More On Lehman's Slide To Oblivion

Today's breaking financial service sector news is all about Lehman- again.


This time, the firm announced the departure of its CFO, Erin Callan, and its COO, Joseph Gregory.


Somehow, amidst the firm's turmoil and management mediocrity, CEO Dick Fuld remains untarnished and firmly in place.

As the nearby Yahoo-sourced three-month chart for the embattled investment bank and the S&P500 Index clearly shows, it's been a stunningly-fast decline for the firm's luckless shareholders.

Or, maybe witless shareholders?

In just three months, Fuld and his team have managed to destroy roughly 50% of their shareholder's value, while recapitalizing the firm just three days ago by about 50%, after first saying it was unnecessary.

While Lehman is the smallest and weakest of the four remaining investment banks- Goldman, Merrill and Morgan Stanley being the other three- one wonders why anyone would have bought equity in these firms after January. Especially in Lehman.

Trying to time 'turnarounds' is dicey in the best of circumstances. In financial services, trouble tends to come from excessive, poorly-managed risk. In Lehman's case, this is true in spades.

Being number four doesn't just mean being smaller. When it comes to risk management, judging by the results of the past twelve months, it seems to also mean just being worse at this key financial service firm function.

That said, I would simply re-emphasize the conclusions of my prior posts about Lehman, found here and here.

To repeat David Einhorn's observation, Lehman has added capital it said it didn't need, to offset losses it had earlier denied experiencing, from instruments about which it was less than forthcoming.

Now, the firm has jettisoned its two key members of its own mis-management team.

What trust can possibly be remaining by anyone regarding Lehman? Investors? Debt holders? Eventually, even counterparties and customers will worry about the safety of their assets or trades, and the slide into oblivion will accelerate for Lehman.

This time, though, Hank Paulson & the Fed have recent experience with Bear Stearns on which to draw to manage a less market-affecting end to the smallest public investment bank.

Dennis Kneale's Succinct Analysis: We Are NOT In Bad Shape

Yesterday on CNBC, co-anchor Dennis Kneale, late of Forbes, presented the very defensible and, in my opinion, correct view that the seemingly-widespread handwringing about the current US economic situation is overdone.

As Kneale noted, 1980 was far, far worse than 2008.

Back then, the price of a barrel of oil was roughly $107, versus $130 now, a rise of slightly less than 30%. But consider the following other measures.

The average fuel efficiency of a car was 25mpg in 1980, versus 32mpg now. Even with so many SUVs on the road. That's a rise of roughly 23%.

What about non-transportation usage of oil for power generation? Six years after the initial 1974 oil embargo, the US generated only 10% of electricity generated from oil. Now, it's down to only 1.6%! More than an 80% decline.

The inflation outlook is similarly different now from then. Back in 1980, a typical monthly CPI change was 1%, in contrast to today's modest .2%. Again, an 80% decline!

Lastly, interest rates are at totally different levels. In the Carter era, rates were north of 10%, whereas now they are far lower, with Treasuries at 4% this morning.

Yes, the Carter era was incomparably worse than today's Bush economy.

The US is nowhere near the levels of misery index and widespread despair that led to Carter's mistaken steps such as: windfall oil profit tax, gasoline rationing, and lectures to Americans on reducing credit usage and wearing more sweaters.

Certainly, with a Presidential election season gearing up, we'll be hearing a lot from at least one candidate about how the US is on the brink of depression, failure, catastrophe, etc.

Don't you believe it.

The Beauty of Markets: Energy and Julian Simon

Wednesday's editorial in the Wall Street Journal by Holman Jenkins, Jr., entitled "The Coming Oil Investment Boom," largely sums up my own thoughts on the current situation involving oil supply, demand and price.


Congress is engaged in folly, as it both tried, and failed to pass a massive piece of pork masquerading as an energy bill, decries the result of functioning world oil markets, demands more supply from others, yet won't fully exploit America's own energy supplies.

But, as Jenkins writes, the real world is reacting correctly to the oil situation,

"With a couple billion Chinese, Indians and others joining the global marketplace, they will need energy, and lots of it. The price mechanism is our only hope.

Sure enough, it's working. Money is pouring into Canada's massive tar sands. A thousand substitutions are taking place on the demand side. Sales of SUVs are falling; sales of four-cylinder sedans are up. The number of miles driven by American motorists shrank in February for the first time in 26 years.

At $70 a barrel, we worried only that the folly of India and China in artificially holding down prices to consumers would spread. The news is happy here too. Taiwan, Indonesia and Malaysia are cutting back subsidies or thinking about it. India and China may not let prices float anytime soon, but they're letting gas lines and spot shortages ration supply anyway."

Yes, already consumers and markets are adjusting supply and demand via price, while onlooking producers and investors are also behaving rationally. New substitutes for conventional, oil-based hydrocarbon energy are being developed without any government mandating them.

Jenkins continues by opining on whether the current price of oil is largely a function of speculation,

"If today's towering price of oil reflects some speculator's bet on a long-term scarcity of liquid motor fuels, this will prove the misguided bet of a lifetime. Hydrocarbons are abundant and can be extracted from living plant matter as well as from their fossil remains. Many oil fields under current technology are considered depleted when they're still 50% full. But technology advances, doesn't it?

Yet there's one miracle of adaptation that even $135 oil apparently can't vouchsafe. It can't bring intellectual coherence to American rhetoric or policy on energy.

By one count, America sits on enough oil and gas to meet its own needs for half a century. We won't help ourselves although our environmental delicacy somehow doesn't stop us from screaming at other countries to tear up their own pristine wildernesses to supply us with cheap energy. President Bush rushes to the Saudis, supplicating for more oil. Congress threatens OPEC with antitrust action. Go figure. That U.S. politicians can afford to indulge a persistent unreality about a basic input of industrial civilization only testifies to how responsive and resilient the global energy market has been despite the political silliness it meets at every turn."

This passage really hits home. Just this morning, on CNBC, the Democratic governor of Kansas spent several minutes speaking carefully out of both sides of her mouth. When asked directly by the program's guest host, a Bush administration economic official, whether she supported exploiting US energy resources currently off-limits due to Congressional legislation, the governor managed to say everything and nothing. She's for conservation and lower energy prices, preservation of American wilderness for future generations and energy production.

Nowhere did she acknowledge how silly American politicians look as they behave as described by Jenkins- demanding the despoiling, if that's what it is, of other countries' environments to supply the world with more, less expensive oil.

