G(Auntie E)M

The title, for those for whom it was too subtle, speaks to the optimistic outlook for our car industry; although Fritz Henderson may need more than a pair of Red Slippers and to click the heels three times to return GM to Kansas, I mean, profitability.

Now I know that we are looking at a Game 7 in the NHL Finals (really, we are.  Trust me, Detroit v Pittsburgh.  No kidding, Friday night.) And the NBA Finals will go at least 5 games; and the Yanks still have yet to beat the Red Sox, but this GM saga is really one of the most real world fascinating events going on today, and for the next few years.

Think back a few months.  GM, and the rest, like Chrysler (will get to them later) were hemorrhaging cash by the minute.  Were they too big to fail?  Should the government jump in?  Can they avoid bankruptcy? 

And consider the options that Obama had:

1. Let GM go bankrupt on its own; put, potentially, 100s of thousands out of work
2. Attempt to save GM with an influx of cash, but take no ownership sake to ensure the Government does not try to pick winners.  (This approach was criticized by everyone from Paul Krugman to Yes MSG — he had to have a say if he were going to spend our money on a million Chevy Malibus)
3. Attempt to save GM with an influx of cash, and take an ownership sake.  (This approach is being criticized by all who point out that the government has no experience in the industry, and will have a conflict of interest.)

Now look at the above.  #3 was the only option wasn’t it?  I, in general, would not favor bailing out a company that had made poor decisions over a 30 year period, watching its market share go from around 45 to 19.  But considering the fragile state of the economy, and wanting to keep MY job, you have to adjust your principles.  A private bankruptcy was too big a risk.  #2 was not really an option either.  If we, the taxpayer, are going to invest in these companies, then we should have a say.  Heck, the government cannot be any less qualified than the average (none could be considered good) GM exec.

However, the investment has already created conflicts that make this option, albeit the best, likely to fail too.  First of all, who do you get to run the company?  Obama picked Steven Rattner, ex-NYT columnist and Private Equity magnate.  Sure he is smart, but running a car company?  However, this is the least of the worries.

The President wants GM to make small, fuel efficient cars.  Probably a good idea for many reasons, but not based on market data.  Yet that is not the worst of it.

Now Congress is weighing in.  535 men and women with no discernible expertise in anything but bloviating, all trying to save their local interest in GM.  Now that is a recipe for disaster.  Plants have to close, people will lose jobs, and it CAN happen in your district.  Sorry.  And this does not even mention the members of Congress who will defend the UAW to the potential detriment of GM’s profitability.

I am sure the HBS class of 2015 will be reading about the outcome of this experiment in Government (Forced) Nationalization.

Now before I forget, the Supreme Court has stayed the acquistion of Chrysler by Fiat due to a law suit from some pension funds.  Seems these pension funds believe that they are gettign a raw deal and could have done better. 

Um, what?

The company was going to go bankrupt; not a controlled bankruptcy with the support of the government.  You don’t think Cerberus Capital, with its brain trust that includes Ex Treasury Secretary John Snow, and Ex-VP San Quayle, and Ex-CEO Bob Nardelli, did not look for a deal to recoup their $3B or whatever investment?

Plus, how many companies are looking to buy a company that has three interesting episodes in its history:

1. Invented the Minivan (the scourge of fathers worldwide)
2. Copied the Bentley to create the under $30K version, known as the 300
3. Gave us the K-car

Gee, where do I sign!

Please, I know it is rather embarrassing when an Italian Car Company is your savior, but you have to accept reality.

Grazie!

Financial Advice for VoIP

So as the article states below, eBay is thinking of an IPO for Skype because they could not find any takers for the price they wanted.   Gee, no wonder.  As the article states below, eBay, for no apparent reason, decided to pay $3.1B for Skype a few years ago.  I don’t recall exactly, but at that time, the acquisition cost per user was between $35 and $50.  Pretty high price considering the revenue generated per user was approximately ZERO!

eBay went on to say that Skype does not fit into its current two businesses — auctions and payment services.  Interesting, as these were the same two businesses they had in 2005 when they bought Skype in the first place.

And now my favorite part.  They say Skype is worth up to $4B, which would be a major reversal of a bad deal for ebay, which even with a $.14B write down, still has $1.7B on the books.  Now, I don’t have an MBA, oh wait, yes I do, and nowhere did I see where a company that generates $1 per user ($500M with 400M users) would be worth $4B.  I guess if all the revenue were profit, then I could see that a company with 100% contribution margin and profit of $0.5B per year would be worth that kind of money, but if that is the case, who is doing the accounting?  Arthur Andersen?

 But then again, what do I know?  I did not work as a Master of the Universe at Lehman; nor did I bring down the entire economy with CDRs, so don’t take my word for it.  Skype will probably be the IPO of the year in 2010.

From NY Times

April 15, 2009

EBay Plans Public Offering for Skype

 

By BRAD STONE

 

SAN FRANCISCO — EBay announced plans on Tuesday to spin off Skype, its Internet calling division, in an initial public offering aimed at the first half of 2010.

