Meredith Whitney, Credit Card Lending & The Fed's Rumored Solution

Meredith Whitney, once of Oppenheimer, now on her own, wrote an insightful and thought-provoking piece on March 11th in the Wall Street Journal regarding consumer installment credit, i.e., credit card loan limits. She appeared that week on CNBC in support of her article.

As I write this, the S&P500 is up about 3.8% this morning, causing all matter of pundits to declare victory over recession and equity market doldrums. With this as a background, consider Whitney's contentions.

Whitney, who is regarded as a capable and generally accurate sell-side banking analyst, originally forecast credit card loan limit reductions of something like $2T. In her recent Journal piece, she wrote,

"Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010."

This isn't just an isolated event. And it does seem to be a rather under-reported credit contraction story. But Whitney continues by explaining the implication of her forecast,

"Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines.

There are several factors that are playing into this swift contraction in credit well beyond the scope of the current credit market disruption. First, the very foundation of credit-card lending over the past 15 years has been misguided. In order to facilitate national expansion and vast pools of consumer loans, lenders became overly reliant on FICO scores that have borne out to be simply unreliable. Further, the bulk of credit lines were extended during a time when unemployment averaged well below 6%. Overly optimistic underwriting standards made more borrowers appear creditworthy. As we return to more realistic underwriting standards, certain borrowers will no longer appear worth the risk, and therefore lines will continue to be pulled from those borrowers."

Clearly, this sort of consumer-lending risk management on the part of card issuers will have a dramatic effect on any economic recovery in the years ahead. According to Whitney, the use of credit card loan availability by US consumers is not uniform. She concludes her piece by noting,

"Over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool. For example, 90% of credit-card users revolve a balance (i.e., don't pay it off in full) at least once a year, and over 45% of credit-card users revolve every month. Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. In fact, a relatively small portion of U.S. consumers have actually maxed out their credit cards, and most currently have ample room to spare on their unused credit lines. For example, the industry credit line utilization rate (or percentage of total credit lines outstanding drawn upon) was just 17% at the end of 2008. However, this is in the process of changing dramatically.

Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively."

I haven't read or heard of analysis similar to Whitney's elsewhere recently. I suspect it means that governmental economists are going to be seriously blindsided by this aspect of the banking system's reaction to recent events.

Of course, given Washington's actions and reactions over the past twelve months, beginning with the handling of Bear, Stearns' collapse, you can probably count on the following solution to this forecasted dramatic contraction of consumer credit card lending capacity.

Look for the current administration to step into frozen, shrunken consumer installment lending with Fed-issued credit cards.

I understand that, even now, prototypical card designs are being circulated, much like a Capital One card customization package. Available designs from which a Fed credit card holder could choose would include: the current President, Fed Chairman Ben Bernanke, and Treasury Secretary Tim Geithner behind a motif of jail bars.

It wouldn't surprise anyone, would it? A Fed-backed credit card for otherwise-cardless consumers would seem to be the last, logical extension of Federal credit guarantees which began with Bear Stearns, led to AIG, the TARP, GM and Chrysler/Cerebrus bailouts, mortgage forgiveness, cramdowns, and, now, this week, the TALF.

Everyone, it appears, will receive their bailout, including ordinary consumers whose credit lines have been cancelled by prudent private lenders.

Steinhardt, Cooperman, Dachille & Gabelli On CNBC This Morning

This morning's CNBC programming featured an hour with hedge fund managers Michael Steinhardt, Lee Cooperman, and Mario Gabelli. After 8AM, Gabelli was replaced by Doug Dachille, the always-interesting, outspoken fixed income maven.

CNBC billed the first hour as one of 'hedge fund legends' opining on the current state of financial markets and the economy.

It was, to be sure, an interesting hour. But not necessarily for the reasons CNBC expected.

First, there wasn't really anything special about these three particular managers. One might even suggest that CNBC couldn't get the "real" legends- Steve Cohen, Eddie Lampert, or one of the founders of Brahmin or Fortress.

What was on offer was surprisingly transparent, in the cases of Gabelli and Cooperman.

First, Gabelli is really the only large-scale, active manger of the three. And he was recently in danger of doing jail time for abetting a woman who either was his employee, or the wife of an employee, in fronting for Gabelli to acquire a federal spectrum license. The case got a lot of attention, and Gabelli was severely tarnished for having obviously, if not at the level of proof of criminality, played games to get the value of such a license on the cheap by exploiting minority set-asides.

As such, Gabelli presented himself as fast-talking, on the make, and generally shallow. Very marketing-oriented, as if his appearance constituted a great, free sales opportunity.

Cooperman was a bit more interesting. While I have not ever met Cooperman, I have had a fairly close acquaintance and a business partner who know him well. Cooperman was, years ago, the Abbey Joseph Cohen of Goldman Sachs before it was such a prominent post. Since his departure from the investment bank, Cooperman's track record with Omega Partners, his hedge fund group, has apparently been uneven, to say the least.

Looking at him on the CNBC set, one saw, as with Gabelli, a bit of delight at the free marketing opportunity for his fund. Cooperman's Omega is an active fund, but I don't believe he has the assets under management of Gabelli's fund complex.

From my personal contacts, I gather that Cooperman is very tempermental and prone to weight gain when under stress and performing poorly in the markets. It looks like last year wasn't good. He also is sporting what can only be described as a colossal comb-over.

Alone, it might have been less noticeable. Flanked by the snow-haired Gabelli, and the purposely-bald Steinhardt, Cooperman appeared much less natural.

While Cooperman made some decent points about recent market performance and government intervention, he was, on the whole, predictable and safe in his remarks.

Then we come to Michael Steinhardt. I had not seen much of Mr. Steinhardt prior to this appearance. Other than reading about him in years past as a prominent and highly-successful short investor, art collector, and founder of WisdomTree, he was pretty much a mystery.

But, by a country mile, he was the most interesting and compelling of the three "legends" on CNBC this morning.

What impressed me most about Steinhardt was his laser-like focus on what he termed the 'change in morality' in the US during this period of economic uncertainty and deleveraging. His slow, careful, richly-structured comments reflected a very intelligent, philosophical and wide-ranging mind.

