Art Laffer On Washington State's Personal Income Tax Initiative

Art Laffer took on the Bill Gates, Sr. and Jr., of Washington state, in one of yesterday's Wall Street Journal editorials. The Gates' are pushing hard for the state to institute a new personal income tax.

Here's how Laffer described it,

"Mr. Gates Sr. has personally contributed $500,000 to promote a statewide proposition on Washington's November ballot that would impose a brand new 5% tax on individuals earning over $200,000 per year and couples earning over $400,000 per year. An additional 4% surcharge would be levied on individuals and couples earning more than $500,000 and $1 million, respectively.

Along with creating a new income tax on high-income earners, Initiative 1098 would also reduce property, business and occupation taxes. But raising the income tax is the real issue. Doing so would put the state's economy at risk.


To imagine what such a large soak-the-rich income tax would do to Washington, we need only examine how states with the highest income-tax rates perform relative to their zero-income tax counterparts. Comparing the nine states with the highest tax rates on earned income to the nine states with no income tax shows how high tax rates weaken economic performance."

Laffer's a good, empirical economist. He immediately took ends of the distributional spectrum of US states with respect to tax rates, and found,
"In the past decade, the nine states with the highest personal income tax rates have seen gross state product increase by 59.8%, personal income grow by 51%, and population increase by 6.1%. The nine states with no personal income tax have seen gross state product increase by 86.3%, personal income grow by 64.1%, and population increase by 15.5%.
 
Over the past 50 years, 11 states have introduced state income taxes exactly as Messrs. Gates and their allies are proposing—and the consequences have been devastating.
 
Over the past decade, the nine states with the highest tax rates have experienced tax revenue growth of 74%—a full 22% less than the states with no income tax. Washington state has done better than the average of the nine no-tax states. Why on earth would it want to introduce a state income tax when it means less money for state coffers?


What's true for those states with the highest tax rates is doubly true for the 11 states that have instituted state income taxes over the past half-century. They too have lost huge sums of tax revenue."

Here's the revealing table from his editorial.

As a sort of coup de grace, Laffer offered this,
 
"A final thought for those who want to punish the rich for their success: As the nearby chart shows, those states with the highest tax rates, and those states that have introduced state income taxes, have seen standards of living (personal income per capita) substantially underperform compared to their no-tax counterparts."
 
I won't quote his parting shot to the Gates, but you can guess the nature of it.
 
Just focusing on Laffer's statistics and chart, it's a stunning picture that he paints. With the publication of this piece, why would any state be mad enough to initiate a personal income tax? Or raise the rate of one it already has?
 
Laffer doesn't mention it, but, surely, the same relationships must hold between countries, as well.
 
He has done a wonderful job providing clear, unmistakable evidence that higher tax rates depress standards of living and output. Period.

Lee Cooperman Today On CNBC

Omega Advisers founder and chairman, and former Goldman Sachs equity strategist, Lee Cooperman, was a guest host on CNBC this morning for an hour or more.

I don't feel terrific having to write this, because content should trump delivery, in an ideal world.

Someone has to tell Cooperman to lose the now-grotesque comb-over. Wear a hat, a toupee, go bald. Whatever it takes.

The grossly unflattering camera angles on the set showed his head from virtually all angles. It was decidedly not pretty.

I confess that his message, whatever it was, was, for me, lost in the presentation. But the one thing I did hear him say was to simply agree with David Tepper's comments two Fridays ago.

Oh, yes, there was Cooperman's big announcement that he's donating half of his considerable fortune to charity. All the liberals on set congratulated him for being a 'good corporate citizen,' implying that anyone who desires to keep his hard-earned money is somehow evil and anti-social.

That's some steep price to get on CNBC these days, isn't it? Or maybe just for Lee?

Other than that, Cooperman didn't seem to say much of interest.

Economic Lies Yesterday On CNBC

David Goodfriend, billed as a 'former Clinton White House staffer,' was a guest on Larry Kudlow's late-morning CNBC slot yesterday. He was the Democratic liberal of a pair debating the TARP program on the day of its notional closure. Never mind that billions of TARP funding still support AIG and Citigroup.

Goodfriend's comments provided an excellent example of how careful you have to be in believing what you hear on CNBC.

At least twice, I heard him baldfacedly state that 'every economist agrees that TARP helped us avoid what was going to be the next Great Depression.'

His exact words may have differed a bit, but not the sentiment. He was very clear that "every economist" agreed that, but for TARP, "we would have had another Depression."

No question, no debate. Goodfriend said so.

Later, Goodfriend professed to not have wanted the TARP, then offered what he felt should have been required attachments to TARP fund conditions. These included the laughable notion that banks would have been given the funds with the requirements that they be lent out, with no particular way of ensuring that such government-mandated loans wouldn't become the next chapter of the Fannie and Freddie credit policies which started the whole financial meltdown in the first place.

Such is the nature of Goodfriend's intellect, awareness of economics and finance, and prejudices.

However, it turns out that Alan Reynolds, and economist, has written several Wall Street Journal editorials, about which I wrote posts, found under the 'Alan Reynolds' label, specifically disputing the egregious use of federal power to prolong and deepen this recession, just like FDR did in the 1930s Depression.

Phil Gramm, former Democratic House Member and Republican Senator also wrote a recent Journal editorial along the same lines. He, too, disputed the need for the excessive federal measures of the past few years.

Goodfriend is wrong. He lied.

It is simply untrue that every American economist agrees that TARP was necessary and appropriate.

It's bad enough that CNBC has guests who lie, but its worse when nobody even bothers to challenge the lies. And it was the sort of 'big lie' that, left unchallenged, leaves many uninformed people simply believing that it must be true that there wasn't one economist in the US who disagrees with the proposition that, if not for TARP, the US would have been in another Depression.

Gillette's 34-Cent Razor

I love a good marketing success story, and Friday's Wall Street Journal showcased what may become a terrific one at Gillette.

Gillette, now part of Procter & Gamble, has developed a 34-cent razor with an accompanying 11-cent blade for its Indian markets. The current price of a Mach 3 blade in India is about $2.25. Quite a stunning change in price points. And, as it turns out, product features.

Gillette intensively studied Indian consumers with respect to their preferences for shaving items, and determined that, given distribution channels, product feature needs, and price points, a dramatically downscaled razor and blade were required.

As the article states,

"The price takes into account not only consumers but the kiosk owners who serve most shoppers in developing markets. The lower cost will encourage more small store owners to stock up on the item.

