Category Archives: Business – General

Bashing the capitalist roaders

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Hillary%20Clinton%20pointing2.jpgDoes it appear to anyone else that Hillary Clinton is getting a bit desperate in attempting to salvage her campaign for the Democratic nomination? Get a load of this:

Sen. Hillary Clinton took a swipe at [investment bankers], suggesting wealthy investment bankers and hedge fund managers on Wall Street aren’t doing real ‘work.’ [. . .]
“We also have to reward work more,” Clinton told a small group of Ohio residents today. “and by that, I mean, I have people in New York working on Wall Street as investment managers, as hedge fund executives. Under the tax code, they can pay a lower percentage of their income in taxes on $50 million dollars, than a teacher, or a nurse, or a truck driver in Parma pays on $50,000. That’s very discouraging to people.” [. . .]
The line about investment fund and hedge fund managers has been introduced into Clinton’s talking points as she campaigns across the economically struggling state of Ohio.

Investment bankers are certainly an easy target, but Clinton’s statement that they don’t do “real work” is either disingenuous or appallingly ignorant. Would Clinton say such a thing about other financial intermediaries such as real estate brokers? Investment bankers working on multi-billion dollar mergers are not all that different from real estate brokers — they are financial intermediaries who get paid a commission for helping to originate and close deals. In short, they are being paid a fee for arranging a transaction between a willing buyer and a willing seller.
And believe me, for anyone who has ever seen investment bankers work a deal, it’s definitely hard work. Finding potential buyers and sellers, persuading them to become involved in a transaction, and making the deal happen amidst the myriad of risks that could undermine it is not a cakewalk. Long hours, the ability to deal with rejection, the uncertainty of the fee until the deal closes, grinding travel and pressurized work conditions are just a few of the hardships that investment bankers endure.
Inasmuch as such work is hard, it’s not for everybody. Thus, with really good investment bankers in short supply, they can command high compensation. And the good ones are well worth it. Where else will a seller or buyer find someone with a comprehensive list of direct contacts among potential parties to a transaction and extensive experience getting difficult deals closed? A principal to a transaction is simply renting those contacts and experience and, although often expensive, the investment banker is worth every penny if he or she can pull a deal together for the principal.
The foregoing is pretty basic stuff, so it’s alarming that a Senator from a state with more investment bankers than any other would engage in demagoguery over them. John Carney over at Dealbreaker sums up the irony quite well:

“Now being the First Lady for eight years and a Senator from a state in which you’ve never lived, that’s real work.”

And lest the Obama crowd get too over-confident with Clinton’s increasingly bizarre statements, get a load of this performance by Austin lawyer, former Austin mayor and current Texas state senator Kirk Watson, who has endorsed Obama:

Looking for other lines of work

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buser.gifSo Professor Buser, what did you plan on doing as a side occupation after your expert witness career? Judge Posner wants to know:

Buserís initial report proposed that if permitted by Allmerica to continue its market-timing trading, Emerald would have earned an annual rate of return on its investment
of 34 percent for 20 years, for a discounted present value of $150 million. That was a preposterous estimate, properly excluded by the district judge under Fed. R. Evid. 702. . . .
Buserís first report was so irresponsible as to justify the judgeís decision to exclude the second report summarily. Buser had demonstrated a willingness to abandon the norms of his profession in the interest of his client. Such a person cannot be trusted to continue as an expert witness in the case in which he has demonstrated that willingness, and perhaps not in other cases either.

The faux-analyst

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earnings%20call.jpgOne of the funniest things I read from this past weekend was this W$J article about the earnings conferences calls being crashed by a faux-analyst named Joe Herrick:

At least seven times just the past three weeks, a mystery caller has cleverly insinuated himself into the normally well-manicured ritual of the quarterly calls. As top executives of publicly traded companies respond to securities analysts’ questions about their balance sheets, he impersonates a well-known analyst to get called upon. Then, usually declaring himself to be “Joe Herrick of Gutterman Research,” he launches into his own version of analyst-speak.
“Congratulations on the solid numbers — you always seem to come through in challenging times,” he said to Leo Kiely, president and chief executive officer of Molson Coors Brewing Co., on Feb. 12, convincingly parroting the obsequious banter common to the calls. “Can you provide some more color as to what you are doing for your supply chain initiatives to reduce manufacturing costs per hectoliter, as you originally promised $150 million in synergy or savings to decrease working capital?”