Of all his comments, the three which impressed me most were these:

-The recent and ongoing shift in morals and sentiments of US citizens are of paramount importance with respect to our economy and financial sector and markets in the foreseeable future.

-The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive.

-What is meant by a "depression" in our current environment? Due to automatic stabilizers, i.e., transfer payment mechanisms, Steinhardt believes that an unemployment rate as low as 12% will trigger consumer behaviors and public sentiment generally associated with much higher 'depression' unemployment levels.

-With respect to the next six-twelve months, he prefers to not lose any more money and sit tight, rather than allocating assets to the market in long positions.

Overall, Mr. Steinhardt projected an intensely astute, contemplative and really, really intelligent persona. I'd love to spend a long, non-alcoholic lunch with him. It would be a fascinating discussion. His calm demeanor and self-assured Socratic approach to his own thoughts and the comments of his fellow guests marked him as an unusually open-minded, insightful and candid observer of the US economy, its financial markets and citizens.

Doug Dachille joined Steinhardt and Cooperman for part of the next hour, providing an electric and fast-paced disgorgement of opinions. Dachille expressed some very blunt opinions casting doubt on the current government handling of the financial crisis, but also made some fairly silly comments contending that the holding of index funds has been the cause of poor corporate governance.

While it's difficult to recall every exchange among Gabelli, Cooperman and Steinhardt, the lasting impression I have is that it was somewhat less of an "event" than the CNBC producers had hoped. They would have been more successful by simply having Steinhardt on alone, or perhaps with Bob McTeer, Richard Armey or Michael Holland.

Color Me Confused: The Fed & The Economy

Color me confused.

This morning's Wall Street Journal noted,

"But the Fed's statement Wednesday dropped any reference to the economy recovering "later this year," hinting at the reasons for its drastic move and a warning sign for anyone piling into stocks."

But, didn't Bernanke just appear on CBS' 60 Minutes last Sunday to spread the word that the US recession would be over later this year?

Am I to believe that, in only two days, the US economic picture has deteriorated so much? Or was Bernanke just lying, to spread confidence? Or, did he simply not really have a well-informed view on the economy?

Here's what else confuses me.

Essentially, beginning in the summer of 2007, with the collapse of two Bear Stearns mortgage-backed instrument mutual funds, there has been a global reduction in leverage. That is, the creation of debt capital by many parties began to be reversed, first by the reduction in the market values of such debt, and, subsequently, the failure of lenders to provide new cash in exchange for maturing debt of various types, especially short term notes financing entities such as mutual funds holding structured finance instruments of dubious value.

As such, we are in the midst of a rare, but clear global contraction of leverage.

Simultaneously, the US began to enter a naturally-occurring recession. Recessions occur periodically as a natural part of economic cycles. They cannot be avoided, but sometimes can be softened.

In this case, however, the combination of the global contraction of credit and the US recession have resulted in GDP and employment declines on an order similar to that of the 1981-82 US recession.

We didn't see an FDR-style New Deal in response to the Carter-induced 1981-82 recession. Spending didn't skyrocket.

In fact, President Reagan quickly moved to cut spending and tax rates. And that worked. Those actions laid the foundation for twenty years of healthy, productive US economic growth, during which the several recessions were relatively mild and short-lived.

What am I missing?

What has changed, besides the tendency of Americans to now believe panicky calls that the economic sky is falling?

Whether you believe Alan Greenspan's recent, continuing self-defense in the Wall Street Journal, that he was right, and Stanford's estimable economist, John Taylor, was and is wrong, or not, it's a fact that too-cheap money in the US, in the wake of the technology equity bubble collapse, led to irresponsible debt financing of risky mortgages.

I wrote recently, here and here, of the phenomenon which we are currently experiencing: the combination of global deleveraging and recession. In the second post, I noted,

"On one hand, there is, based upon the NBER's December statement based upon job losses, a US recession which began in late 2007.

However, within this recession is a secular trend of economic shrinkage that will not be reversed by anything but a return to higher leverage. Thus, no amount of unleveraged economic 'help' will reverse these losses and the accompanying fall in GDP growth.

Seen from this perspective, the only way in which a new, massive Federal stimulus package can provide 'recovery' is to substitute government-issued obligations to return US societal economic leverage back to the dangerous, unsustainable levels at which it was before the current crisis.

How is it that leverage undertaken by the private sector, and judged imprudent, can now be replaced with government-sourced leverage, in the form of either: 1) more printed money, or 2) increased sale of government debt, without creating even more risk by spending the money in less accountable, measurable ways through political channels?

The simple fact is that, for the US economy to lower its capital leverage, and adjust to that lower leverage level, some jobs and business activity will have to simply vanish and not return. Whatever economic level we enjoyed, from which our current recession guideposts are measured, it logically follows that we cannot return there anytime soon unless we collectively decide, as a society, to try to raise financial leverage back to what it was.

If we decide this is unwise, then we have to accept that unemployment will be higher, and business activity levels lower, as the marginal, leveraged activities have been eliminated with the fall in financial leverage.

There is no other way around this fact."

This week's indication by the Fed that it will use newly-printed money to buy Treasuries, and other, less-highly rated assets, in order to effectively provide leverage to the US economy, would seem to be returning us to exactly where we just came in mid-2007.

Why is it so hard for people to simply accept that the economy, and our level of economic activity, will be smaller and lower, until such time that lower-leveraged business activity grows back to GDP and employment levels earlier seen with higher leverage?

Anything done in the meantime to simply "create jobs" or "provide credit" when these are not truly market-driven activities, will be, of necessity, temporary and market-distorting. What deserving business activity is awaiting credit?

Isn't the situation of our commercial banks one of having money for which there are few attractive opportunities to lend?

Isn't this week's Fed statement simply delaying the inevitable? That is, the return of economic activity, leverage, employment, and other related variables back to their deleveraged levels, until such time as genuine private capital investment underpins real economic growth, rather than false, government-stoked temporary inflation, job- and money-creation?

If our government institutions replicated their actions of 1981-82, rather than those of 1932-38, perhaps we would see a faster, healthier and more reliable end to the current recession, rather than the creation of an atmosphere of panic and deep crisis, where none exist.

