One of the larger grocery stores in my area is a Super Stop&Shop. I'm uncertain as to the ownership of the chain. It's based in the Boston/Rhode Island area, but I cannot find it as a publicly-listed company.
(Author's note: I have since verified that Stop&Shop is a division of Royal Ahold, the Dutch-based food retailer.)
In recent years, the chain has upgraded stores, adding departments and various services. Recently, it took a giant step to distinguish itself by adding hand-held scanners. This product allows a customer to scan bar codes while shopping, including using custom-printed produce bar codes generated by electronic scales. The result is potentially the quickest possible checkout experience, bar none.
Not only does a customer not have to re-scan each item, but, due to having nothing to scan, s/he may use the express lane. The only significant activity at checkout is paying for the merchandise.
Due to this technology, I had shifted nearly my entire food purchasing activity to Stop&Shop, from a local, smaller chain, Kings. That chain had been owned by British-based Marks&Spencer for years. I'm not sure of its ownership status now, but I believe M&S at least reduced their stake, if they did not succeed in divesting themselves of their entire interest.
The Stop&Shop hand-held scanner is apparently a third-party provided solution, as I learned this summer.
One evening, having successfully sped around the store scanning away, I was checking out in the express lane, when the monitor announced that I "needed help," and suspended checkout. I was the victim of a cart audit.
Understandably, the hand-held scanner system generates "random" audits of shoppers, at which a S&S employee comes over to randomly scan items from the customer's purchases, confirming that each re-scanned item matches an originally-scanned item.
However, this became a problem when I was subjected to this so-called "random" event at least 4 times this summer.
Since the entire purpose of the combination of self-checkout lanes and a hand-held scanner is to deliver a speedy shopping experience to the customer, being stopped for an interaction with a low-paid, low-skilled clerk defeats the entire purpose. A well-designed audit program would balance stopping theft through unscanned items with truly random, or, better, system learning, so that customers who are audited, and not found to be stealing, are rated a lower risk, and subject to fewer random checks over time.
After the third audit this summer, I demanded to see the manager on duty at the time. In a long conversation, I explained that I did effectively all my grocery shopping at that store, because of the self-checkout and hand-held scanners. And that it was difficult for me to believe that I was "randomly" audited 3 times in, at most, as many months. That each audit was, to me, as a customer, a pending accusation of theft.
I told the employee, actually the store's assistant manager, that if I was subjected to one more audit within the next three months, I would stop patronizing his store. I didn't care how he would arrange it, but this was my promise.
Last week, I was stopped again for a cart audit. This time, as I loudly asked if the audit did not mean the store management suspected me of theft, and, when I passed the audit, was I not innocent of said assumption, I demanded to see the on-shift manager. This time, it was the store's manager, and he was standing only a few feet away. With him was the man I recognized, from my earlier conversation, as the store's assistant manager.
That's when the real fun began.
By now, a short line of people were queued up behind me in the express lane. I had a heated conversation with the manager, who tried to excuse the situation by claiming that the system was not under his control. That a third party was managing it.
I retorted that, as a customer, that made no difference to me. I was in a Stop&Shop store, so I had a reasonable expectation that the store's manager was responsible for my treatment. We went on like this for some minutes, with the manager incredibly contending that if I were to contact his corporate management, it would have more impact than his own complaint.
I replied that I had better things to do with my time, and that, if his statement were true, his firm is in more trouble than they probably realize. And that, as promised to the assistant manager, who had not recognized me, I was now returning to Kings to do all of my grocery shopping.
When I tried to check out, after the employee had done the required cart audit, the monitor froze, then came back up blank. The manager was horrified. Because my purchase used the scanner, the hand-held unit was needed to restart the checkout process.
But the audit employee had taken it. She, and it, were nowhere in sight.
I then had the pleasure of an event of which many of us have probably dreamt, but few have done.
I announced loudly that the store's system and management were totally inept, and could not even check out my purchases.
And then, I began to unload my very full canvas shopping bag onto the floor.
Again, clearly and loudly, to the manager, explaining that I did not even want the merchandise I had just selected and tried to buy, I placed various produce items and packaged goods in and around a small hand-basket, then left the store. Again, announcing my next stop- the rival grocery chain store down the street.
This is a store manager's worst nightmare. The cost of reshelving items is pretty high. Basically, with 1% sales margins in grocery stores, it effectively wipes out profit on those items, and then some. Not to mention the produce, which might have to be discarded.
Then there is the visual of a customer dumping items back onto a floor in full view of other customers. It's the ultimate repudiation of a retailer.
Honestly, I'm surprised the manager let me do this, and didn't offer almost anything to prevent it.
Ironically, as I processed what had just happened, with this post in mind, I realized that Stop&Shop's failure in this case was not its use of technology. Or the technology's failure.
No, the real culprit was the store's manager, assistant manager, and staff.
The assistant manager had never taken my name or contact information during our initial conversation in July. I clearly warned of the consequence of my experiencing another cart audit within the next few months.
Had the assistant manager been alert and competent, he would have taken my contact information, and at least begun a communications process that would lead me to believe, and, more importantly, feel that the store's management sympathized with my plight, and was doing something about it.
Even during my second conversation, with the store manager, he, too neglected to take any identification or contact information whatsoever.
Here, he had a disappointed, angry soon-to-be-ex-customer loudly denouncing his store in front of several lines of other customers at the checkout lanes. You'd think he would take the opportunity to exhibit maximal empathy and a show of action calculated to defuse my frustration and demonstrate real concern for his customer.
Instead, he appealed to me to contact his own senior management, though offering no advice as to how to do that, or whom to contact.
If that store manager had taken my contact information, apologized for the occurrence, and promised to 'do something,' he would have kept my business for at least a week or so, and have put on a wonderful show of positive, caring customer service in front of several dozen other customers.
This is, I think, a rather important lesson. Blaming the technology that a firm chooses to provide in its stores for its customers, for a bad shopping experience, is hardly productive or effective.
But almost any bad customer experience can be, at least temporarily, assuaged by genuine attention, collection of the customer's name and contact information, and a promise of imminent contact and communication to remedy the situation.
As I have mulled over this experience for the past week, I become more and more amazed at the lack of training, sophistication and innate instinct for good customer service that was displayed by the store manager of the Stop&Shop. What's sad, of course, is that if this constitutes "leadership" at the store, imagine how inept and ineffective customer service must be among the lower-level employees.
Isn't it ironic that Stop&Shop has invested substantial sums of money to become a leader in allowing very fast shopping trips, with no interaction with the store's staff, only to blunt this potentially important competitive advantage through poor control and oversight, and integration, of the technology with the store's management. And, then, compounding this error with poor customer service.
Customer service really is the first- and last- line of defense for a retailer. It can at least temporarily blunt and offset a poor customer experience with the store. But if this line of defense fails, the retailer is lost.
Friday, September 25, 2009
Thursday, September 24, 2009
Cadbury's Stitzer's Key Customer Insights
Tuesday's Wall Street Journal featured an article detailing a supposed "softening" of Cadbury CEO Todd Stitzer.
However, buried deep within the story were two refreshing and insightful quotes by Mr. Stitzer. The first was,
"I completely respect the fact that we would be attractive to someone else, but the world of large conglomerates has passed," he said. "Shareowners recognize that focused businesses, and focused in an area that has commercial and operational synergies, is a very good space to be."
This is a rare, honest admission for a CEO. Granted, Stitzer's Cadbury is the prey, not the hunter. So it's self-serving. But it's also true. Contrast his candor with both parties' words in the recent Dell-Perot Systems deal.
This was followed by the article's noting,
By buying individual confectionery brands, Mr. Stitzer said Cadbury has tried to grow bigger within the category, rather than by teaming up with a bigger food company.
Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,
"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."
Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.
With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.
After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?
If anything, Stitzer is really making the case, by omission, for another approach entirely.
Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?
That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.
The nearby price chart for Cadbury, Kraft and the S&P500 Index shows an interesting picture. Over the period, though moving in similar patterns, Cadbury has substantially outperformed Kraft. In fact, Kraft ended down, in absolute terms, about even with the index, while Cadbury managed to have gradually, consistently bested Kraft's performance.
It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage.
Granted, Irene Rosenfeld has shown promise. But as I noted in this post from early 2007, Kraft has been plagued by management lethargy for years.
Looking at the price chart again, while mystified how Kraft could have a stock price prior to 2007, when it was part of Altria, I can't help but think that my idea would be better for shareholders of both firms than Ms. Rosenfeld's attempt to take over Cadbury.
However, buried deep within the story were two refreshing and insightful quotes by Mr. Stitzer. The first was,
"I completely respect the fact that we would be attractive to someone else, but the world of large conglomerates has passed," he said. "Shareowners recognize that focused businesses, and focused in an area that has commercial and operational synergies, is a very good space to be."
This is a rare, honest admission for a CEO. Granted, Stitzer's Cadbury is the prey, not the hunter. So it's self-serving. But it's also true. Contrast his candor with both parties' words in the recent Dell-Perot Systems deal.
This was followed by the article's noting,
By buying individual confectionery brands, Mr. Stitzer said Cadbury has tried to grow bigger within the category, rather than by teaming up with a bigger food company.
Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,
"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."
Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.
With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.
After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?
If anything, Stitzer is really making the case, by omission, for another approach entirely.
Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?
That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.The nearby price chart for Cadbury, Kraft and the S&P500 Index shows an interesting picture. Over the period, though moving in similar patterns, Cadbury has substantially outperformed Kraft. In fact, Kraft ended down, in absolute terms, about even with the index, while Cadbury managed to have gradually, consistently bested Kraft's performance.
