Friday, May 15, 2009

The Longer Term Consequences of Government's Coercion of Chrysler's Creditors

The Wall Street Journal published a nice, concise article by Todd Zywicki, a law professor at George Mason University, entitled, "Chrysler and the Rule of Law."

The piece brought to mind a comment by some administration apologist in the past few days claiming that the president 'is trying to save the auto industry in America.'

Well, not really. The administration is trying to bail out the UAW, by way of keeping Chrysler and GM out of a bankruptcy court. As it happens, the auto industry in America is quite healthy, thank you very much. Daimler, Toyota, and other vehicle producers located primarily in less-unionized southern states have not asked for aid, are not failing, and seem to be doing just fine.

In fact, earlier this week, a frequent, hopelessly liberal CNBC guest who is apparently an economist, decried the lack of 'legacy costs' burdening newer US entrants, such as Toyota, Daimler, He stated that it was "unfair" for those firms to be allowed to compete with GM and Chrysler, whose own bad compensation decisions contributed to their current bankruptcies.

Monday's Journal carried a front page piece detailing the horrible arm-twisting and undisguised intimidation used by the administration and its allies in Congress to illegally bludgeon the Chrysler bondholders from exercising their legitimate, legal rights as secured creditors.

Professor Zywicki's main point, however, is that the White House's coercion of the senior secured Chrysler debt holders will likely bring about future unintended consequences. He wrote,

"But we need to ask how eager lenders will be to offer new credit to General Motors knowing that the value of their investment could be diminished or destroyed by government to enrich a politically favored union. We also need to ask how eager hedge funds will be to participate in the Public-Private Investment Program to purchase bank's troubled assets.

And what if the next time it is a politically unpopular business- such as a pharmaceutical company- that's on the brink. Might government force it to surrender a patent to get the White House's agreement to get financing for the bankruptcy plan?"

Which gets to the point I made in this prior post. Both business and government overstepped their boundaries and failed to simply follow conventional procedures for the bankruptcy of American corporations.

Derivatives Oversight- It's About Time

Earlier this week, Treasury Secretary Geithner announced plans to form an exchange on which derivatives will be traded. I wrote about this, in an indirect manner, over a year ago, in this post.

It's way, way past time for the federal government to have announced this initiative.

In fact, from the day Bear Stearns became the subject of bankruptcy speculation, early in the week of March, 2008, at the end of which it closed, this should have been Job One at Treasury and the Fed.

Oh, right. Geithner was at the New York Fed. His fingerprints are all over the Bear Stearns and AIG rescues.

Why has it taken 16 months simply to announce that a derivatives exchange will be created? That should have occurred by the end of March of last year. So that, by now, it might actually be in the early stages of operation.

This sort of inaction and delay is yet another reason why one should carefully consider the wisdom of so much federal involvement in our economy now, and as proposed, for auto makers and health care, in the future.

Thursday, May 14, 2009

The Latest Government Canard: Our Healthcare Costs Hold Us Back

I heard some excerpts from the current administration's tired, repetitive arguments that the US healthcare system, and its costs, are now a significant anti-competitive burden for US businesses. That only by federalizing the system can its costs be contained, and, thus, the primary goal of being globally competitive can be attained.


You know, if that were truly a business proposition, it would be tested. There would be evidence of the current loss of competitive value or strength. A case would be made for how a new system would work, how its costs would be lower, at the same or better care levels, than the current one. How this would translate, dollar by dollar, into allegedly lower costs for the same business output in US companies.

Instead, all we hear is empty claims. Scary talk. And statements that pose as fact, without any evidence whatsoever as to the veracity of the claims.

This troubles me greatly.

Sure, I have reservations about federal health insurance "competing," with taxpayer-financed subsidies, with private sector providers. Everything critics allege will almost certainly be true, because no private firm can compete with a rival that has: access to government funding, and; represents the law-making authority in the nation. You'd have to be crazy to compete on those terms.

You'd know that, should your government rival somehow not attain sufficient market share, they could literally change whatever laws were required to eventually put you out of business.

But prior to getting into those details, the very emptiness and falsity of the top-line argument of the current administration, and many in Congress, is disturbing.

When did these guys suddenly begin to care about business' healthcare burden? If they are so concerned about US competitiveness in a global market, how about cutting US tax rates for business and simplifying regulation? And halting the idiotic card check drive?