To cut costs, P&G eliminated the lubrication strip and colorful handle designs Indian men weren't willing to pay for."

It is stunning to me that a global consumer products company will actually shift from a blade price in the $2 range to one costing about a dime. Such scale of change in revenue at such low prices suggests how serious P&G is at moving its current 10% share of the Indian market up toward its global average 50% share. It's amazing that they plan to make money, to prosper, on 11-cent razor blades.

More interesting are these closing passages,

"P&G will introduce Gillette Guard first in emerging markets, says Mr. Carvalho, who doesn't rule out the possibility of bringing the cheaper razor to developed markets like the U.S. "We haven't yet looked in a detailed way if it makes sense doing this in developed markets," he says, "We'll probably know that in the next six to 12 months."

That could really make for interesting consumer reactions in the US, where, as the article also notes, recent advanced Gillette razors sell four for $16.99.

What If AIG Had Been Allowed To File A Conventional Chapter 11 Bankruptcy?

Yesterday's faux-repayment announcement by AIG rivaled GM's various announcements of debt repayment and an IPO for trying to disguise reality.

If you read the details, all that's really occurred is that Treasury has taken common shares to swap out the TARP's preferred shares in AIG. Hardly earth-shaking, is it?

The cognoscenti on CNBC yesterday morning were all a twitter about this development, with at least one co-anchor or guest host gushing that the TARP fund won't lose money, that AIG will ultimately not be a loss for the taxpayer, etc.

This got me thinking about the closest comparison to AIG- GM. Yesterday, I wrote this post about Paul Ingrassia's review of auto czar Steve Rattner's book on the administration's takeover of GM. In it, I observed, quoting from a prior post,

"Maybe if GM were allowed to go through a normal bankruptcy, and another firm had bought and reorganized various divisions of the old GM, all that borrowed Canadian and US money may have stayed in the private sector and funded other, better jobs with new firms."

What if AIG had also been allowed to proceed through a conventional, orderly Chapter 11 reorganization? As I wrote in one of many posts on this topic, found under the label "AIG,"

"I think Jenkins' idea is sound, but he omitted one very credible alternative that Geithner & Co. have never discussed.


That is, a simple carving out of AIG's financial products unit for placement into bankruptcy. Such a move would have isolated the troubled portion of the insurer from the heavily-regulated insurance operations.



Once in bankruptcy, AIG's counterparties would no longer have a right to 100% payments for positions. But an orderly disposition could have occurred, again avoiding needless losses to US taxpayers.



It continues to mystify me why only one Journal contributor has ever raised this option. It's the default path for failing companies, and should have been the preferred option for AIG.


Geithner may or may not have been guilty of various malfeasances or neglectful inactions in the AIG situation. But one thing is sure. He and his team were surely guilty of a lack of creativity and perspective on the situation."
 
In other posts, I suggested, as have others, that AIG could have been easily broken into three pieces: a group of conventional, state-regulated, solvent insurance units; a collection of asset management businesses which held, in trust, other peoples' money, and, finally; the problematic financial engineering and swaps-writing business units. Only the third was insolvent. As one Journal editorialist noted, a court could simply have assigned uniform haircuts to all counterparties and reduced the excess liabilities of the third unit.
 
That done, it could have been either closed or sold to the highest bidder.
 
But, like GM, our government chose to use taxpayer dollars to 'rescue' a firm which could have more efficiently and effectively been reorganized under existing Chapter 11 protections, with investors paying a market-determined value for any surviving operations and shareholders taking appropriate losses in bankruptcy.
 
So taxpayers footed the bill to keep dubious operations afloat and essentially prop up questionable asset values.
 
Why?
 
Wouldn't it have been a much better use of capital to allow investors and a bankruptcy court to determine asset values and use private money to reorganize, sell and/or liquidate various elements of both GM and AIG?
 
Then we wouldn't have this unholy entanglement of government and private sectors. Or the questionable use of taxpayer money to favor a few companies over others which went bust.
 
Then there's the question of opportunity costs. It's debatable that taxpayer funds will ever earn an appropriate, risk-adjusted return for the money pumped into either GM or AIG.
 
There was always an existing, appropriate path for handling GM and AIG- conventional Chapter 11 reorganization and, where necessary, bankruptcy.
 
What we see now is many government, GM and AIG officials, and selected pundits, misleading taxpayers about just what risks their money incurred for these bailouts, and what the appropriate return should have been or be in the future.
 
A classic example of a magician's misdirection and diversion from the real action, which, in this case, is that these companies should have been consigned to bankruptcy court where private investors could risk their own capital.

The 1930s: Could It Happen Again?

Tuesday's Wall Street Journal carried a rather innocuous staff editorial entitled A Game of Trade Chicken.

In it, the staff wrote,

"The U.S. and China are slouching toward a trade war, with the House of Representatives aiming to vote this week on a bill to impose duties on Chinese goods if Beijing doesn't revalue its currency against the dollar. Two can play at that game, however, as China is proving as it responds to earlier U.S. protectionism.


China's Commerce Ministry Sunday unveiled its final order in an antidumping investigation against U.S. poultry. Effective yesterday, Beijing is levying duties ranging from 50% to 104%, depending on the producer, on imports of products such as chicken feet. The Chinese government claims U.S. companies sell in the Chinese market at a price less than their cost of production. In a separate case in August, Beijing slapped countervailing duties of between 4% and 31% on the imports, claiming U.S. agricultural policies unfairly subsidize chicken production in America.

These moves must be about politics because the economics of the cases make no sense. Far from dumping, U.S. poultry producers can sell chicken products in China at a premium over the American market because Chinese consumers prefer parts of the bird that Americans don't like—especially the feet, a delicacy known as "phoenix claw." And while it's hard to dispute that subsidies distort the U.S. agricultural marketplace far beyond anything Adam Smith would recognize, to the extent China feels the effects they amount to a U.S. subsidy for Chinese consumers.

This case also came after years of Chinese frustration with an unrelated move on Capitol Hill to block imports of cooked Chinese chicken over misguided safety concerns. Chinese chicken producers had complained about U.S. practices for a long time. In the face of mounting American protectionism, Beijing simply couldn't say no to its own domestic lobby anymore.


As for American lawmakers—and Mr. Obama—the chicken case is a warning. Merely because retaliation hurts China's own economy doesn't mean Beijing won't give in to political pressures to respond to American protectionism.