It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage.
Granted, Irene Rosenfeld has shown promise. But as I noted in this post from early 2007, Kraft has been plagued by management lethargy for years.
Looking at the price chart again, while mystified how Kraft could have a stock price prior to 2007, when it was part of Altria, I can't help but think that my idea would be better for shareholders of both firms than Ms. Rosenfeld's attempt to take over Cadbury.
Wednesday, September 23, 2009
Art Laffer's Recent WSJ Piece
Noted economist Art Laffer wrote a sobering piece in yesterday's Wall Street Journal. I would have gotten to his piece later yesterday, but a number of searches which brought people to my blog were about Laffer and the Journal, so I knew he must have written a new editorial.
There are quite a few economists who write on the pages of the WSJ from time to time. Brian Wesbury, one of my favorites, has been absent for some time. But those who still contribute include Robert Barro and Alan Reynolds, to name two more.
While not a degreed economist myself, I have studied the discipline with great interest since my freshman year in college. I've read a number of basic texts, including Keynes' work, and one of his contemporary critics, Michael Hutt.
I've come to feel comfortable reading and evaluating various economists' monographs. In this vein, Laffer's recent piece is very troubling.
Without going into details, Laffer addresses the 1930s as the milestone by which current fiscal and monetary powers that be are measuring themselves. Laffer begins by discussing the initially too-tight monetary policy of the Depression, and current Fed Chairman Bernanke's determination to avoid making that mistake again.
At this point, Laffer takes a turn into tax policy. Framing Smoot-Hawley as a tax, which it most assuredly was, he provides evidence of enormous increases in a myriad of tax rates. He observes,
"The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that the U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s."
Laffer then cites the current slated rise in state tax increases at 3.1% rate, the highest in almost twenty years. Further, he notes the 'cap-and-tax' legislation and health care levies as heading in this wrong direction.
He then turns to Milton Friedman and Anna Schwartz on the subject of gold.
Following the twists and turns of the period's gold policy, Laffer notes two rather obscure facts. First, FDR forcibly took gold from the US populace at $20.67/ounce, then, less than a year later, devalued the dollar to $35/ounce. He both seized assets, and unintentionally sparked inflation, with two gold-related actions.
And this was technically fiscal policy, because, as Laffer points out, it was FDR's doing, not the Fed's.
Laffer concludes with a rather astounding statement of facts. The consequence of FDR's actions, in concert with the Fed, by mid-decade, produced consumer price inflation of roughly 15% from 1933-37, during a period of double-digit unemployment.
He finishes his editorial with these words,
"The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon.
My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits."
There's no getting around what Laffer is saying. He bemoans the fact that fiscal tax policy can easily exist with lax monetary policy, ushering in a lethal economic brew of stagflation. That is, high unemployment, deficits, and high inflation. Because economic management is split between an administration and the Fed, this is a perennial risk.
As Laffer notes, Bernanke is already doing his part to over-inflate money supply. The current governments, state and federal, are repeating the mistakes of FDR's administration during the Depression, raising taxes to new heights.
This is the type of economic piece which causes me do dispute James Grant's recent cock-eyed optimism.
I had lunch earlier this week with my friend, B. He is a PhD with a focus on the history of monetary systems. He is currently concerned about inflation. As a member of a prominent think tank's board, he frequently participates in conferences and discussions of selected topics. Recently, he presented a paper concerning the sources and consequences of the recent financial debacle. B, and his colleagues, all fear hyper-inflation far more than a Depression.
And they are all pretty convinced we are headed in that direction. As Laffer notes, just because we have retarded economic activity today does not in any way mean we can't, or won't, also manage to ignite serious inflation.
The Fed had doubled the monetary base in the past year, as Laffer pointed out early in his editorial. The Fed is buying Treasuries, monetizing our own debt, too. The financial markets have responded by using the printed money and Fed cash to push up asset prices and keep interest rates low. Laffer remarked on this yesterday afternoon, on Neil Cavuto's Fox News program. With so much government liquidity flooding markets, he explained, of course equity prices are on a tear, as are commodities. But Laffer sees this sparking inflation within a few years.
Laffer quoted the esteemed late Milton Friedman,
"Inflation is, everywhere, a monetary phenomenon."
And monetary policy is probably the easiest in our Republic's history. Printing presses wide open and Congressionally-legislated deficits doubling through the next decade.
We have, as Laffer noted, a nearly-exact replay of the Great Depression's monetary and fiscal mechanics now in full swing. Monetary easing combined with fiscal irresponsibility that is resulting in higher tax burdens.
This is why I don't see an imminent, nor prolonged real economic recovery underway in the US at this time.
There are quite a few economists who write on the pages of the WSJ from time to time. Brian Wesbury, one of my favorites, has been absent for some time. But those who still contribute include Robert Barro and Alan Reynolds, to name two more.
While not a degreed economist myself, I have studied the discipline with great interest since my freshman year in college. I've read a number of basic texts, including Keynes' work, and one of his contemporary critics, Michael Hutt.
I've come to feel comfortable reading and evaluating various economists' monographs. In this vein, Laffer's recent piece is very troubling.
Without going into details, Laffer addresses the 1930s as the milestone by which current fiscal and monetary powers that be are measuring themselves. Laffer begins by discussing the initially too-tight monetary policy of the Depression, and current Fed Chairman Bernanke's determination to avoid making that mistake again.
At this point, Laffer takes a turn into tax policy. Framing Smoot-Hawley as a tax, which it most assuredly was, he provides evidence of enormous increases in a myriad of tax rates. He observes,
"The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that the U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s."
Laffer then cites the current slated rise in state tax increases at 3.1% rate, the highest in almost twenty years. Further, he notes the 'cap-and-tax' legislation and health care levies as heading in this wrong direction.
He then turns to Milton Friedman and Anna Schwartz on the subject of gold.
Following the twists and turns of the period's gold policy, Laffer notes two rather obscure facts. First, FDR forcibly took gold from the US populace at $20.67/ounce, then, less than a year later, devalued the dollar to $35/ounce. He both seized assets, and unintentionally sparked inflation, with two gold-related actions.
And this was technically fiscal policy, because, as Laffer points out, it was FDR's doing, not the Fed's.
Laffer concludes with a rather astounding statement of facts. The consequence of FDR's actions, in concert with the Fed, by mid-decade, produced consumer price inflation of roughly 15% from 1933-37, during a period of double-digit unemployment.
He finishes his editorial with these words,
"The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon.
My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits."
There's no getting around what Laffer is saying. He bemoans the fact that fiscal tax policy can easily exist with lax monetary policy, ushering in a lethal economic brew of stagflation. That is, high unemployment, deficits, and high inflation. Because economic management is split between an administration and the Fed, this is a perennial risk.
As Laffer notes, Bernanke is already doing his part to over-inflate money supply. The current governments, state and federal, are repeating the mistakes of FDR's administration during the Depression, raising taxes to new heights.
This is the type of economic piece which causes me do dispute James Grant's recent cock-eyed optimism.
I had lunch earlier this week with my friend, B. He is a PhD with a focus on the history of monetary systems. He is currently concerned about inflation. As a member of a prominent think tank's board, he frequently participates in conferences and discussions of selected topics. Recently, he presented a paper concerning the sources and consequences of the recent financial debacle. B, and his colleagues, all fear hyper-inflation far more than a Depression.
And they are all pretty convinced we are headed in that direction. As Laffer notes, just because we have retarded economic activity today does not in any way mean we can't, or won't, also manage to ignite serious inflation.
The Fed had doubled the monetary base in the past year, as Laffer pointed out early in his editorial. The Fed is buying Treasuries, monetizing our own debt, too. The financial markets have responded by using the printed money and Fed cash to push up asset prices and keep interest rates low. Laffer remarked on this yesterday afternoon, on Neil Cavuto's Fox News program. With so much government liquidity flooding markets, he explained, of course equity prices are on a tear, as are commodities. But Laffer sees this sparking inflation within a few years.
Laffer quoted the esteemed late Milton Friedman,
"Inflation is, everywhere, a monetary phenomenon."
And monetary policy is probably the easiest in our Republic's history. Printing presses wide open and Congressionally-legislated deficits doubling through the next decade.
We have, as Laffer noted, a nearly-exact replay of the Great Depression's monetary and fiscal mechanics now in full swing. Monetary easing combined with fiscal irresponsibility that is resulting in higher tax burdens.
This is why I don't see an imminent, nor prolonged real economic recovery underway in the US at this time.
Tuesday, September 22, 2009
About Dell's Purchase of Perot Systems
Yesterday morning's big corporate news was Michael Dell's computer making company buying Perot Systems. For a hefty $30/share, a hefty premium to the $17 or so Perot closed at on Friday. A price the consultant/system integrator hasn't seen in ten years!
I'm sure Dell shareholders are thanking Michael profusely for squandering their money so unwisely.
I'm sure Dell shareholders are thanking Michael profusely for squandering their money so unwisely.
I happened to have lunch with my friend and former/sometimes business partner, B. He noted that all of Ross Perot's companies had now been purchased, i.e., EDS by HP, and Perot Systems by Dell.
I added that a third, GM, was now owned by the US government. We both laughed. For those too young to recall, GM once purchased EDS, making Ross Perot the largest single shareholder, and a gigantic thorn in the side of then-CEO Roger Smith. Eventually, they paid Ross to go away. And spun off EDS, as well.