As I wrote here in November, Julian Simon would be nonplussed about the situation. Without the signals of higher oil prices, how will markets and consumers ever know to behave in ways which allow market forces to bring about solutions?

As Jenkins writes,

"But the biggest fools today may be those greenies who are clapping their hands over $135 oil as if this somehow represents the beginning of the end of fossil fuels. High prices are not the equivalent of carbon taxes – they will have the opposite effect in the long run, spurring investment and technological progress to bring vast new resources of fossil energy into production. For instance, turning coal, oil sands and oil shale into motor fuels, which is cost-effective at half of today's oil price, means massive additional releases of CO2. It's the worst nightmare of the climate worrywarts."

Yes, indeed. Because if you think that the US Congress or any other governmental body on the planet knows more about which energy sources, at what prices, should be developed to replace oil, you deserve the ham-handed governmental solution you're going to get from that.

In summary, Jenkins contends that the global warming crowd needs to 'grow up',

"Growing up would begin with recognizing that science doesn't prove the case against CO2. Our political system has been looking at the problem of climate change for a generation, and lack of action is not due to the machinations of big oil – but to the inability of policy to bridge a giant chasm between proposed costs and benefits. Even if carbon's guilt is assumed, the economics are far from certain that it wouldn't be cheaper just to endure a changing climate.

Growing up would also mean realizing that climate activists are in danger of losing all political credibility as they become handmaidens to corrupt pork bonanzas for the corn ethanol lobby and Silicon Valley alternative energy impresarios. Look no further than the climate bill being debated on Capitol Hill this week. The only real question it poses is how much Congress will spend on climate pork while having no discernible impact on climate.

Finally, growing up means recognizing that their one politically and morally saleable proposition is to offer carbon taxes as a de facto consumption tax, with the proceeds used to offset labor and capital taxes that discourage work and investment. This would be a case of taxing "bads" not "goods," with benefits for growth and the average voter's bottom line independent of any problematic evidence about CO2 and climate.

Voters and their representatives then could at least contemplate supporting a climate policy on cost-benefit grounds, rather than on the religious posturing that Al Gore and others adopt to push what they can't sell rationally. Will the greens learn these lessons? Not likely – which is why $135 oil may prove the beginning of the end of any political movement to do anything about climate change."

That last sentiment is really insightful. How many times do politicians mandate what won't sell on the free market? When you hear "mandate" from a legislator, look out. Someone's lobbyist hit pay dirt and you're going to pay.

In this case, as Jenkins notes, what Al Gore and company can't present as a salable proposition in the free markets, they hope to connive and manipulate the US Congress to mandate instead.

That energy/climate change bill mercifully failed already. In the meantime, people we don't even know, and some who we do, are busily engaged in innovation to supplant $135/barrel oil with new energy solutions for America and the world.

If we're lucky, oil prices will remain relatively high long enough to see these new technologies come to market and result in the world moving again to a lower long-run energy cost curve.

Lehman Again- Today!

Back in April, here, shortly after Bear Stearns' demise, and, again, more recently, here, I have written about the remaining weakest investment bank, Lehman Brothers.

Currently, the smallest public major investment bank is having difficulties due to largish losses and a very public fight with short-seller David Einhorn.

Einhorn was on CNBC one morning last week, launching salvos against Richard Fuld's Lehman. Lehman has been studiously silent and declined to also appear on CNBC to answer Einhorn's allegations regarding the investment bank's asset quality and probable writedowns, plus their need for capital.

This morning, as I write this, the news is that Lehman is, in fact, seeking some $6B in commmon and preferred equity to remain in decent shape in terms of its balance sheet.

On CNBC discussing all of this is, shock of shocks, my old boss of bosses, George Ball, once CEO of Hutton, now a part of Lehman, and, later, PruBache Securities. I find it curious why the former CEO of what were essentially retail wire houses would be the appropriate guest host to discuss a primarily institutional investment bank's potential demise.

And, to make my point, Ball was mouthing silliness such as, maybe when Fuld is under fire for leverage, is the time he should shrink, stay independent, and lever up even more, to stay independent!

You can't make this stuff up!

Who exactly does Ball think will lend a levered up Lehman more money? And with less total asset cushion, as they sell off assets to manage risk?

More to the point, the talk on CNBC was about just who would want to buy Lehman at this point. Like me in the second linked post, they felt that Lehman's business model is now hopelessly and fatally flawed.

And, like me, they considered the really strong players- private equity and hedge funds. I didn't bother to write about this element of the Lehman endgame, but it's sensible to me.

Commercial banks don't really need a Lehman, since they all compete with it anyway, lend it money for liquidity, and, to a bank, are in fairly serious straits themselves just now.

The more likely result is for the Blackstones and their ilk to cherry pick the choice employees and, finally, bid for parts of Lehman's balance sheet, after forcing writedowns of the toxic stuff.

The real issue here is, again, public versus private ownership of these types of financial institutions. As I've written for nearly a year now, the really good financial services talent, except for Goldman, has left for the private world years ago.

If you think I'm wrong, consider Dillon Read. How many times has that boutique investment bank sold itself to a slow, fat public financial services company- Equitable comes to mind in one round- at a market top, only to buy itself back at the bottom? I have literally lost count.

But it begs the question of why anyone thinks there are really good opportunities for long-running, consistently superior total returns at any publicly-held financial service firms anymore, when their competition is off the radar screen, in the privately-held world.

I suspect that if today, this week, this month, aren't the end of Lehman as an independent publicly-held company, they probably mark the beginning or middle of the end of that era.

On Microsoft's Mismanagement of Its Operating System Dominance

I've contended for at least two years, as noted in this May, 2006 post, that Microsoft would do its shareholders a service by breaking itself up into at least 3-4 pieces: operating systems, desktop applications, gaming, and online/advertising.

Now, in Wednesday's Wall Street Journal, technology columnist Lee Gomes provides more examples of how Microsoft's integrated businesses model has badly served customers in ways that almost certainly means it has also hurt shareholders.

Gomes' clever article was entitled "Dear Windows 7 Programmers, I Have a Few Ideas..." In it, he sends up some of XP's and Vista's worst faults.

Among his priceless quotes are,

"SKU stands for "stock keeping unit," and one of Microsoft's most baleful decisions for Vista was to wring from it as many SKUs as possible. Thus was born Vista Home, Vista Professional, Vegetarian Vista, etc. Each successive version had more features and, naturally, a bigger price tag.