We're blithely told that a full-scale trade war a la the 1930s can't break out again because everyone knows better. But that's what we were told about the other lessons of Depression economics, and our leaders have already remade nearly every one of those mistakes. In a game of trade chicken, everybody will lose."


This case has hardly made the major media headlines, yet, for its potential consequences, it surely must be one of the most chilling and important news items of the past week.
 
That last paragraph says it all, does it not?
 
"...because everyone knows better. But that's what we were told about the other lessons of Depression economics, and our leaders have already remade nearly every one of those mistakes."
 
Worth repeating to really let it sink in.
 
We've had, by now, $1 trillion of nearly-pointless so-called stimulus spending. All that borrowed and printed money, which will have to be repaid somehow, has done no more to reduce unemployment, create jobs, than FDR's myriad make-work spending programs after which the stimulus was explicitly modeled.
 
Economists have criticized the stimulus bills for ignoring the reality that today's consumers, as taxpayers, realize that Keynesian fiscal pump-priming has to be repaid from higher subsequent taxes, so they feel poorer simply by watching such programs enacted.
 
While it's true that Bernanke's Fed hasn't shrunk the money supply as his predecessor did in the 1930s. If anything, he has erred on the side of excessive easing, creating a liquidity trap with 0% interest rates.
 
And now we have our Congress embarking on a trade war with our major creditor.
 
Smart. Really smart.
 
Between the new, beggar-thy-neighbor currency devaluations among major nations, and this new tilt toward tariff and trade wars, we're well on our way to repeating much of what made the US depression of the 1930s last so much longer and be so much more severe than it was in other countries of that time.
 
What was that about those who don't learn from the past are destined to repeat it, especially their prior mistakes?

Ann Mulcahy "Turnaround Queen?"

Xerox's former CEO, Ann Mulcahy, has been a guest-host on today's CNBC morning program. As she arrived on the set, the talker at the bottom of the screen proclaimed her the "turnaround queen."

Really? I don't see it.

I didn't see it when I wrote this post last week concerning her reportedly being in the running to replace Larry Summers. In that post, I wrote,

"Mulcahy became CEO of Xerox on 1 August, 2001.

After a smartly-rising performance from 1990-1999, Xerox's share price deflated, along with that of many other technology firms, when the tech bubble burst in 2000. By 2001, the company's stock price had begun to recover, but has basically flat-lined over the period of Mulcahy's management. The S&P did roughly the same.

How does this make Mulcahy some sort of management maven? And why does anyone even bother with Xerox anymore? It's been a technology also-ran for at least a decade."

Turnaround? I'm not seeing it.

And, as I mentioned, Xerox has not been a 'high tech' firm for decades.

C'mon, in a world of iPads and such, copiers are high tech?

The co-anchors have been nearly genuflecting to Mulcahy all morning, and for what? Yes, she comes across as intelligent, poised and reserved. Probably competent at running a has-been technology firm which had fallen on very hard times. Not a rocket scientist, but not an idiot, either.

Want to see a real eye-opening graphic? How about the nearby chart comparing Xerox's and GE's stock prices since about 1975?

GE went up like a rocket until 2001, when Welch left, while Xerox was flat for a decade before rising during the 1990s, along with the US economy. But, since 2001, when both Immelt and Mulcahy became CEOs of their respective companies (within about a month of each other), Xerox has actually marginally outperformed GE. Mulcahy managed to keep Xerox flat, while Immelt destroyed value at GE.

Now, if Mulcahy is the "turnaround queen" for this performance at Xerox, what does that make Immelt's comparatively poorer performance at GE? And since NBC was sold to Comcast, will CNBC finally tell the truth about Immelt's disastrous reign at their former parent?



Paul Ingrassia Review's Rattner's "Overhaul"

My one-time squash partner and friend, former Wall Street Journal executive Paul Ingrassia wrote a review of Obama auto czar Steve Rattner's recently-published book, "Overhaul." As a Pulitzer Prize-winning author for his own auto-related book, Ingrassia was the natural choice of the Journal to comment on Rattner's alleged tell-all tale of the administration's intervention into GM's and Chyrsler's travails in 2009.

As I write this, I am picturing Paul sitting in front of me discussing his review, because, due to my past personal association with him, I don't want to find myself writing anything that, were I to run into him on the street this week (he lives in the next town), I wouldn't be at a loss to explain or defend.

That written, my overall reaction to Paul's review is that it reveals what I think is his latent liberal political bent. As a seasoned and highly successful journalist, Paul never made a practice of advertising a specific partisan bias, but I think it's fair to say that he certainly conveyed, at best, a sceptical acceptance of conservative fiscal and social policies.

Thus, he lauds the administration's decision to eschew conventional bankruptcy for GM. For me, the salient passages of his piece are these,



"Mr. Rattner recruited a 15-member task force whose members had private-equity backgrounds, not auto- industry experience. That turned out to be an advantage, because Team Auto, as the group called itself, wasn't constrained by Detroit's hidebound thinking. The conventional wisdom argued against the auto companies' declaring bankruptcy or the government's taking equity (if temporarily). 



President Obama is pictured as cool and decisive, especially when dealing with his divided staffers on whether to save Chrysler. There was no such debate about GM, which was deemed too big to fail.


But to his credit, Mr. Rattner also shows unexpected candor. He reveals that White House staffers vetoed GM's desire to move its headquarters from downtown Detroit to the suburbs, despite President Obama's insistence that the government wouldn't call the shots at the company.



Given the chance to do it again, Mr. Rattner writes, he would have reformed the fixed-pension systems at GM and Chrysler, which he says might come back to haunt both companies. He also expresses concern that the United Auto Workers union hasn't changed enough to be a partner instead of a problem for Detroit.


Mr. Rattner acknowledges that the bailout remains unpopular, though he believes that the government will recover most of the $82 billion spent—in part by selling its stock in what he calls "Shiny New GM." The money, he says, averted "a major economic calamity in the industrial Midwest and helped keep the national economy from spiraling from deep recession to outright depression." It's a self-serving statement, but credible. Team Auto did a fine job, and Mr. Rattner has written a good book about its efforts. Whether GM and Chrysler make the most of their second chance is yet to be determined and will be fodder for future books."

It's surprising to me that Paul would refer to a traditional Chapter 11 filing and court-supervised bankruptcy for GM as being against "conventional wisdom," I rather think such a filing was the conventional wisdom, and the entirely right thing. Except that it would be a non-government-tainted bankruptcy, in which the UAW wasn't paid back for political favors at the expense of bondholders with legitimate rights.