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The Southwest Airlines culture

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Southwest_Airlines_logo-1.jpgWhile Continental Airlines continues its speculative merger dance with United Airlines, Southwest Airlines continues to be the most profitable company in the U.S. airline industry. This Jeff Bailey/NY Times article reports on the unique culture of Southwest that makes it an unlikely merger partner within the current round of consolidations in the airline industry. On the other hand, that special culture may also explain why Southwest is routinely the most profitable U.S. airline.

Criminalizing Capitalism

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handcuffs%20121308.gifIf I didn’t know better, I’d say that Nicole Gelinas has been reading (H/T Professor Bainbridge) my blog over the past several years:

[I]n the end, Sarbanes-Oxley has just made it easier for ambitious government attorneys to criminalize bad business judgment and complex accounting in hindsight. Further, in their focus on strengthening legal enforcement, the feds have passed up opportunities to create commonsense protections for investors. Worse still, the government has instilled investors with false confidence by implying that they can rely on prosecutors, not prudence, to protect their market holdings. Now the housing and mortgage meltdownówhich could hurt the economy far more than Enron didóis reminding investors that no law or regulation can protect them from economic disruption. [. . .]
As the economy heads into a possible downturn, calls will grow for someone to pay for the pain of another burst bubbleóand for yet more onerous rules, regulations, and prosecutions of businesses to prevent future crises. But no government mandate or punishment, however harsh, will stop companies and markets from being imperfect collections of fallible human beings. At the end of a decade of financial surprises, that may be the most enduring lesson of all.

As I noted here almost three years ago and have reiterated many times, the truth about Enron is that no massive conspiracy existed, that Jeff Skilling and Ken Lay were not intending to mislead anyone and that the company was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming commodities trading operation. Although there is nothing inherently wrong with such a business model, it turned out it to be the wrong one to survive amidst the perilous post-tech bubble, post-9/11 market conditions. Thus, when the markets were spooked by revelations of the embezzlement of several millions by Enron’s CFO and his relative few minions, the company failed.
However, Gelinas is spot on in observing that Enron’s failure was not a market failure. That Jeff Skilling failed to predict that Enron would fail is not a crime. Unlike his main accusers Andy Fastow and Ben Glisan, Skilling didn’t embezzle a dime from Enron. Did he tirelessly advocate on behalf of this innovative company? Sure, but since when is it a crime for a CEO to be optimistic — even overly-optimistic — about his company?
The primary justification for the absurdly-long sentence handed to Skilling is the plight of the innocent employees and investors who lost their nest eggs when Enron went bankrupt. But the main reason that those nest eggs ever had value in the first place was because Skilling had transformed Enron into the world’s leading energy risk management company through the creative use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers.
Although nothing is wrong with compassion for folks who lose money on an investment, rarely is it mentioned in the Enron morality play that many of those investors who lost their nest egg when Enron failed were imprudent in their investment strategy. They should have diversified their Enron holdings or bought a put on their Enron shares that would have allowed them to enjoy the rise in Enron’s stock price while being protected by a floor in that share price if things did not go as planned. Even though virtually all of those innocent Enron investors carry insurance on their homes and cars, one can only speculate why they didn’t attempt to hedge the risk of their investment in Enron stock. Most likely, many of the investors simply did not understand how Enron’s risk management services created their wealth in the first place.
Beyond the shattered lives, families and careers, the real tragedy of the post-Enron demonization of business is that it has distracted us from examining the tougher issues of what really causes the demise of a company such as Enron and understanding how such a company can be structured to survive in even the worst market conditions. It’s easy to throw a good and decent man such as Jeff Skilling in prison for most of the rest of his life, throw away the keys and simply attribute Enron’s failure to him. It’s a lot harder to try and understand what really happened.

Vetting the Trans-Texas Corridor

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Trans%20texas%20Corridor.jpgThis Ralph Blumenthal/NY Times article does a good job of summarizing the massive scale that is the proposed Trans-Texas Corridor project:

. . . the Trans-Texas Corridor, a public-private partnership unrivaled in the stateís ó or probably any stateís ó history, that would stretch well into the century and, if completed in full, end up costing around $200 billion. [. . .]
The plan envisions a 4,000-mile network of new toll roads, with car and truck lanes, rail lines, and pipeline and utilities zones, to bypass congested cities and speed freight to and from Mexico. [. . .]
The corridor project grew out of the 2002 governorís race when [Governor] Rick Perry, . . . surprised transportation experts by taking ideas they had discussed a decade earlier, to little interest, and ìsupersizing them,î as one recalled.
The project grew to consist of four ìpriority segments:î new multimodal toll roads up to 1,200 feet wide paralleling Interstates 35 and 37 from Denison in North Texas to the Rio Grande Valley; a proposed I-69 from Texarkana to Houston and Laredo; I-45 from Dallas-Fort Worth to Houston; and I-10 from El Paso to Orange on the Louisiana border. But the exact routes are years away from being designated.

