The New Status Quo

Healthcare Reform Isn't Transparent

2009-09-24T02:52:00.002-05:00

Commenting on: Senators Debate Transparency of Health Care Bill

Typical nonsense. Let's pass a healthcare bill but not discuss its actual contents or cost online at least 72 hours in advance of any vote. This is transparency? The arrogance of Congress is astounding. Moreover, this behavior exemplifies the paternalistic and condescending attitude towards the American public (i.e., we'll tell you what WE think you need to know).

Implications of Lack of DIP Financing

2009-08-03T00:09:00.008-05:00

Commenting on: Default Increase Curbs Bankruptcy Lending as Recoveries Dwindle

This suggests to me that we are a long way from a true economic recovery. If private companies seeking to reorganize cannot obtain DIP Financing at all or not on reasonable terms, unemployment will continue to rise as will lease vacancies, and commercial lease rates will decline. This does not bode well for commerical real estate valuations unless Uncle Sam decides to perform another socialist bailout.

Wall Street Gluttons Return

2009-08-02T23:42:00.006-05:00

Commenting on: http://www.bloomberg.com/apps/news?pid=email_en&sid=ahRV7KbfekAw

Of course the remaining Wall Street firms are back to their old spending habits courtesy of the U.S. taxpayer. It sickens me that these supposed "capitalists" received billions of dollars of government money (via government redistribution of income/wealth) virtually guaranteeing them huge profits. For that, they are going to receive huge bonuses and spend like gluttons, figuratively and literally. These Wall Streeters should be ashamed of themselves for putting the country at risk and now they're laughing all the way to the bank because the Bush and Obama Administrations didn't force them to absorb their own losses. Absolutely disgusting.

Goldman Sachs: Still Arrogant and Unrepentant

2009-07-26T13:09:00.003-05:00

Last week Goldman Sachs (GS) reported record profits for the April through June 2009 quarter. Quite a difference for a firm that was nearly insolvent less than a year earlier. But thanks to the TARP and favorable borrowing terms from the Federal Reserve, Goldman was able to use taxpayers' funds primarily for the benefit of its shareholders and employees.

In announcing its stellar quarterly earnings of $3.44 billion or $4.93 per share, Goldman stated that it was setting aside $11.36 billion for an employee bonus pool, or $386,489 per employee. According to the Wall Street Journal, Goldman is on track to set aside $20 billion for the year or $700,000 per employee. Under any circumstances, such bonus compensation would be considered sensational. But given the actual circumstances under which its profits were "earned", the projected bonuses are reprehensible and unjustified.

The justification for such bonuses should reflect the risk/reward undertaken to achieve them. Unfortunately, that is far from the case in this instance. Rather, Goldman's apparent success is a function of a confluence of events which had very little to do with the adeptness of its management or employees.

As alluded to above, Goldman was in severe financial stress last Fall as the U.S. financial system was under assault. First, Bear Stearns effectively failed and was sold off to J.P. Morgan Chase (JPM) for $10 a share. Second, Lehman Bros. was forced into bankruptcy after the federal government decided not to bail it out. Third, other financial institutions nearly collapsed and were forced to sell for a fraction of their value only months earlier. Consider Washington Mutual, Merrill Lynch and Wachovia for example.

After the Lehman failure, the financial woes of the U.S. financial system worsened rapidly. The Government enacted the TARP to prevent a further avalanche and in the process created a bailout nation mentality, as least among the largest financial institutions.

A huge beneficiary of TARP funds was AIG. As of today, AIG has received approximately $180 billion of government funds and guarantees for other substantial obligations on its books depending on the ultimate value received for the vast inventory of credit-default swaps and related derivatives on its books.

Of the AIG TARP funds, Goldman received nearly $13 billion. Without those funds, Goldman would likely have suffered a significant loss on the counter-party liability due from AIG. Although Goldman claims that it was really never at risk and was substantially collateralized, Goldman showed no hesitancy in accepting the AIG TARP funds as opposed to enforcing its contractual rights. Clearly, if AIG had gone out of business, it is far from certain as to the nature and extent of AIG's total liabilities and of those particularly due to Goldman, and how such obligations would be treated vis-á-vis other creditors of AIG.

Aside from those funds, Goldman also received $10 billion of TARP funds directly. Of course, this was only after Goldman received nearly instantaneous approval to change its status from an investment bank not regulated by the Federal Reserve to a bank holding company that is. Without the change in status, Goldman would not have qualified for TARP funds and it would have had to raise additional capital from private sources.

In fact, before becoming eligible for TARP funds, Warren Buffett invested $5 billion in preferred stock of Goldman in exchange for a cumulative annualdividend of 10% and warrants to purchase 43,478,260 shares of common stock bearing a strike price of $115. In contrast, thanks to Henry Paulson, the then-Treasury Secretary and former CEO of Goldman, the U.S. government only negotiated to receive a cumulative annual dividend of 10% on its preferred stock investment and warrants to purchase only 12,205,045 million share of common stock with a strike price of $122.90. In effect, Buffett received twice the dividend rate of return on his equity investment to that of the government (even though the situation was more dire when the government invested the TARP funds) and 31,273,215 more warrants than the government at a strike price almost $8 lower. Clearly, the government's below-market equity investment terms were a benefit to Goldman, which would have had to pay at least the same terms to a private investor as received by Buffett (which, given the government's investment, would have equated the right to purchase almost 87 million shares at a strike of $115) and likely much more, given the severity of the situation when the government made its TARP investment as the likelihood of repayment was even less certain at that time.

