Archive for November 20th, 2008
November 20th, 2008
 Published Nov. 24:
When it comes to the histrionics gripping Wall Street — and Capitol Hill, for that matter, remember this:
It’s all a matter of perspective — what you see depends on where you’re standing.
From the CEOs’ side of the looking glass, their plight has all the romance and tragedy of a Herculean drama.
These mighty titans, like the mythical Greek hero, once ruled their empires armed with nothing but brute strength and clubs. In modern parlance, that’s synthetic collateralized debt obligations.
Sapped of their strength, stripped of their status, a final indignity — the last insult to their injured pride — is threatened: The treasure they amassed during their reign will be looted.
How have the mighty fallen, to be sure.
I wonder if these guys realized, when they began begging Uncle Sam to save them, that their least favorite uncle was going to hit them where they live: their take-home pay.
From this side of the looking glass, they must have. There has been entirely too much criticism levied at the enormous sums they and just about every other CEO on the planet take home every year.
Today’s CEO takes home 275 times what the average working stiff does, according to the Economic Policy Institute, the left-leaning think tank based in Washington. That means the average CEO earns more in a day than I do in a year.
But it isn’t their fault.
I don’t necessarily begrudge those higher salaries, as long as certain provisions are met:
The CEO’s salary must be commensurate with that of his (or her) work force — which doesn’t mean the average Joe on the production line should also take home several million dollars a year.
CEOs must provide a solid return on their shareholders’ investment.
CEOs must position the company for growth, among other things.
Some of them do well with this. Oracle Corp. CEO Larry Ellison comes to mind — his annual salary is $1 million or so, although his actual take-home is closer to $72 million — or Jeff Bezos at Amazon.com, whose compensation over the past six years has averaged about $1 million but whose take-home is considerably larger.
Others, in retrospect, are so suspect as to be laughable.
One of my favorites: Angelo Mozilo, the former chairman and CEO of Countrywide Financial, which was eaten by Bank of American before it could collapse this year.
His annual paycheck averaged $66 million. But once you factor in his total compensation — including salary, bonuses, options and stock — his take-home pay neared $200 million by 2006.
His company, one of the leaders in what later turned into the subprime-mortgage mess, was among the first casualties of this brave new financial world.
From my perspective, not a great return for shareholders.
Another one: Richard Fuld, former chairman and CEO of Lehman Bros., which declared bankruptcy a few months ago. Salary: $40 million.
Stanley O’Neal, former chairman and CEO at Merrill Lynch. Salary: $46 million.
James Cayne, former chairman and CEO at Bear Stearns. Salary: $40 million.
You get the idea.
But here’s a question for you: What do those four have in common, other than being rich, white, male and fired?
They were not only the chief executive officers of their respective companies, they were also chairmen of the board of directors, which set their overall compensation packages.
And which, of course, the CEOs lead.
The only person I recall who turned down a pay raise is Al Kaline, the former ballplayer, who once famously rejected his increase because he didn’t feel he deserved it.
A quaint notion, certainly, but one to which our modern CEOs don’t, apparently, subscribe.
Congress has wasted a lot of time this year calling the CEOs to Capitol Hill, asking them to justify their salaries.
Instead, let’s find out why the boards of directors think those numbers are justified.
November 20th, 2008
Published Nov. 17:
It is only a matter of time, I suppose, before the Bush administration steps in for another rescue of Detroit’s collapsing automakers. At this point, the only question is how much it will cost us.
The companies first received a mere $25 billion loan. But, as it turns out, they need more than that. And they need it right now.
They’ve since upped the ante to $75 billion, plus permission to tap into the government’s $700 billion bailout money.
Not that they don’t have reason. General Motors Corp. is hemorrhaging money, reporting a $2.5 billion loss and a cash burn of $6.9 billion in the third quarter — and offhandedly remarking that it could run out of money before the end of the year.
Privately held Chrysler LLC, for which its parent, Cerberus Capital Management, has been shopping for suitors, is doubtless in similar shape.
Ditto Ford Motor Co, which reported a mere $129 million quarterly loss but managed to burn through $7.7 billion in the quarter, although a massive loan it clinched last year puts it in a slightly better cash position than its crosstown rivals.
Into this fray steps the Center for Automotive Research.
The Ann Arbor, Mich.-based industry research group, which gets part of its funding from the automakers, wanted to know what would happen if two or all three of Detroit’s automakers folded.
“The circumstances are such that either of these scenarios is possible, and indeed one or the other is probable, within the next 12 months,” according to the report.
What comes next reads like Cormac McCarthy’s “The Road” written for auto industry analysts. Presumably without the cannibalism.
Consider:
If all three Detroit automakers go under, the first-year employment hit would be a loss of nearly 3 million jobs in the U.S.: 239,341 at the automakers, 973,969 at supplier companies and more than 1.7 million others who would suffer without the wages of the autoworkers. By 2011, the net job loss will have been reduced to 1.8 million because of increased U.S. production by foreign automakers and dislocated workers finding new jobs.