By claiming that banking, economic activity, and housing are all in a deep crisis, our various governmental entities seem to be prolonging our economic difficulties. Why treat a recession as worse than it is, and ignore conventional, previously successful tools, like tax and spending cuts?

I think what we need is properly-scaled, fairly routine actions like those of 1981-82, which led the US out of that recession, rather than unusual, crisis-oriented actions like those of the 1930s, which we now know prolonged and deepened that depression, without ever actually ending it.

Helicopter Ben's Latest Trillion

Yesterday's 2.1% rise in the S&P500 Index was mostly fueled by Fed chairman Ben Bernanke's promise to add a trillion dollars to the Fed's balance sheet via quantitative easing.

Faced with a 0% interest rate, all the Fed can now do is to pump money into the US and global financial markets by purchasing financial instruments.

But, as I wrote in this post earlier this month, where is the money coming from? By what means will investors continue to value US dollar obligations as the Federal Reserve either prints more money or borrows more money with which to buy more questionable assets from US financial institutions.

This approach may have led to a one-day equity market rally, but, longer term, it has to have inflationary implications. And that, of course, is bad for equities.

In a healthy US economy, or one in a normal recession, the Fed can command sufficient confidence to add liquidity to the economy without necessarily causing long term economic damage via inflation.

But the US economy is currently deleveraging in the midst of a recession. What Bernanke is proposing, in conjunction with the federal government's many spending plans in excess of several trillion dollars, is to essentially releverage our economy.

But isn't that what we now believe was a mistake? Private over-leveraging of our economy led to unsustainably low interest rates which fueled bad lending and overconsumption of housing.

Isn't Bernanke's solution of adding a trillion dollars to global capital markets just repeating, with government money, what was viewed as a mistake by private markets only last year?

A Reader's Comment On My AFSCME & Pensions Post

My recent post concerning government employee and related unions and their inflated pensions drew a record number of visitors in the past few days. Thanks to the post being linked and/or copied on several other websites, there were 772 direct visits yesterday, with an unknown additional number of readers viewing the post by email or pasted copies on the other sites.

One reader left a comment that merits being reproduced here, for direct rebuttal. It's typical of the sort of rant one hears from uninformed, narrow-minded union members who tend to reject reality and view the situation through the lens of their own denials. The capitalization has been left as it appeared in the reader's original comment.

"AHEM...TRY GETTING YOUR FACTS STRAIGHT ABOUT THE MAJORITY OF IL. PENSIONERS AND the il pension sytem......know what you're talking about...

HERE'S THE TRUTH....... JUST DON'T BLAME THE ILLINOIS BUDGET CRISES ON THE PENSIONERS...OR THE PENSION SYSTEM...!

Debunking Illinois Pension Myths!.

Myth: Illinois has too many public employees.

Reality: Illinois actually ranks 49th among the states, next to last in the nation, in number of state employees per capita.Historically, Illinois has not been a high public employee head count state. Instead, Illinois is mostly a grant making state– that is, rather than hire state employees to provide services; Illinois disburses grants to independent providers such asLutheran Social Services or Catholic Charities, which in turn deliver the service to the public

Myth: Public employee benefits are too generous.

Reality: For most Illinois public employees, their pension is all they receive upon retirement – fully 78% are notcovered by and do not receive Social Security. This is unlike workers in the private sector, who receive both SocialSecurity and private retirement benefits.

4. Myth: Illinois’ current defined benefit system is too expensive.

Reality: The ‘normal cost’ of a pension system is the contribution required from an employer to fund the plan’s benefits.The weighted average ‘normal cost’ across all five Illinois pension systems, as a percentage of active members’ payroll,averages 9.13 percent. The national average for state and local government is 12.5 percent, placing the normal cost ofIllinois’ current defined benefit program far below the national average.IL PENSION SYSTEM BENEFITS ARE ONLY ABOUT 49TH AS GOOD AS OTHER STATE PENSIONSSTATE HAS A NUMBER OF EMPLOYEES FAR FAR BELOW OTHER STATESPENSIONS ARE ONLY 18K A YEAR AVERAGE AND BECAUSE OF PENSION SYSTEM RULES... 78 % HAVE NO SOCIAL SECURITY EITHER....!y

J. Allaman, "

M. Allaman makes a number of errors of logic.

First, simply to allege that because a group of people don't qualify for Social Security says nothing about their other pension arrangements.

Neither does the number of a state's employees deal with the richness of their pensions, or the timeframe within which such pensions may be vested and become payable.

Without knowledge of the full distribution of pension costs, as a percentage of active governmental employee costs, we can't know whether any single state is "FAR BELOW" the costs of mean or median cost of state or local employee pensions.

Of course, discussing only costs of pension systems avoids, as you would expect, the discussion of the tax base available to service said pensions. The reader omits any comparison of Illinois' ability to actually pay its AFSCME- and related union employees. This, however, would seem to be of great import.

States with fewer resources would seem to be less able to afford rich public employee pensions.

Finally, merely referencing a mean point of a distribution of mostly poorly-managed states proves nothing.

I would venture to guess that the majority of readers of this blog who reside in the US are unhappy with their state governments, as well as the federal government.

To cite statistics of a group of mismanaged states hardly justifies lush pensions for public employees, especially when most of the private sector long ago moved to defined-contribution plans.

On The AIG Bonuses

Yesterday's Wall Street Journal's headline article focused on the apparent fury caused by the payment of contractually-required bonuses to AIG personnel in the unit which triggered its near-insolvency and subsequent purchase by the Federal government.

Everybody from US Senators and Representatives of both parties, to talk show hosts such as Bill O'Reilly and Sean Hannity decried the payment of these bonuses. Iowa Republican Senator Chuck Grassley, in perhaps the worst excess, called for Ed Liddy and his executive team to publicly apologize, then either resign or "commit suicide."

This sort of demagoguery is precisely why government intrusion into private companies, whether they be publicly- or privately-held, is to be avoided at all costs.

The clearest, most illuminating explanation of the situation was provided yesterday by former federal judge Andrew Napolitano on Fox News. The judge, a Fox News contributor, laid the blame on the very same federal government whose senior members are now outraged at what they have wrought.