EBay has been looking to sell Skype since the beginning of the year. But it could not find a bidder willing to pay a high enough price, despite interest from Skype’s founders, Niklas Zennstrom and Janus Friis, who led a group of private equity firms in making an offer for the rapidly growing calling service.

“Skype is a great stand-alone business with strong fundamentals and accelerating momentum,” said John Donahoe, eBay’s chief executive. He noted, however, that Skype was not a good fit with eBay’s two core businesses, its auction site and its PayPal online payments service.

“We believe operating Skype as a stand-alone publicly traded company is the best path for maximizing its potential,” Mr. Donahoe said.

EBay outbid Google and Yahoo in buying Skype in 2005 for $2.6 billion, on top of performance incentives that later lifted the final price to $3.1 billion. In 2007, Meg Whitman, then eBay’s chief executive, acknowledged that the company grossly overpaid by writing off $1.4 billion of the purchase price.

One problem for eBay in selling Skype is an escalating intellectual property dispute between eBay and the Skype founders. Joltid, a company founded by Mr. Zennstrom and Mr. Friis, retained ownership of the peer-to-peer technology used in Skype and licensed it back to eBay. Recently, Joltid said that eBay had breached that agreement, and eBay has asked a British court to intercede.

The matter is unlikely to be resolved by the end of the year, which could be dissuading potential buyers of Skype. It is also one reason eBay is planning an offering for Skype nearly a year from now. The company said market conditions would determine the specific timing.

“We will settle that before we do an I.P.O., and we are confident in our legal position on that litigation,” said Alan Marks, an eBay spokesman.

Analysts who follow eBay had expected it to sell Skype outright and were surprised by the announcement. They applauded eBay’s efforts to spin it off, though they noted that the public markets had not been very receptive to initial offerings. There have been no I.P.O.’s of venture-backed companies in the last two quarters, the first time such a drought has occurred, according to the National Venture Capital Association.

“EBay is communicating that they expect capital market conditions to be much better next year,” said Sandeep Aggarwal, an Internet research analyst at Collins Stewart.

In 2008, Skype generated revenue of $551 million from 405 million users. The company recently announced that it expected Skype to top $1 billion in revenue in 2011. Skype’s new application for the iPhone was downloaded two million times in its first week, and has become one of the most popular third-party applications on the device.

“You have a large, fast-growing, highly profitable enterprise. It probably would represent the most compelling technology story since VMware or Google,” said Paul Bard, head of research at Renaissance Capital, which estimates a Skype offering could raise as much as $4 billion, depending on what kind of ownership stake eBay retains. “It’s a growing biz, highly profitable, and it’s a leader in its market.”

Super Bowl Pick

Before I get to my long awaited pick, I have to vent, for cathartic reasons.  Not that I am going to say anything that the rest of us have not thought, and that every columnist has not already written, but WHY AM I PUTTING MY TAX DOLLARS TOWARD $35K TOILETS?

What is with these bozos that had to go hat in hand to the government and ask for BILLIONS, and then they go spend the money on $50M jets, $40K chairs and $35K antique commodes.  Not to mention Billions in bonuses to keep their ‘best’ people.  Um, weren’t these the Best and the Brightest that resulted in $15B loss at Merrill, and a request for TARP funds?  Seriously, was Robert McNamara running the place?

But hey, I understand.  The world is in economic meltdown, Wall Street is shedding jobs by the thousands, but you need to keep your best people as these guys might have left and gone….WHERE?  This would be the same as GM paying bonuses for fear their “Brightest” go to Chrysler.  C’mon.

And what pains me more, as I expect Wall Street Bankers to be tone deaf (see below), is the already tremendous LACK of oversight of Congress.  Not that this should be a surprise, but did they ask for oversight and/or audit rights?  You think Goldman Sachs was going to pay huge bonuses without Buffett’s approval, since he gave them $5B LARGE!  Congress is full of lawyers — aren’t they supposed to be trained negotiators?  No wonder Ahmadinejad and Bin Laden run circles around us.

My favorite part is how they are going to investigate if TARP funds were used to pay the bonuses.  Listen Reid/Pelosi/ Geithner, if I give a crack addict $100, then someone else gives him $100, it does not really matter whether he used “my” money to buy crack; I enabled it.

And in another ironic twist, my Rock Center correspondent pointed out to me that the loans given to Pfizer to buy Wyeth for $70B will result in the combined company shedding 20k jobs.  Well, I am really happy about that use of my tax funds as well.

Returning to my Banker behavior comment above: I went to a reasonable business school, when Consulting and Banking were hot (and when anyone who went to Yahoo because they could not get a ‘real’ job ended up 100x as rich as us).  The rationale for going into consulting was always a combination of:

1. I don’t know what I want to do
2. I like the idea of helping companies
3. The pay is not bad

We at least gave lip service to #2.  Conversely, the Investment Banker argument usually went like this:

1. I will make a f*ing ton of money

Not once do I remember hearing that “providing access to funds to streamline our capitalist engine, and get small companies off the ground, and large companies to scale so that they could compete on a global level” as a rationale.  As a guideline, not a rule, they were usually the more shallow and avaricious members of the class — like the High School Football QB that needed to stay popular.