Curiously, Paul is completely silent on this point in his review. Instead, he seems to have swallowed Rattner's argument that only by employing non-auto task force members was his 'Team Auto' able to devise the correct and best solution to GM's woes.

That's just nonsense. That Rattner and his Team were involved at all shows how what should have been a straightforward, unbiased, court-adjudicated reorganization of GM's operations became political theatre and an opportunity to dispense political largesse while appearing to be concerned with larger economic issues.

Many, myself included, feel that the only larger economic effect of the poisoned GM bankruptcy was the nearly-complete erosion of investors' faith in the rule of law in the US.

At least Paul highlights what Rattner revealed, which is that his Team and the government exercised far more control over GM, despite promises to the contrary, than they admitted in public at the time. Or now.

I'm puzzled that Paul didn't chide Rattner for only musing that reforming the outdated defined-benefit pensions of GM's employees was necessary to truly reorganize GM for any future success. You'd have to have had your head in sand somewhere for the past 20 years to believe otherwise. Every major US industry involving capital goods, beginning with steel, then airlines, and, now, autos, has seen its defined-benefit pensions gutted by economic reality. For anyone to think that any auto company will long survive with this sort of retirement scheme is ludicrous.

Finally, I was, again, not surprised that Paul wrote so approvingly that "Team Auto did a fine job."

Team Auto did a job that should never have been attempted. I've contended in prior posts, here and here, there was a simple and clear path to cleaning up GM's problems. In one of those posts, I wrote,

"Who are you, or any government official, to say that the alleged new 7,500 jobs at GM are better than letting capital markets create jobs?


Maybe if GM were allowed to go through a normal bankruptcy, and another firm had bought and reorganized various divisions of the old GM, all that borrowed Canadian and US money may have stayed in the private sector and funded other, better jobs with new firms.


My brilliant boss at Chase, SVP Gerry Weiss, used to remind us that the real value of informed resource allocation across the bank's many businesses was realized by transferring money and employee counts from the least-efficient, money-losing units, to more efficient, more profitable and, typically, much faster-growing units. The major delta in the bank's performance would result from this move of resources from extremes. From extremely bad uses to extremely good uses.


It is just this process that is frustrated by crony capitalism such as we've witnessed in the GM bailout. Instead of the resources wasted at GM being freed up to be used elsewhere in the economy, they were allowed to remain in place, then more capital added, from taxpayers, as a free equity injection. Free to GM, but very costly to taxpayers and the economy in general."



Paul himself admitted to being biased for the big auto companies in a prior Journal book review. I therefore expected him to pretty much back whatever the administration had to do to "save" GM. It's in his blood, and I really think it's such a deeply-rooted, emotional facet of Paul as a former beat auto sector reporter that he literally cannot change how he feels and, therefore, thinks about the GM situation.

As such, he would never quarrel with someone whose job was to manage the government's dominant role in preserving GM, rather than taking a broader, longer range economic viewpoint. Paul seems to simply assume that the many claims of complete US economic depression resulting from a GM court-supervised Chapter 11 reorganization were true on their face, without any evidence of that contention. As friends with experience in Chapter 11 proceedings have assured me, filing for and undergoing reorganization, and actually dissolving a company, are two completely different events. The former allows for continued operation of business while closures, sales and such are consummated.

Plenty of other old, famous US corporate names from the past have vanished over the years- TWA, RCA, Continental Bank, and American Motors, to name just a few. Death and dismemberment of outdated businesses is one of the inherent strengths of the US economic system.

That means reliance on relatively-free, of government interference, for one, markets in both good and finance, to make the best choices on the uses of resources and their values.

Not reliance on a handful of bureaucrats picked by politicians in Washington.

Thus, not only does Rattner's book obviously come from a heavily vested-interest perspective but, unfortunately, so, too, does Paul Ingrassia's review of that book.

GM Uses Taxpayer Money To Lobby Congress & Fund Political Campaign Coffers

In another story of sordid uses of government money, last Friday's Wall Street Journal featured a staff editorial focused on the use of what is now predominantly taxpayer's money to fund Midwestern Democrats' campaigns as well as pay a slew of Washington lobbyists.

The editorial points out some questionable legalities, including GM's being a near-government entity and, thus, barred from lobbying Congress. Then there is the UAW, which is also now a part-owner of GM, and conducts extensive partisan political fundraising and lobbying. Both situations walk precariously close to the line separating government and non-government, and, thus, blur it, since two organizations which are joined in minority ownership of GM with the federal government are using fungible money to influence the latter.

It's a tortured, unholy mess.

A failed company uses taxpayer money to influence its new political masters. We, as taxpayers, are funding the bankrupt firm to influence the government for which we also pay, enriching lobbyists to the tune of some $7MM, and the campaign coffers of selected politicians with about. $90K of contributions

How in the world is this healthy? Or legal?

This is just yet another example of the expensive distortions of real economic forces which occur when government intervenes unwisely in private industry, rather than simply allowing things to take their normal course.

In GM's case, that would have been to file a normal Chapter 11 bankruptcy and be reorganized under court protection, with no involvement from unions or the federal government.

The Perils of Government Selecting Private Sector "Winners"

Here's a post from my companion political blog concerning Michigan's investment in private sector battery makers. It illustrates the perverse results which can flow from allowing government, under the auspices of fostering business growth, to choose winners, and, by exclusion, losers in the private sector.

Regardless of which party does it, having government do anything other than let contracts for services will lead to unintended, entangling, consequences for reasons other than economic, between itself and the private sector.

Jamie Dimon's "Halo" Effect

It never fails to amaze me how many people ascribe unique managerial powers and skill to Jamie Dimon, despite any significant evidence that he's ever been anything but a cost-cutter trained at Sandy Weill's knee.

In yesterday's Wall Street Journal's book review, Philip Delves Broughton reviewed Paul Sullivan's new book, Clutch. Here's the passage from the review that I found to be amazingly ill-informed and wrong-headed.

"At one point he contrasts the performances of Jamie Dimon, chief executive of JPMorgan Chase, and Kenneth Lewis, the former head of Bank of America, during the financial crisis of 2008. Both men went into the crisis with their firms in good health. By the end of it, Mr. Dimon had acquired Bear Stearns and Washington Mutual and handsomely increased his company's share price. Mr. Lewis had acquired the teetering Merrill Lynch and seen Bank of America lose $90 billion in shareholder value.