No, this isn't about helping business. This is about lulling business into believing they will receive something positive from the gutting of the private healthcare insurance and delivery sector of our economy.

This is a mistake we will come to regret. And soon.

Wednesday, May 13, 2009

Today's Equity Market Declines

Much is being made in the media of today's equity market decline. As I write this, the S&P500 is down 2.5%. However, only this past April 20th saw a 4.3% loss in the S&P500.

Perhaps the newsy aspect of today's decline is that it follows several weeks of fairly sustained gains, albeit without any real positive economic news.

Then again, as with significant market declines last fall and again in January of this year, perhaps the selloff is a function of worrisome news that is not directly economic, but never the less, indirectly suggests more economic uncertainty in the near future.

For example, the senior executives of GM were reported to have sold all of their shares earlier this week. Hardly a vote of confidence. Maybe those executives have a better grasp of the ultimate fate of the nearly-bankrupt auto maker, once it falls into government hands, then the rest of us do.

Sadly, I wrote that last sentence as if it is pre-ordained, when it should not be so. That may be part of the problem.

Then we have the nation's VP promise a roomful of schoolchildren yesterday that every child's college education will, if necessary, be paid for by our government. Meaning you and me.

More economic lunacy and uncertainty. What if this sort of nonsense actually becomes law?

Then we have Ed Liddy, the poor public servant who agreed to come out of retirement to help out as AIG's CEO, only to be pistol whipped by Congress earlier this year, reappearing on the Hill today. More opportunity for Congressional grandstanding, unreasonable, unlawful demands, and threats of show trials.

Finally, Congressional Democrats and the president held a press conference to announce some sort of health care reform news. Again, the sort of intrusion by government into another private sector in a way that freezes private investment and causes uncertainty with respect to future competitive and regulatory actions by the government.

Perhaps the sum of the political signals of the past few days, added to the vote of no confidence in GM's future by its own executives, has finally begun to weight heavily on the equity markets, and bring investors to their senses about real risks ahead for the US economy.

Tuesday, May 12, 2009

More Inappropriate Consequences From The Government's Rescue of GM

The Wall Street Journal ran two articles concerning effects of the government's bear hug on GM, after the latter unwisely requested federal 'help' last year.

Yesterday, the Journal noted that Kent Kresa, GM's interim chairman, was ordered by Treasury officials to hire search firm Spencer Stuart to find new board members. Kresa had planned to search for new board members on his own, using his considerable contacts from a career as CEO of a major company.

No dice. The T-men said hire Spencer Stuart, and that is what Kresa did.

Yet, at present, the federal government owns now GM common equity. Is this thuggery, or what?

As bad as this is, it may not be the worst outcome so far from the unholy alliance of the failed auto maker and our federal government.

Dennis Berman writes in today's edition of the Journal of the stealth takeover of GMAC, GM's former financing unit, by the feds. It's one of Berman's better pieces.

First, he notes the inherent unfairness and anti-competitiveness of allowing the government to subsidize GMAC in its operations, while Ford's credit arm has no such advantage.

Just as in banking and insurance, and, perhaps, soon in health insurance, the federal government is wading into our various private business sectors, choosing winners, and backing them with free, printed money, or extremely low-cost federally-provided funding.

Berman tracks the funding going into GMAC from the federal government, as well as the FDIC's reservations and, ultimately, refusal to consider the at-shotgun-point-created "bank" that GMAC now is for emergency funding relief. One Fed governor also declined to approve the recent chartering of GMAC as a bank, opining that the granting of a bank charter wasn't meant to be used to facilitate corporate rescues.

Berman concludes with this passage,

"Put it together and what have you got? A bank potentially owned and regulated by the government. One that is embarking on an ambitious merger in a troubled industry, directed by a board in flux. Looming above are a Congress and White House that have expressed little public care for strategy or accountability.

Congratulations, indeed, taxpayers."

I'll provide my own ending thoughts, to follow on Berman's excellent digest of the GMAC situation.

The government owns a big chunk of Chrysler. It will doubtless end up owning a big chunk of failed GM, too.

We all know of the Democrat's appetite to wave a magic wand and make everything related to energy "green."

Add to the two failed US car companies in government hands a government-owned, former auto-finance company, and you have the pieces with which to mandate and subsidize green autos.

Look for Congress and the administration to mandate/coerce Chrysler and GM to produce 'green' cars and trucks, plus other 'personal' vehicles, for which subsidized financing will be offered from GMAC, the government's wholly-owned little bank.