Napolitano noted that the Fed, in its rush to save AIG, twice, simply took over the firm, fired its CEO and board, asked Ed Liddy to head the firm, filled the board with its own slate of directors, and put no effective constraints on the arrangement. In short, as Napolitano explained, the government did no due diligence, did not become aware of the contractually-required bonus payments, and, therefore, did not take necessary steps to void them.

By the way, this is yet another instance in which a proper Chapter 11 filing would have allowed AIG to continue operating, but given a court-appointed referee the power to void or alter contracts such as the ones requiring the recent payments of several hundred million dollars of bonuses.

It's all well and good for various pundits to declare that without the federal intervention, these bonuses wouldn't even be payable. But that is precisely the point. Bankruptcy would have precluded this embarrassing example of federal ineptitude.

Now that taxpayers own AIG, we are being subjected to the rantings of the third-rate, relatively-unintelligent people we elected to Congress and the executive branch. Having just spent more than a trillion dollars of our money, between the so-called stimulus bill and the 'regular' budget, these public trough-feeders now express outrage- outrage!- at the requirement that their hasty actions have necessitated, i.e., paying a few comparatively measly hundred million dollars to employees of AIG.

But, if spending a trillion dollars on largely pork barrel projects is a good thing, isn't putting a few hundred million dollars into the pockets of AIG employees good, too?

Where's the consistency in the logic that certain spending waste is okay, but other spending that goes directly to consumers is not?

But, as judge Napolitano noted, the feds have only themselves to blame. They rushed in and unwisely seized AIG. Now, their hasty and ill-conceived action is generating unwanted consequences.

Is it too much to hope that maybe government officials will use existing means for processing insolvent companies in the future, i.e., Chapter 11, and refrain from ham-handedly seizing private property without due process?

Andrew Cuomo, Merrill Lynch, AIG & The Martin Act: So What?

It seems that New York Attorney General Andrew Cuomo has kept himself in the headlines since December, what with his tantrums over Merrill Lynch's early bonuses and, now, AIG's recent contractual bonus payments.

I don't know if Cuomo is married and, if he is, he cheats on his wife. But in every other respect, he sure does resemble his predecessor, Eliot Spitzer, in grandstanding over financial sector activities taking place in his state.

We all know about New York's Martin Act. Well, perhaps I should write that we have all heard about it- til we're sick enough to vomit- but may not know its details. The link to the New York Observer article provides sufficient shorthand explanation for my purposes.

Back in 2001, Spitzer trained his Martin Act guns on various brokerage analysts, including, if memory serves, Mary Meeker and Henry Blodget, resulting in the "settlement" which created a few so-called independent research houses. And required then-existing investment banks to buy some research from these allegedly independent research sources, thus supposedly ending biased research, which was, in reality, marketing by another name, in their own departments.

But if the Martin Act, thanks to Spitzer, and, according to the Observer, Dinallo, had been effectively used in the early 2000s, why did we have the recent mortgage-securities financial meltdown?

What was the point of all that Martin Act-driven investment banking and research restructuring?

Nada.

Now we have Andy Cuomo going after John Thain, Ken Lewis, and AIG, all over bonus payments. The theory being, I guess, that companies which took federal money, either at the request of the feds, or as part of a shotgun-bailout, as at AIG, should not comply with pre-existing contractual obligations to pay promised bonuses.

What exactly does Cuomo do for anyone by tilting at windmills like the already-purchased Merrill Lynch, or the federal government-owned AIG?

Aside from keeping his own name in the headlines, and bullying CEOs, I doubt Cuomo's antics materially improve anything about financial markets.

As I noted earlier in this post, Spitzer's sound and fury directed at the research practices of brokerages and investment banks almost a decade ago did nothing to prevent the structured-financial instrument-sourced problems we face today.

Other than lending the current New York AG a bully pulpit with which to make his name recognizable nationally, I don't think the Martin Act does anything relevant nor material. In fact, if anything, its enabling the AG to drag anyone in for questioning, without promise of charges to be filed, pretty much makes it a poster child for the worst in legislative excess and untrammeled exercise of government power in a truly horrific and improper manner.

The Coming AFSCME & Teacher Pension Storm

Today's Wall Street Journal featured an article in the Money & Investing section regarding US state and municipality pension-funding woes.

It is a topic for which I've been waiting to see become a mainstream media coverage.

Right after recounting some of the troubles various localities are having complying with pension funding for government and related workers, the article made a reference to voter outrage,

""It's going to be huge showdown" between taxpayers and public employees, said Susan Mangiero, president of Pension Governance Inc., a consulting and research firm in Trumbull, Conn. "The anger is more acute today when people are feeling economic hardship."

The specter of higher pension bills comes as many states and cities are struggling to balance their budgets or, in some cases, avoid drastic measures, such as filing for bankruptcy protection, amid falling tax revenue, foreclosures and rising unemployment costs."

I was discussing exactly this point with my business partner this weekend. I have friends who are teachers, and I firmly believe they are going to be in for a major disappointment by the end of twenty years. Especially the ones who are public school employees.

It won't be too long before a growing number of states' voters realize how much their governments have given away in unsustainable "30-and-out" or less packages to various governmental employees over the decades since WWII.

Side by side with unions such as the UAW, Teamsters and Steelworkers, AFSCME members reaped huge pension promises from governments during an era from the 1950s-1970s when the US experienced a temporary growth bubble resulting from the absence of competition from WWII losers Japan and Germany. Beginning in the early 1970s, American industry began to suffer from these competitors, but the prior decades' pension promises, made by dimwitted, myopic CEOs, governors and legislators, remained.

Now that global competition is a major force influencing the movement of industries among countries and the compensation of employees in many industries, many pension promises made long ago are simply unrealizable.

Some of the solutions being advocated by panicked governments are seen by AFSCME as extreme. To wit, from the Journal piece,

"Proposals pending elsewhere would move new public employees to a 401(k) plan. Some state lawmakers believe they would save money with a 401(k), which requires employees to pay a higher percentage of the contribution rate than they do under defined-benefit plans, said Alicia Munnell, director of the Center for Retirement Research at Boston College.