But, back to Dell.
The nearby 5-year price chart for Dell, Perot Systems and the S&P500 Index clearly displays the folly of Michael Dell's move. For the past five years, Dell has been on a long, slow decline. My many posts discussing the firm's fall from its prime, and Michael Dell's inability to recover its lost ability to generate consistently superior total returns, provide background on this.
With a loss of 50% of its value over the past half-decade, Dell is headed toward the graveyard of Schumpeterian dynamics. There's just not that much juice left in manufacturing, selling and distributing computers the Dell way.
Compared to Dell, Perot Systems have performed spectacularly well. It's managed to remain even, and even slightly outperform the S&P over the whole period, though not consistently.
For Dell to buy Perot is essentially a bid to diversify into a different business, using spare cash. It's a classic example of the financial theory argument that investors can more cheaply diversify for themselves. At a premium exceeding 50%, that's certainly true in this case!
In fact, the nearly $4B acquisition begs the question of what Dell is doing with some $10B in liquid assets on its balance sheet while its value decays?
The Wall Street Journal opinion piece lauded Dell for diversifying. Personally, I don't see it that way. Instead, Michael Dell, like so many other CEOs, can't let go. He should just sell or merge Dell to create a larger PC manufacturer. Let his shareholders buy a pure systems integrator play, or HP, if that's what they desire.
Michael Dell is using his shareholder's money to continue having a company to run. How he is going to make Perot something it can't be on its own should worry Dell shareholders. Perot could have borrowed money, were its business opportunities sufficiently attractive. If Michael Dell better knows how to run a systems integrator than do the senior management of Perot Systems, Dell could have grown its own unit, for much less money.
Finally, as usually occurs in these situations, Dell seems to be buying the weakest of the breed of remaining systems integrators. The better ones, such as EDS, were already picked off.
There's nothing about this deal that makes sense, except prolonging Michael Dell's personal joyride running a Fortune 500 company.
Much as I suggested for Kodak's shareholders, Dell's should be bringing a lawsuit over this egregious use of their money. Or, better yet, just sell Dell immediately and take the recent loss as a lesson in being more judicious investors when the company is run by the guy it's named for, but the firm is over the hill.
Monday, September 21, 2009
James Grant on An Economic Recovery
This past weekend's Wall Street Journal edition carried a prominent, long piece by respected market observer James Grant.
The Grant piece, which comprises the very long lead in the last section of the edition, is surprisingly positive. Given Grant's recent scepticism, he is unfailingly optimistic about an imminent economic recovery of monumental proportions.
In a way, it's too bad that Grant spent so much ink on something that, to sane, informed business professionals with any economics education, is so obvious. I don't disagree with him that really deep recessions produce really strong recoveries.
The question is when.
On that, I don't see Grant providing compelling evidence, despite his assertion that said recovery will be much sharper and sooner than many pundits now believe and forecast.
Grant omits any evidence as to why recent political changes are not different than prior ones, or, if the same, why. The truth is, today's more powerful government interventions are built upon FDR's original interventions, not instead of them. And the exit of the US from the Great Depression had more to do with rearming for WWII than it did with a magical, sudden change in consumer spending and subsequent employment.
Personally, from my reading of many economists and related pundits, I simply feel that Grant is, in a word, wrong. Too optimistic about the timing of a recovery.
What if one had been similarly optimistic at Carter's election in 1976? One would have been waiting a long time for the Reagan recovery, strong as it ultimately was.
Instead, I found this morning's article by E. S. Browning in the Money & Investing section of the Journal more useful and credible.
Browning is much more convincing, in my opinion, in his/her detailed assessment of the risks of this period of "economic instability."
Absent a major war, it's unclear what consistent, steady demand will arise very soon in the US economy to fuel all the economic recovery currently forecast by Grant and others.
The Grant piece, which comprises the very long lead in the last section of the edition, is surprisingly positive. Given Grant's recent scepticism, he is unfailingly optimistic about an imminent economic recovery of monumental proportions.
In a way, it's too bad that Grant spent so much ink on something that, to sane, informed business professionals with any economics education, is so obvious. I don't disagree with him that really deep recessions produce really strong recoveries.
The question is when.
On that, I don't see Grant providing compelling evidence, despite his assertion that said recovery will be much sharper and sooner than many pundits now believe and forecast.
Grant omits any evidence as to why recent political changes are not different than prior ones, or, if the same, why. The truth is, today's more powerful government interventions are built upon FDR's original interventions, not instead of them. And the exit of the US from the Great Depression had more to do with rearming for WWII than it did with a magical, sudden change in consumer spending and subsequent employment.
Personally, from my reading of many economists and related pundits, I simply feel that Grant is, in a word, wrong. Too optimistic about the timing of a recovery.
What if one had been similarly optimistic at Carter's election in 1976? One would have been waiting a long time for the Reagan recovery, strong as it ultimately was.
Instead, I found this morning's article by E. S. Browning in the Money & Investing section of the Journal more useful and credible.
Browning is much more convincing, in my opinion, in his/her detailed assessment of the risks of this period of "economic instability."
Absent a major war, it's unclear what consistent, steady demand will arise very soon in the US economy to fuel all the economic recovery currently forecast by Grant and others.
Friday, September 18, 2009
About The Kodak-KKR Financing Deal
I read of the Kodak-KKR financing deal yesterday with mixed feelings. It wasn't until today, reading another, more analytical piece in the Wall Street Journal, that I settled on a final opinion of the matter.
It seems to me that Kodak's CEO and senior management are probably guilty of some poor corporate governance behavior.
In retrospect, the Journal's Thursday edition headline, "Kodak Gets Financial Lifesaver from KKR," should have immediately tipped me off. Yet another management team of a publicly-held company enriches lenders at the expense of its own shareholders.
The way the deal is structured, KKR comes out much like Warren Buffett in his GE financing deal. KKR gets a 10% rate on its loan of up to $700MM, warrants that are already in the money, and senior status to all other Kodak debt.
The article, and this morning's analysis, note that KKR has, predictably, feathered its nest on both the upside and downside. They get a hard 10% income stream and the best protection available on the balance sheet. If Kodak miraculously improves its condition, KKR then gets to convert warrants to own up to 20% of the company.
You have to ask, as I did this morning, reading that second piece, out of whose hide do these generous terms come?
Why, the Kodak shareholders', of course. And I didn't notice any changes in management compensation. You know, like tying bonuses or large parts of salaries to Kodak's total return.
No, the management is basically rolling the dice with their owners' money, after having pissed away so much of it over the past five years, as I noted in this recent post.Schumpeterian dynamics, as I noted in that post, have gutted this company's ability to function in a manner that would deliver its shareholders consistently superior total returns.
What does management do? Does it explore avenues to reap gains on sale of assets to those who could more profitably use them? Or at least stem the losses? No.
Instead, they are doubling down with borrowed money. Expensively-borrowed money, at that. Paying 10% in an era of 0% Fed funds.
Am I the only person who wonders why those choosing to remain as shareholders in this hapless has-been aren't suing to block the KKR deal?
As for me, I simply don't own this pig.
Thursday, September 17, 2009
Michael Porter Is Over The Hill
I regretfully sat through too much of Harvard professor Michael Porter's visit on CNBC this morning.
If Porter isn't emeritus yet, he should be. If that.
I have never actually held Porter in very high regard. The 'competitive strategy' books for which he became known in the late 1970s were, in fact, merely rehashed microeconomics, with generous dashes of findings from the Strategic Planning Institute's PIMS database. Friends of mine from that organization related that Porter had spent months over at their shop, due to its historic tie to Harvard Business School, using their then-current and copious business-unit level database.
Now, with time and thinning hair, Porter is introduced as a 'competitive strategy expert.'
On what basis, I still ask? His books provided no new information. To my knowledge, no one ever hired Mike as a VP of competitive strategy, and then announced some heretofore unachieved total returns over time. Or share gains. Profit. Etc.
You get the idea.
This morning, Mike launched into now-typical accusations against and descriptions of the US medical/health insurance sector, with nary a statistic nor fact within sight.
He began by declaring various European countries to have 'superior' health care systems, and ours to be of inferior 'quality.' Then he held forth on the inadequacy of US health care distribution and lack of universal coverage, declaring those to be worth rating US medical care as subpar.
Apparently, I wasn't the only viewer who had misgivings about Mike's rather loose and cavalier manner of evaluating the US health care sector.
About fifteen minutes later, co-anchor Joe Kernen, in response to many emails which had flooded the program in that time period, asked Porter to clarify his earlier comments.
At which point Porter backtracked, suddenly declaring that, for serious illness, US medicine was, and is, in fact, on a par with, if not superior to that of other countries. He then sharpened his criticism to that of 'delivery' and 'coverage.'
Well, that's fair. But he's not known as a medical care delivery and coverage expert. And Mike provided not a shred of comprehensive, non-anecdotal evidence to support any of his statements this morning. And his little intellectual two-step made him look old, doddering and unable to communicate his thoughts. If he even clearly understood them himself, in the first place.
They may as well have had him on to opine about financial regulation or energy policy. Neither of which is he known for having studied, either.
In fact, it was extremely disappointing to see the program's anchors completely avoid asking Mike some questions that would have taxed his supposed expertise.
For example:
-Given your years studying industry structure, Mike, what do you think is the most likely competitive structure of the health care sector, consistent with sustainable profitability and competitive total returns?