So that is why I can see them buying ridiculously priced curtain rods.  But that brings to mind another question: Who thinks of creating this stuff?  Really, you are Kohler, or American Standard, or some bizarro SoHo artesan, and you think that what the world needs is a $35K toilet?

Hey, as we get richer, I can see our tastes changing — buy a $5K watch, a $250K car, a $5M plane.  Even a $6K handbag maybe.  While I am not certain I could ever have enough money to feel that the above was worth the price — except for the Aston Martin DB9 — I can understand how others would.  But how warped are you to need a $35K toilet?  Does Thain do that much reading?

I am sickened, but not surprised, that he would spend his (firm’s) money on these things, but I am more disturbed that these products even exist.  That, my friends, is my, it is hoped, unique take!

Now the Cards have proven us all wrong all along, but the Steelers seem more balanced.  Arizona scores 4 times, but it is 3 FGs; whereas, Pitt finds the end zone 3 times and adds a FG –

Steelers 24

Arizona 16

Men Behaving Badly

The title and the sports-bias prevalent in Yes MSG would lead you to believe that I am to speak about:

1) Plaxico Burress — he of the bling-showing, sweatpants-wearing, Glock-carrying fame. Or

2) PacMan Jones — who is lucky that Commish Goodell did not think that a drunken fight with your bodyguard warranted season-long suspension.  Or

3) Stephon Marbury — self-proclaimed best point guard in the NBA despite never having won a playoff series in a 12 year career (but did earn $120M give or take)

But no; to some extent, we expect that type of behavior from our athletes.  After all, these guys most likely have always been popular, the most athletically gifted kids in the class, and have been enabled by those around them.  Which, instead, brings me to the perfecta of execs, who, if you presumably substitute “intellectually-gifted” for “athletically-gifted,” you end up with the 3 following beggars and their bogeyman:

Let me introduce:

1. GM’s Rick (Off the) Wagoner
2. Ford’s Alan (Mulligan) Mullaly
3. Chrysler’s Bob Nards-delli
4. UAW’s Ron Butterfinger (ok, Gettelfinger, but he should have changed his name as Gettelfinger is horrible)

These four and a bunch of others, have conspired to destroy billions in shareholder value, as well as burden the US-HQ’d auto industry with a cost disadvantage of approximately $2,000 per vehicle.  Considering the history of the Big Three, I am not certain I want to pay, say, 5% more just for it to be American-made.  And while we are on the topic of ‘buying American” consider if you will that Honda, Toyota, Mercedes and BMW all manufacture quality, elegant, desirable automobiles in the USA.  The issue is not the factory worker, it’s the bozo leadership.

Toyota and Nissan also survive (unlike Mercedes and BMW) on mass market automobiles, and last I checked they had not asked the governments of interest — Japan and France (Nissan owns Renault) for handouts, and we know the French love to give money to crap companies.  Come to think of it, maybe the Big 3 should all claim they are farming companies and Sarkozy will send some Euros their way.

Yet, while GM and others have lost 90+% of their value, Off the Wagoner has reportedly earned $100+M since 2000.  What kind of bonus package was that?  It is like giving A-Rod more millions for hitting above 0.150.  Mulligan, as that is what he should take on his Ford leadership, got like $20M last year.  And Nards, former GE protege of Jack, was once paid $200M to leave Home Depot.  How the heck he got another job is beyond me, unless you adhere to the Major League Baseball history of just hiring the nearest White Guy Retread (OK, worked with Charlie Manuel, but not so many others).

Now let’s add in Butterfinger, which pains me as it is my favorite Candy Bar, who has to have earned millions as head of something as large as the UAW.  One could probably consider him the second most powerful union boss in the world perhaps, right behind Lula Inacio da Silva, who parlayed a similar job into the Presidency of Brazil.  Now I know that the Union boss’s job is to negotiate the best package possible for his members, but part of the equation should be the actual survival of the industry you are in.  $60 per hour and healthcare is not worth quite as much if the company fails.  D’Oh.

So where does this leave us?  Well, these 4-in-a-box toolset, who all recently got $25B to assist with building fuel efficient vehicles, and who have already asked for extensions to meet the standards, are now asking for $34B.  The funny thing is that they came to DC two weeks ago asking for $25B.  However, having flown in three corporate jets, yet with no business plan, they are returning this week in hybrid cars and with business plans in presumably target recyclable carrying cases, but asking for an additional $9B.  How does that work?

(Speaking of corporate jets, here is a quick note – I am writing this in Coach on Continental Airlines at 35,000 feet where they are now playing the Mary Tyler Moore show.  Huh?  Low royalties?  This show was on before most passengers were born.  And to compound matters, the woman next to me, who reeks of cigarette smoke and feels very ill, is asking for Sprite and Apple Juice, and just SPIKED her soda with Vodka — Good Times!  Where is my corporate jet?)