Whatever incremental revenue Microsoft raised with this ploy couldn't possibly have been worth the confusion and ill-will it engendered. A certain technology columnist who will here go unnamed because I don't want to embarrass myself, once spent a lengthy session with Microsoft tech support trying to get my Vista to see a disk drive. Only well into the process was it discovered that the requisite "dynamic disk" feature wasn't in that particular SKU.

If society is going to be inflicted with an operating-system monopoly, society might at least get the benefits -- especially the one where everyone shares a common base of the same software. The Vista SKU epidemic gives us the worst of both worlds: software silos combined with a single big supplier.

Open-source software such as Linux is traditionally seen as the opposite of proprietary software from the likes of Microsoft and Apple. But that's a false dichotomy. Why can't Windows be proprietary, for-profit and copy-protected -- while at the same time be open for user control and inspection? If Windows were a car, you'd never be able to open the hood and see what was underneath.

OK, a cheap shot, I know, but just last week, I installed the new Service Pack 3 for XP, only to see my brand new Internet Explorer 7 crash in the first two minutes of use. Granted, I was doing something especially demanding -- surfing from one Web site to another one -- but still, I expected better.

It's well-known that massive teams of programmers are the worst thing possible for good software because they make the process so bureaucratic. But if a small team is what's needed to make Windows 7 great, then Microsoft is big enough to spend whatever it takes to build a team smaller than everyone else's."

I've felt for years that, no matter what else their market share dominance in desktop operating systems, Microsoft's arrogant attitude to issues such as Gomes mentions has caused them to have a customer base that actually loathes the company and its products.

That just can't be good. Dealing with your computer's Microsoft operating system is almost as bad as dealing with your- or my- bank. And if you've read my recent columns about that, you know it's not a good thing.

Would an independent operating systems group treat customers as badly as the current Microsoft unit does? As I saw at the old, integrated ATT of nearly three decades ago, I believe Microsoft's operating system group management is sub-optimized in favor of helping its fellow divisions- applications, gaming and online. Thus, rather than do what is the best thing for paying customers of operating systems, the group probably does what is best for maximizing overall Microsoft profits.

How differently would you or I expect a separate, standalone MSFT operating systems company to behave?

As Gomes notes, it might not lock the hood on your operating system, preventing you or anyone else from easily diagnosing problems in the software you now own.

Or maybe they'd go directly to the subscription model, similar to anti-virus vendors. That way, you'd enjoy more smooth, continuous updates and fixes to the software. And perhaps even some better online or on-system diagnostic tools.

For nearly every computer user to loathe buying a new machine, as I do, because of the trouble we know we're in for when we 'upgrade' to a new operating system must mean that we'd pay more for a better situation. Or the same to at least have something less awful.

If Microsoft's CEO's inability to manage the firm to consistently outperform the S&P500 over the past few years doesn't clue you in to the firm's problems, maybe knowing how much customers hate the firm for the necessity of buying its operating systems on their new PCs will.

GM's Further Woes

This week's GM shareholders' meeting was cause for more gloom and doubt about the continuing viability of America's largest- by market share- auto maker.

Yesterday's Wall Street Journal had one article noting that the price for credit-default swaps on GM instruments has been soaring, indicating a higher perceived risk of bankruptcy. It's cash position, relative to, say, Ford, is very weak. In light of GM's need for some serious product policy turnarounds, it's looking increasingly as if the company might finally bottom out financially before it can ever re-ignite sales and profit growth, let alone achieve some semblance of consistently superior total returns for shareholders.



No surprise there.



But this morning's edition of the business newspaper went much further in documenting the incredible, continuing ineptitude of the nation's battered vehicle-producing giant.

As the Journal article reports in a piece ominously titled "GM Shifts Its Strategy Into Reverse,"

"After three years of restructuring and tens of billions of dollars in losses, General Motors Corp. shifted direction once again Tuesday, unveiling plans to close four truck plants and possibly sell its Hummer brand.

The moves were forced on GM by soaring gasoline prices, which are prompting more consumers to opt for more fuel-efficient vehicles. The struggling auto maker must now try to rapidly reduce its dependence in North American truck sales, once seen as the key to its turnaround.



The abrupt shift, outlined at GM's annual meeting, is an acknowledgement that Chairman and Chief Executive Rick Wagoner miscalculated in 2005 when he bet big on trucks. That plan, based on expectations of steady vehicle sales and gas prices in the U.S. through 2008, won the backing of GM's board and helped Mr. Wagoner prevail in a 2006 board-room battle with then-shareholder Kirk Kerkorian."



If you are, sadly, unfortunately, still a GM shareholder, those paragraphs ought to be sufficient to end that. Plus the knowledge that Kerkorian sold his GM position and now owns shares of Ford.



Need I even state what I think the board should do to/with the hapless, inept Wagoner?

How can GM's board possibly defend continuing to let Wagoner hold any job at the company after an error of such tremendous magnitude that the vaunted turnaround of two years ago now must be reversed? SUVs were the wrong bet, and now Hummer has to be sold. How much do you think anyone else will pay for the latter, with US gasoline prices near and above $4/gallon?

Can you say, "shareholder value destruction," Rick?



As CNBC covered Wagoner's opening remarks at the GM meeting the other morning, I heard Wagoner try to smear lipstick all over the pig, including hopefully mentioning the company's new Volt electric car.

Too bad it's due out in....... 2010. Will an independent, non-bankrupt GM even still be around to produce and market the car by then?

Take a look at the nearby 45+ year stock price chart for GM, Ford and the S&P500 Index. Makes you sick, doesn't it?

At least Ford has had positive price action over nearly half a century.

Yet, in the same timeframe when the S&P rose nearly 2000%, GM has actually lost ground, and is now worth less, on a price basis, then it was when Kennedy was President! Sure, throw in some dividends and it's probably positive by a bit.

The bad news about Wagoner is how little he seems to understand what it takes to get GM to the point of delivering consistently superior shareholder returns. The only good news is that he's really not that much worse than every other GM CEO for the past half-century.

They have all been pretty mediocre CEOs, with boards to match, judging by the complacency with which the latter have allowed the former to preside over the slow death of this American automotive giant.

You know it's really bad when the Journal writes,

"Some shareholders are frustrated.

"You don't get a sense that the General Motors crowd really gets it," said Sister Patricia Daly, who represents the Sisters of Saint Dominic of Caldwell, N.J., a religious order that owns GM shares, in an interview on Friday.

"Even in the 1990s, it was clear they weren't going to be able to sell the big SUVs for 15 years without any impact." "



Now that's really scary, isn't it? A Catholic nun has better instincts about the US car market than the CEO of GM?

Here's hoping, for their Order's sake, that those sisters are out of GM by the end of tomorrow.