Municipal unions said they would oppose such a shift, and note that such efforts have failed in the past, including four years ago in California. "It's not a program that is attractive to state employees," said Richard Ferlauto, director of corporate governance at the American Federation of State, County and Municipal Employees. "It's doesn't work because you wouldn't be able to hire people."

But soaring pension costs are emboldening critics of public plans. They said local governments cannot afford to pay what are often perceived as generous benefits to government employees when the 401(k) plans held by others have shrunk, and as taxpayers already are looking at higher taxes and fewer services.

The pain is about to start in Wisconsin. The state has an unusual policy of adjusting the amount of benefits paid based on the pension fund's performance. Now, for the first time in 25 years, the majority of retirees will receive a benefit reduction.

Some states may decide it is easier to cut public employee benefits than it is to raise taxes, especially during hard economic times. In the Virginia General Assembly, a bill would freeze the current pension plan starting in July and replace it with a 401(k) plan for all future hires.
A state senator in Pennsylvania introduced a similar bill in 2007, and it went nowhere. But this year it is attracting attention.

If employer contribution rates in Pennsylvania jump as high as 28%, "the pension system is just not manageable," said Pat Browne, the Republican state senator who sponsored the bill. He said he expects it to be voted on this year.

"We need to get it passed quickly if we are to phase out the existing plan in time to make an impact.""

As long ago as the summer of 2006, my father, then residing in Illinois, told me that the state was already effectively bankrupt, if you put its total pension-related obligations up against the state's earning power for the foreseeable future.

My partner and I have debated for months what the implication of a California or Illinois bankruptcy would be. What happens when citizens leave a state in droves, while the state's obligations remain?

In one of the larger unintended consequences of federal mortgage policy mistakes of the past decade, the looming pension shortfalls at the state, county and municipal levels across America are going to pit voters against government employees.

Why should AFSCME members remain unaffected, while their private-sector union brethren have taken haircuts, both in and out of bankruptcy? They won't.

Do you think government union members will seriously risk striking, only to see their jobs given to new applicants during this recession, as state and local legislators move to either file bankruptcy and tear up the old contracts and pensions, or simply hire new replacements on the condition that they accept 401Ks in lieu of defined benefit pension plans?

That's really the rub, isn't it? With most of the US workforce losing defined benefit pensions, why should a select, privileged few enjoy such perks, amidst a nationwide asset-value meltdown?

Look for a struggle between state and local governments and AFSCME of epic proportions, beginning.....now.

Bad Research: From The Pages of The Wall Street Journal

Two weeks ago, the Wall Street Journal's "Managing" page carried an article by Phred Dvorak entitled, "Dangers Can Lurk in Clinging to Solutions of the Past."

This particular column seems to be, in my opinion, cursed to provide opaque or nonsensical advice on purportedly serious topics. The idea that a one-third page synopsis in the Journal can deliver valuable, actionable management prescriptions seems, on its face, preposterous.

Consider this passage from the article in question.

"Vijay Govindarajan, a professor at Dartmouth College's Tuck School of Business, started looking into experience 25 years ago, when considering why some companies failed at long-range strategy. After studying businesses like Encyclopedia Britannica and Sears, Roebuck & Co., he concluded that some managers are so set in their past ways that they can't cope with new situations."

The author then goes on to cite the professor's conclusions in the cases of Sears vs. Wal-Mart.

But, just from reading the quoted passage, you can see the error both in the companies' approaches, and Mr. Govindarajan's.

Wouldn't you assign long-range strategy to, well, a strategist, rather than hidebound managers who are "so set in their past ways?"

This is why businesses schools purport to teach strategy. It's supposed to be an abstract skill or practice which can be applied by those without a deep experience in a particular function, business or sector.

If not, why do McKinsey, Bain and Mercer exist and prosper? Isn't their entire raison d'etre one of objectivity, external perspective, and the ability to gather and process relevant information without necessarily having 20 years of experience in the product/market at hand?

So, perhaps Professor Govindarajan has it all wrong. Maybe he's looking in the wrong places for the wrong examples.

Could it be that he suffers from, well, too much past experience researching the success or failure of long-range strategy development?

In truth, this is not a simple subject. Having been a strategist, consultant, and the first head of research for what is now the financial sector arm of Mercer Management consulting, I can attest to the difficulty of separating strategy development from implementation. And to the written documents alleging to be strategies, versus the processes by which they were developed.

The activity of strategy development for major businesses is much more about imagination, fresh perspectives and bold vision then about mere product line extensions. If there is any place in a company where you probably don't want veteran line managers, it's in corporate strategy development.

I'm surprised that a professor from Tuck would have been so narrow-minded as to miss this distinction.

The Localized Nature of US Mortgage Foreclosures

Last week, while traveling, I happened upon this USA Today article concerning mortgage defaults. I don't usually read this paper, but, being as I was at one of those business hotels that provides it for free, and the Wall Street Journal was nowhere in sight, I skimmed through it.

The interactive map can't be pasted here, but I urge you play with it to note how foreclosures grew in just a few states, and only some counties within those states.

To quote the article,

"Half of the nation's foreclosures last year took place in just 35 counties, a sign that the financial crisis devastating the national economy began with collapsing home loans in only a few corners of the country.

Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year.

The worst-hit places comprise about 1% of all U.S. counties.

A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble.

The worst-hit counties are home to about 20% of U.S. households, but accounted for just over 50% of the nation's foreclosure actions last year, driving most of the national increase. And even among those places, a few stand out: Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation's foreclosures last year.

In more than 650 other counties — about a fifth of the nation — the number of foreclosure actions actually dropped since 2006."

If you needed evidence that the mortgage crisis is localized, not requiring of federal involvement, and is really a state-based problem, this article provides it.

Is anyone really surprised that southern California, Las Vegas, Florida, Virginia (near D.C., of course), and part of Colorado were the epicenters of this mess?

You have to wonder why the other 38 states should literally be paying for this problem. It sure sounds like a problem for the affected states to solve.

And certainly, it is not a problem sufficiently widespread to require changes in federal law to allow municipal court judges to "cram down" principal and interest rate changes on holders of affected mortgages.