These Bozos went back to Dearborn, actually did a biz plan, and said, “wait, we don’t need $25B, that was just back of envelope.  Now that we are using Excel, we need $34B.” Regardless, they now have a business plan, but this brings to mind another few concerns:

• Yes MSG is a great fan of “Recovery Plans.”  Effectively, what you are saying is that there are all these things we can do to be successful, and we were going to do NONE OF THEM.  However, now that times are tough and expectations are not being met, like company survival, here are all the cool things we can do.  Should the Big Three and Mr. Candy Bar have thought of this before?
• Yes MSG is also a fan of accuracy, not precision.  I am sure that the Business Plan is very precise, right down to the day and dollar when Detroit returns to the black.  However, the accuracy of that number and date might as well have been provided by a monkey with a calculator and a calendar.  Perhaps it was.  I have some faith that the cost items could be achieved, however, the $34B question is why should I believe that after three decades of the K-car, the Mercury Marquis and anything Oldsmobile, that these guys will design anything that ANYONE WANTS TO BUY?  The revenue line gives me pause, and while precise, I am equally certain, totally inaccurate.
• Yes MSG is also a fan of fables, and this seems to be “Boys who Cried Wolf.”  These three have been bleeding market share for decades, with no discernible urgency.  Yet now I am supposed to believe that the economic crisis, which started in September, is why they are on the verge of bankruptcy.  Save me the “perfect storm” argument.  Sure, sales will be way down in Q4, which has not even ended, but that is the fine line between survival and failure?  If these businesses are so susceptible to a single down quarter, then I think I can find another place to spend $34B
• Yes MSG is also a fan of expertise.  I already have questioned the expertise of these execs, who have failed during their tenures, doing a business plan for companies that have 30 years of poor performance, but lovely executive dining rooms I hear; but to compound matters, these plans are going to be evaluated by Barney Frank?  Christopher Dodd?  Members of Congress?  People whose expertise is at best law, and at worst, a$$-kissing.

Shouldn’t these plans be evaluated by seasoned professionals?  I don’t know, hmmm, perhaps people from the business community who have a specialty in evaluating business plans?  Maybe a combination of Private Equity firms, Venture Capitalists and Business School professors?  Heck, I would even be satisfied with my local 7-11 franchisee, who knows profit and loss, and gets NO bailout when the local construction crew’s site is closed down and they stop buying taquitos at 7am.  Or even outsource it to India, like everything else, as there is absolutely no shortage of brilliant MBAs there who would evaluate the plans objectively.

Now my loyal reader P-Dub has reminded me that Chrysler is already owned by a Private Equity firm, Cerberus Capital (cannot check as in the air).  So perhaps we should say an elite Private Equity firm, like KKR or Thomas H Lee.  For VC, Kleiner or Sequoia; not one of the valley one hit wonders.  Of course, the realization that Chrysler is owned by a Private Equity firm leads me to the following recommendation:

1) Chrysler: as a prize for needing government intervention twice in a generation, and for having been bought by, supposedly, shrewd investors, you get to go bankrupt.  No reason my tax dollars should give Nards or Cerberus ANY of my money.  Plus, everyone says that bankruptcy would be the death knell for the company.  Hey, I am a trained scientist, we have three candidates, let’s find out.

2) Ford: since you are the solvent one for the time being, you get your line of credit.  Personally, I would like you to go out of business just so that you have to sell the Detroit Lions and put us out of our Thanksgiving Day game misery, but that would be unfair, maybe.

3) GM: not sure what to do here.  Maybe you get the funds, to complete the trifecta — one failure, one line of credit to be accessed if needed, and one investment.  Seems fair.

Actually, I would prefer to force a merger of the three or a takeover by Nissan or Toyota, but that would be more challenging.

Now I know what you are all thinking?  What about the workers?  You, Yes MSG, admitted they are just as productive as their Asian-employed counterparts.  Perhaps, since we just saved BILLIONS by letting Chrysler go under and not investing (yet) in Ford, we use the excess monies to retrain workers.  That would be more effective and would help the little guy, not the boardroom.  My own back of the envelope calculation says that we could have $5-10,000 per worker.  That, my friends, is a lot or schooling.

Cool — 2 hour flight from Houston (George Bush Intercontinental Airport, which should be renamed George Herbert Walker Bush Intercontinental, just to avoid, you know, confusion) to Fort Lauderdale and Yes MSG, with a great assist from P-Dub and my Midwest correspondent, Jad-wurst, have solved the auto crisis.

Someone forward this to W and Obama.

The Essence of Taste (redux)

We all anxiously await the Texas Tech v Oklahoma game tomorrow.  I would break it down for you, but I am sure that Big12 Correspondent GeneB wants to do that considering he is an OU alum.  Either way, should be an 80 point affair.

With that on mind, let’s go on to some other items:

1) More Madonna.  Guy Ritchie is not going to take Madonna for half.  At least, that is the report on their divorce.  Madonna has a fortune worth reportedly $500M, which makes total sense.  However, Ritchie is presumed to be worth $50M.

What the heck?  Guy has made like three successful films, that were identical — Lock Stock (1998), Snatch (2000) and RocknRolla (2008), but with different titles, and is woth $50M.  CraigBe, please explain.

2) The Auto Industry.  I believe all my readers know how I feel about giving billions (additional, as Detroit, do not forget, has already received $25B for plant modification and the ability to meet fuel standards by 2020 (which they are already asking for relief on)).  These bozos leading the companies and the unions have not created an auto anyone wants in like 30 years.  Yet we are supposed to bail them out?  How about a bankruptcy and restructuring?