Ford and the non-US based auto makers with production facilities onshore will be competitively disadvantaged, of course.

Perhaps the best hope here is for Ford, Toyota, Daimler and the other auto makers producing vehicles in the US to sue the federal government under the Sherman anti-trust law.

Otherwise, I'm very much afraid we are going to see a completely non-transparent, uneconomic, wasteful effort by the current Congress and administration to produce and 'sell' and finance vehicles built with their pet, though inefficient and unproven green technologies, in unfair competition with privately-financed, publicly-owned auto makers, with no way to stop them.

Ken Langone On CNBC

Ken Langone, former Home Depot co-founder and well-known business figure involved in the NYSE-Grasso mess, is on CNBC this morning.

Langone is truly irrepressible. He cannot be censored.

Among the gems he uttered this morning, surely the best was part of an unrehearsed, long soliloquy in reply to Elliot Spitzer's return to public media on CNBC last week.

After commenting on how evil and power-mad Spitzer had been as NY AG, and how Spitzer appears not to have learned his lesson, nor changed whatsoever, from his fall, Langone finished by saying, of Spitzer,

"The tragedy is, he was born on third base and thought he hit a triple."

In discussing Bill Ackman's campaign to replace as much of the board of Target as possible, Langone argued that boards have the power they need, often simply lacking the will and courage to do whats right. But he also remarked,

'Shareholders have the ultimate power- they can sell their shares.'

I use single-quotes, because that may not be exactly word for word what Langone said, but it is within a word of being precise.

This reinforces my own view. That is, you can complain all you want about corporate governance, and you can try to change the board. But in the end, each and every shareholder has the ultimate power- just sell the stock.

Monday, May 11, 2009

How Greens Misunderstand Markets

Due to the fact that I have subscribed to Outside Magazine for years, I receive an unintended torrent of green-think. What was once primarily a monthly periodical about outdoor sports has morphed, over the years, into a cause-focused publication with offices now located in Santa Fe, New Mexico.

Thus, I happened to read a piece from the magazine's January issue concerning an MIT scientist named Daniel Nocera. His speciality is evidently having tuned up a rather well-known idea- the fuel cell.

Yes, the same fuel cell that powered the Apollo spacecraft to the moon and back what, nearly 40 years ago?

In Nocera's case, according to the magazine's glowing, fawning tribute, he adds a "chemical catalyst (cobalt and potassium phosphate) to plain water....splits the molecules using just a volt or so of electricity. Coming up with a scheme like this has been a holy grail of chemistry."

Well, not so fast. Nocera is quoted as saying he's actually still five years away from this approach actually working as promised. Details include non-trivial matters such as "a better way to compress hydrogen for storage and building a more efficient and inexpensive fuel cell."

Wow. Storing hydrogen in your basement? Or, what, next to the furnace? Sounds totally safe to me. Sure, I want a mini-Hindenburg in my house, don't you? While you're at it, bring in that gasoline can from the garage and park it next to the furnace or hot water heater, too.

I found it odd that the article gives one the impression that it's here, it works, and Nocera is a God of science and the green movement, but then informs us that it's really half a decade away, by the scientist's own, probably overly-optimistic estimate. And there is that nasty-sounding cobalt compound. Wonder how safe that is to store, transport and handle in every home in America, or around the globe?

But that's not what really got my attention.

After extolling how Nocera's approach will turn every home on the planet into an energy source by splitting water into hydrogen and oxygen during the day, using sunlight, then powering the home at night by reversing the fuel cell's process to reunite them and release energy, the article concludes,

"Moving forward, Nocera believes, is really a matter of commitment. If Americans could get serious about funding renewable energy- instead of "throwing money down the drain in stock markets"- the innovations would come.

"We went to the moon! Doesn't it seem easier to do what I'm doing here?" "

My use of bold in the quoted portion of the text in the prior paragraph is meant to highlight Nocera's, and Outside Magazine's evident misunderstanding of capital markets.

In the beginning of the article, much is made of private companies either funding Nocera's research, or wanting to partner with him. This is how the piece starts to portray him as a sort of environmental engineering Deity.

How, then, are we to square that initial positioning with Nocera's own rejection of capital markets? He clearly feels that money invested in equities is simply "throwing money down the drain in stock markets."

Hey genius! Guess what?