-How do you think some of the proposed new regulations will alter what would be, in their absence, an optimal, terminal competitive industry structure in this sector?
-What do you think of current expense and profitability levels in the health care sector, as compared with; other US economic sectors, long run sustainable profit levels, global comparables.
-How would eliminating or relaxing policy mandates, and allowing inter-state health insurance competition, affect competitive structure, profits, total returns, and overall performance in the sector?
-If the government eviscerates profit in this sector, either through regulation, and/or a government-owned competitor, how do you envision that type of 'competition' comparing with competition from relaxing interstate marketing and policy mandates?
I'd have really appreciated hearing Porter's thoughts on those topics. Sadly, nobody thought to have prepared such a list to ask him. What a waste.
The guy has one alleged speciality, competitive structure analysis, and the CNBC co-anchors and staff couldn't even be bothered to tap it in an intelligent fashion while Porter spent about half an hour on the set.
If Porter isn't emeritus yet, he should be. If that.
I have never actually held Porter in very high regard. The 'competitive strategy' books for which he became known in the late 1970s were, in fact, merely rehashed microeconomics, with generous dashes of findings from the Strategic Planning Institute's PIMS database. Friends of mine from that organization related that Porter had spent months over at their shop, due to its historic tie to Harvard Business School, using their then-current and copious business-unit level database.
Now, with time and thinning hair, Porter is introduced as a 'competitive strategy expert.'
On what basis, I still ask? His books provided no new information. To my knowledge, no one ever hired Mike as a VP of competitive strategy, and then announced some heretofore unachieved total returns over time. Or share gains. Profit. Etc.
You get the idea.
This morning, Mike launched into now-typical accusations against and descriptions of the US medical/health insurance sector, with nary a statistic nor fact within sight.
He began by declaring various European countries to have 'superior' health care systems, and ours to be of inferior 'quality.' Then he held forth on the inadequacy of US health care distribution and lack of universal coverage, declaring those to be worth rating US medical care as subpar.
Apparently, I wasn't the only viewer who had misgivings about Mike's rather loose and cavalier manner of evaluating the US health care sector.
About fifteen minutes later, co-anchor Joe Kernen, in response to many emails which had flooded the program in that time period, asked Porter to clarify his earlier comments.
At which point Porter backtracked, suddenly declaring that, for serious illness, US medicine was, and is, in fact, on a par with, if not superior to that of other countries. He then sharpened his criticism to that of 'delivery' and 'coverage.'
Well, that's fair. But he's not known as a medical care delivery and coverage expert. And Mike provided not a shred of comprehensive, non-anecdotal evidence to support any of his statements this morning. And his little intellectual two-step made him look old, doddering and unable to communicate his thoughts. If he even clearly understood them himself, in the first place.
They may as well have had him on to opine about financial regulation or energy policy. Neither of which is he known for having studied, either.
In fact, it was extremely disappointing to see the program's anchors completely avoid asking Mike some questions that would have taxed his supposed expertise.
For example:
-Given your years studying industry structure, Mike, what do you think is the most likely competitive structure of the health care sector, consistent with sustainable profitability and competitive total returns?
-How do you think some of the proposed new regulations will alter what would be, in their absence, an optimal, terminal competitive industry structure in this sector?
-What do you think of current expense and profitability levels in the health care sector, as compared with; other US economic sectors, long run sustainable profit levels, global comparables.
-How would eliminating or relaxing policy mandates, and allowing inter-state health insurance competition, affect competitive structure, profits, total returns, and overall performance in the sector?
-If the government eviscerates profit in this sector, either through regulation, and/or a government-owned competitor, how do you envision that type of 'competition' comparing with competition from relaxing interstate marketing and policy mandates?
I'd have really appreciated hearing Porter's thoughts on those topics. Sadly, nobody thought to have prepared such a list to ask him. What a waste.
The guy has one alleged speciality, competitive structure analysis, and the CNBC co-anchors and staff couldn't even be bothered to tap it in an intelligent fashion while Porter spent about half an hour on the set.
Wednesday, September 16, 2009
Two Contrasting Views of The Impact of Lehman's Failure
Today's Wall Street Journal presented two starkly differing anniversary reviews of the failure of Lehman Brothers.
Two finance professors from the University of Chicago, John Cochrane and Luigi Zingales, argued, with hard, credible quantitative evidence, that it wasn't Lehman's demise, but Hank Paulson's and Ben Bernanke's panicked testimony to Congress a few days later, that caused financial markets to begin to fail, too.
On the other side of the argument, with little but hearsay and a few top-line numbers sizing the mutual fund market, is the Journal's own financial columnist, James B. Stewart. Augmenting Stewart's piece in the paper was an afternoon appearance on CNBC, wherein he went beyond his Journal article, contending that Lehman's failure was a financial system near-death event, and that no firm like Lehman should, or could, now, ever be safely allowed to fail.
Whom to believe?
Well, first, let's review the academics' piece. Cochrane and Zingales present a graph showing clearly that shortly after Lehman's bankruptcy, spreads of instruments like Libor-OIS rose only 18 points, whereas it rose more than three times that within two days after the Treasury Secretary and Fed Chairman sounded the general financial alarm and demanded that the TARP legislation be passed.
Since the TARP was never actually used as described, it wasn't even the source of any significant calming of the financial markets.
As to the importance of the Lehman failure, or its rescue, they wrote,
"Would a Lehman bailout have averted a panic? The news would still be that Lehman failed, and markets knew bailouts would not last forever. After all, the Bear Stearns rescue in February had just postponed worse trouble."
Cochrane and Zingales go on to contend that the real lesson in Lehman's bankruptcy "cannot be that the government must always bail out every large financial institution."
They cite the 1984 Continental Bank rescue, and others that followed, including LTCM, to demonstrate that none of these rescues have positively or constructively affected financial firms' appetite for risk. They write, near the end of their piece,
"The blame-it-on Lehman story leads to a dangerous complacency. If we can persuade ourselves that the fault was just one policy mistake, forced on the feds by silly legal restrictions and not enough bailout power, everything can go back the cozy way it was before.
This is a convenient story for large banks that dominate the lobbying and communication effort. And it absolves the Fed and Treasury of facing up to their long string of policy mistakes."
The two Chicago professors conclude that, while they don't claim to have the perfect answer, they would trust markets before trusting an overly-powerful government which has serially increased the stakes of each financial crisis which it has spawned through 25 years of bailouts.
In contrast to Cochrane's and Zingales' use of actual data to demonstrate that Lehman's failure did not panic markets, Journal writer James Stewart continues his usual misunderstanding of financial markets by claiming that Lehman's debt obligations, stuffed into so many mutual funds, required the government to guarantee those assets. Thus, by Stewart's reasoning, allowing Lehman to fail was a huge mistake which necessitated the assumption by the government of $4 trillion of mutual fund value.
On CNBC this afternoon, however, Stewart babbled on incessantly about how necessary it was that Lehman had been saved. That no similarly-sized financial firm can ever be allowed to fail again, because, although markets would have eventually corrected, Stewart solemnly judged that such correction would have taken us 'back to the iron age.'
Really?
That's precisely what the two professors convincingly demonstrate would not have happened. And did not happen.
The fact is that mutual fund investors take risks for extra return. Holding those assets meant investors chose to bet on the managements of those funds.
Have those funds now been cleansed of inept managers? No. The federal safety net saw to that. Just as Ken Lewis and Vik Pandit still run BofA and Citigroup, their incompetence notwithstanding.
I don't know if anyone else happened to notice this bizarre coincidence in today's Journal. It makes for an interesting comparison between savvy, analytical observers of last year's financial crisis, and a fear-mongering, large-government and -bank supporting financial beat flack with little in the way of evidence to sustain his contentions.
Two finance professors from the University of Chicago, John Cochrane and Luigi Zingales, argued, with hard, credible quantitative evidence, that it wasn't Lehman's demise, but Hank Paulson's and Ben Bernanke's panicked testimony to Congress a few days later, that caused financial markets to begin to fail, too.
On the other side of the argument, with little but hearsay and a few top-line numbers sizing the mutual fund market, is the Journal's own financial columnist, James B. Stewart. Augmenting Stewart's piece in the paper was an afternoon appearance on CNBC, wherein he went beyond his Journal article, contending that Lehman's failure was a financial system near-death event, and that no firm like Lehman should, or could, now, ever be safely allowed to fail.
Whom to believe?
Well, first, let's review the academics' piece. Cochrane and Zingales present a graph showing clearly that shortly after Lehman's bankruptcy, spreads of instruments like Libor-OIS rose only 18 points, whereas it rose more than three times that within two days after the Treasury Secretary and Fed Chairman sounded the general financial alarm and demanded that the TARP legislation be passed.
Since the TARP was never actually used as described, it wasn't even the source of any significant calming of the financial markets.
As to the importance of the Lehman failure, or its rescue, they wrote,
"Would a Lehman bailout have averted a panic? The news would still be that Lehman failed, and markets knew bailouts would not last forever. After all, the Bear Stearns rescue in February had just postponed worse trouble."
Cochrane and Zingales go on to contend that the real lesson in Lehman's bankruptcy "cannot be that the government must always bail out every large financial institution."
They cite the 1984 Continental Bank rescue, and others that followed, including LTCM, to demonstrate that none of these rescues have positively or constructively affected financial firms' appetite for risk. They write, near the end of their piece,
"The blame-it-on Lehman story leads to a dangerous complacency. If we can persuade ourselves that the fault was just one policy mistake, forced on the feds by silly legal restrictions and not enough bailout power, everything can go back the cozy way it was before.
