Friday, May 22, 2009

The Early Fruits of Government Coercion in Chrysler's Bankruptcy Negotiations

Early consequences of the administration's use of coercion to stiff secured creditors in the Chrysler bankruptcy are already upon us.

You will recall that Team Obama muscled Chrysler bondholders to step behind the UAW, an unsecured, junior creditor, and accept 29 cents on the dollar, so that the union could receive 55 percent of the smoldering ruin that will be the 'new' Chrysler.

Never mind that being a secured creditor legally confers certain privileges in bankruptcy, all of which have been voided at whim by the administration.

Some investors are already announcing their changed behavior.

The Wall Street Journal reported yesterday,

"Indiana Treasurer Richard Mourdock revealed this week that his state's police and teacher pension funds have lost millions of dollars in the Chrysler "restructuring." Indiana's State Police Fund and Major Moves Construction Fund, which finances roads and bridges, together lost more than $1 million. And the Teacher's Retirement Fund "suffered, at a minimum, a loss of $4.6 million due to the action of the Federal government," reports Mr. Mourdock.

And, sure enough, Mr. Mourdock says that from now on no funds under his control will invest in the secured debt of "General Motors, other manufacturing companies, or those insurance companies who have or will be receiving bailout funds." Given the recent actions by the feds, he adds, "the risk is too great for any prudent investor to accept."

This isn't political grandstanding. Public investment officials like Mr. Mourdock have a fiduciary duty to seek maximum returns for retirees. The question for all public officials responsible for investing pension money is whether they too should conclude that investing in U.S.-aided companies now carries so much political risk that it violates their legal obligations. Such are the wages of White House disdain for legal contracts."

So, there you have it. And who'd have guessed that a state-level investment official would be the first to publicly declare any investment 'opportunity' that is remotely near any federally-assisted company to be 'off limits.'

The consequences of the administration's deliberate violation of bankruptcy laws are just beginning to be felt. But investors have taken note and are behaving accordingly.

The Business of Going Green

Bjorn Lomborg wrote a scathing editorial in yesterday's Wall Street Journal entitled "The Climate-Industrial Complex." The occasion is this weekend's World Business Summit on Climate Change in Copenhagen.

His use of the hyphenated term is a direct and explicit reference to outgoing president Dwight Eisenhower's use of the term "military-industrial complex."

Rather than worry about the unholy alliance of large defense contractors, the Pentagon and members of the House Armed Services and Appropriations Committees, as in olden times, Lomborg spotlights today's new unholy alliance.

That would be people like Al Gore, on whom Lomborg focuses, climate-change-friendly legislators and government administrators, and their collaborating corporate partners, such as Duke Energy. I'm a little surprised he omitted GE. Maybe they aren't attending the summit, although it's almost impossible to believe they would miss such an obvious public trough at which to feed, isn't it?

Lomborg writes in his editorial,

"Naturally, many CEOs are genuinely concerned about global warming. But many of the most vocal stand to profit from carbon regulations. The term used by economists for their behavior is "rent-seeking."

American electricity utility Duke Energy, a member of the Copenhagen Climate Council, has long promoted a U.S. cap-and-trade scheme. Yet the company bitterly opposed the Warner-Lieberman bill in the U.S. Senate that would have created such a scheme because it did not include European-style handouts to coal companies. The Waxman-Markey bill in the House of Representatives promises to bring back the free lunch.

U.S. companies and interest groups involved with climate change hired 2,430 lobbyists just last year, up 300% from five years ago. Fifty of the biggest U.S. electric utilities -- including Duke -- spent $51 million on lobbyists in just six months.

The massive transfer of wealth that many businesses seek is not necessarily good for the rest of the economy. Spain has been proclaimed a global example in providing financial aid to renewable energy companies to create green jobs. But research shows that each new job cost Spain 571,138 euros, with subsidies of more than one million euros required to create each new job in the uncompetitive wind industry. Moreover, the programs resulted in the destruction of nearly 110,000 jobs elsewhere in the economy, or 2.2 jobs for every job created."

That Spanish statistic is pretty chilling, and provides context for all those green energy ads you see touting the job creating power of wind or solar energy. Something you certainly don't hear about, eh?

Lomborg concludes his piece with these observations,

"The World Business Summit will hear from "science and public policy leaders" seemingly selected for their scary views of global warming. They include James Lovelock, who believes that much of Europe will be Saharan and London will be underwater within 30 years; Sir Crispin Tickell, who believes that the United Kingdom's population needs to be cut by two-thirds so the country can cope with global warming; and Timothy Flannery, who warns of sea level rises as high as "an eight-story building."