If ordinary investors don't buy equities of the companies attempting to partner with you, or funding your research, you're nowhere.

In fact, the article, has a sort of 'wink and a nod' attitude that Nocera knows best, and anyone lucky enough to be giving him research money or allowed to partner with him should just trust him to know best.

And being perched in a professorship at MIT seems ironic, because Nocera isn't taking any risks at all. Commercialization of his technology might be five years away, or it might be ten. Who knows? Nocera has a job and funding, either way.

Henry Ford did it the harder way. He built a prototype and went into business.

True innovation doesn't hide out in an academic ivory tower, where risks and failures go unpunished, breakthroughs are always just over the (funding) horizon, and failure actually provides you with a longer runway to play around on your pet project without having to deliver commercialized results.

I'd have a lot more respect for Nocera, and he'd probably have more credibility, if he dealt with MIT to get some control or interest in his IP, left the university, put his own money and career where his mouth is.

As it is, he asks rhetorically if what he's doing isn't easier than going to the moon? I don't know, is it?

More importantly, why isn't Nocera convincing equity investors in his own startup?

Oh, right. That's going to the 'stock market.' Bad! Bad! "Throwing money down the drain."

Nocera and Outside don't appear to buy into, much less understand, the concept of ideas competing for capital in free markets. If Nocera really wanted funding, he'd compete for investor money, promising more tangible progress and returns.

Instead, he seems to believe he should just be handed funds to continue to work at his pet fuel cell project, because, well, he says so. And he knows best.

This sort of antagonistic attitude to capital markets, which have the potential to fund innovation, won't get Nocera very far. For all we know, he's hiding some serious complications that, were he to try to commercialize his process via the equity capital route, would become known, and result in a funding failure.

That's why free capital markets are such a great tool. Money flows to those who present the most credible, profitable cases. Not just to those who privately think their idea is a social good, and maybe the best social good, so it must be funded.

Sunday, May 10, 2009

Not "That" Green Thing.....

On Friday, I wrote this post discussing the alleged "green shoots" of US economic recovery. I remain sceptical of this equity market rally.

A reader commented on that post, but not about the economic angle. Instead, he referred to that other green thing, writing,

"Financial instutions played a big role in the economic recession. How about our financial tools and where we have been investing our money. I would like to take a different approach and request everybody to be more careful about investing their money to more eco friendly, green companies.

A new bank called (name of bank) is trying to accomplish it. I would invite everybody to take a place in this green movement."

I would invite everybody to observe the lunacy of this comment.

First, while financial institutions may have 'played a big role in the economic recession,' the reader missed the fact that Congress induced the two largest, Fannie and Freddie, to back mortgages to unqualified borrowers, plus passed CRA legislation to force commercial banks to do the same.

As to where we invest our money, that's a non sequitur to the first remark about financial institutions.

Most people invest for return. So-called green companies, if you can even decide what that term means, and how to measure it, are usually profitable because of some government handout or tax preference. Think ethanol. One of our government's larger, more stupid energy policy mistakes which boiled over, due to the law of unintended consequences, into food price inflation.

Once again, thanks Congress, and the Bush administration, for bone-headed, knee-jerk energy "policy" legislation.

No matter what your favorite cause, it's not going to change our economy without proper price signals. Subsidies, tax preferences, etc., only distort natural behavior for a while, typically with serious unintended consequences.

If voters really want high prices set on carbon-based energy, and watch the huge loss of jobs, both indirect and direct, from this policy, as well as the loss of a substantial amount of our ability to meet demands for heavy-duty, non-stationary power requirements, they should instruct Congress to do that.

But it's not going to spur much job creation. No matter how many loopy ads you see with actors portraying wizened old farmers and westerners criticizing oil companies, or claiming to build huge solar panel or wind farms that will create a whole new legion of jobs, think about this.

Wind and solar remain viable today due to subsidies. That means they don't actually work profitably yet. Even Boone Pickens has mothballed his big wind initiative as oil prices have declined.

So boosting the price of carbon-based energy will result in an immediate loss of economic activity and jobs which won't be replaced anytime soon by wind or solar.

The concept of a functioning, high-employment-at-family-supporting-wage-levels "green" economy or economic sector, without government subsidies, is a myth. It would take years to replace the energy sources, jobs and economic value currently created from carbon-based energy.

It is thus a mere footnote to observe that some bank ostensibly involved in this economic enterprise won't be doing much of value or scale anytime soon, either.