Why the difference? Mr. Lewis made the errors typical of chokers. He over-thought the situation, and he was over-confident. When the Merrill deal was criticized, he tried to avoid the blame. He acted, according to Mr. Sullivan, as an "imperial chief executive," refusing to believe that the worst might happen. Mr. Dimon, by contrast, immersed himself in every detail of his acquisitions, fought to get prices that made hard financial sense and never shirked from the consequences. It was as if all his experience as a financier and manager had found its perfect expression in that moment."

Really?

Well, here's an alternative view. Substantiated by facts. The accompanying chart displays stock price series for Chase, Goldman Sachs, Wells Fargo and the S&P500 Index from 2006 to the present. Dimon became CEO of Chase at the beginning of 2006.

That BofA and Citi are the worst two performers is no particular surprise, is it? While it's not crystal clear from the chart, one can deduce that Goldman and Chase performed roughly the same, while Wells Fargo and the S&P500 did a little worse.

Much of Chase's milder value loss during the recent financial crisis stemmed, as I've written in prior posts, from it's simply being slower and less agile in getting into the mortgage-backed game in the first place. Thus, the bank's traditional stodginess and slow execution accidentally saved it from becoming another Citigroup or BofA. It was an error of omission, not commission.

Regarding the acquisition of various wrecked investment and commercial banks, I think Broughton wrongly gives Sullivan a pass on incomplete understanding of the situations.

Bear Stearns was the smallest of the publicly-traded investment banks, and Chase only rescued it with assurances of loss guarantees from the government. Maybe that counts as Dimon's skill, maybe not. At that point, with mortgage-backed instruments having caused tens of billions of write-offs on bank balance sheets beginning in late 2007, only an idiot would not have required such guarantees when agreeing to purchase a bushel full of them by way of taking over the failed Bear Stearns. It surely wasn't rocket science.

By the way, Lewis did the same thing with Merrill Lynch, even to the point of trying to walk away from the deal, only to be basically blackmailed by the Treasury and Fed.

Regarding Chase's WaMu takeover, it is positioned as more brilliant than it actually was. As a commercial bank, WaMu's dissolution was a relatively straightforward event. The FDIC handles these routinely, albeit on a smaller scale. But a bank like WaMu was, in comparison with Bear Stearns, a fairly simple 'acquisition.' Chase simply took over the deposits and branches, negotiating with the FDIC on various aspects of the assets. But it was a known business.

I see the difference between Lewis and Dimon as more a matter of different types of flaws. Dimon has never been a big-picture guy. Yes, he is probably very astute on details, because that's what his mentor, Sandy Weill, focused on as he acquired his string of brokerages to build Shearson Lehman. But every large-scale concept Weill pursued exploded in loss. Particularly....Citigroup. Nobody would ever accuse Dimon of having new, innovative strategic concepts, or implementing any successfully.

Lewis, on the other hand, evidently thought strategic acquisitions came with the executive suite he inherited from Hugh McColl. The missing acquisition mistake in the review, and perhaps the book, is BofA's purchase of the wreckages of Countrywide. As a mortgage bank, Countrywide's demise didn't really threaten the financial system, so Lewis' overpayment for it was a self-inflicted wound. There was no pressure for any bank to 'rescue' the troubled mortgage lender. It wasn't seen as a key financial institution in the fabric of the US economy.

The Merrill Lynch acquisition was more complex than Chase's of Bear Stearns. I see Lewis' mistake, again, as one of scope, rather than detail. And, frankly, both Lewis and Dimon, already heading firms that were among the largest five commercial banks in the US, did not really need any of these acquisitions to remain so. Consolidation is the dominant trend in the sector, but these two firms were already pretty much impervious, absent tremendous operating losses, to losing their positions as financial utilities, whether they bought any of the failed investment and commercial banks, or not.

Wells' successful digestion of Wachovia remains uncertain. Wachovia had unwisely overpaid for Golden West, which helped destroy the North Carolina bank.

To me, viewing the last five years of performances of these institutions, the lesson is that only the most and least aggressive two firms came out on top. Goldman maneuvered through the crisis, while Chase more or less hunkered down, with a few distressed asset purchases relying on government guarantees.

Perhaps the better lesson from Lewis' and Dimon's behaviors is that it's better not to operate beyond your capabilities in the first place. That doesn't mean Dimon is a better overall manager, but, in this case, that his particular skills in micro-management and small-picture thinking happened to dovetail with the brief era. The sort of skills, come to think of it, which are all one probably needs to oversee a lumbering, slow-growth, unexciting financial utility.

Selective Recall: Former Fed Governor Randy Kroszner On CNBC This Morning

Former Fed governor Randy Kroszner appeared on CNBC this morning, fully displaying a case of extremely selective memory regarding monetary policy and the Great Depression.

When co-anchor and token conservative Joe Kernen asked Kroszner  if it wasn't possible tit was time to just let the economy recover on its own, Krosznerhat  immediately channeled the ghost of the Great Depression, claiming 'they tried that in the 1930s and look what you got.'

Evidently, Kroszner's only knowledge of history comes from Friedman and Kagan's A Monetary History of the United States.

Never mind the tax hikes, regulatory assault on business, a plethora of government agencies designed to compete with business (e.g., TVA), and the Smoot-Hawley Tariff. In Kroszner's world, simply noting the admitted mistake of excessive tightening and employment of the 'real bills' doctrine choked US money supply during the Depression, so its opposite must be employed now, e.g., excessive monetary easing.

I guess when you've been a member of the Fed, it's impossible for you to see it as a warped, possibly-unconstitutional, grossly imperfect and usually badly-run central bank. Kroszner clearly has no ability to even entertain the thought that, as Alan Reynolds' research has shown, a little over a year ago in the Wall Street Journal, that the Fed's interventions in periods of economic softness have deepened and lengthened US recessions.

When challenged, Kroszner solemnly intones or implies that now-familiar argument so often used by the current administration in defense of its wasted, nearly-pointless fiscal stimulus programs,

'Ah, but it would have been so much worse without Fed intervention.'

By appearing on CNBC with the grandeur of a monetary wizard, and the deference of the co-anchors, Kroszner delivers a sense of certainty and absolutism in defense of any Fed intervention, no matter how massive nor disruptive of naturally-clearing and healing financial markets. And no matter that actual evidence of Kroszner's contentions is non-existent.