Free speech is important. But these visions of catastrophe are a long way outside of mainstream scientific opinion, and they go much further than the careful findings of the United Nations panel of climate change scientists. When it comes to sea-level rise, for example, the United Nations expects a rise of between seven and 23 inches by 2100 -- considerably less than a one-story building.

There would be an outcry -- and rightfully so -- if big oil organized a climate change conference and invited only climate-change deniers.

The partnership among self-interested businesses, grandstanding politicians and alarmist campaigners truly is an unholy alliance. The climate-industrial complex does not promote discussion on how to overcome this challenge in a way that will be best for everybody. We should not be surprised or impressed that those who stand to make a profit are among the loudest calling for politicians to act. Spending a fortune on global carbon regulations will benefit a few, but dearly cost everybody else."

Lomborg's casual comment on the one-sided nature of the summit belies his concern. As many have suspected, the climate change crowd is no longer interested in either debate about the sources of any change, nor the sort of cost-benefit work regarding how it could even be affordably affected, as Lomborg has long and successfully demonstrated to be virtually impossible.

Instead, this 'unholy alliance' is moving full steam ahead to wring profits out of the climate scare for the early, chosen few businesses.

Thursday, May 21, 2009

Distorting Schumpeterian Dynamics

Tuesday's Wall Street Journal carried an editorial by Scott Sperling, a partner in a private equity firm, defending the administration's intervention the Chrysler bankruptcy by using intimidation and the coercive power of government to force secured creditors to accept less than unsecured creditors, i.e., the administration's favored party, the UAW. It is grotesquely misleadingly entitled, "Obama's Auto Plan Is Capitalism at Work."

The author has an impressive biography, and currently functions as co-president of Thomas H Lee Partners, now renamed THL Partners.

Mr. Sperling defends the strong-arming of Chrysler bondholders by contending,

"Many probably bought these loans at prices below the 29 cents on the dollar that the government is offering since this debt often traded below that level."

That's a pretty raw view of how the rule of law is supposed to function. The context in which bondholders legally became so doesn't, so far as I know, affect the rights which they acquire with those secured debt instruments. Sperling seems to think that motive affects how one's legal rights should be viewed.

Further, it's interesting to note that this defender of the administration agrees with the president regarding his view of Chrysler bond investors as 'speculators.' However, the administration seems to want speculators in its PPIP initiative, where they are supposed to buy toxic financial assets, and hope Congress or the administration don't change their minds when the speculators actually profit from the purchases at a later date.

But perhaps the most amazing paragraph in the editorial is this one, near its conclusion,

"Far from harming capitalism, the Obama administration's policies concerning GM and Chrysler are very much in line with the process of "creative destruction" that the economist Joseph Schumpeter described as the active heart of capitalism's success. The government has been willing to support an important industry -- but only on the condition that all stakeholders make the tough choices necessary for the companies to succeed in the long term. This is capitalism at work."

I don't know what Sperling's motives are for writing this public love letter to the current administration. Perhaps to curry favor as financial institutions such as his line up for a generous serving of federal gravy in the disposition of impaired assets that the government has acquired in the past few months?

I do know that Mr. Sperling makes a mockery of Joseph Schumpeter's theories and essays, many of which I have read. Schumpeter's work from the 1920s would not square well at all with Sperling's contentions.

To even employ the phrases "government has been willing to support an important industry" and "necessary for the companies to succeed in the long term" smacks of a blatant misinterpretation of Schumpeter's viewpoint.

Schumpeter's point, in this regard, was that companies which failed were rightly cannibalized by other firms, the better to recycle resources in more profitable, productive enterprises. No company, in Schumpeter's view, was going to succeed in the long term.

Yet, thanks to two consecutive administrations committed to propping up failed US auto makers, we have no appreciable recycling of inefficiently-employed resources, nor the appropriate treatment of management, workers and investors, in a failed enterprise. Nothing has really died at Chrysler or GM. The weak and inefficient are simply being given new leases on life.

A bankruptcy court could have easily presided over the sales of healthy divisions to other auto makers, the spinoffs of others which could survive on their own, and the dissolution of the remainder.

Instead, as Howard Davidowitz so clearly noted in the video in this recent post, the Obama economy is all about investing in inefficient enterprises.

Hardly Schumpeterian dynamics. More like bastardized fascism to repay unions, while stiffing the capitalists who legitimately acquired secured debt, and the protections and legal rights which go with it.

Wednesday, May 20, 2009

The Flaw In Federal Vehicle Mileage Regulations

There's been quite a bit of media buzz regarding the new, accelerated vehicle mileage and emissions requirements announced unilaterally by the administration this week.

Even last night, on Bill O'Reilly's Fox News program, he argued for the new regulations, saying they would help decrease the country's dependence on foreign oil.