If there were ever a case for allowing states to function independently, as each saw fit, to solve a problem, this would seem to be it.

Yesterday's Equity Market Rally

Yesterday's equity market surge has been attributed to several factors.

First was Citigroup CEO Vik Pandit's rather tenuous claim that the ailing/failing banking giant managed not to lose money so far this year.

Wow. If that's fuel for a rally, things are pretty bad.

Pandit's statement was totally unsubstantiated. No audited financials. Not even a full quarter's performance. Is this really all it takes to move the market up 6.4%?

Maybe not. Ben Bernanke made obtuse comments about mark-to-market in a pre-market-open address. Nobody with a brain suggests that it should be eliminated or suspended. I've argued for almost two years now that it should be modified to reflect the greater of economic or market value, especially for assets planned to be held for more than a year.

But Bernanke evidently gave reason for some hope, as he opined that it made little sense to take writedowns for paper losses on performing instruments.

For what it's worth, our volatility measure rose significantly with yesterday's market rally. It's near 3%, which is much higher than it's been for probably two months.

In any case, I suspect this was simply a short-term reaction by traders to some unexpected news.

Various pundits, including CNBC's resident senior economic moron, Steve Liesman, claim that Pandit's utterance means that maybe the federal government's various banking palliatives are working.

Fat chance. Citigroup shouldn't even be alive. It should have been seized, its management and board removed, its assets auctioned off, months ago.

For anyone to read into Citigroup's unvalidated performance claims a sign of success of federal financial services sector rescue is to mark that person as naive.

Even if Citigroup does post a profitable quarter, it means little for the economy or the entire banking sector. The bank is now getting funding almost for free. This isn't a sustainable basis for profit.

As I write this, just prior to the market open, the S&P futures are up 9 points, to 725. But I remain unconvinced that the bases for a sustained equity market recovery are in place.

Our put positions for November, December and January were all negative until two weeks ago. Then they moved steadily upwards, leaving all but one comfortably positive. The late-2008 equity market rise was totally erased by late February.

I don't think what is occurring now is much different.

Tiresome Warren Buffett's Remarks on CNBC

Once again, Warren Buffett is coasting on his reputation. Certainly, his recent performance would not get him the coverage he now enjoys.

For example, last Monday's Wall Street Journal noted that his company, Berkshire Hathaway, barely beat the equity market indices last year, and is "slightly better than the Dow Jones Industrial Average" this year.

The accompanying Yahoo-sourced chart shows Berkshire losing about 25% in the past two years, while the S&P500 Index declined about 45% in the same period.

But is this the performance of, as the Journal wrote,

"The man considered by many to be the greatest investor of all time?"

It further notes that 2008 was his worst year ever. Maybe Warren is losing his touch.

Noted short-seller and fund manager (Seabreeze Partners) Doug Kass wrote in a question to Warren on his all-morning appearance on CNBC yesterday, asking if Buffett's 'buy and hold forever' strategy is not now out of date, as Kass has contended?

Buffett, of course, rambled, sputtered and replied in the manner which he obviously thinks is endearing- that trademark 'aw, shucks' sort of pause and fumbling- that buying good businesses and holding them a long time is still a wise move.

Evidently, Buffett ignores that most people need and want to make money from investments in a consistent manner. And that he has access to deals which the ordinary investor does not, such as loaning Goldman Sachs money on a guaranteed-return basis, with an embedded call option.

If you look closely at the two curves in the chart, you see that virtually all of Buffett's outperformance of the S&P in the past two years occurred between September and December of 2007. After that, Berkshire pretty much has mirrored the index. Meaning that it was a timing phenomenon that allowed him to outperform. It was by no means a consistent, recurring activity.

As I've written prior to this in other posts, such as this one last May, Buffett is more enigma than great investment manager. If he's even that, as I noted in this passage from that post,

"Funny, but actually on point. Is Buffett the portfolio manager of a very large, actively-managed, closed-end portfolio? Rather like, well, GE?

Or is Buffett just another conglomerate CEO?

Either way, I still just don't see the evidence that Buffett has rewarded his investors for most of this decade with superior total returns."

CNBC went for ratings, rather than content, yesterday, when it had Buffett on as a guest for the entire 6-9am timeslot.

Honestly, the guy is now a caricature of himself. He smirks and mumbles platitudes about how, in the long run, America is great and will come back.

As if anyone needs him to tell them that. But CNBC and other news channels played up all the footage they could of Buffett's remark, as if some national grandfather had appeared to soothe the country's nerves. I don't know which was worse, the bleating, plaintiff emails to Buffett, or his seriousness in replying, as if he actually has the power to calm the masses, or knows anything that the rest of us don't.

Personally, I'd prefer someone like John Paulson, the hedge fund manager who made a killing last year shorting residential mortgage finance. At least we know he knows how to outperform the market, and will bet on his knowledge.

An Ineffectual Competitive Response- Part Three

I last wrote about market dynamics, new entrants and competitive responses to my local fitness club market in this post from January.



In that post, I provided some quantitative estimates of the damage that a single LifeTime Fitness club had wrought on my old fitness/squash club. Since that post, another LifeTime facility has opened just about five miles from my old club, and perhaps ten miles from the first of the large-scale fitness club's location.


This past week, in anticipation of my renewal for another year, my old fitness club mailed me an invoice and accompanying letter.


The letter goes on and on about various programmatic changes at the club, as it slowly has come to grips with what a departing employee reported has been an exodus of 375 members from a one-time base of some 2,100. By the end of March, it's likely that this number will top 400, if for no other reason than that, until April, people like me, who are still members, but have not used the club since early November, have not yet been recognized, technically, as gone. Thus, the old club has sustained about a 20% loss in its customer base, including a very heavy percentage- perhaps 90%- of its higher-priced squash memberships.


Thus, in a display of panic, the owners' letter reported two unprecedented changes in the club's fee structure.


They now offer a daytime (morning-3PM) squash membership for the same price as a basic fitness membership, i.e., $100/month, and a family maximum monthly fee equal to the price of the three most expensive family memberships, with joining fees capped at $500.