Anyway, I was debating how it is difficult to let so many jobs go but at the same time how I don’t want to throw bad money after bad.  So I thought, why not let Detroit have the money, if, IF, IF, we allow Warren Buffett to negotiate the terms?  Makes more sense than Congress, who would attach such conditions as “please let us know when you can how you will lose the funds.”

Warren gave $5B under superstrict terms to Goldman Sachs, and that should be the model.

Coincidentally, I caught Magic Johnson on Morning Joe this morning and since he is from Lansing (Dad was an auto worker) and he is a super successful entrepreneur (far more successful than MJ as Magic has expanded to real businesses, not just expanding the Nike empire), and he discussed eloquently how he would disburse the money.  Look, Magic cannot seem to put a sentence together on TNT NBA broadcasts, but after this morning’s performance, I prefer he distributes any extra monies to Detroit versus Paulson, Frank, Pelosi, or Reid. 

Oh, and on that note, here is Chrysler’s input to the LA Auto Show from the NYT:

Chrysler, which had embarrassingly canceled its only two hybrid vehicles in October — the same month they were introduced — had nothing left to introduce here.

3) AIG.  Speaking of bailouts.  Seems that AIG is to use like $500M for executive bonuses and retention.  I know it is obvious, but are these really the execs we want to retain?  This fits Yes MSG’s axiom of:

- The Professional Sports PR Assistant: Each team has a number of low rung functions like this.  Probably a $25-30K per year job.  However, you know what they pay for these jobs — ZERO.  You know why?  Because people like Theo Epstein and Brian Billick (yes, these two guys) are willing to work for nothing to get a foot in the door.  Most jobs are like that.

Now I am not saying that you replace GM’s or AIG’s CEO with a Yale grad fresh out of college, but there is certainly a strong group of candidates at lower rungs of management who could easily do the job, obviously better than the current CEOs who have set a negative bar.  So I say FIRE THESE GUYS with NO BONUSES (who gets a bonus for asking for $25B?) and get in someone who appears to want it and need it.

Lots of large organizations seem to do this with their execs.  Oh, we have to pay them huge bonuses to retain them. But these are the guys who

• Got you in this mess in the first place, and who
• Have no options — where are all these execs going to go?  It is not like there are a thousand VP and C-level jobs available. 
• This is most egregious in large, market dominant orgs.  Take Detroit.  You are a car exec with a highly dubious track record.  Who would hire you?  And if you are at all geographically constrained, what other companies in Detroit could even hire you?  You have no OPTIONS.  Magic Johnson or Warren Buffett would leverage that point, fire you with no bonus, and start sinking the metaphorical three pointers with a new, hungry, forward thinking management team

Most jobs can be done by the equivalent of the PR Assistant, the rest is luck.  For every Steve Jobs who has proven his vision and genius repeatedly, there are 1000s of CEOs and other execs who were lucky.

(I think I had more, but have to go to my day job)

The Housing Market

It is a tough economic environment, mainly brought on moronic mortgage borrowers, abetted by  unscrupulous lenders and bankers, that could bring our economy to its knees.  So it is nice to know we are not alone, with even prominent Germans getting caught up in the bubble.

I am back!

I know my loyal reader missed me, but Yes MSG took the much better half on an overnight to Denver to catch Madonna in concert this past week.  Now I know what you are saying — did you pick up your skirt on the way? But really, the show was awesome, and Madonna, and U2, are the two greatest musical acts of my generation.  (Elvis, Beatles, Stones, Springsteen are all previous generations, even if I have seen some of them and they were great.)  I put The Police, who I just saw too, a notch below. 

Regardless, there was not a lot of suspense in College Football.  Unlike last year, with the exception of the Big 12 South, there is not a lot of round robin upsets.  We are looking at Florida v Texas Tech in the finals, unless Tech loses at Oklahoma (distinct possibility) or spits the bit against Missouri in the Big 12 Title Game (not likely).

But while I was out, it was nice to see Congress thinking of giving the Big 3 automakers an addtional $25B on top of the $25B they already got.  It was rather odd to see two programs, in which Carl Levin (D-Michigan) and Thomas Friedman (Op-Eds NYT) debating whether Detroit was worthy (Yes according to Levin) or not (No, according to Friedman).

I mean, do we really want a writer and a career politician determining how to spend $25B?  Um, no.  Of course, considering the CEO, Rick Wagoner, says he is unclear why he should resign if they take the money, maybe the previous two are better choices.  (Um , Rick, who got GM into this mess — admittedly every short sighted and idiotic CEO over the past 30 years, but you did your part.)

But this got me thinking.  They claim that 1-3M jobs are at risk if the Auto industry fails.  What about Microsoft?  They, reportedly, have 640,000 partners.  Let’s say that each one has 20 employees.  That is 12.8M employees tied to Bill Gates.  Add in the 200K that Microsoft and vendors have and we are at a cool 13M.

What percentage are at risk if Google continues its onslaught?  I say easily 20%, if not up to 50%.  So a Microsoft failure could cost 2.6-6.5M jobs.  I say Steve Ballmer should camp out on the Hill if Detroit is any lesson.