Ivi Debuts with "Live TV On The Internet"

A colleague recently sent me this article regarding Ivi, a new television content-to-PC service. Billed as "live TV on the internet," it describes the service thus:

The Seattle-based company is launching a downloadable PC application that takes a live feed from TV channels and distributes that stream, uninterrupted and without delays, to viewers worldwide 24 hours a day. Ivi is offering a 30-day free trial for the service to watch major broadcast channels including ABC, NBC, CBS, Fox, The CW, PBS and other local affiliates.

The Ivi TV player transforms a computer into a television with multiple channel offerings. Users can select the channel by using a simple channel guide. The TV player can be downloaded to any Windows, Mac, or Linux computer. It will soon be available on platforms such as mobile devices, tablets and set-top boxes.

The company claims Ivi will make set-top boxes obsolete by allowing viewers to watch their TV shows anywhere, on any PC where they download the application. Todd Weaver started Ivi in 2007. He serves as chief executive.

One of the features that consumers have long wanted is a la carte TV channels. Most of the time, consumers may want only one or two channels. But they have to subscribe to a whole bundle of channels in order to get what they want. Ivi says it can enable such a la carte service.

The basic Ivi Air package contains over 25 major broadcast channels for $4.99 a month, after the 30-day free trial. More channels will be added each month for no additional costs. If you want time shifting, or digital video recording that allows you to watch a show whenever you want, you pay 99 cents a a month more.

Ivi hopes to create a bigger hole in the cable TV industry, which is losing lots of subscribers. Market researcher SNL Kagan reported that the cable TV companies lost 711,000 subscribers in the second quarter of 2010. Yankee Group said that pay-TV revenues are starting to decrease, partly due to rising cable service rates. Ivi claims that it has legal rights to run TV shows on the web and it will be paying royalties to copyright holders.

Ivi’s service does not require buffering, or a delay which occurs as a video downloads to a user’s system. You can watch the Ivi shows in any quality level you want. You can watch local content anywhere in the world. You can view New York City broadcast channels wherever you are. The company is one among many companies that are promising to disrupt the TV business. Others include Apple with Apple TV, Google with Google TV, Samsung with its TV apps, and Logitech with its upcoming Google TV set-top box.

There's no doubt that Ivi, if it operates as claimed, gives you instant PC- or other digital device-based access to television content wherever you can get an internet connection. And it certainly allows your PC to function like a television with a digital recorder.

In this regard, it certainly offers an ability to drop a $50+ monthly cable television subscription.

However, it's unclear how Ivi disrupts the provision of cable signals to an actual home television. I can think of two methods of doing that. One is to simply dedicate a laptop or Ipad with a companion large flat panel monitor as one's home television. Another is to buy a new Tivo remote with which to access the internet.

So it's likely one can fashion a method of linking those last few feet from a home digital device to one's television. I simply found it odd that Ivi celebrates making your laptop into a television, which is already old news, what with Hulu already offering free access to previously-aired programming. Yes, the real-time television content hook might be worthwhile. But if you time shift already, maybe not.

Still, with Ivi available, and for such a low monthly fee, the further disintermediation of cable television and its revenues looks to be given another big shove.

David Tepper On CNBC This Morning

CNBC's 6-9am program featured a half-hour segment, ending at 8:30, with David Tepper, founder and head of the $12B+ hedge fund Appaloosa Management. I'm sure it's already a featured clip on the network's website, and will remain in the paid portion for some time.


Tepper said a lot during his half hour as the program's only guest. But there were two comments which, for me, were especially notable.


The first was his nonchalance concerning the bet his hedge fund made on US bank equities and debt in 2009. According to Tepper, Treasury published a white paper declaring, in advance, the bank equities it would purchase, and at what prices. Citing the failure to comply with this document as fraud under SEC rules, Tepper claimed that it was easy to go long in the bank instruments which delivered Appaloosa's reported 100%+ gains for 2009.


"Sometimes, it's that easy," the 17-year veteran hedge fund manager observed.


Despite questions from Becky Quick and Joe Kernen concerning the changes in federal government actions, versus stated intent, for TARP, and its quixotic behavior two years ago this fall, Tepper remained calmly insistent that Appaloosa's long positions going into 2009 were a simple, riskless move.


I can't help believe that Tepper is putting a different face on those risks now then he and his team viewed them two years ago.


For example, the federal government enjoys sovereign immunity from many lawsuits. And it's very unlikely that any administration would allow its SEC head to bring action against its Treasury Secretary or the Fed for failing to act upon a 'white paper.'


I'm sorry, but I just don't buy Tepper's characterization of his funds' positions as essentially riskless and a no brainer in late 2008 and early 2009.


If he'd been wrong, and Treasury had had second thoughts, we'd have read about Appaloosa's horrendous losses. And maybe a feeble attempt to bring suit. Which probably would have brought heat from the SEC to quash the attempt at forcing Treasury to follow through.


The second interesting comment from Tepper arguably began to turn equity market futures this morning. When asked about his views for the rest of the year, Tepper didn't hesitate to say he was longer than usual, and fully expected the Fed to make good on its desire to facilitate US economic growth.


According to Tepper, between continued easy money, borrowing, and/or, if necessary, QE2, he's confident that the Fed will get its wish. As he put it, to paraphrase,


'If the Fed continues easing, equities will do well, but bonds will get killed. If, on the other hand, that doesn't ignite growth, and they need to do more quantitative easing, then everything will do well for the remainder of the year.'


Tepper didn't say there wouldn't be a price to be paid for all of this easing. He simply reiterated his early comment about 2009, i.e., you should believe the Fed and Treasury when they say they want to assure an economic result which, in the short term, they have the means to effect.


Having seen some prior examples of a market heavyweight's comments on CNBC seem to move the S&P and Dow futures, I'm not at all dismissive of the impact of David Tepper's remarks. When he began speaking, the S&P futures were around 1122. Now, at 9am, an hour later, they are around 1133, with the added help of some positive economic news.

One has to wonder why Tepper suddenly appeared on CNBC this morning. Was it a function of the equity markets falling back from their recent, multi-month highs? Was Tepper concerned about the fate of his long positions?

I don't believe in coincidences of this sort. A few months ago, Doug Kass, a noted bear and also a guest/host on CNBC earlier this morning, made public his belief that equities had hit a bottom and, sure enough, they began a march upward that morning.

No matter how talented the equity manager, whether public or private/hedge fund in nature, I can't help but see them all merely talking their books when they agree to appear on CNBC.