This is a convenient story for large banks that dominate the lobbying and communication effort. And it absolves the Fed and Treasury of facing up to their long string of policy mistakes."
The two Chicago professors conclude that, while they don't claim to have the perfect answer, they would trust markets before trusting an overly-powerful government which has serially increased the stakes of each financial crisis which it has spawned through 25 years of bailouts.
In contrast to Cochrane's and Zingales' use of actual data to demonstrate that Lehman's failure did not panic markets, Journal writer James Stewart continues his usual misunderstanding of financial markets by claiming that Lehman's debt obligations, stuffed into so many mutual funds, required the government to guarantee those assets. Thus, by Stewart's reasoning, allowing Lehman to fail was a huge mistake which necessitated the assumption by the government of $4 trillion of mutual fund value.
On CNBC this afternoon, however, Stewart babbled on incessantly about how necessary it was that Lehman had been saved. That no similarly-sized financial firm can ever be allowed to fail again, because, although markets would have eventually corrected, Stewart solemnly judged that such correction would have taken us 'back to the iron age.'
Really?
That's precisely what the two professors convincingly demonstrate would not have happened. And did not happen.
The fact is that mutual fund investors take risks for extra return. Holding those assets meant investors chose to bet on the managements of those funds.
Have those funds now been cleansed of inept managers? No. The federal safety net saw to that. Just as Ken Lewis and Vik Pandit still run BofA and Citigroup, their incompetence notwithstanding.
I don't know if anyone else happened to notice this bizarre coincidence in today's Journal. It makes for an interesting comparison between savvy, analytical observers of last year's financial crisis, and a fear-mongering, large-government and -bank supporting financial beat flack with little in the way of evidence to sustain his contentions.
Tuesday, September 15, 2009
BofA, Merrill Lynch, Ken Lewis, Bernanke, Paulson et. al.- Redux
The big news out of always-litigious New York state is that gubernatorial hopeful AG Andrew Cuomo is expected to file charges against BofA CEO Ken Lewis and perhaps his CFO, Joe Price, over the tortured purchase by the ailing bank of Merrill Lynch late last year.
I wrote these two posts, here and here, earlier this year, regarding the conflicting stories emanating from former Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke, and BofA CEO Lewis.
As I reread the first post, I found myself ironically delighted that a suit may actually be brought over this issue. Reviewing my impressions of Lewis' testimony before Congress, as well as recalling Paulson's and Bernanke's later remarks, also in on Capitol Hill, I'm looking forward to seeing this whole mess hashed out in a courtroom.
Serendipitously, Judge Jed Rakoff rejected the SEC's settlement in the case, pointing out that it is patently unfair to require injured shareholders of BofA to pay a fine for said injury.
Somehow, it seems appropriate that this entire affair is barrelling toward a more formal legal event.
The nearby 2-year price chart for BofA, Chase, Wells Fargo, Citigroup and the S&P500 Index shows that the entire sector hasn't done any favors for investors lately.As you'd expect, the worst of this sorry bunch are Citi and BofA.
BofA is off more than 50% in the past two years, which hardly constitutes effective stewardship of shareholder assets. It's too simplistic to associate all of the loss in shareholder value in late 2008 with BofA's agreement to acquire the nearly-failed brokerage firm, Merrill Lynch. Still, the bank's equity price dropped an additional 20 or so percentage points through early 2009.
Having heard Lewis, Paulson and Bernanke tiptoe around the issue of whether, and how strongly the two federal officials intimidated and coerced the bank CEO, I, for one, welcome seeing them retell their stories under oath in a courtroom.
I'm not a lawyer, so I can't cite specific laws of which any of the three may be guilty. That said, as I alluded to in my prior posts, I think it's just possible that Lewis could be found guilty of violating Sarbane-Oxley and some other SEC rules. Bernanke and Paulson could potentially be charged with perjury and conspiracy to lead Lewis to violate federal laws.
While reading Amity Schlaes' "The Forgotten Man," it has occurred to me that, just as FDR's NRA was brought low by a seemingly-minor lawsuit in New York court, so, too, could recent, bipartisan federal overreaching into the affairs of financial service companies be brought to a halt by some convictions in the BofA-Merrill matter.
Monday, September 14, 2009
Lehman's Dick Fuld's State of Denial
This past weekend's Wall Street Journal carried a front-page article regarding the recent activity of now-defunct Lehman Brothers' last CEO, Richard Fuld.
It's a lengthy article, carrying over from the middle of the front page to half of an inside page. There are a host of details concerning how Fuld is, appropriately, still treated as a pariah by most senior executives in the financial services sector.
Despite that, Fuld has already filed the paperwork to start his new shell of a firm, Matrix Advisors LLC.
One thing the Journal article stresses through numerous anecdotes is that nobody is paying Fuld for anything. He has "given hours of free advice to a firm run by a former Lehman employee," the piece states, and then goes on to remark similarly on other Fuld efforts to stay busy.
Somewhere among the details of his helping to wind down the smoldering ruins of his old firm, this passage appears,
"Yet in these same months, Mr. Fuld would walk down the hall and park himself in Mr. Marsal's office, sometimes asking his new boss: "Is there anything I could have done differently?" "
Gee, let me think.
Take less risk? Try not to intimidate anyone inside Lehman who disagreed with you?
Maybe wake up by late 2007, watch the commercial banks booking hundreds of millions of dollars in mortgage securities write-offs, and figure that debt markets were going to be getting chary? Maybe lengthen your own firm's average funding duration and prepare to shrink your balance sheet, so you would not get hit with an age-old risk of brokerages, which is having your funding commercial banks pull your credit lines?
You see, when the balance sheets of banks that fund your short-term credit needs, out of their aptly-named broker-loan divisions, begin to shrink like balloon suddenly thrust into a deep-freeze, you can pretty much guess that you, as a brokerage and/or investment bank, will be next in line for credit access troubles.
But, I guess, not if you're Dick Fuld.
No, Dick just merrily played Russian roulette with the regulators, lenders, and investors. Never one to look on the gloomy side, or prudently plan for less-than-desirable scenarios, Fuld rammed his firm's operating throttles to the wall as 2008 moved into summer.
In a telling, candid interview nearly exactly one year ago today, described in this post, former Salomon Brothers' CEO John Gutfreund addressed Fuld's actions at Lehman.
I wrote of Gutfreund's remarks,
"Gutfreund was asked how Lehman's demise came about, and he said something to the effect,
"By the over-optimistic actions of the firm's CEO and his senior managers."
Pressed further, he allowed as how the firm was unrealistic, in this era and environment, to believe it could remain independent while grappling with its writedown problems. Gutfreund never used Fuld's name, but pointed out that Lehman had had months in which to gracefully sell itself before coming to Chapter 11."
Maybe Dick Fuld should have asked Gutfreund, rather than a rather innocuous financial rag merchant, how he managed to run Lehman into the ground, and what he could have "done differently."
The Journal article also replays Fuld's now-famous comment before a House committee that he will never understand, until he is buried, why no government rescue was organized to save Lehman.
I find, and have always found, this to be the epitome of chutzpah on Fuld's part. Ever the swaggering, intimidating brute of an investment bank CEO, cutting an image of a swashbuckling, fearless leader, he now asks us to sympathize with his expectation that, having ruined Lehman, someone should have saved him, and his investors, from his own bad judgment.
I'm a bit surprised the Journal even wasted half a page on this treacle. Then, again, as a friend and I observed over the weekend, the paper has morphed heavily toward tabloid business journalism since Murdoch's purchase.
Human interest stories of fallen Wall Street titans probably sells a lot of newspaper subscriptions.
It's a lengthy article, carrying over from the middle of the front page to half of an inside page. There are a host of details concerning how Fuld is, appropriately, still treated as a pariah by most senior executives in the financial services sector.
Despite that, Fuld has already filed the paperwork to start his new shell of a firm, Matrix Advisors LLC.
One thing the Journal article stresses through numerous anecdotes is that nobody is paying Fuld for anything. He has "given hours of free advice to a firm run by a former Lehman employee," the piece states, and then goes on to remark similarly on other Fuld efforts to stay busy.
Somewhere among the details of his helping to wind down the smoldering ruins of his old firm, this passage appears,
"Yet in these same months, Mr. Fuld would walk down the hall and park himself in Mr. Marsal's office, sometimes asking his new boss: "Is there anything I could have done differently?" "
Gee, let me think.
Take less risk? Try not to intimidate anyone inside Lehman who disagreed with you?
Maybe wake up by late 2007, watch the commercial banks booking hundreds of millions of dollars in mortgage securities write-offs, and figure that debt markets were going to be getting chary? Maybe lengthen your own firm's average funding duration and prepare to shrink your balance sheet, so you would not get hit with an age-old risk of brokerages, which is having your funding commercial banks pull your credit lines?
You see, when the balance sheets of banks that fund your short-term credit needs, out of their aptly-named broker-loan divisions, begin to shrink like balloon suddenly thrust into a deep-freeze, you can pretty much guess that you, as a brokerage and/or investment bank, will be next in line for credit access troubles.
But, I guess, not if you're Dick Fuld.
No, Dick just merrily played Russian roulette with the regulators, lenders, and investors. Never one to look on the gloomy side, or prudently plan for less-than-desirable scenarios, Fuld rammed his firm's operating throttles to the wall as 2008 moved into summer.