Yikes!

TMQ Cut and Paste — Cheerleading and the Financial Crisis

Since TMQ is a long article, I thought I would cut and paste the highlights.

Self Explanatory

 

Cheerleader of the Week: Devan of the Philadelphia Eagles, a dean’s list student at Temple University. According to her team bio, Devan is pursuing a degree in “dance and advertising” — a lot of advertising involves dancing around facts! Also according to her team bio, Devan has taken German for six years and would like to visit Germany. If she hurries, she can just barely make Oktoberfest.

And on the Financial Crisis

 

Gimme! Gimme! Gimme! Last week, TMQ asked why no one was paying attention to the fact that the national debt ceiling was quietly raised by $800 billion during the summer. Well, toss that column: The White House just asked the national debt ceiling be raised another $700 billion, for the proposed financial-sector bailout. If that happens, in 2008 alone, $1.5 trillion will have been added to the national debt: every penny borrowed from your children and their children. Stated in today’s dollars, in 1979 the entire national debt was $1.5 trillion. George W. Bush and Congress have in a single year added an amount equal to the entire national debt one generation ago. And the year’s not over!

It took the United States 209 years, from the founding of the republic till 1998, to compile the first $5 trillion in national debt. In the decade since, $6 trillion in debt has been added. This means the United States has borrowed more money in the past decade than in all our previous history combined. Almost all the borrowing has been under the direction of George W. Bush — at this point Bush makes Kenneth Lay seem like a paragon of fiscal caution. Democrats deserve ample blame, too. Harry Reid and Nancy Pelosi, Democratic leaders of the Senate and House, have never met a bailout they didn’t like: Harry and Nancy just can’t wait to spend your children’s money. Six trillion dollars borrowed in a single decade and $1.5 trillion borrowed in 2008 alone. Charles Ponzi would be embarrassed.

 

 

If you borrowed, borrowed, borrowed, you could afford to live high for a while — then there would be a reckoning. Hmmm … that sounds a little like what many Americans did with gimmick mortgages in 2005 and 2006. They were only imitating their political leadership! Why is it both parties in Washington think the United States can borrow, borrow, borrow without a reckoning ever coming? Bush, Reid and Pelosi seem poised to transfer hundreds of billions of dollars of borrowed public money to political insiders on Wall Street and in banking, whose bonuses will now be tax-subsidized. The capitalist maxim is, “She who reaps the gains also bears the losses.” Now Washington wants those who reaped the gains to shift the losses to those who lived humbly. The young will pay and pay for these cynical ploys to insure the luxury of the powerful old. Why aren’t the young outraged?

TMQ’s pal Isabel Sawhill, among the leading public-policy economists of our day, says Washington does indeed need to intervene in the financial system — the harm to the average person of letting credit markets freeze would be greater, she thinks, than the harm caused by more public debt. Fair enough. But it doesn’t inspire confidence that on Sept. 12, Treasury Secretary Henry Paulson said the financial system had been fixed and “under no circumstances” would there be further bailouts; on Friday, Paulson said the system was collapsing and another $700 billion was needed. Suddenly Paulson is insisting the country has no choice other than immediately to hand over $700 billion to Wall Street fat cats, with barely any debate or even explanation of the plan. Why should anyone believe this guy, when just one week previously he said no further bailouts would occur? It seems clear Paulson had no idea what he was talking about then, while if the problem is really as bad as Paulson says now, his past delay in facing the problem has made the cost far higher. With such a poor track record, why is the treasury secretary suddenly viewed as a superbrilliant genius whose marching orders must be followed?

 

 

It is not public intervention that is objectionable. University of Chicago Nobel Prize winner Gary Becker, among the top conservative economists, just said, “I have reluctantly concluded that substantial intervention was justified.” Rather it is size of the bailout, and the hurry-up-give-the-money-don’t-stop-to-think aspect, that are troubling. Much of the $700 billion will flow to investment-community friends of Paulson, Bush and other administration figures. Average Americans who behaved irresponsibly by signing gimmick mortgages may get some taxpayer aid from the Paulson proposal, and maybe they should get none. But in the end, average Americans will still be liable for most of what they owe — that is, will still be held responsible for their actions. Wealthy, politically connected insiders who run banks and companies such as American International Group will be exempt for responsibility for their actions, and will stuff taxpayer-subsidized millions into their pockets.

 

 

On Sunday, Paulson called the self-serving actions of top Wall Street figures “inexcusable” — yet the plan is not only to excuse them, but to shower them with free money. Paulson said Wall Street pay levels were “excessive,” but should be discussed later, after the bailout is done. Now is the moment of maximum leverage! Once they are holding the public’s money and laughing about how easily they got it, financial executives will have no incentive to compromise on pay. Here’s an idea: Any company that participates in the bailout agrees to limit its top-tier executives to the federal minimum wage. That is, after all, the amount Washington says is enough to live on. Meanwhile, of the two jokers who drove Fannie Mae and Freddie Mac into the ground, one was paid $19.8 million in 2007, the other $14 million; each will get nearly $5 million in taxpayer-funded “retirement” bennies.