After Bear Stearns, Is Lehman Next To Collapse?

This week's hot investment banking story is the vulnerability of one of the remaining weak sisters among publicly-owned investment bank/brokerages, Lehman Brothers. I last wrote about this issue here in April.

Nearby is a price chart of Lehman, Goldman Sachs, Morgan Stanley, Merrill Lynch and the S&P500 Index for the past five years.

Goldman is clearly the class of the class, especially distinguishing itself since late 2006- months before last summer's mortgage finance-fueled fixed income markets crisis.

Of the other three investment banks, Lehman has the relatively 'best' performance. Of course, that's not saying very much, since none of the three could give an investor a better return than the S&P500 did over the period.

As I read yesterday's Wall Street Journal piece about Lehman's new difficulties, I noticed the article making a really big deal about how Lehman's leverage has recently been lowered from 31.7 to 27.3. Today's Journal has a lead piece in the Money & Investing section about Lehman looking abroad for capital.

In my opinion, this completely misses the point. As I wrote here in late March,

"Looking beyond simply Bear Stearns, can anyone truly justify the existence of all four of Goldman Sachs, Merrill, Lehman and Morgan Stanley? Especially in the modern world of large private equity firms and hedge funds? The former provide additional underwriting, M&A advisory and asset management, while the latter focus on providing trading capacity and investment management.

Other than emotional reaction of former employees seeing their old firm's name vanish, what would be different if one or more of those names were bought by or merged with a commercial bank?

Contrary to Andy Kessler's view, in the Wall Street Journal this past January, about which I wrote here, it's unlikely now that an investment bank will do the buying. With their high leverage and dependence upon commercial banks for funding, I suspect the investment banks are the more vulnerable. Now having access to the Fed discount window, it's only a matter of time before the regulators get around to levying a new regulatory framework on the investment banks."

It's not whether Lehman reduces their leverage right now by a pithy 4 or 5 percentage points. That's going to be irrelevant if/when their big meltdown comes. Bear Stearns saw billions of dollars of client assets, and customer business, vanish in days.

Quite simply, as I wrote in that prior post, Lehman exists at the pleasure of its commercial bank Broker Loan divisions to fund them beyond the current maturity of outstanding liabilities. Whether the leverage is 30, or 25, 20, 15, won't matter when customers leave within two days.

At that point, anything above 1:1 spells dissolution. The mechanics of profitability, risk management and leverage have simply changed for long term survival of most publicly-held investment banks.

A plethora of hedge funds and private equity shops have trimmed profit margins in virtually every investment banking business except asset management. There, the best managers head for private firms ASAP anyway. Meaning the publicly-held investment banks, with the exception, still, for now, of Goldman, are largely the province of the lesser-skilled bankers at the mercy of commercial bank funding and the need to take ever-larger risks to offset declining profit margins.

A recipe for long term death of these firms? You bet.

As I wrote later in that March post,

"A natural consequence to this will probably be even more smart financial services people migrating back to the privately-financed arena. Just like consumer goods merchandising has the 'wheel of retailing,' whereby new entrants compete at the low-cost end of the market, as existing players migrate upwards in terms of quality, service, selection and price, so, too, it seems, will financial services now have its own version of this 'wheel.'

Only in financial services, the 'wheel' is between publicly- and privately-held concentrations of capital and risk management. Again, viewed from afar over decades, the story of commercial and investment banking for the past forty years has been a gradual selling of transactions, asset and risk management businesses at their 'tops,' as formerly-private banks of both stripes went public, followed by managerial ineptitude, decline in risk management, and excesses in pursuit of growth via more risk."

And, as I wrote in my recent post on Wachovia CEO Ken Thompson's demise,

"To me, the pecking order of smart management in financial services begins with the best private equity and hedge funds. After them would come Goldman Sachs. Then.....well..I don't know if there is anyone else thereafter."

So to me, this breathless watch over Lehman's viability is sort of misplaced. As soon as confidence begins to erode, it's 'game over.' Bear's situation proves this. As I wrote in the earlier linked post, why doesn't Fuld just take the opportunity to sell to a commercial bank and retire gracefully, while his image is still in good shape?

The Folly of Corporate Diversification

I've written a handful of posts about diversification. Perhaps the two that I find most important in conveying my core philosophy about diversified companies are found here and here.

Not surprisingly, because it is probably the best known American diversified conglomerate, GE has been the primary subject of those two posts.

However, GE isn't the only American company that is probably overly-diversified. Consider yesterday's sacking of Wachovia's CEO, Ken Thompson. One of Thompson's mistakes, in his rush to make Wachovia larger and faster-growing, was the unwise purchase of Golden West Financial at the top of the real estate boom in 2006.

Now, it appears that Wachovia, like its Charlotte rival, BofA, would have done better simply remaining a large commercial bank without trying to become a major presence in the now-national business of mortgage lending.

Over the past decades, auto makers have bought, then sold: EDS, Hughes, and several financial service companies.

Who knows how much better-managed and -positioned for today's changing, challenging environment GM, Ford and Chrysler would have been, had they not frittered away precious capital and management attention on these diversifications?

Or consider TimeWarner's disastrous merger with AOL. Eventually it destroyed huge amounts of shareholder value. A needless diversification that never truly worked.

Microsoft has grown cumbersome and complicated to understand and manage, judging by their total return performance over the past decade.

When I consider both Microsoft and GE, it seems pretty obvious to me that too broad an assortment of businesses, especially when their commonality is eclipsed by their differences, leads to mediocre total return performances for shareholders.

Who really believes that Microsoft's applications businesses need to share a corporate structure with the games division?

Or that GE's aircraft engine business has a lot of interdependence with its Universal/NBC unit?

What are the odds that executives overseeing these unlikely combinations actually add value that exceeds the costs of their administration?

Look at the nearby price charts for five companies and the S&P500 Index for the past five years.

The monoline companies- Google and Apple- far outperform the diversified ones- GE and Microsoft.

I know there are many reasons to assail this comparison. What I want to show is the huge performance gap between operating models. The focused, largely single-business firms have created far more value for their shareholders in the last half decade than have the two diversified ones.

How can Gates, Ballmer and Immelt possibly excuse such lackluster performance for so long?

I contend that CEOs who collect and 'manage' businesses too many in number, with little inter dependencies, are ineffectively constructing mini-indices of their own. As Microsoft's and GE's performances so clearly demonstrate, at best, they might perform like an index..but with much higher risk.