In a telling, candid interview nearly exactly one year ago today, described in this post, former Salomon Brothers' CEO John Gutfreund addressed Fuld's actions at Lehman.
I wrote of Gutfreund's remarks,
"Gutfreund was asked how Lehman's demise came about, and he said something to the effect,
"By the over-optimistic actions of the firm's CEO and his senior managers."
Pressed further, he allowed as how the firm was unrealistic, in this era and environment, to believe it could remain independent while grappling with its writedown problems. Gutfreund never used Fuld's name, but pointed out that Lehman had had months in which to gracefully sell itself before coming to Chapter 11."
Maybe Dick Fuld should have asked Gutfreund, rather than a rather innocuous financial rag merchant, how he managed to run Lehman into the ground, and what he could have "done differently."
The Journal article also replays Fuld's now-famous comment before a House committee that he will never understand, until he is buried, why no government rescue was organized to save Lehman.
I find, and have always found, this to be the epitome of chutzpah on Fuld's part. Ever the swaggering, intimidating brute of an investment bank CEO, cutting an image of a swashbuckling, fearless leader, he now asks us to sympathize with his expectation that, having ruined Lehman, someone should have saved him, and his investors, from his own bad judgment.
I'm a bit surprised the Journal even wasted half a page on this treacle. Then, again, as a friend and I observed over the weekend, the paper has morphed heavily toward tabloid business journalism since Murdoch's purchase.
Human interest stories of fallen Wall Street titans probably sells a lot of newspaper subscriptions.
Friday, September 11, 2009
Financial Regulatory Reform One Year Later
One year on from the month of the most severe equity market collapse in twenty years, financial regulatory reform seems to have hit a brick wall.
I wrote quite a few posts concerning financial regulatory reform over the past year. This one, among them, stands out as being concise and pretty exhaustive in its prescriptions. Of course, that post doesn't deal with federal government-initiated problems such as Fannie Mae and Freddie Mac being directed by Congress to securitize too-thinly capitalized, unseasoned adjustable rate mortgages. But, rereading it a year later, I'm still okay with it as a useful set of regulatory solutions.
The recent action has moved from industry competitors to the regulators. With the new administration, much hot air has been spewed arguing for, or against, empowering the Fed to be the single, omnipotent regulator.
Isn't it odd that none of these financial sector regulations have managed to be enacted in the past year? About all we have is income caps on the CEOs of bailed-out banks. Those which have repaid the forced 'loans,' such as Goldman Sachs, are back to paying large bonuses again.
But what of the development of exchanges for derivatives, so that a Bear Stearns of Lehman bankruptcy would no longer imperil long daisy chains of derivatives executions?
What of the packaging of questionable debt into collateralized obligations?
What of the GSE's pumping too-green, too-leveraged mortgage loans into their own securitized issuances?
How about the fact that the FDIC, Fed and OCC all missed what appear, in retrospect, to have been obvious inadequate mortgage loan documentation and/or improper lending to unqualified borrowers?
None of this has been resolved.
It's very curious and disturbing. Some of these regulatory steps would be very helpful in lowering the risk of a rerun of the mortgage lending bubble that did so much financial damage to the US financial sector and economy.
Why has nothing been done in the past year?
I wrote quite a few posts concerning financial regulatory reform over the past year. This one, among them, stands out as being concise and pretty exhaustive in its prescriptions. Of course, that post doesn't deal with federal government-initiated problems such as Fannie Mae and Freddie Mac being directed by Congress to securitize too-thinly capitalized, unseasoned adjustable rate mortgages. But, rereading it a year later, I'm still okay with it as a useful set of regulatory solutions.
The recent action has moved from industry competitors to the regulators. With the new administration, much hot air has been spewed arguing for, or against, empowering the Fed to be the single, omnipotent regulator.
Isn't it odd that none of these financial sector regulations have managed to be enacted in the past year? About all we have is income caps on the CEOs of bailed-out banks. Those which have repaid the forced 'loans,' such as Goldman Sachs, are back to paying large bonuses again.
But what of the development of exchanges for derivatives, so that a Bear Stearns of Lehman bankruptcy would no longer imperil long daisy chains of derivatives executions?
What of the packaging of questionable debt into collateralized obligations?
What of the GSE's pumping too-green, too-leveraged mortgage loans into their own securitized issuances?
How about the fact that the FDIC, Fed and OCC all missed what appear, in retrospect, to have been obvious inadequate mortgage loan documentation and/or improper lending to unqualified borrowers?
None of this has been resolved.
It's very curious and disturbing. Some of these regulatory steps would be very helpful in lowering the risk of a rerun of the mortgage lending bubble that did so much financial damage to the US financial sector and economy.
Why has nothing been done in the past year?
Thursday, September 10, 2009
Evidence On Government Spending & Recession Severity
Back on August 21st, the Wall Street Journal published an excellent economic editorial by Alan Reynolds entitled, "Big Government, Big Recession."
As is the case with quite a few of our less partisan economists, Reynolds directly contradicts liberal apologist Paul Krugman. He begins by providing the impetus for his research and resulting editorial,
‘So it seems that we aren’t going to have a second Great Depression after all,” wrote New York Times columnist Paul Krugman last week. “What saved us? The answer, basically, is Big Government. . . . [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.”
In rebuttal, Reynolds writes,
"This is certainly a novel theory of the business cycle. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts. It is not enough to assert the U.S. economy would have experienced a "second Great Depression" were it not for the Obama stimulus plan.
Proponents of Big Government can't say we avoided the next Great Depression due to hypothetical stimulus money that is mostly unspent. So they argue it's more important that the federal government merely continued spending and didn't "slash" spending as in the early 1930s. But the federal government didn't slash spending in the early '30s. Federal spending rose by 6.2% in 1930, 7.7% in 1931 and 30.2% in 1932. Since prices were falling, real increases in federal spending were huge during the Hoover years.
President Obama clearly believes Big Government is the antidote to this and perhaps all recessions. At his first news conference in February, the president said, "The federal government is the only entity left with the resources to jolt our economy back to life." Yet that raises a key question: If the U.S. economy could not recover without a big "jolt" of deficit spending, then how did the economy recover from recessions in the distant past, when the federal government was very small?
A 1999 study in The Journal of Economic Perspectives by Christina Romer (now head of the Council of Economic Advisers) found that "real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe." Ms. Romer also noted that "recessions have not become noticeably shorter" in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer—11.3 months. The longest recession from 1887 to 1929 lasted 16 months. But there have been three recessions since 1973 that lasted at least that long."
That's a pretty interesting nugget about Christine Romer, isn't it? Her own academic work concludes that the administration's so-called stimulus plan won't actually alleviate the current recession in any meaningful manner.
But Reynolds goes further,
"In the late 19th and early 20th centuries, nobody thought the government could or should do anything except stand aside and let the mistakes of business and banking be fixed by those who made them. There were no Keynesian plans to borrow and spend our way out of recessions. And bankers had no Federal Reserve to bail them out until 1913. Yet recessions after the Fed was created soon turned out to be much deeper than before (1920-21, 1929-33, 1937-38) and often more persistent.
It's clear that U.S. history does not support the theory that Big Government means shorter and milder recessions. In reality, recessions always ended without government prodding, long before anyone heard of Keynes and long before the Fed existed. What's more, recessions ended more quickly before the New Deal's push for Big Government than they have in the past three decades. The economy's natural recuperative powers before the 1930s proved superior to recent tinkering by Big Government economists, politicians and central bankers."
It's hard to argue with Reynolds, since he bases his conclusions on facts. But Reynolds, again, goes further, looking abroad,
"The chart nearby lists 13 major economies by the size of government spending relative to GDP using OECD figures for 2007 (the U.S. is well above 40% by 2009). Europe's big spenders are at the top, the U.S. and Japan are in the middle, and fiscally frugal countries like China and India are at the bottom.
The last column shows the change in real GDP over the most recent four quarters—ending in the second quarter for the U.S., U.K., Germany, Japan, France, Italy, Sweden and China, but the first for the rest. Four of the five deepest contractions happened in countries with the biggest governments—Sweden, Italy, Germany and the U.K. Japan's government spending in 2007 was about like ours, but Japan's tax rates are far more punitive and the economy has suffered endless "fiscal stimulus" packages. China's central government spent 22% of GDP, but 30%-plus with local government included.
To believe Big Government explains why this extremely long recession was not even longer, we need to find some connection between the size of government and the depth and duration of recessions. There is no such connection in U.S. history, or in recent cyclical experience of other countries."
Again, it's difficult to refute Reynolds' rebuttal of Krugman's emotional contention that only Big Government has saved us this year.
Reynolds then concludes his editorial,
"On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S.
In short, bigger government appears to produce only bigger and longer recessions."
Why do you suppose this is true? What is it about large-scale government intervention that causes recessions to be longer and deeper?
I would guess it is two factors.
The first is the distorting effect of government, which is to say, political meddling with price, demand and supply signals in an otherwise-free market for goods and services. Reading Amity Schlaes' excellent history of FDR's economic failure, "The Forgotten Man," brings home how destabilizing and distorting massive government economic intervention is. Investors hold back, worried about the shifting rules governing the context of their investments. Which industries will government punish or radically regulate next?
The second is the nature of recession-based government legislation. Typically, it involves two things- printing or borrowing large amounts of money on the citizens' behalf, and creating or enriching transfer payment schemes.
The first action leads to higher taxes, crowding-out of private investment, and higher interest rates down the road. None of which are necessarily healthy for the private sector, or a country, as a whole.