What To Expect from the Bureau of Consumer Financial Protection

Much has been made of Elizabeth Warren's rather tortured, strangely-handled appointment to head the federal government's new Bureau of Consumer Financial Protection. I've written about that aspect of her long-awaited appointment here on my companion political blog.

In this post, though, I'd like to consider what this new agency is likely to do to and for US financial consumers.

According to a Wall Street Journal article on the subject, Warren is to oversee a staff which will now commence writing hundreds of pages of new rules and policies governing practices at financial firms.

Warren is now attempting to spin her efforts as being "willing to cooperate with business leaders."

Unlikely.

Anyone who's seen Warren's scolding, imperious, inquisitorial manner during her TARP Oversight Committee will find it hard to believe that statement.

Instead, Warren has spoken of "tricks and traps" that consumer lenders employ, and of calling for "fundamental changes to the way rules are written in Washington." According to the Journal article, Warren wants two-pages contracts for mortgages and credit cards. It's not clear how that would offer more protection to consumers, unless the language is so sweeping as to provide for nearly-unlimited lender liability.

You don't really have to know just what new regulations will be written to understand the effects they are likely to have on consumer lending. Rather than allocate credit according to a consumer's ability to pay, new regulations are more likely to result in no access to credit whatsoever for borderline borrowers.

If consumer lending documents truly become distilled to one or two pages, it's reasonable to assume that only the safest credits will be funded. The fewer terms and conditions are allowed, the more assured lenders will want to be that their customers, and their loans to them, are very low-risk.

Just stepping back and considering Warren's overall belief that lenders have behaved predatorily, and consumers need to be 'protected,' it's a good bet that the price of credit will rise, when it's available.

Perhaps a good example of this likelihood was Warren's reaction to a question from Jack Welch on CNBC's morning program yesterday. When Welch asked Warren if she thought her efforts would increase the price of credit, she replied,

'That's the wrong question to ask.'

Amazing, isn't she? Simply ruling an inconvenient question off limits, out of bounds, to be ignored. Which she did.

She went on to claim, without any examples, that whole companies existed simply to take advantage of consumers with 'tricks' to make them pay exhorbitant fees and rates. Then resorted to the hoary old references to 'families' to contend that all was amiss in the finance industry. Not just a few bad apples, according to Warren, because she never actually admitted that there were honest lenders out there.

Instead, Warren painted a picture of poor, uneducated, stupid consumers waiting to be fleeced by sharp lenders. In her world, consumers sign loan agreements they don't read or understand, despite being adults and understanding that nobody is making them borrow money. For a glimpse of this, go find and watch CNBC's House of Cards documentary. The scene with the large California woman who knew she couldn't afford her mortgage, but figured that 'if they want to give me the money, they must believe it's okay and I can afford it.'

That woman is the prime example of the average consumer in Elizabeth Warren's world. In reality, of course, no amount of regulation or protection will prevent such a person from making mistakes, borrowing too much money, at unaffordable rates. But don't try to tell that to Warren.

Thus, as with most regulatory overkill, the results of her efforts will, typically, be the opposite of intentions. In this case, it will not facilitate borrowing for lower-income borrowers, but probably eliminate them from qualifying for loans at all.

A Downside of Low Interest Rates

Earlier this week, the Wall Street Journal ran an article discussing a somewhat hidden downside to the US economy's current ultra-low interest rates. That problem is what such rate levels do to assumptions driving pension fund values versus long term liabilities.

Simply put, companies- and states, for that matter- are facing much greater shortfalls in their pension funding. For example, the article cited GM sources as saying that "every .25 percentage-point decline in its discount rate could increase its pension obligation by about $2.4 billion."

That obligation as "underfunded by $17.1 billion at the end of 2009."

On a larger scale, the article noted,

"If S&P 500 companies took account of the interest-rate decline as of Aug. 31 to calculate their pension-fund balances, the combined deficit would increase by about $167 billion, or nearly two-thirds more than the year-end 2009 deficit of about $260 billion, estimates Jack Ciesielski of the research firm Analyst's Accounting Observer."

Leave it to the free market's checks and balances to identify this risk. Between suspect private sector growth rates inhibited by government interference, taxation and deficit policies, and these low interest rates, one wonders how any ground will be gained on these pension liabilities.

Down the road, of course, this could morph into lower demand and savings, as retirees don't collect expected pension payments.

Jeff Sonnenfeld's Misinformed Praise of Ann Mulcahy & Xerox

With Larry Summers' resignation from the administration's economic team, every pundit worth her/his salt has been tossing names out for his replacement. Among business people, to my astonishment, former Xerox CEO Ann Mulcahy has been mentioned as an inside favorite.


Jeff Sonnenfeld lauded Mulcahy on CNBC yesterday afternoon as having had a "fabulous tour of duty" as the struggling firm's CEO.



If you look at the accompanying chart of the price series of Xerox and the S&P500 Index, it's hard to understand Sonnenfeld's enthusiasm for Mulcahy's performance.


Mulcahy became CEO of Xerox on 1 August, 2001.

After a smartly-rising performance from 1990-1999, Xerox's share price deflated, along with that of many other technology firms, when the tech bubble burst in 2000. By 2001, the company's stock price had begun to recover, but has basically flat-lined over the period of Mulcahy's management. The S&P did roughly the same.

How does this make Mulcahy some sort of management maven? And why does anyone even bother with Xerox anymore? It's been a technology also-ran for at least a decade.


Leave aside that she's never been considered an economist. Precisely what is it about Mulcahy's lackluster reign at the copier company that would make anyone believe she's somehow qualified to be an economic adviser, or process coordinator, at the White House?

I know. Sonnenfeld probably believes that without Mulcahy, Xerox would have performed even worse since 2001! That's the sort of performance that could well find Mulcahy a spot on the administration's economic team.

Because it certainly wouldn't have been due to Mulcahy's doing her shareholders any favors during her term as CEO at Xerox.

By the way, in his long-winded comments, Sonnenfeld confided that Summers' post was only created in the Clinton administration to give Bob Rubin a place to hang until he could be made Treasury Secretary. If that's really true, how about letting Summers leave and just save the money? It's not like we need more economists in the administration, is it? With their current performance, I'd say rather fewer might be better.

If the stories about Mulcahy being a serious contender for Summers' job are true, I'm not sure who comes off worst- Sonnenfeld, Mulcahy, or the White House.

Is Google A Monopolist?

That was the title of last Friday's Wall Street Journal presentation of two editorials arguing the question.

It's nice to have a topic to discuss that involves more pure business and strategy than government intervention, although, the very question actually begs the latter.