Yet there’s scant outrage. Maybe this is because in an era of fiscal irresponsibility by both parties, everybody wants a bailout. Wall Street, bankers, homeowners who lied on their mortgage applications, Detroit automakers, farmers — gimme, gimme, gimme! Rather than asking whether the $700 billion giveaway is too large or being structured in a way that benefits the rich, numerous members of Congress are instead demanding more bailouts be appended: for seniors (see below), cities, states, more “stimulus” checks, you name it. Give money to whoever will fund my re-election! The money is being forcibly extracted from the pockets of our children and their children. Every dollar borrowed today by the irresponsible old of Washington will subtract two dollars from future economic growth, leaving our children and their children a legacy of stagnation.

 

 

The 1980 Chrysler bailout, which was nationally debated for months before happening, cost $3.2 billion, in present-value dollars, and was financed by revenue rather than by borrowing. Here is the borrowing that’s happened in 2008 alone, with precious little public debate:

 

 

• $29 billion to bail out Bear Stearns.

 

 

• $40 billion in the first mortgage-holder bailout.

 

 

• $80 billion for an additional year of Iraq war operations. (Another $150-$200 billion in war costs such as future veterans’ disability benefits were incurred but not funded.)

 

 

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AP Photo/Pablo Martinez Monsivais

We should give away $700 billion? I need to think about that. OK, I thought; give it away.

• Up to $85 billion to bail out AIG.

 

 

• $153 billion to households for “economic stimulus.”

 

 

• $200 billion, and possibly more, to bail out Fannie and Freddie.

 

 

• $290 billion in farm subsidies, despite agricultural prices and grains profits being at record highs.

 

 

• $700 billion general bailout of securities backed by bad debt. (The International Monetary Fund estimates this figure will rise to at least $1 trillion.)

 

 

That comes to $1.6 trillion, explaining the debt-ceiling rise, and does not include roughly $300 billion in essentially interest-free cash issued to banks by the Federal Reserve on an emergency basis, which may or may not be repaid, but which in any case make all existing money somewhat less valuable. Why is the debt aspect of the splurge barely being remarked on by the mainstream media and by politicians? Why are the young not furious? And about that $700 billion about to the shoveled to the Wall Street elite — in 2007, George W. Bush vetoed an increase of $7 billion per year in health care spending for the poor, saying the country couldn’t afford it.

The Financial Crisis

(read to the bottom for a special bonus)

My readership has been crazy, waiting for me to ’suspend’ my sporting insight in order to give some financial advice.  After all, like that kid in the FedEx add: I have an MBA.  Of course, so does W — the MBA President.

Look, I went to a business school — Wharton — that is considered competitive with the one our illustrious President attended — Harvard Business School (HBS).  However, I don’t actually think that Wharton is equivalent to HBS on the metrics that are most pertinent: Number of CEOs; Network.  HBS is above Wharton, and for that matter Stanford, too, and by a wide margin.

However, in this case it has a legacy problem.  W went there, but it appears that he was too busy with his other vices (this is before he found Jesus), as he gives no confidence when discussing economic issues.  In fact, it appears he is reading the menu at Wendy’s.

Now this should not be surprising.  If I recall, prior to being Gov of Texas, he ran three companies into the ground, except that Daddy’s (George HW) friends ‘bought’ the companies.  Who knew though, that his schooling would allow him to run the world’s largest and most successful economy into the ground.  [I know, I know, the President's effect on the economy is limited.  However, in this case, the laissez faire attitude and lack of oversight can be tracked to the administration's opinion on most things economic.  Read this to understand how we lacked leadership.]

Now I am not much more confident in Congress.  These are the a$$-kissing lawyers that get elected and pass laws without any experience or understanding of economics.  Personally, I would prefer that the Sikh, who owns a few of my local 7-11s, would run the bailout, as he certainly understands what it takes to run a business, profit-loss, and risk-reward, better than the 536 tools in Washington DC (House + Senate + Prez for those of you not familiar with our bicameral system).

And it is fun to watch McCain say that ‘in this time of crisis’ he will suspend his campaign.  C’mon, this is posturing.  His tail is visibly between his legs as he postures to avoid the debate in MIssissippi on Friday.  Plus, I have heard that the co-eds in Oxford are unbelievable, so how dare he deprive the nation of the opportunity to determine this for itself.

So despite my perceived credentials, I tend to simplify this entire mess, but am willing to be corrected by my more financially sagacious readers.  Let’s see, anatomy of a crisis, which I mainly see as an issue of OPM (Other People’s Money) and No Repercussions.

1) Mortgage Lender lends money to those least available to pay — Mr. Jones, with your $40K salary, I don’t see why a $450K mortgage should be a problem.  Sign here.

2) Mortgage Lender then packages these mortgages and sells them to others — like Merrill Lynch.  Thereby removing mortgage company from the risk, but still collecting the commision.  Nice!

3) Securatized mortgage purchasers should understand the risk, but the earnings they generate are too great to ignore.  Ahh, housing prices will never go down, just like internet stocks.

4) Amazingly, and this is what perplexes me, these firms over-exposed themselves to the extent that they actually risked going out of business, which some did.