That's why I have written for years that both GE and Microsoft would benefit their shareholders by splitting their companies into their logical constituent parts. In both cases, their business units are sufficiently large to operate as independent corporations, and would have much more transparency and focus if they did so.

With total return performances like GE's and Microsoft's, it's hard for anyone to argue I'm wrong.

Does any reader know of a legitimate exception to my position? That diversification of corporations is, in today's environment, with deep, broad equity pools, needless and counterproductive for shareholders and managements?

Synfuel & Energy Security

Back on May 21st, the Wall Street Journal ran an interesting article describing efforts by the US Air Force to test the use of synfuels in its bombers and fighters.

As the Journal article explained,

"Despite its high-tech connotations, synthetic fuel -- often dubbed "synfuel" for short within the industry -- has been around for decades. The basic technology for transforming coal or natural gas into synthetic fuel was invented by a pair of German researchers, Franz Fischer and Hans Tropsch, in the 1920s. The Nazis later used the Fischer-Tropsch process to mass-produce synthetic diesel fuel. During the apartheid-era embargo against South Africa, scientists there tweaked the technology so it could also produce synthetic jet fuel.

The Fischer-Tropsch process transforms a synthetic gas derived from coal or other material into liquid gas. The resulting synthetic fuel is different from biofuel, commonly produced from corn, sugar or other plants. Continental Airlines Inc. has announced plans for an experimental flight using biofuel this spring, which would be the first by a U.S. carrier; Virgin Atlantic also has done some testing."

I have had a vague awareness of this process for some time. Originally, I thought it converted coal into liquid hydrocarbons, then I later thought that was mistaken, and it only 'gassified' coal to burn like natural gas. In fact, it does produce liquid fuel. Sounds too good to be true, right?

Well, in a sense, it might be, as the Journal piece noted,

"The pure synthetic fuel Syntroleum sold the Air Force for the B-52 test flight in 2006 cost almost $20 a gallon. Its price since has come down sharply, but the synthetic product used in the B-1 supersonic test in March still cost $4.62 a gallon. It was mixed with petroleum fuel costing $3.04 a gallon, according to government officials."

You can guess, and the article confirms, that if large refiners knew that the US government stood ready to buy their output at some reasonable minimum price, the cost and, subsequently, price of synfuel would fall dramatically.

But then there's this aspect to the synfuel solution,

"Military use of synthetic fuel faces significant obstacles. The energy bill signed into law by President Bush last year included a clause preventing the government from buying the fuel if it emits more pollution than petroleum. Manufacturers have promised to meet that target by recapturing carbon dioxide and other greenhouse gasses produced in refining. Without those efforts, synthetic fuel can emit up to twice as much pollution in refining as conventional petroleum."

Here is where common sense would hopefully prevail. Seeing the US, as Boone Pickens believes, spend $500B per year buying oil from external suppliers, isn't it worth something to avoid that import bill?

Screw the greenhouse gases for now, we're talking energy security. Military energy security. As the Journal article states,

"The problems are particularly acute for the Air Force, which uses about 2.6 billion gallons of jet fuel a year, or 10% of the entire domestic market in aviation fuel. The Air Force's fuel costs neared $6 billion last year, up from $2 billion in 2003, even as its consumption fell by more than 10% over the same period because of energy-savings measures, including a campaign to shut off lights and lower thermostats at bases.

The Air Force wants to be able to purchase 400 million gallons of synthetic jet fuel a year by 2016, an amount equal to 25% of its total fuel needs for missions in the continental U.S. This year, it expects to buy slightly more than 300,000 gallons."

With all the handwringing about US energy security, surely it's worth first reducing our dependence on overseas petroleum, then working on the emissions issues.

Here we have a clear, proven, even old technology which will make good use of coal, the fuel which America has in such abundance that we are sometimes called the 'Saudi Arabia of coal.' And yet in the midst of tight petroleum supplies and dwindling non-sovereign control of the energy source, we needlessly hamper our own ability to convert coal into synthetic oil and gasoline.

And the Air Force tests? The Journal had this to report,

"On a clear day in March, the three men took off for New Mexico with a reporter aboard. When the B-1 crossed into the closed airspace above the White Sands Missile Range, Capt. Fournier yanked back his throttle and sent the plane climbing almost straight up, throwing the bomber's occupants back into their seats. He then pitched into a steep dive. Pens and other small objects hovered around the cabin, weightless, until the plane leveled off again.

Capt. Fournier fired the plane's afterburners and sent the bomber roaring over the range. A small dial in the cockpit showed that the bomber was flying faster than Mach 1.

Back at Dyess, the crew packed into a small conference room to analyze the flight with a crew of military and civilian officials, including a pair of engineers from GE, which makes the bomber's engines. Capt. Fournier said the plane handled normally at high speeds and on sharp turns. The only difference he noticed was that the synthetic fuel had a different smell than conventional jet fuel. "So it didn't give you the normal buzz?" one of the engineers joked.

With the B-1 certified to fly on the synthetic mix, Maj. Donald Rhymer, the deputy director of the Air Force's alternative-fuels certification office, said the Air Force would soon test fighters such as its workhorse F-16.

"Our biggest litmus test was Capt. Fournier coming out of the B-1 and saying that it was an unremarkable flight," Maj. Rhymer said as the meeting ended. "That's the subjective endorsement we're looking for with all of the planes.""

Ken Thompson Fired At Wachovia

Well, it's official. At least one commercial banker has gotten the axe for his boneheaded 'leadership.'

CEO of Wachovia Kennedy "Ken" Thompson's forcible resignation was announced this morning.

As the nearby Yahoo price chart illustrates, Thompson's Wachovia (WB) hasn't really delivered for shareholders for the past five years.

Wachovia barely tracked the S&P until early last year, when the bank's stock price went flat, while the index rose, and then plunged precipitously while the index flattened.

Guess buying Golden West, the California mortgage bank, in 2006, at the top of its value, wasn't so smart after all, eh, Ken?

Of course, the other Charlotte-based "Ken," Lewis, about whose bank I wrote here recently, has had his share of problems, as well, as depicted in the chart.

While Thompson's Wachovia actually lost about 25% of its value in five years, Lewis' BofA barely managed to stay above the flat line. Neither, at their best in the past half-decade, ever showed signs of out-performing the S&P.

In Lewis' case, the purchase of Countrywide, another California-based mortgage lender, hasn't helped BofA. The early purchase of an interest in the real estate financial firm, to help shore it up, looked expensive by the time Countrywide collapsed and offered the rest of itself to BofA at a much lower price.