The Dear Abby of business

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Lucy.jpgLucy Kellaway, Financial Times columnist and associate editor, pens an entertaining blog called Dear Lucy in which she solicits letters from businesspeople about various business problems. Sometimes she comments on them, but all the time she opens them up to reader comments, which range between the insightful, hilarious and bizarre. The following is last week’s letter:

I recently submitted an expense report following a routine trip to Frankfurt. Instead of attaching the total bill, I mistakenly attached a fully itemised printout. Unfortunately, this was returned to me, copied to my boss, with one item ñ ìPrivate Room Entertainment: Adults Only Movieî ñ highlighted as an illegitimate business expense. I ordered the film more out of curiosity than habit and am usually meticulous over my expenses. I work in the finance department and am a loyal and trusted employee. The form was seen by my secretary, though, and I am anxious that it may become a topic of conversation with her lunchtime colleagues. How do I salvage the situation?
Manager, Male, 43

The following was one reader’s advice:

“Go to work tomorrow dressed as a lady. It’s sure to deflect from any comments made.”

Warning labels?

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Enron%20stock%20price.gifRemember when the various credit-rating agencies contended that their relatively sanguine ratings of Enron’s debt up until the company went belly-up were the result of the company’s misrepresentations? One of the more ludicrous allegations was that the rating agencies didn’t understand the true nature of such relatively common structured finance transactions as derivative pre-pay transactions. Yeah, right.
Fast forward a few years and get a load of this W$J article:

In an acknowledgment that the system it used to rate billions of dollars of mortgage-related securities was potentially flawed, Moody’s Corp. said it is considering a new way of rating those and other sometimes-volatile structured finance vehicles.
The credit-rating firm is considering an overhaul of its rating procedures that could include new labels to help investors distinguish collateralized debt obligations and other structured-finance investments from corporate bonds and Treasury securities. . .
More broadly, the ratings firm is trying to decide whether to add warning labels that essentially acknowledge the limitations of its ratings.

Warning labels on highly-volatile structured finance investment vehicles? Barry Ritholtz has some fun with that one.

Are they finally getting serious?

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Continental%20Airlines%20logo%20020708.jpgThe Wall Street Journal ($) reported yesterday afternoon that Houston-based Continental Airlines seemingly perpetual merger negotiations (see also here) with Chicago-based United Airlines are accelerating for a variety of reasons. A Continental-United deal is contingent on Northwest Airlines’ ongoing merger negotiations with Delta Airlines because Northwest currently owns the right to block a Continental merger. However, that right evaporates if Northwest merges with Delta.
Whether all of this is the product of rational thought or irrational exuberance remains is another issue. As noted recently here and many other times on this blog, the airline industry is a mess overall and combining two large airlines does not necessarily provide any meaningful competitive benefit. Continental performed in the middle of the airline industry last year, doing reasonably well financially and operationally, but ranking ninth-worst in terms of frequency of bumping customers from flights. Only Delta was worse at bumping customers among the major carriers.
United, on the other hand, has been a basket case for years. In its first full year of operations after emerging from its long bankruptcy case, United’s earnings were among the worst in the industry last year (only JetBlue’s were worse). Moreover, United struggled with operations, ranking seventh in on-time percentage after a disastrous December that included numerous cancellations and delays. Meanwhile, United’s rate of customer complaints was second-worst, ahead of only US Airways, as Professor Bainbridge would attest.
So, what to make of all this? At this point, it’s hard to say, other than management of both airlines are probably betting that the biggest airlines have the best chance of survival when the inevitable shakeout of the industry finally is allowed to happen (chronic reorganizations of distressed airlines have delayed that process up to now).
Color me as skeptical.

A nice reward

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Pebble%20Beach%20no%207.jpgSo, what’s the reward for inducing Microsoft to overpay for Yahoo!?
Answer: Playing in the AT&T Pebble Beach National Pro-Am (scroll down to the bottom of the list).
Perhaps Bear Stearns’ board should have thought of such a reward? ;^)
By the way, Yang will be able to compare notes during the tournament with Houston’s Jim Crane, who can tell him a thing or two about a takeover battle.
Update: The Epicurean Dealmaker provides this alternately witty and elegant analysis of the Microsoft bid for Yahoo!