When one is on a business trip, one often orders the Kobe Beef Steak.  OPM.  When you travel with your family, Sizzler!  Not to different the above.  The only difference is that I cannot call the Government when the sizzler bill is too high.  Which brings to mind the following:

This bailout is rather ridiculous.  Say this was the Big 3 Automakers, who happen to be asking for $25B.  Is it the taxpayer fault that the Big 3 have been unable to change in the 30 years since the Japanese first started making inroads with better, prettier, more fuel efficient autos? (And to think that they (Big 3) are already protesting the new fuel standards set to go into effect in 2020.  2020!!!!!!!!!  In the immortal words of Ted Knight in Caddyshack — You will have nothing and like it!

Should the government bail out Microsoft since it is getting its a$$ handed to it in online advertising by Google?

Yes, the difference is that the risk to the entire economy is too great to ignore.  OK, but in that case, the bailout should give the funds to mortgagees who could not pay their bills so they can keep their homes, even if they are idiots for signing mortgages they cannot afford.  But Stockholders?  Bondholders?  Thanks for playing, you get nothing.  That is the risk we all take when investing.

And the execs?  They should be fired with no parachute and they should have to give back their previous earnings, just like I would prefer for Fannie Mae and Freddie Mac.  Now some say you cannot limit their pay as you cannot attract good talent at low pay. What?  These are the guys who got greedy and ran the firms into the ground — go take a lead aspirin.  Again, my Sikh friend above can be in charge.

If we have learned anything from this crisis as well as Enron, not to mention 9-11, it is this:

1) If it is too commplicated it probably will not end well.  These financial mechanisms are overly complex to the extent that they cannot even be understood by their owners.  Remember, for all the financial theory, Discounted Cash Flow should still reign supreme.  And lending at 5% while you borrow at 3% is still a more solid business model than Default Credit Swaps.

2) Don’t go pass legislation too fast.  I find it amusing (in a sort or YOU ARE SO PATHETIC sort of way) that our congress cannot do anything in years, but then can pass incredibly complex legislation in a weekend.  Of course, the last time they got bullied into this, they opened the door for eavesdropping and water boarding.  My point is that they need to really ensure this legislation will be effective, give relief to those who deserve it (or at least, least don’t not deserve it!), the homeowners, and not bail out Master of the Universe who may be out the second yacht.

OK, the bonus, since I will certainly take flak for such a long economic diatribe — read Tuesday Morning Quarterback.  Great take on football, and as he is a Brookings Institute Fellow, great insight into other topics, including the current economic crisis, but also including Movies, Space Travel, and Cheerleaders.  A true renaissance man. What Yes MSG aspires to.

Gustav, Palin’s Family Values, and Obamanomics

As I still prep myself for the first weekend of College Football Recap, I was merely going to recommend a single article from the NY Times Magazine, that would lend some perspective to those of us — me — that get too wrapped up in sporting events.  Pretty heavy read, but if interested in one reporter’s experience over 4 years in Iraq, it is here.

However, then I saw that, ironically, the GOP would have to postpone the major festivities from their Convention due to Hurricane Gustav in Louisiana.  Considering that when Katrina hit, President “My Pet Goat” seemed to be caught by surprise, as was FEMA Director, and Arabian Horse Breeder Mike Brown.  Hey, we all know that weathermen are wrong all the time, but, people, it was a HURRICANE they were predicting.

Regardless, I thought that the GOP might actually benefit since today was going to be the inspiring speeches of Cheney and Bush, and now no one would hear them.  But then again, this is a reminder of the total incompetence of the administration. If only the Lower 9th Ward had oil.

On another topic, did you all see that VP Candidate Palin’s 17 year old daughter is 5 months pregnant?  She is going to marry the father, Levi, and the cool thing is that the kid will have an uncle that is only 9 months older than s/he is.  I love it when families overlap like that.  Reminds me of Jamie-Lynn Spears!  Who is the celebrity now?

This is the thing that social conservatives normally decry in, shall we say, socio-economically underprivileged families.  Now it could be the second most powerful person in the world. 

What is amazing is to think that either:

1) McCain knew this and still chose her

2) McCain did not know this as she kept it a secret

My vote is number 1, only because more plausible, even if completely confounding.  How was the Veep decision process?  Let’s choose someone totally unqualified from a useless state, who is under investigation for firing her ex-brother in law, because she is Conservative, obviously Pro Life, and has a lovely extended family of 5 kids and a grandkid at the age of 44.  WTF John?  Pawlenty may not have been any more prepared, but at least he could not possible have these skeletons in the kitchen (much less the closet).

And to think that two years ago Palin’s day was filled with:

- the traffic signal is out at Elm and Main

- someone get that moose that is loose at Caldwell’s PaknSave

Two years from now it could be:

- Change those diapers

- Nuke Iran

- Extend free trade to Bolivia

I am brimming with confidence.

Finally, while I am recommending items for extended reading, here is an article on Obama’s economics.  As well as the tax tables for the candidates tax programs.  Needless to say, for my readers who make more than $250K per year, chill out; but for my readers that average around $9M, vote McCain, or you may not get that last Aston Martin, unless you sign up for HM Secret Service.