If just one or two of the companies fails, the first-year U.S. job loss would still approach 2.5 million before coming back somewhat in the second and third years. That’s because the domino effect of one major automaker going under would push several financially fragile auto suppliers under, interrupting production at the remaining companies, including foreign-owned automakers.
The loss of one or two companies also would reduce personal income by more than $125.1 billion in the first year and $275.7 billion over three years. If all three go, income would be reduced by nearly $400 billion.
And that’s just the first three years.
“However, it is assumed that the international producers would recover fully by the third year” and will have taken over about a quarter of the Detroit automakers’ production. Otherwise, the report says, the surviving domestic automakers would resume production of at least 50 percent of the pre-apocalypse era.
The report, issued on Election Day (which, I’m sure, was just a coincidence), is breathtaking, to be sure.
But it doesn’t change the fact that another government bailout won’t change the domestic industry’s business model.
And it just plain doesn’t work.
They’re still hamstrung by a slew of federal and international regulations, to which they have adapted only clumsily. They allowed themselves to be held hostage by the United Auto Workers and for years kowtowed to the union’s extravagant, sometimes-to-the-point-of-comical demands.
They again gravely misinterpreted the swings of the market and were left holding a bag full of trucks when consumers — presumably we actually mean it this time — clamored again for fuel efficiency.
Could they have foreseen gas prices that rose so swiftly? I doubt it.
Should it have occurred to them that gas prices would eventually, inexorably rise? That consumers would at some point want a variety of models to meet their financial needs?
Put it this way: If it didn’t, they don’t deserve to be in business.
November 20th, 2008
Published Nov. 16:
If you’re not feeling particularly upbeat about the economy lately, you have plenty of company.
But you probably already knew that.
Consumers en masse have retreated to the financial equivalent of bomb shelters, waiting for the markets to stop exploding. Wall Street, pale and emaciated, is feebly searching for a foxhole of its own. Retailers are already hoarding provisions, anticipating torpid holiday sales and the long, hard drought which will inevitably follow.
And industry after industry is lining up on Capitol Hill, hoping desperately the federal government will throw them a lifeline.
There is, however, light at the end of this long, dark tunnel. Unfortunately for most of us, the good news these days too often comes disguised as bad news.
But here it is: There is an end to the lean times. Market contractions are an inevitable part of market expansions. That’s cold comfort to many of us, crouched in our shelters and waiting for the fallout to dissipate, but the lean times, like the boom years, will pass.
Now for the actual bad news: The depth of a market contraction can usually be measured by the breadth of the euphoria that drove the expansion. And the expansion that began nearly a decade ago was, by 2005, edging out of euphoria and preparing to leap headlong into hysteria.
So I don’t expect to see any solid growth, and then only in some sectors, until 2012 or so.
But there is one thing you must keep in mind, however, as we weather the storm around us: The government isn’t saving you.
It’s trying, of course. Lately it’s been throwing money around as though it grew on trees (as luck would have it, the federal government does, in fact, own a Mint).
But that’s cold comfort, too, since we at the consumer level will start seeing the trickle-down effects of that money in, oh … 2012 or so.
More than two years ago, when we were still living blissfully beyond our means and banks were actually loaning money, a few number crunchers on Wall Street were giving their ledgers a second look. Some of their investments were failing. Spectacularly.
Then more of the moneymen began scratching their heads.
And suddenly, the majority of Wall Street’s power brokers were wondering how in the world they were going to talk their way out of the mess they had created.
That was in the third or fourth quarter of 2005, depending on how closely they were watching their books.
Remember, this contraction may have been heralded by the stunning — well, at the time it was — collapse of investment bank Bear Stearns in March, but it was growing long before that.
In fact, the week before Bear Stearns’ abrupt failure — when Bear executives were loudly proclaiming their financial good health — Federal Reserve Chairman Ben Bernanke made what, at the time, was an extraordinary announcement, calling the Fed the lender of last resort. Just in case, you know, anybody needed money.
The trillions of dollars (you heard me) the government will end up throwing at the loudest problems in the market may help. At this point, it may not. There’s only so much the government can do, after all, beyond forming regulatory committees and scolding the financial institutions who are obstinately refusing to abide by the rules set by the regulatory committees.
At the end of the day, the government — bogged down as it is in bickering over who gets how much — won’t be the force to pull us out of this mess.
As always, we’ll pull ourselves out of it. We got ourselves into it — you’ve heard me countless times, Faithful Reader, decrying the debt that always destroys our booms — and no matter how much of our money the government spends, it will be up to us to get us out.
With or without the U.S. auto industry.
November 20th, 2008
Published Nov. 10:
Every day, the news gets a little bleaker.
Like you, I watch the markets, I keep an eye on economic indicators, and I pay attention to the interaction of business and government. I try to read between the lines of balance sheets and press conferences to determine whether what they say is true.
And I watch the headlines.