This is ironic, considering the content of my first conversation with one of the owners early this fall concerning my joining LifeTime Fitness on a trial basis. At the time, in response to the owner's question as to why I had elected to try the new club, I replied,

"Bill, you know that you never priced your club to attract families. In fact, you've never really wanted them to join at all."


To which he replied, nearly verbatim,

"Well, you're right about that."


Considering that Bill and his partners had at least an eighteen month notice of LifeTime's arrival in the area, their competitive response has been, to be blunt, pathetic.


Most families who might have enjoyed the new pricing caps and remained at the old club have now tasted the forbidden fruit of 24/7 access, three swimming pools, jacuzzis, two basketball courts, more fitness equipment and a rock climbing wall. All for about half of the new, lower family price.

The only remaining members who would benefit from the new squash pricing plan are older, retired males. Everybody else, including children, use the courts after 3PM. It's not all that likely that non-squash playing members will suddenly stampede the courts during midday hours.


To me, there is a lesson in this local business case regarding the formation of competitive responses to new market entrants. An existing, dominant share player needs to begin planning their responses as soon as they are aware of the new entrant. Waiting until after the new arrival is open and has successfully stripped off customers with their new service offerings and potentially lower price points is an invitation to an imminent death of the formerly-dominant vendor.



Instead, I believe the existing market leader has to reconsider their entire marketing mix- product offerings, channel, communications and pricing- as if they are trying to resell each customer. Because, in effect, that's what they will have to do when the new entrant ramps up their marketing efforts.


If the market leader elects to compete on price, they had better do so early and in a manner calculated to cement their customer base for a period of time during which the new entrant will exert maximum effort to win new customers from existing competitors. As I wrote in my first post in this series, here, my old club could have offered pricing discounts to existing members in exchange for an immediate commitment to a long-term renewal of two years.

Failing a pricing response, or, in addition to one, the management should have worked much harder to identify, via primary research, a niche position for their club that would be believable, defensible and attractive. Lacking many appealing facilities that LifeTime Fitness clubs possess, the old club should have figured out how to package what they do offer in a comparatively



My old club ignored the new competition until literally 10% of their customers had left. Then they spent a few months redecorating the lobby and telling themselves that these 200 members would be 'begging to come back.' That's a direct quote from friends who spoke with the old club's owners.


Now, another 200 departed customers later, they are trying to stanch the outflow with some half-hearted pricing policies. When I mentioned this to the manager of one of the LifeTime Fitness facilities, he remarked that another existing, smaller fitness competitor had done the same thing, only to suffer reduced profitability as it cut prices on existing members.



This is what I prophesied would happen if my old fitness club tried to cut price to meet LifeTime's price points. The cost of retaining a few remaining customers will cost them revenue and profit at a time when they are probably near, if not below, breakeven on their volume/cost/profit line.



As I wrote in the earlier posts in this series, I genuinely like the owners of my old club. And I enjoyed my 27 years there very much. But I'm not going to renew my membership at the end of this month.



Time and trends have passed my old fitness/squash club by. By failing to adapt, modify their marketing mix, respond to new competitors with timely and effective pricing policies, though, I don't think they will be operating past the end of this year.

Have US Commercial Banks "Failed?"

Wells Fargo @ $8.12. Chase @ $16.60. BofA @ $3.17. Citigroup trading @ $1.02.

Yes, you can't even buy McDonalds snackwrap with a share of Citi stock.

Have our largest commercial banks really "failed?" Failed, in the Depression-era sense?

Clearly, they have not. Commercial banks are no longer the same as they were in FDR's era.

In fact, many people mistakenly identify our commercial banks as our total financial system, but nothing could be further from the truth.

First, all of these institutions have, for all practical purposes, had totally-insured deposits for decades. For several months, even their money-market funds have been federally insured, too.

The nation's financial plumbing system- clearing, settlement, electronic cash movement, etc., are separable, if necessary. Loans are made by several sorts of financial service firms, and more could enter at any time.

"Wealth management," a/k/a brokerage and money management, is a sector unto itself, even with the collapse of Merrill Lynch.

Truly, there is little, if any real economic damage from simply letting badly-run commercial banks fail.

From the nearby chart, it's easy to see that, among the surviving large US commercial banks, Vik Pandit, Ken Lewis and the management of BofA and Citigroup should be fired.

Citigroup is, for all intents and purposes, currently a government bank. How can any administration leave Pandit & Co. in charge, when, by comparison, Chase and Wells did so much better, if not so great in absolute terms?

BofA is a wreck, too, now. Lewis has to go.

But there's no actual risk to the economy's health in closing Citigroup and BofA. If anything, as Anna Schwartz noted, that would leave fewer, healthier banks, and opportunities for capital to move into the sector, should it require more lending capacity.

But with two of the largest US commercial banks trading nearly as penny stocks, reflecting investor doubts about the true, intrinsic values of their assets, it's ridiculous to keep them open.

Let's get the thing done, close or nationalize Citi and BofA, bring in new management, and get on with modifying mark-to-market rules to allow for economic valuation.

Where Will Sovereign Stimulus Funding Come From?

Yesterday's equity market rise was allegedly due, in part, to hopes of China's stimulus plan and news of possible economic near-expansion.

However, I find this confusing.

We have recently experienced significant deleveraging in the private capital markets. Debt and equity prices are far below their year-ago levels. The S&P500 Index has declined more than 50% in the past year.

Now, with the destruction of capital values on a scale not seen in decades, two large governments intend to fund large spending programs with debt.

Who will buy this debt? Where is the money, given the significant capital losses of the past year?

Even my sixteen year-old daughter understands instinctively that if $1T is spent using mostly printed money, the dollar will be worth less. Of course, if buyers of US debt were found, their interest rate demands are almost certainly going to be crippling.

China and the US together tapping capital markets for between 1 and 2 trillion dollars is incomprehensible.

It's the equivalent of these two nations telling the world,

'We don't want our citizens to feel any pain whatsoever right now. So we're going to borrow or print several hundred billion dollars and dispense it to our people, giving them money on which to live, hoping it will restart our economies. Then, later, we'll buy the debt, yuan and dollars back.'