This is a good example of what a head fake this autocratic directive really is. Holman Jenkins, Jr., would agree, based upon this morning's topical Wall Street Journal editorial.

What O'Reilly failed to grasp, despite a clear explanation from one of his guests, Monica Crowley, is that mandating fuel efficiency revokes consumers' rights to choose what they want among transportation tradeoffs. Jenkins has written of this in prior editorials.

One critical piece of evidence that fuel efficiency supporters either dismiss, or fail to understand, is that, despite over 30 years of CAFE standards, US gasoline usage, on a per/driver basis, has not fallen.

Greater fuel economy simply results in people using more fuel! Wow, imagine that!

Further, as Jenkins has tirelessly noted, Americans don't want the kind of cars that meet the most extreme fuel efficiency standards. That's one reason why Chrysler and GM have gone bankrupt. They've been forced to produce and sell unprofitable small, fuel-efficient cars, to meet federal CAFE standards.

Linking those standards to emissions standards won't do much, either. Does anyone think driving a car so small, light and unsafe that you wear, more than drive it, is really going to offset China's and India's overwhelming expansion of coal- and oil-fired power generation plants in the next decade?

Americans innately understand this, and are unlikely to go meekly into the future in Euro-style mini-cars. Especially when their federal government officials are seen whizzing around Washington in large, inefficient vehicles.

How much simpler it would be for the government to simply set a variable tax on gasoline, equivalent to making the pump price, say, $4/gallon, then use the revenues to fund alternative transportation fuels with a steadily declining scale of subsidies, and an increasing required efficiency over time. Perhaps even fund a 'prize' for the first viable, scalable alternative technology to meet a set of practical requirements.

With a known, higher price of gasoline, consumers will then choose according to their preferences. Those wishing to save money might buy smaller, more fuel-efficient cars. Or they may keep to larger vehicles, but drive less.

At the same time, the remaining, non-government-owned auto makers would obviously compete to offer more fuel-efficient vehicles according to their reading of consumer preferences. Market-driven innovation is always going to be more effective than government-mandated regulations, if only because fewer of our brightest minds work in government bureaucracies than work in the private sector.

Jenkins' conclusion in his column today is correct. The administration can regulate all it wants, but US consumer behavior is going to find its way around regulations and eventually have what it demands. Either economically or, if necessary, through political/governmental change.

Tuesday, May 19, 2009

Google's Radio Advertising Gaffe

Last Tuesday's Wall Street Journal carried a lead story describing Google's failed attempt to change and dominate the business of radio advertising.

The tale contained a lot of surprisingly predictable, believable anecdotes concerning the lack of fit between the slick, shallow brothers who ran the ad placement business Google bought, and the larger online firm's own more cerebral staff. Just reading those stories, you could see a crack-up in the works.

But what was perhaps most revealing was Google's steadfast belief that, because they could technically accomplish radio ad placement and effectiveness measurement, buyers would flock to it and simply conform to Google's plans.

Well, first, like every other advertiser since Marconi's day, Google found that they couldn't actually measure the effectiveness of radio ads. They had estimates, models, and surrogates. But their customers, the radio stations and their clients, quickly saw through the charades.

I was rather surprised Google proceeded to even buy the Steelberg's little business without having completely doped out and built the complete feedback-loop of electronic ad placement, measurement and delivery of effectiveness results. Apparently, the firm got caught up in the ability to automate bidding on radio ad time, neglecting to note that, in many cases, prices would fall, not rise. The net effect for most stations was to face a loss of total net ad revenue.

It's hard to believe Google didn't see that coming, because, just reading the Journal article, that's the first thing I began to consider, as the story of the initial implementation of the Google-Steelberg system unfolded.

It's a sobering account. Here's a world class online firm stumbling on one of the oldest advertising challenges, in one of the most basic ways possible. That is, coming in from outside, buying a totally different type of firm, then combining the two to attempt to uproot, by force, the entire radio ad business. There were apparently never any pilot programs, focus groups with those who would be affected, or much of any attempt to design, share, trial, review, modify and re-release a new system of radio ad purchase and effectiveness measurement.

For all of Google's vaunted managerial excellence in its prior forays, it sure stumbled badly on this one.

Probably the silver lining is that Google closed the effort down in reasonable time. They didn't leave people hanging, continue the charade of changing the radio ad business, or redouble the failed effort in a similar fashion.

Instead, they sensibly reviewed the failure, and cut their losses soon thereafter.

Presumably, Google's Eric Schmidt would view this episode as characteristic of the company's philosophy of trying a lot of ways in which to leverage the Google brand and process. Some work, some fail.