Isn't it ironic that the two one-time North Carolina regional powerhouses, NCNB and First Union, by virtue of astute risk management in the 1990s, managed to scoop up the west coast money center titan, BankAmerica, and assorted other US bank chains. Then, in the latter half of this decade, squandered their shareholders' value by returning to..where else?....California to buy mortgage lenders which subsequently caused large loan losses.

Almost seems like some sort of revenge of California finance on the North Carolina banks worthy of a Greek tragedy, doesn't it?

Now Thompson's out, and Lewis is looking less and less effective.

This morning, on CNBC, Dick Bove, a long-time commercial bank analyst, opined that both franchises lost their focus and moved out of basic deposit-taking and lending, thus damaging themselves with mortgage banking.

As I wrote here last October,

"Quite simply, as a group, US commercial bank CEOs are typically less-broadly experienced and, frankly, less 'smart,' in a business sense, than their investment banking CEO counterparts.

Stretching back to the 1970s, I think only David Rockefeller and Walter Wriston were, among commercial bank CEOs, possibly on a par with their investment bank peers in terms of vision and business acumen. Even then, these two were encumbered by the inherent obligation, as leaders of large US banks, to act to protect the banking system, rather than focus primarily on their shareholders' interests."

Further on in that post, I noted,

"As I consider the M-LEC and its supporters, I can't help but see it as essentially an attempt by the less-savvy commercial bank CEOs to stave off a fire sale of fixed income assets which they abetted by their operation of various SIVs. Meanwhile, the savvier investment bank, hedge fund and private equity CEOs circle, like sharks in the water, waiting for the inevitable disgorgement of SIV assets to begin. They will wait for near-bottom prices, buy and hold and, eventually, realize tremendous profits for their risk taking."

Among the investment banks operating when I wrote that post, Bear Stearns is gone. Lehman is teetering, as it attempts to outlast liquidity concerns amidst weak performance. Merrill has been run for decades more akin to a money center bank than an investment bank.

To me, the pecking order of smart management in financial services begins with the best private equity and hedge funds. After them would come Goldman Sachs. Then.....well..I don't know if there is anyone else thereafter.

What Thompson, Lewis, and perhaps even Dimon, seem to forget is that commercial banking really only grows without excessive risk in two ways: with market demand, or by expanding geographically without overpaying for acquisitions. Typically, moving into new businesses, such as mortgage banking and capital markets, brings disaster.

It has for Wachovia and Thomson via Golden West. Lewis has capital markets losses and the specter of Countrywide's losses with which to contend.

It's too early yet to discern whether Chase has really bought anything worthwhile by scooping up the remains of Bear Stearns.

Commercial bank CEO's rarely learn the lesson of long term risk management vis a vis growth. Each large bank CEO wants their bank to be the largest, their asset and income growth to be the fastest.

To their shareholders continuing regret.

Bear Stearns' Management's Naivete

Earlier this week, I read the second part of the Wall Street Journal's retrospective series concerning the demise of Bear Stearns. The piece ended with the following passage,

"At about 6:45 a.m., Bear Stearns officials received an email from Stephen Cutler, J.P. Morgan's general counsel. It was the draft of a news release announcing that the bank had agreed to provide Bear Stearns with financing "as necessary" for up to 28 days.

The money underwriting the rescue was coming from the Fed, which was also bearing the risk of the loan. It was the first time since the Great Depression that the Fed had made a loan like this to an entity other than a bank. It would provide the bailout through J.P. Morgan, because as a commercial bank the firm already had access to the Fed's discount window and was under the central bank's supervision.

Inside the sixth-floor conference room where Messrs. Molinaro, Upton and others had huddled, executives cheered and exchanged high-fives. They thought they had four weeks to sort out their problems."

When I read that last paragraph, I just shook my head. Those guys must be idiots.

The bulk of the article described the steady drain of customer assets and counterparty business fleeing Bear Stearns that week. Anyone with as much experience in financial services as Cayne and Schwartz should have remembered how quickly Continental Illinois Bank went from healthy to shuttered.

Once customers and counterparties smell weakness in a leveraged financial institution, it's over. Nobody will risk their cash with a counterparty or custodian who might, on any day, suddenly become insolvent. It's more than just 'staying away until the dust settles,' as one institutional customer told their Bear contact.

With sufficient numbers of other trading houses in the sector, who needs to do business with a cripple what might collapse in the next day's market decline?

What were those guys thinking? Did they really believe that the 11th-hour loan, brokered by the Fed and run through Chase, would actually save them? They didn't have a month to 'sort out their problems.'

They never had more than that weekend, because as soon as Monday morning's market open, every remaining customer would flee the obviously-weakened firm, and counterparties would step back, too.

You don't have to be a rocket scientist to understand that the Thursday night loan simply got Bear through one last day before a weekend deal to arrange the transfer of positions to whomever became the new owner of what remained of Bear Stearns.

I haven't read part three of the series yet, but the end of part two just left me incredulous that the guys at the top of Bear Stearns could have been so naive and clueless. Truly, they did not deserve to continue their corporate existence.

GE, Immelt, O'Reilly & Olbermann...And Corporate Governance Again

It seems that every time Bill O'Reilly mentions GE, Jeff Immelt and Iran on his Fox News program, my blog visits skyrocket. When people Google any two, or all three, of the words 'Iran GE/Immelt O'Reilly,' one of the top results is one of my blog posts regarding my appearance on O'Reilly's program last month discussing the business aspects of GE's dismal performance under CEO Immelt.

This morning, however, I received a visit from a reader who found my blog from this referring post. I don't really follow the O'Reilly-Olbermann feud, although I have friends who keep me abreast of it from time to time.

What I find interesting about the post and its author is its apparently objective viewpoint that, based on the facts, O'Reilly is probably right on this one. And, thus, with his link to my blog, which is unabashedly critical of Immelt's inept management of GE, he also sustains my own views on the matter.

I have yet to find anyone who can counter the points I have made in my many GE- and Immelt-related posts (conveniently located by searching under those labels on the right-hand side of this page). Whatever Olbermann's faults may be, there's no denying his boss-of-bosses, Immelt, has pretty much flatlined GE after its many years of at least market-paced performance under his predecessor, Jack Welch.

Cable Gamer ends his GE-related post,

I should stop there, but I do have just one more thing on my mind: GE shareholders should be mindful that none of this controversy is doing them any good. This blogger, The Reasoned Skeptic, makes the point that GE has been hurt financially by all this ruckus. And when I see that GE stock is at 32, I think that surely somebody is going to come and rescue shareholders from this worst of both of both worlds--an amoral relationship with an American enemy, as well as poor economic performance.