Why would anyone in their right mind by this idea? Or the debt to fund it?

It's ludicrous. Isn't it much more reasonable for governments to be cutting tax rates and letting people retain more of their own money? Perhaps local governments will have infrastructure projects which are economically viable.

But to engage in wasteful, nationwide spending as an excuse to spare citizens the pain of their earlier bad financial choices, on the face of it, cannot work in the long run.

Either the money will be wasted, and/or the immense debt loads, at high interest rates, will result in dampened GDP growth rates for a decade or more.

In the worst case, nobody can buy this debt, the spending is funded by printing presses, and inflation rates on a scale that will make the Carter era look tame may be with us. It would seem that there is simply not enough capital to fund these immense governmental spending plans and provide for private uses of capital at the same time.

Personal Music Players: A Retrospective

Much is made these days of the failure of the music industry to fend off piracy and fail to profit adequately from the huge technological advances which occurred with the coming of the CD.

That may be so, but in this era of over-consumption, houses with many large closets and master baths bought on no money down, let's not overlook how the basic standard of living for an average American has improved by leaps and bounds. Sometimes in deceptively small ways.

For example, many years ago, in the age of the audio cassette tape, I used to ski while listening to music. In those early years, it took a fair amount of initiative and a tolerance for some pain to do this.

I vividly remember some yard sales at Jackson Hole, in which my headphones were ripped off of my head- painfully. After my ears had already been crushed all morning by wearing goggles over the headphones, with the metal headpiece pressed into my ears and skull.

Changing tapes and batteries on the slope was not a simple process. Nor was carrying spares. Cassette tape boxes didn't do well in violent falls. The intense cold tended to drain batteries very quickly.

Ski clothing didn't accommodate music hardware. You had to figure out how to either use a pocket for a smaller cassette player, risking damage to the headphone cord as it flopped around outside your jacket, or clip the player somewhere inside ski your suit/jacket, feeding the cord up under it.

I don't think I had skied with music since the arrival of the CD player. With its bulk, sensitivity to jarring, and delicate controls, it was never, at least for me, a favored ski accessory.

All that has now changed. Yesterday, for perhaps the first time in two decades, I skied all day to music with almost no effort.

Thanks to iTunes and a $50 iPod Shuffle the size of a small refrigerator magnet, and a ski suit designed for music players, I had a surprisingly wonderful, hassle-free reintroduction to music on the slopes.

My ski suit features a small hole up near the collar for an ear bud cable to pass from a special, outside-accessed, internal pocket with a purpose-designed, Velcro closed music player pouch. The iPod's earbuds eliminate the goggle-hat-headphone bar problem and attendant pain.

The Shuffle, being solid state, with an internal battery, functioned perfectly in the cold as I skied bumps, steeps and cruisers. Even a fall could not stop it from playing. The small size of the MP4 player made it literally unnoticeable all day.

No tapes or CDs to change. No batteries to swap on a cold, steep slope while exposed to the wind.

And with iTunes, I could literally fill the Shuffle with new music daily, if I so chose. No time spent recording tapes or CDs with my favorite music.

Unlike twenty years ago, personal music for skiing is now inexpensive, unobtrusive, highly customized, and much longer-lasting and easy to operate.

It's a small creature comfort. And it never was a huge expense item. But, for me, it's a milestone of improved living standards. The sort of techno-business advance in hardware, software, and clothing for sport that offers much better value and enjoyment for your money than in the past.

Amidst much economic and business confusion and pain right now, it's nice to savor an example of innovative, productivity- and pleasure-enhancing progress which emerged, unplanned, from several different places in our economy.

No government could have orchestrated such lifestyle and standard of living improvement.

Will The Equity Markets "Crack"?

Yesterday's equity market sell-off has brought us close to 700 on the S&P. My partner and I both feel that, if the S&P closes below 700, a whole new psychology will affect it, sending it down in a near free-fall for a while.

After patiently riding out a negative return to our January puts for most of the past six weeks, they have moved up by 50 percentage points in the past week, resulting in the commencement of selling the better-performing ones for returns in excess of 100%.

It's not particularly gratifying to bet on extreme market declines in order to profit from financial positions. But, as one of my prior research partners, and a fairly wealthy private investor counseled me, sometimes, you have to acknowledge market forces and go short.

Our February put options are now up about 70% for the entire portfolio, with at least one position returning over 100%.

Looking at our volatility measure, we expect this downward trend to continue for at least the next few months. One of the mathematical facts which affect the S&P now is how large a percentage change a given point move represents. Seven points down is now 1% of the index, instead of half of that, only last summer.

I saved an early January piece from the Wall Street Journal in which several market strategists made convincing cases for a -20% S&P in 2009. At least one thing that was prominently mentioned in article is coming true. As the effects of various negative performances cascade, the magnitude of the consequences are outstripping expectations.

Given the losses in the S&P thus far in 2009, a 20% or 30% decline this year in the S&P could easily mean several more months of significant losses, followed by large gains later in the year.

But for now, the various signals which I follow do not seem to be predicting any lasting trend up in the equity or derivatives markets any time soon.

Dell's Failed "Turnaround" Confirms My Prediction

Over a year ago, I wrote this post concerning a Wall Street Journal article about CEOs returning to rehabilitate the companies they founded or led to prominence.

"In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance."

This past Friday's Journal reported on Dell's most recent quarterly results. They bear out my prediction. Profits slid 48%, so the firm is planning even more cuts.

This is what is known as a death spiral.

Sure, Michael Dell returned. He's reshuffled executives and pushed some new products. It's not working.

As I expected over a year ago, many trends are against him and his company. Frankly, it remains somewhat surprising to me that so many observers- pundits, analysts, journalists- continue to expect some sort of resurrection of Dell.

But, as my business partner reminds me, most people are sentimental. They like a good human-interest story. They enjoy the emotions accompanying a would-be come back story. Or the failure of one.

But people continue to expect businesses to live forever.

They just don't. Some die. Others should die sooner than they are allowed.

Would not Dell's shareholders have been better off with an orderly dismantling of the firm a year ago, when more value might have been realized for them? Rather than feeding the founder's ego?