The Google case seems, on the surface, to resemble that of the infamous browser wars in which Microsoft drove Netscape into oblivion. That certainly is the contention of one of the editorialists, Rick Rule, now retained by Microsoft and other firms in an anti-trust action against Google.

However, as I thought about this question over the weekend, I found myself believing that Mr. Rule is engaging in a deceptive and erroneous comparison.

Google offers a free search engine to anyone wishing to use it. But it is not the only search engine available. In fact, so robust is the search engine market that Microsoft re-entered the fray recently with its branded Bing service. And just this past week, a co-anchor on CNBC announced that she had gone back to Yahoo's search engine and found it better than the other two.

Since one accesses Google's search engine as an online service, it immediately begins to depart from the browser example, in that those software programs were coming pre-loaded on personal computers of the day.

If memory serves, one of the major anti-competitive behaviors by Microsoft involved tying its browser to its Windows personal computer operating system when selling the latter to PC producers such as Dell. The argument against Microsoft was that it was illegally using the ability of Dell to sell PCs pre-loaded with the most popular operating system, Windows, to force it to also pre-load the included Internet Explorer web browser, and exclude Netscape's or any other firm's browser.

As such, Microsoft's alleged anti-competitive behavior involved violating the Robinson-Patman Act's provisions involving illegal tying.

Google, however, isn't tying anything to a product for which money is paid.

No, the current argument is really about advertising market foreclosure. Even the debate concerning Google's alleged manipulation of search results is baseless in that nobody pays for searches.

Thus, despite a long-winded diatribe, Mr. Rule's only real well-founded point is that Google's share of online advertising exceeds 70%, which he claims exceeds the Sherman Act's "consensus" threshhold.

However, again, online advertising isn't "sold" to users. It's bought by those wishing to advertise, and they can choose all three search engines, if they wish, on which to advertise their products and services.

It reminds me of my local, freely-distributed weekly 'newspaper.' Many communities have them. A local publisher prints and distributes variants of the same weekly paper to many nearby towns through contracted carriers. Nobody pays for these nuisances, and often they receive multiple copies. Thus, it could be said that the publisher in question has a monopoly, in that every house in a town is given at least one copy of the paper. Companies pay to advertise in the paper, but nobody suggests that these small entities have a harmful monopoly on advertising.

Mr. Singhal, a Google fellow and the Journal's choice to represent Google's viewpoint in the other editorial, argues that Google is always vulnerable to its search engine being eclipsed by a better one, thus upsetting its business model. I wrote a post several years ago contending precisely this case. Everything else that Google has pursued has necessarily been dependent upon revenues from search-related advertising. If search goes down, Google's entire empire is in jeopardy.

As an aside, while I understand that Google's, and other search providers, receive their ad revenues from those wishing to place product and service ads, I continue to marvel that companies do this. My own behavior almost never results in purchasing goods or services directly from an ad on an online search. True, a company purchasing a keyword might get a click-through from me, but rarely a purchase.

In any case, businesses do see value in buying various search words and terms, fueling Google's, Yahoo's and Microsoft's search-related advertising revenues.

But none of those seem to even remotely pass the test of current anti-trust laws which require the guilty party to actively foreclose markets to suppliers or predatorily price goods or services to buyers in order to eliminate competitors.

It seems that, like it or not, existing anti-trust laws do not easily apply to the world of online search and advertising. Google's predominance, when viewed objectively, would not seem to be a result of any illegal activity, whether it is a monopoly, or not.

New Fed Rules & Commercial Bank Presidents: Does It Even Matter?

Sometimes it's worth considering the output of a system, before getting excited about changes to its inputs.

In this case, I'm referring to a recent Wall Street Journal article professing concern that Chase's Jamie Dimon doesn't feel he can "perform his duties on the Fed board" because of recent financial regulatory reform legislation.

Is the the same Fed which has been reduced to a 0% interest rate policy and quantitative easing in order to effect monetary policy in the US? The Fed which is dominated by its chairman, currently known for throwing liquidity at any crisis, rather than let natural systemic reactions help to right the nation's economy?

Having work with several CEOs of large US banks in my past, I'm wondering just what it is for which Dimon is required on a regional Fed board. Even that of New York.

I'm one of those people who doesn't believe that large company CEOs magically become omniscient and smarter, i.e., someone they never were before, just by being anointed with the title.

In Dimon's case, he was never considered a monetary or economic policy savant when he carried Sandy Weill's bags for years at Shearson, American Express, Travelers or Citigroup. Why should he have such wisdom now?

The gritty, operational details of banking, the expertise with which might be a necessity on a regional Fed board, aren't generally possessed by bank CEOs, either.

In short, I wonder just what a bank CEO can provide to a Fed board that reports and analysis from his/her bank's various functions can't, with greater specificity?

The most important element of the Journal article to me was the potential conflict now created by new legislation and the existing Federal Reserve. It could well be that the recently-passed law improperly and illegally infringes upon Fed powers. Or maybe it's a legal curtailment that constitutes a sort of 'back door' curbing of Fed powers which has been threatened by Congress, but never implemented, for decades.

That would seem to be the real story. Not just whether a certain bank CEO on a certain regional Fed board is no longer able to "perform his duties."

Private Equity's Comeuppance

Last Wednesday's Wall Street Journal had an article highlighting the challenges of private equity firms attempting to cash out of firms via IPOs in the current thin market for such issues.

The overall thrust of the article was simply that the private equity groups are now facing the fact that they constitute the bulk of IPOs and, as such, might drive down prices for the firms they are now trying to unload. And that many are under the pressure of expiring fund pools to liquefy their gains via sale of the firms they once took private.

But my own takeaway was that, as with all markets, timing is everything. And what seems to be a great strategy at one point in time can become a curse at another time.

In fact, this article illustrated to me that there is a second risk to the private equity business besides the one that recently became evident by Cerberus' debacle with Chrysler and GMAC. That problem is simply too many private equity firms chasing too few opportunities, leading to deals with little chance of paying off. Combinations of excessive prices paid by the private equity groups, and poor choice of targets, results in some deals never making it through the process and back out into the public markets.

Now, in addition to failure on the front end of the private equity process, however, we see that simply having a fund near its dissolution date can result in a group having to dump properties back into the equity markets at a bad time. Not only are there few other IPOs, but, in the current market, it's not clear that prices will be the best they could be.

Seems all is not unalloyed gold in the private equity business, after all.