In keeping with my recent rant about what shareholder democracy really means- and there will be an upcoming post exploring this in more depth- let me reprint a key passage. I wrote,

"But the investment angle of the story, as represented by Mr. O'Reilly's institutional manager/guest last night, now focuses on the wrong point.

The wonderful thing about our American economic system and environment is that you don't have to own GE! Or any other underperforming asset!

There are thousands of investing options available to both institutional and retail investors alike.

Rather than wait, like those poor souls anticipating Godot's arrival, for the seemingly-always-coming 'corporate governance' solution, investors are better off to just sell what they don't like and buy something else."

Someone come to GE's shareholders' rescue? How about they just do the sensible thing and sell the damn stock???!!!!

I spoke with my partner about this a few nights ago. Why, he asked, do people hold onto equities of companies that are such long-term poor performers.

He believes it is due to a basic element of human nature- a tendency to be in denial about the bad outcome of prior (investment) decisions. Rather than admit a mistake and sell the equity, keep it and hope someone will 'fix' it.

I don't think I can express it any better than I did in that post, so I'll just reprint the conclusion-

"There are so many opportunities for investment in the American economy that there's simply no reason to hold onto a problematic equity and either hope, yet again, that this year will bring change for the better, or, worse, lobby for 'management change' or 'board action.'

It probably makes more sense to trust the senior management and board of the firm in which you invest to do a great job with the assets under their control than to invest in a company which you think could, or wish would, do better than it has with the company's assets, and then try to change the management and/or board's behavior."

Technology's Disruptive Effects

Technology- multiplier of manpower, driving force of innovation, cutter of prices, improver of living standards

Technology- destroyer of jobs, wrecker of industries, change run amok, reducer of investment values

Technology is an awesome and typically unpredictable force in our society.

Yesterday, my partner was remarking on a factoid he read last week concerning financial services employment among large US companies. At least, I think that was the universe.

Anyway, the fact was that, before the recent purges of financial services employees, following last year's credit debacle and subsequent writedowns, financial services employment had just about reached the same level it had prior to the sector's last major cuts, following the attacks on the World Trade Center on 9/11.

He and I were frankly puzzled that the labor force in the sector had swollen by so much again. He asked whether the industry should not have become more productive, and, thus, had fewer employees at its recent peak?

That seems correct to me. We discussed productivity, and he asked how I would define that measure. I cited the method I've always used, which is value-added divided by the number of employees. Value-added, the meaning of which my partner inquired, is, classically defined, the net of revenues and purchased goods and services.

Our conversation brought me back to a similar one in the library of the then-headquarters of my former consulting employer, Oliver, Wyman & Co., in 1995. I was discussing issues of size of markets, growth, revenues and gross margins among financial services businesses with my then-colleagues John Stroughair and David Boone. We gradually came around to discussing the role of IT in the sector, beginning in the early 1960s.

This led me to conjecture that it was possible that the industry's gross margin dollars had remained relatively constant as the application of information and electronic technologies to financial services had expanded the number of customers while reducing prices. For example, credit cards, money market and mutual funds became more ubiquitous, and fees for these services fell, thus opening them up to a much larger and broader mix of customers.

Even if the gross margin dollars grew, they probably grew at a slower rate than that of revenues or customers.

My point is, the application of technology has a decidedly mixed effect, even upon industries which undertake it for its supposed benefits.

In financial services, the thinning of gross and, ultimately, net margins probably led to less cushion against risk, as ever larger customer bases were served against shrinking profitability levels.

Technology tends to lower or remove barriers to entry, which, of course, leads to lower profit margins.

Returning to my discussion this week with my business partner, I mentioned an industry with which he is familiar, and in which he has had some fairly influential contacts- recorded entertainment.

Does anyone doubt that electronic and digital technology has gradually, at first, then rapidly decimated the businesses of producing and marketing audio and video entertainment?

Prices and margins fell through the floor with each new technology- cassettes, CDs, DVDs, VCRs, MP3 & 4 players.

This is part and parcel of what Joseph Schumpeter observed and codified almost a century ago. Businesses which enjoy substantial growth, especially from technological sources, open themselves to a bargain with the devil. Technology allows for the dramatic growth in new products and services, but with the accompanying shrinking of margins and ease of competitive entry. Thus, once on a path emphasizing technology-based change and growth, businesses which pause tend to get overrun by market forces- either consumer- or competition-based.

Existing products and services, like those in entertainment and banking, become cheaper, and, thus, appear more costly to offer, in terms of gross margin. Thus, firms which fail to move forward by shifting their business mix to new, higher-margin products and services, suffer from lower profitability, even if they were initially pioneers in the technologically-based changes.

Technology is, indeed, a two-edged sword. Having initiated its use to spark growth, firms run the risk of longer-term obsolescence if they fail to appropriately continue to ride the back of this tiger. Once begun, a business' affair with technological advances can't safely be ended, or even brought to a point of just 'maintenance.' To do so is to invite an early death.

Details...Details...What's In The Boilerplate Of Those Securities?

Yesterday's Wall Street Journal's Money & Investing section featured an article discussing the putting back of bad mortgages by institutional investors to sellers of the instruments.


The article cites Countrywide Financial as having reset its liability for such repurchased bad mortgages from $365Mm last year to $935MM now.

According to the Journal article,

"Additional pressure is coming from bond insurers such as Ambac Financial Group Inc. and MBIA Inc., which guaranteed investment-grade securities backed by pools of home-equity loans and lines of credit. In January...MBIA began working with forensic experts to scrutinize pools it insured that contained home-equity loans and credit lines to borrowers with good credit. "There are a significant number of loans that should not have been in these pools to begin with," says Mitch Sonkin, MBIA's head of insured portfolio management."

Further on, the article relates that WMC Mortgage, a unit of GE, made improper representations and warranties of subprime loans it pooled which PMI insured. Essentially, PMI is suing GE's unit for fraudulently describing the loans, for which PMI charged a fee to insure, because, in reality, the loans were much riskier than had been represented to PMI. PMI also wants WMC to repurchase the loans or pay damages to PMI, as the delinquency rate on the loans rose 30% within eight months.

What I find comforting, on some level, is that the legal agreements underpinning various mortgage loan and securitization instruments allow for buyers and insurers to recover for fraud and breach of contract, putting back the misrepresented instruments to the sellers.

Somewhere, in a handful of Wall Street investment banks, i.e., the few still solvent and publicly-owned, I can imagine rooms full of young financial wunderkinds being taught a lesson about the real meaning of those thick piles of documentation that accompany traded, securitized loans.

