition of positive change, we had better listen to Brian Wesbury.

Tuesday, June 17, 2008

The Death of Old Lane

Last Thursday's Wall Street Journal carried an article about the final death of Citigroup CEO's hedge fund, Old Lane, entitled "Citigroup To Close Hedge Fund; Blow to CEO."

The piece details the fund's founding, growth, purchase by Citigroup, at Chairman Bob Rubin's insistence, and, then, its demise.

But, a blow to Pandit? Hardly. Granted, $100MM of his $165MM payday for Old Lane's sale is still stuck in some sort of successor fund. Let's say he even loses 80% of that. Pandit still nets, right now, before taxes, $85MM.

That's right. Pandit was able to off-load a turkey of a hedge fund with less time operating in the public markets than any other financial institution would tolerate before even considering to invest large sums in it, let alone buy it. Remember, Pandit never actually ran a hedge fund before. He was a middle-office guy at Morgan Stanley.

So basically, after getting helped to leave Morgan Stanley amidst the scuffling a few years ago, Pandit and his colleagues started a hedge fund and ended up having one of America's largest commercial banks ask to buy it at an inflated price.

I think it's fair to say that most Americans, and even a lot of commercial bankers, would feel extremely fortunate to have failed at operating a hedge fund and be paid at least $85MM, pre-tax, for the privilege.

Don't you?

How in the world is the closing of Old Lane a blow to Pandit? Rubin, yes. Pandit, no.

If anything, it simply clarifies how lucky Pandit was, and how much teflon seems to be adhered to him now. That nobody even considers that the business and 'record' that attracted him to Citigroup's Chairman and board, now being discredited, are grounds to rethink Pandit's job qualifications says more about how badly-overseen Citigroup is than how inept Pandit is.

Of course, Pandit has plenty of time to provide more evidence, in addition to his so-far inept record as Citigroup CEO, that he is, in fact, pretty inept as a commercial bank CEO.

But this month, Bob Rubin should be taking the axe for his appallingly bad judgment in the Old Lane affair.

Monday, June 16, 2008

Murdoch, YouTube and Sensibility

Last week the Wall Street Journal published a special section on digital technology and strategies. Among the stories in the section was an interview with Rupert Murdoch.

In that interview, the following exchange was reported,

"Ms. Swisher: How do you look at a YouTube? Sumner Redstone sued Google. Why didn't you sue them?

Mr. Murdoch: We came down to the view in the end that it was doing more to promote our shows than it was to hurt them."

I loved this short portion of the article. It so typifies wh Murdoch has been so successful.

Back when Google acquired YouTube, and the whole lawsuit issue came up, my consultant friend, S, and I were discussing what Redstone was doing, and who else might sue.

We agreed that, for most older media properties, YouTube actually stimulates new viewing, usage and, ultimately, purchase, at no expense to the owners of the properties.

Redstone clearly did not see it that way. But if you look at Redstone's companies, it's not a really pretty picture.
Over the past five years, as the nearby, Yahoo-sourced chart of prices for News Corp, CBS, Viacom and the S&P500 Index indicates, both pieces of Redstone's empire, split up in late 2005, have done poorly.
While CBS unexpectedly outperformed Viacom, which was supposed to have the better assets, and was still headed by Redstone, it, too, under CEO Les Moonves, has come back down to earth.
While Murdoch's NewsCorp may trail the S&P, it has handsomely outperformed all of Redstone's media properties. Its recent decline, along with CBS and Viacom, has been much milder, and has even turned up again recently.
My guess is that Murdoch's instincts for content media, in which he began, rather than Redstone's self-aggrandizing management style and expansion from movie theaters, accounts for a lot of the performance difference.
Thus, Murdoch's sense of getting something for nothing by letting Google's YouTube use his media content without payment or lawsuits over the whole matter indicate his better feel and touch for new media.
The performance numbers certainly seem to bear this out.