Let me recap a few from last week: “Government to borrow record funds.” “Lack of credit leads to mounting manufacturing losses.” “Banking industry tightens lending.”
Right about then, I became supremely irritated. Because by now it’s clear that too many of the big lenders are still trying to hide behind the illusion that Wall Street built.
And we all know what happened there.
The wreckage littering financial markets these days — the detritus left behind from the collapse of too many companies to mention — was inevitable, given the amount of risk they allowed themselves and the self-enforced blindness that drove their reasoning.
But I remain in a state of dazed disbelief over the events of the past few years. I find it stunning that so many smart people would sacrifice success for easy money, would mistake the growing demand for questionable securities as a solid foundation on which to build wealth.
A few weeks ago, former Federal Reserve Chairman Alan Greenspan was roundly criticized for some of his testimony to the House Committee of Government Oversight and Reform.
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity are in a state of shocked disbelief,” he said.
I’m with him.
I also believed that Wall Street’s smug preoccupation with its own invulnerability would ultimately protect it, particularly in a place where hours and days are measured in dollar signs. I’m no genius, but even I know that allowing my employer to fall apart just isn’t a smart business strategy.
So it took me a while. But I get it. Alas, that fundamental reality seems to be eluding the remaining big lenders.
Last week’s headlines revolve around one irrefutable premise: Banks must start lending again to keep what’s left of the economy from a further free fall.
The government’s doing its part: borrowing more than $500 billion right now — and that’ll just get it through December — to keep up with the bailouts that have been promised to banks, not to mention the billions more promised to various other groups, including Freddie Mac and Fannie Mae (whose executives marked the occasion by going on a $6,000 golf outing).
The $700 billion bailout promises that the feds will provide much-needed capital to banks as long as those bankers start lending it.
It’s also sending the country’s debt into the stratosphere; some estimates put it at $2 trillion by the time we save everyone who made a questionable decision five years ago.
In the meantime, banks are, for the most part, reneging on their part of the bargain. They’re still not lending.
Oh, they’ll take as many billions as the government offers, but they’re not going to jump back in the game.
They’ve spent all the time they can handle in the game, and every one has been singed — some more than others — because they all got taken in by the same siren song: bad investments cloaked by slippery accounting.
So I have a suggestion for the federal government: Let’s hold off on that loan.
Throwing good money after bad didn’t save all those Wall Street guys. It won’t save the American taxpayer, either.
November 20th, 2008
Published Nov. 9:
In my little corner of the world, two distinct opinions were battling for supremacy last week.
Resoundingly — and I have to say surprisingly — most echoed my assertion in last Sunday’s newspaper: Let them fail.
The Detroit Three automakers, that is, and their bid for (at last count) $75 billion from the federal government to stay afloat.
About 70 percent of those who got in touch with me last week also were against the bailout.
The U.S. auto industry has gotten plenty of taxpayer help in its 100-year history, they said, and here we are again. What guarantee do we have that the industry will position itself to finally stand on its own this time? When do we say enough is enough and allow the market to determine which companies live and which die?
As for the rest, they didn’t necessarily support the bailout as much as they opposed such heresy. How can we stand idly by while the domestic automakers — one of the engines driving the U.S. economy — sputter and die?
I couldn’t disagree with them. It broke my heart to write that column.
But this is business, and we cannot allow emotion to conquer reason.
They tried again: We’d be forced to buy foreign cars!
Sure we would. But we’re doing that already, from automakers who aren’t looking for a handout. Who had been thriving as they built cars on American soil and are only now starting to see sales declines as consumers react to the worldwide crisis by keeping a stranglehold on their money.
But my critics are a resolute bunch. They tried again.
Think of the jobs that will be lost, they argued. You think the economy’s bad now?
Once again, they got no argument from me, other than to note thousands of autoworkers already have fallen victim to the crisis.
And more are on the way:
In Janesville, Wis., the 90-year-old General Motors Corp. plant will close permanently in December, its remaining 1,200 workers to join the ranks of the unemployed.
Last week, Chrysler LLC offered voluntary buyouts to nearly all the workers at the Belvidere assembly plant to make some room for workers from newly shuttered plants.
And GM is planning to cut an additional 5,500 salaried and factory workers and Ford an additional 2,260, the automakers announced Friday.
Granted, that’s small potatoes, relatively speaking.
Those job cuts, while catastrophic to the workers and their families, are minor ripples in comparison with the complete failure of one or more of the domestic automakers.
But the U.S. would survive and, I believe, be the stronger for it.
My critics can take heart, however: My opinion isn’t likely to make much of a difference.
On Saturday, congressional Democrats, chief among them House Speaker Nancy Pelosi, pressured the Bush administration to allow the automakers to tap into the $700 federal bailout program, and President-elect Barack Obama has pledged to support the struggling companies — as long as they start making real changes.
“I’ve made it a high priority to … help the auto industry adjust and weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States of America,” Obama said Friday.
Back to the drawing board.