Buying a security that is what it says it is, and losing money, is one thing. Buying a fraudulently-described mortgage-backed security is quite a different matter. It's good to see that astute buyers are forcing the sellers to take back their fraudulently conveyed paper.

I wonder how much more in losses than currently expected this will bring to the larger mortgage-backed securitizers of the last few years.

Annheuser-Busch's No-Brainer Choice

This week's news in the beer industry has taken on quite the dramatic quality. European brewing giant InBev is planning a bid to buy the dominant US brewer, Annheuser-Busch.

For entertainment purposes, business media outlets, including the Wall Street Journal, are playing up the family angst angles, but it's really a no-brainer for shareholders. Vote for the acquisition, sell your AB shares, whatever.

I should probably provide a quasi-disclaimer. Although I own no AB stock, and never have, I do have some acquaintanceship with the company and family. My undergraduate alma mater is Saint Louis University in Saint Louis, Missouri. That university's student center is named the Busch Center. At the time I was completing my BS in marketing, one of the Busch children was also a student. The city reveres the first family of American brewing. The St. Louis Cardinal baseball team plays in.... Busch Stadium. At least it did. I believe the newly-built field is also named for the team's owners.

Suffice to say, I am well-acquainted with the family's identification with the company whose shares they sold to the public some time in the last century.

As CNBC co-anchor Michelle Caruso-Cabrera stated so clearly earlier this week, as I paraphrase,

'The family wanted capital and went to the public to sell shares. If they wanted full control over the company, they shouldn't have done that.'

She's right.

Further, look at the nearby five-year price chart of AB (ticker symbol BUD) and the S&P500 Index. The brewer has done its shareholders no favors. Clearly, having Busch as your last name doesn't seem to do much for achieving consistently superior returns for shareholders. Over five years, AB hasn't even made it back to a flatline performance, while the S&P has chalked up a +40% return.

The family situation of the Busch's also reads like that of the Ford family. Bloodlines thinned of talent over the generations. Divorces, underperforming sons, distant father-son relationships.

We read that the current CEO, August IV, was basically estranged from his father, by way of divorce. He, the son, went on to become a typical wealthy bad boy in his younger days.

The most chilling passage of the Journal article is its last, which reads, quotes the current CEO as saying, of his relationship with his father, August III,

"Succeeding atop Anheuser is paramount to the relationship, he says. "I honestly do believe if I failed in my professional life, it would be much harder to ever gain his respect," he says."

Meaning, I guess, that the AB shareholders are hostage to whatever it takes August IV to do to gain his father's respect.

Damn the shareholders- focus on dad!

The Journal piece does a fine job cataloguing the company's fending off Miller Brewing in the 1970s and '80s, then eschewing international expansion via mergers or acquisitions. Now, AB is the lone family brewer among large global players, and its performance is hurting.

This Yahoo-sourced price chart of the brewer and the S&P500 from the early 1980s tells an interesting story.

For nearly two decades, the brewer tracked the index, briefly declining to equal the latter's performance by 2001. At that point, the brewer's performance flattened slightly, but, relative to the bubble-bursted index's decline, posted a few years of outperformance. But by 2003, the index was rising again, while the brewer's performance dipped, then flattened.

Hardly laudatory performance by the Busch family on behalf of their public investors, is it?

It's pretty clearly time for a change. For any of the privileged Busch's to see the brewing company as a personal playground for settling family and personal issues is just wrong and unethical.

Looks like it's time for one less headquarters in Saint Louis, and a new division for InBev.

Ford's Bad News Could Be Long-Term Good News

Perhaps the biggest industrial news last week was Ford announced disappointing earnings news.



Ironically, though, this 'crisis' may be the ultimate turnaround opportunity for Detroit- or what's left of it.



The facts are these. On Thursday, Alan Mulally announced that, due to high gasoline prices, truck sales are off in a major way. Mulally used the term 'tipping point' to emphasize that gas prices have, for now, shifted consumer buying away from trucks for the foreseeable future.



The company is cutting truck and SUV production by as much as 40% in the second half of 2008, according to a Wall Street Journal lead article in Friday's edition of the business paper.



The consequence of this gasoline-price-driven change is that Mulally said it's now "extremely unlikely" that Ford will, as he had earlier predicted, return to profitability in 2009.



This is huge news, because Mulally is seen as a very capable manager. Unlike the incompetent crew across town at GM, Mulally has proven his managerial expertise at Boeing, and already made a positive difference at Ford. The unexpected, though small, profit this quarter, and the shedding of Jaguar, have demonstrated this.

The nearby Yahoo-sourced price chart for Ford and the S&P500 for the past year bears this out.

But a longer-term look at the same data, using a five-year chart, tells a different story. Seen from this perspective, it's evident what a tough job Mulally has if he ever hopes for Ford to deliver at least the S&P's returns to his shareholders. Right now, on a five-year basis, Ford is about 60 percentage points behind the index.



But with gasoline-driven cars finally seeing their demise due to global oil economics, it's quite possible that Ford, Toyota, Nissan, et.al. will have a golden opportunity to replace all the cars in America's vehicle fleet with hybrids of various sorts. Or even mono-fuel vehicles that don't use gasoline.



GM might not make it out of the desert of gasoline-powered cars into the promised land of hybrids. But Ford stands a decent chance.

With Kerkorian aboard as an investor, it's not hard to imagine him brokering an alliance, or even merger, between Nissan and Ford, much like he tried to arrange for GM a few years ago, before that company's CEO, Rick Wagoner, fought to prevent it.

To me, the auto industry may now be in a position akin to the recent years of television set manufacturers. Like the giant digital television replacement cycle currently underway, automakers may be able to view high gasoline prices as their salvation, not their demise.

Like it or not, I think most intelligent Americans now expect to seriously consider owning a non-gasoline-only car by the end of the next 5-7 years. I know I do.

While environmental concerns might be trumped-up, there's no missing the obvious implications of much higher oil and gasoline prices on American drivers and the cars they use.

I wrote about them in this post last December.

Just when the conventional design and production of automobiles was causing havoc for Detroit, the appearance of widespread demand for non-gasoline vehicles could change everything.

Battery makers and developers of efficient, usable hybrid drives will reap windfalls. And they should. As will clever designers of uniquely desirable vehicles incorporating various new non-gasoline power systems.

Maybe it'll be electric vehicles, or hybrids. But whatever it is, it could well mean a new lease on life for Mulally's Ford in the years ahead.