You can give the company credit for at least trying and, when obviously failing, moving on.

Too bad our government and GM can't do the same and just file Chapter 11.

Monday, May 18, 2009

Reflections on This Recession, Deleveraging, and Media Pundits

My Sunday post featured a video clip, and accompanying text, on a Yahoo finance webpage. In the clip, retail consultant Howard Davidowitz gives a sort of unvarnished, 'no punches pulled' analysis of consumer behavior, government policy, and the banking sector. Despite his billing as a 'retail' sector guy, I fully agree with his take on the other topics.

As I wrote that post Sunday morning, a conversation I had with a friend on Thursday evening came back to me. The friend is a young man with no appreciable personal experience of severe recessions. Thus, when he asked my thoughts about recent equity market gains and the economy, I found myself focusing on the rarely-discussed effects of deleveraging.

The many bullish comments from guests and anchors on CNBC have become almost tiresome. As I viewed Davidowitz's clip, it dawned on me that he didn't seem to have a sense of context about his remarks. That is, he seemed to be speaking rather candidly, and only to the interviewer. In contrast, I realized, many pundits and on-air anchors on CNBC seem almost afraid to give anything but optimistic, or at least, non-negative comments about economic recovery.

And if this were a normal recession, in a normal context, we might, indeed, be seeing the early signs of a recovery.

But, as I explained to my young friend, this is no normal financial/economic situation. We are grappling with a capital deleveraging unseen since before WWII. Almost nobody who was an adult then is now alive, or, at least, going on the record about our current economic plight.

When I heard Larry Kudlow declaring the recession over earlier this month on CNBC, it seemed preposterous. That's because I think he is totally ignoring the context of a severely deleveraging global economic situation. The usual signals of economic renewal probably don't mean the same thing in the current context.

And when people like Kudlow are on a widely-watched medium, they seem to get, well, tepid and tentative about any negative remarks. Davidowitz's raw energy, attitude and humor contrasts so vividly with the rather stolid, self-important comments one hears on CNBC these days.

That's why I'm steadily losing respect for and faith in most of the editorializing I hear on major business media. Everybody seems to feel personally responsible to not be too negative, even if it's sustained by facts.

I remain unconvinced that a sustainable economic recovery has now begun, that deleveraging has ceased, or that the effects of both the recently-begun recession and damage to global capital markets have reached their worst, and are poised to imminently reverse. If nothing else, Howard Davidowitz's remarks provide some fairly specific reasons why I believe this to be true.

All A'Twitter

Twitter has become quite the instant communication device in recent months. Several people have discussed it with me.

One colleague tells me how it is now becoming a substitute for short blog posts among many people. Jack Welch guest-hosted on CNBC Friday morning, confessing to twittering some of his opinions and activities to followers. Karl Rove is an avid twitterer.

However, there's a darker side to twittering which was brought to mind last week. I recently reconnect with a former business colleague. For a variety of reasons, I won't provide more identification than that.

As she and I recently discussed technological advances, and their effects on ease of terrorist attacks on US soil, we touched upon modern communications technology.

In the context of my conversation with her, Twitter suddenly took on a whole new light. She confirmed that this service poses immense headaches for the NSA. Monitoring tweets is a nightmare, compared to, say, cellular traffic.

Twitter is asynchronous and uses fairly brief messages. Thus, it could be a very effective one-way tool for signaling, much as, during WWII, spies were operated using coded radio messages.

The torrent of tweets adds to the message volume which, theoretically, must be monitored by those whose business is the monitoring of electronic message traffic in the US.

Perhaps the effectiveness of free, publicly-available communications tools was best illustrated by a defense-related intelligence representative at a public forum, who, my friend explained, said something to this effect,

'The publicly-available messaging tools are better than our own internal systems.'

Sunday, May 17, 2009

"The Worst Is Yet To Come"

This video clip and accompanying text, sent to me by a friend a few days ago, featuring retail consultant Howard Davidowitz, is both detailed and far-reaching in its scope concerning at what point the US economy is at present.

I like Davidowitz's simple focus on consumer behavior, spending and saving. And his clear recognition that "we're now in Barack Obama's world, where the money is going into the most inefficient parts of the economy."

How more succinct can anyone be on this point? Davidowitz's further examples of the chicanery going on in Chicago is chilling.

As is his explanation of the real reason for those bank 'stress tests.' He correctly notes that we remain overbanked, while Treasury tries to keep BofA, Citigroup and Wells Fargo in business.

But Davidowitz believes Treasury is simply trying to fool private capital into investing in banks and other entities, because they can't get more Congressional-authorized TARP money. I think that's sadly true.

As Davidowitz says, "If you're not petrified, you're not paying attention...."