The second action slowly, inexorably overlays a drag on economic activity, as new claims on behalf of non-producers are made and collected by big government. This saps savings in order to transfer wealth to those who consume without creating value in the economy. This additional marginal tax, in the form of items like FICA, predictably depress marginal economic activity across many income levels.
These transfer payment schemes are rarely reduced or eliminated, so, over time, you probably have an accretion of this economic drag on productive private sector activity.
Seeing as how our federal government, in just a few months of this year, actually doubled US indebtedness from the time of our country's founding to December of last year, it's hard to see how this biggest of all governments can possibly be consistent with an imminent and robust economy recovery in the US.
As is the case with quite a few of our less partisan economists, Reynolds directly contradicts liberal apologist Paul Krugman. He begins by providing the impetus for his research and resulting editorial,
‘So it seems that we aren’t going to have a second Great Depression after all,” wrote New York Times columnist Paul Krugman last week. “What saved us? The answer, basically, is Big Government. . . . [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.”
In rebuttal, Reynolds writes,
"This is certainly a novel theory of the business cycle. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts. It is not enough to assert the U.S. economy would have experienced a "second Great Depression" were it not for the Obama stimulus plan.
Proponents of Big Government can't say we avoided the next Great Depression due to hypothetical stimulus money that is mostly unspent. So they argue it's more important that the federal government merely continued spending and didn't "slash" spending as in the early 1930s. But the federal government didn't slash spending in the early '30s. Federal spending rose by 6.2% in 1930, 7.7% in 1931 and 30.2% in 1932. Since prices were falling, real increases in federal spending were huge during the Hoover years.
President Obama clearly believes Big Government is the antidote to this and perhaps all recessions. At his first news conference in February, the president said, "The federal government is the only entity left with the resources to jolt our economy back to life." Yet that raises a key question: If the U.S. economy could not recover without a big "jolt" of deficit spending, then how did the economy recover from recessions in the distant past, when the federal government was very small?
A 1999 study in The Journal of Economic Perspectives by Christina Romer (now head of the Council of Economic Advisers) found that "real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe." Ms. Romer also noted that "recessions have not become noticeably shorter" in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer—11.3 months. The longest recession from 1887 to 1929 lasted 16 months. But there have been three recessions since 1973 that lasted at least that long."
That's a pretty interesting nugget about Christine Romer, isn't it? Her own academic work concludes that the administration's so-called stimulus plan won't actually alleviate the current recession in any meaningful manner.
But Reynolds goes further,
"In the late 19th and early 20th centuries, nobody thought the government could or should do anything except stand aside and let the mistakes of business and banking be fixed by those who made them. There were no Keynesian plans to borrow and spend our way out of recessions. And bankers had no Federal Reserve to bail them out until 1913. Yet recessions after the Fed was created soon turned out to be much deeper than before (1920-21, 1929-33, 1937-38) and often more persistent.
It's clear that U.S. history does not support the theory that Big Government means shorter and milder recessions. In reality, recessions always ended without government prodding, long before anyone heard of Keynes and long before the Fed existed. What's more, recessions ended more quickly before the New Deal's push for Big Government than they have in the past three decades. The economy's natural recuperative powers before the 1930s proved superior to recent tinkering by Big Government economists, politicians and central bankers."
It's hard to argue with Reynolds, since he bases his conclusions on facts. But Reynolds, again, goes further, looking abroad,
"The chart nearby lists 13 major economies by the size of government spending relative to GDP using OECD figures for 2007 (the U.S. is well above 40% by 2009). Europe's big spenders are at the top, the U.S. and Japan are in the middle, and fiscally frugal countries like China and India are at the bottom.
The last column shows the change in real GDP over the most recent four quarters—ending in the second quarter for the U.S., U.K., Germany, Japan, France, Italy, Sweden and China, but the first for the rest. Four of the five deepest contractions happened in countries with the biggest governments—Sweden, Italy, Germany and the U.K. Japan's government spending in 2007 was about like ours, but Japan's tax rates are far more punitive and the economy has suffered endless "fiscal stimulus" packages. China's central government spent 22% of GDP, but 30%-plus with local government included.
To believe Big Government explains why this extremely long recession was not even longer, we need to find some connection between the size of government and the depth and duration of recessions. There is no such connection in U.S. history, or in recent cyclical experience of other countries."
Again, it's difficult to refute Reynolds' rebuttal of Krugman's emotional contention that only Big Government has saved us this year.
Reynolds then concludes his editorial,
"On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S.
In short, bigger government appears to produce only bigger and longer recessions."
Why do you suppose this is true? What is it about large-scale government intervention that causes recessions to be longer and deeper?
I would guess it is two factors.
The first is the distorting effect of government, which is to say, political meddling with price, demand and supply signals in an otherwise-free market for goods and services. Reading Amity Schlaes' excellent history of FDR's economic failure, "The Forgotten Man," brings home how destabilizing and distorting massive government economic intervention is. Investors hold back, worried about the shifting rules governing the context of their investments. Which industries will government punish or radically regulate next?
The second is the nature of recession-based government legislation. Typically, it involves two things- printing or borrowing large amounts of money on the citizens' behalf, and creating or enriching transfer payment schemes.
The first action leads to higher taxes, crowding-out of private investment, and higher interest rates down the road. None of which are necessarily healthy for the private sector, or a country, as a whole.
The second action slowly, inexorably overlays a drag on economic activity, as new claims on behalf of non-producers are made and collected by big government. This saps savings in order to transfer wealth to those who consume without creating value in the economy. This additional marginal tax, in the form of items like FICA, predictably depress marginal economic activity across many income levels.
These transfer payment schemes are rarely reduced or eliminated, so, over time, you probably have an accretion of this economic drag on productive private sector activity.
Seeing as how our federal government, in just a few months of this year, actually doubled US indebtedness from the time of our country's founding to December of last year, it's hard to see how this biggest of all governments can possibly be consistent with an imminent and robust economy recovery in the US.
Wednesday, September 09, 2009
The Evolution of the US Economy 1980-2010
Back in late July, I wrote this post contrasting the economic punditry and outlooks of several well-known observers, i.e., Alan Blinder, Dick Hoey and Mortimer Zuckerman. My own conclusion was expressed as follows,
"Who's right?
Personally, I'd put my money on Zuckerman. Leaving aside that Dick Hoey was a fixed income manager back in the day, and his BONY/Mellon/Dreyfus bio doesn't exactly laud him as an economic Nobel Laureate, I don't think Hoey is sufficiently observant of the real differences in the effects of the recent recession on the US labor force from those of recessions prior to 1992."
I continued with this observation,
"That so-called 'jobless recovery' may well have marked a turning point for the US economy which has not yet been captured in various models and adequately observed by pundits-cum-economists like Hoey. Or even Alan Blinder.
Prior to the 1991-92 recession and recovery, you are looking back to 1982-83, the early Reagan years, now very nearly thirty years ago. For perspective, was the 1960 economy different from that of 1930? Very much so. And the 1980 economy was so radically different from that of 1950, thanks to electronics and technological advances in communications as to make forecasting the former with models of the latter seem laughable.
I suspect that's what is happening now. Those analysts and economists harking back to the early 1980s and using conventional models with estimates of consumer spending and labor growth have missed some important transformations in the US economy of 2009."
These passages were what I was referring to in this post of last Friday, when I wrote,
"I personally believe, as I've written in a prior post, that many economists are using inappropriate models and assumptions from over 25 years ago. Models and assumptions which are tied to a different type of economy and workforce than we now have. As such, I don't think they are correctly accounting for today's business IT allowing for previously-unimagined control of overheads and inventories.
If economic recovery is based upon expectations of inventory rebuilds, I just think that's overly optimistic for the next few quarters."
Apparently I thought about this topic a great deal more than wrote about it. Thus, this post.
Though not an economist, as a trained marketing professional, I have been involved with quantitative behavioral modeling and analysis for decades. And, thanks to my business degrees, I've had more economics than most business students, in addition to which, I continually stay abreast of economic thought and opinion in the major business media.
Currently, I believe that what macroeconomic modelling still exists, after the approach lost so much credibility in its early applications forty years ago, remains out of step with our modern US economy.
For starters, the SIC codes were, and are, the underpinnings of most sector-based forecasting. These are now hopelessly outdated.
Employment statistics are warped, thanks to the rise of subchapter-S and LLC entities. This has also served to obscure incomes, as business income for many entrepreneurs now appears on 1040s, rather than corporate returns.
Finally, the entire nature of business operations, being now so heavily dependent upon, and benefiting from computer-based management tools, has changed from 30 years ago.
As an observer who understands economics and business, I find myself wondering just how we can accept economists' references to the jobless recovery from the 1991-92 recession, without explanations as to how this phenomenon has been incorporated into current models.
It's important to know whether economists consider the 1991-92 recession an aberration, or a new paradigm.
A reader commented on my post of last Friday, taking a shorter term, more narrow view of individual recent IT spending by companies. What I meant by my comments in that post was that business has been improving operational information availability for nearly 30 years, with the arrival of the personal computer in 1980. When I was with Andersen Consulting in the mid-1990s, client/server projects were booming, and a sort of internal internet, LotusNotes, was being applied at individual firms.
It's safe to say that business communications and information movement has changed more dramatically and functionally from 1980-2010 than from 1930-1960, or from 1960-1990.
Specifically, the recent period has smoothed supply chain management between companies, so that the holy grail of goods-producing companies, inventory management that is as synchronous with retail sales as possible, has come a lot closer to reality.
Now add to this the rise of outsourcing, both onshore and offshore, and you have corporate employment becoming less sensitive to production volumes. Employment at suppliers becomes more volatile, but those jobs tend to be lower-compensated than the ones they replaced at the larger corporations.
Now add to this mix the public consuming business and markets information via free cable networks, such as CNBC or CNN. Today's consumer can view the reaction of institutional investment managers to some obscure report, previously unknown to consumers, such as durable goods orders, or employment reports, in real time.
Thus, consumer spending and confidence are able to be affected nearly immediately by financial market reactions, which affect the wealth of consumers via asset prices in their various investment accounts.
We probably have a tighter-, faster-linked series of economic phenomena which affect each other as inputs and outputs of information, goods and money flow, than ever before. Certainly far more than thirty years ago.
Is it any wonder that you see employment levels less responsive to economic recoveries in recent decades? Or spending and saving rates affected by generally-available unemployment information?
It is simply stunning to me to read yesterday's Wall Street Journal piece wherein a number of financial pundits were opining on how fast and robust the deep "V-shaped" recovery is going to be.
How do they account for the lack of re-employment of so many recently-unemployed? The defaulting and delinquent home loans? The coming commercial mortgage loan delinquencies and defaults?
Yes, any, or even several of these, in moderation, can be accommodated by a vibrant, recovering economy. But this last recession was, is, different. The scale and breadth of its effects have left conventional financing sources weak and unable to profitably lend at current rates.
There is so much about this recent economic recession, in concert with a financial collapse, that is different from anything the US has experienced in the past 30 years that it's simply difficult for me to trust pundits who rely on conventional econometric models to forecast that the 'usual' recovery has begun, and will surprise us all.
"Who's right?
Personally, I'd put my money on Zuckerman. Leaving aside that Dick Hoey was a fixed income manager back in the day, and his BONY/Mellon/Dreyfus bio doesn't exactly laud him as an economic Nobel Laureate, I don't think Hoey is sufficiently observant of the real differences in the effects of the recent recession on the US labor force from those of recessions prior to 1992."
I continued with this observation,
"That so-called 'jobless recovery' may well have marked a turning point for the US economy which has not yet been captured in various models and adequately observed by pundits-cum-economists like Hoey. Or even Alan Blinder.
Prior to the 1991-92 recession and recovery, you are looking back to 1982-83, the early Reagan years, now very nearly thirty years ago. For perspective, was the 1960 economy different from that of 1930? Very much so. And the 1980 economy was so radically different from that of 1950, thanks to electronics and technological advances in communications as to make forecasting the former with models of the latter seem laughable.
I suspect that's what is happening now. Those analysts and economists harking back to the early 1980s and using conventional models with estimates of consumer spending and labor growth have missed some important transformations in the US economy of 2009."
These passages were what I was referring to in this post of last Friday, when I wrote,
"I personally believe, as I've written in a prior post, that many economists are using inappropriate models and assumptions from over 25 years ago. Models and assumptions which are tied to a different type of economy and workforce than we now have. As such, I don't think they are correctly accounting for today's business IT allowing for previously-unimagined control of overheads and inventories.
If economic recovery is based upon expectations of inventory rebuilds, I just think that's overly optimistic for the next few quarters."
Apparently I thought about this topic a great deal more than wrote about it. Thus, this post.
Though not an economist, as a trained marketing professional, I have been involved with quantitative behavioral modeling and analysis for decades. And, thanks to my business degrees, I've had more economics than most business students, in addition to which, I continually stay abreast of economic thought and opinion in the major business media.
Currently, I believe that what macroeconomic modelling still exists, after the approach lost so much credibility in its early applications forty years ago, remains out of step with our modern US economy.
For starters, the SIC codes were, and are, the underpinnings of most sector-based forecasting. These are now hopelessly outdated.
Employment statistics are warped, thanks to the rise of subchapter-S and LLC entities. This has also served to obscure incomes, as business income for many entrepreneurs now appears on 1040s, rather than corporate returns.
Finally, the entire nature of business operations, being now so heavily dependent upon, and benefiting from computer-based management tools, has changed from 30 years ago.
As an observer who understands economics and business, I find myself wondering just how we can accept economists' references to the jobless recovery from the 1991-92 recession, without explanations as to how this phenomenon has been incorporated into current models.
It's important to know whether economists consider the 1991-92 recession an aberration, or a new paradigm.
A reader commented on my post of last Friday, taking a shorter term, more narrow view of individual recent IT spending by companies. What I meant by my comments in that post was that business has been improving operational information availability for nearly 30 years, with the arrival of the personal computer in 1980. When I was with Andersen Consulting in the mid-1990s, client/server projects were booming, and a sort of internal internet, LotusNotes, was being applied at individual firms.
It's safe to say that business communications and information movement has changed more dramatically and functionally from 1980-2010 than from 1930-1960, or from 1960-1990.
Specifically, the recent period has smoothed supply chain management between companies, so that the holy grail of goods-producing companies, inventory management that is as synchronous with retail sales as possible, has come a lot closer to reality.
Now add to this the rise of outsourcing, both onshore and offshore, and you have corporate employment becoming less sensitive to production volumes. Employment at suppliers becomes more volatile, but those jobs tend to be lower-compensated than the ones they replaced at the larger corporations.
Now add to this mix the public consuming business and markets information via free cable networks, such as CNBC or CNN. Today's consumer can view the reaction of institutional investment managers to some obscure report, previously unknown to consumers, such as durable goods orders, or employment reports, in real time.
Thus, consumer spending and confidence are able to be affected nearly immediately by financial market reactions, which affect the wealth of consumers via asset prices in their various investment accounts.
We probably have a tighter-, faster-linked series of economic phenomena which affect each other as inputs and outputs of information, goods and money flow, than ever before. Certainly far more than thirty years ago.
Is it any wonder that you see employment levels less responsive to economic recoveries in recent decades? Or spending and saving rates affected by generally-available unemployment information?
It is simply stunning to me to read yesterday's Wall Street Journal piece wherein a number of financial pundits were opining on how fast and robust the deep "V-shaped" recovery is going to be.
How do they account for the lack of re-employment of so many recently-unemployed? The defaulting and delinquent home loans? The coming commercial mortgage loan delinquencies and defaults?
Yes, any, or even several of these, in moderation, can be accommodated by a vibrant, recovering economy. But this last recession was, is, different. The scale and breadth of its effects have left conventional financing sources weak and unable to profitably lend at current rates.
There is so much about this recent economic recession, in concert with a financial collapse, that is different from anything the US has experienced in the past 30 years that it's simply difficult for me to trust pundits who rely on conventional econometric models to forecast that the 'usual' recovery has begun, and will surprise us all.
Tuesday, September 08, 2009
Terry McGraw's New Problems At S&P
A little over a year ago, amidst the then-year-old unraveling of mortgage-backed securities which decimated the US banking industry, I wrote this post concerning Terry McGraw's push for growth at his Standard & Poors, McGraw-Hill's rating agency unit.
Now a case is moving through US courts that could spell the beginning of the payback by S&P and McGraw-Hill for its cavalier approach to ratings over the past few years. The Wall Street Journal covered it last week, and I noted to myself, upon reading the article, that it could spell disaster for the firm.
This morning, CNBC had McGraw-Hill CEO Terry McGraw on to defend the company's position. And Terry didn't disappoint. He claimed that the judge had tossed several charges on first amendment bases, and that only one remained, so the company was in great shape.
Ah, not so fast, Terry.
In a move calculated to boost ratings, which is understandable, the program then aired a telephone interview with occasional guest host and periodic guest, Greenlight Capital hedge fund manager David Einhorn.
Einhorn, though far from perfect, is noted for having correctly shorted Lehman last year, publicly dueling with its CFO and questioning the now-defunct firm's valuation of various real estate assets on its balance sheet.
Einhorn confirmed on the air this morning that his fund has shorted McGraw Hill's stock. He went on to give a very detailed explanation of how, in his opinion, Terry McGraw's prior defense was incorrect and overly-optimistic.Basically, the case boils down to this. Publicly-available ratings by agencies are deemed 'protected speech' under the first amendment. You can't sue S&P for their public rating of a bond or CMO issue. Even if it was obviously, in retrospect, flawed and poorly-determined.
However, the case in question involves S&P providing ratings opinions on securities to a non-public investing group. This, the court found, is not protected speech. Thus, possible charges could involve fraud.
Einhorn stressed that S&P has never, in the past, had to worry about being sued for its opinion. The fact that this is now about to happen is a watershed event for it, and its competitors, Moody's and Fitch. He opined that other suits will likely now follow, especially if S&P loses this case.
Then there is the question of damages. Einhorn noted that none of the ratings agencies, similar to what occurred with MBIA's under-reserved financial situation, have the financial depth to actually pay damages on fraudulently-rated securities.
As the 5-year price chart for MHP and the S&P500 Index reveals, Terry McGraw's company has struggled for most of the past five years simply to remain comparable to the index. For the past two years, since late 2007, when the ratings mess began to become public, it's basically been underperforming the index.
It's a decent bet that any serious legal problems at S&P are going to really put pressure on the firm's performance, and maybe, in time, Terry's job. After all, per my post of last August, he was running S&P on a pretty thin funding stream while pushing for massively greater profits and volumes from the unit.
It looks like that strategy is now coming home to roost at the firm, in the form of the investor lawsuit based on the private securitized bonds ratings.
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