Besides the TARP, as a result of Goldman becoming a bank holding company, it was given access to the Fed Discount Window, meaning that it could borrow billions of dollars from the Fed at rates as low as .10% and then deploy those funds. Now, the original intent of such borrowings was to enable "banks" to make loans to creditworthy borrowers to spur stagnating economic growth. Such borrowings were not intended as a mechanism for Goldman or other banks borrowing such funds to either purchase other government instruments bearing a higher rate of return or to fund a bank's proprietary trading operations.

But that is exactly what Goldman did. They didn't make a single commercial loan, nor did they accept a single customer deposit. They used the funds to make money on the spread between the almost non-existent cost of borrowing from the Fed and government-guaranteed rates on return on U.S. bond instruments (i.e., bonds issued to fund the Fed borrowings and other government obligations) and related instruments and derivatives. Net net, the government loaned money to Goldman so that Goldman could buy the bonds/instruments being sold to loan money to it and other financial institutions.

Goldman profited handsomely as a result of all of this government assistance, TARP and Fed borrowings. They were literally guaranteed a substantial profit merely by borrowing as much money as possible and then buying government-backed securities bearing a higher rate of interest. Additionally, Goldman took advantage of its nearly monopolistic bond trading operations. With the departure of Bearn Stearn and Lehman Bros. and with Merrill Lynch becoming a shadow of itself due to its acquisition by Bank of America (BAC), there were only two of the principal bond trading operations existing from at least five only months earlier, the other being Morgan Stanley (MS).

While there were other firms trading bonds, Goldman had and retained a significant competitive advantage due to the loss of three of its principal bond trading competitors.

As a result of all this, Goldman posted record earnings. Was that due to Goldman's talent? The skill of its management and its employees? Or did Goldman benefit from the TARP and easy Fed money and fewer competitors in the marketplace? To put it bluntly, Goldman did benefit mightily and for its management to now seek to compensate itself and its employees as if its skill and expertise alone were the only or primary reason for its success is arrogant and condescending.

Yet, that is what Goldman appears to be doing. Other than a perfunctory acknowledgment of thanks to the U.S. government for its assistance, Goldman apparently hasn't learned a thing, certainly not about humility or avoiding ostentatiousness. Consequently, the outrage from the public and Congress has been strong. And even President Obama has counseled against payment of out-sized bonuses by those firms that benefitted from the TARP and other government assistance now that they have returned to profitability due in no small part to U.S. financial assistance.

If Goldman and other banks do not take this advice to heart, it is quite likely that new legislation will attempt to rectify this compensation issue or at least to prevent it from occurring again in the future.

Disclosure: Long BAC and no other positions.

CIT Execs Should Resign

2009-07-22T10:36:00.006-05:00

I don't know who is supposed to be happy about the CIT bondholder-led financing. Certainly, not the shareholders, unsecured creditors or the non-participating bondholders. Nor the customers of CIT who are likely going to have to find alternative sources of financing when CIT does file Chapter 11 – and it will.

No, the only people who benefit from this "usurious" loan under "duress" are the participating bondholders (the "Passive-Aggressive Lenders" or "PA Lenders", for short).

And, perhaps, the Obama Administration which can now proclaim that capitalism finally exists and works in this country because it refused to provide TARP funds in addition to the $2.3 billion already provided.

Note: I use the appellation Passive-Aggressive Lenders because this is the same group of bondholders who has stood on the sidelines for the past several months, such as PIMCO, obviously waiting for a government-style bailout that wouldn't cost them a cent of principal. You know, the people like Bill Gross who presumably calls himself a capitalist even though he will gleefully promote government handouts or guarantees to serve his own agenda.

But when the government refused to play ball, the nice PA Lenders turned downright nasty and imposed "egregious terms" and what Sean Egan, president of Egan-Jones Rating Co., referred to as "Don Corleone Financing."

Let's consider the financing terms. A new lending facility of $2 billion initially. Fee for providing loan: 5% of principal amount or a quick $100 million. Interest payable at 10% over LIBOR, with a minimum LIBOR rate of 3%.

Therefore, the minimum interest charged will be 13% per annum. In exchange for the $2 billion, plus another $1 billion in less than a month (not sure if additional 5% fee applies to that sum as well, but why wouldn't it?), PA Lenders receive a security interest in previously unencumbered assets of CIT having a nominal value of at least five times the $3 billion loan amount.

Let's just say the PA Lenders received really, really good collateral coverage, or so it seems if the numbers bear any relationship to the truth. A good synopsis of the most relevant terms is set forth in a Bloomberg article entitled: CIT Rescue Group 'Ripped' Lender With 5% Fee, Collateral Demand.

Has anything been solved by CIT's new borrowing? Very little, if anything, as a bankruptcy filing is nearly inevitable. Why? Because CIT has lots of bad loans on its books and its good customers will probably jump ship as soon as they can find a more stable lender than CIT. In order words, CIT's business is kaput with or without a bankruptcy.

Who do we have to thank for this pitiful mess. Jeffrey Peak, CEO of CIT, and the Board of Wreckers, er ..., Board of Directors of CIT. By approving this financing deal, they committed one of the deadly sins of management (in addition to all their prior poor management decisions) ... believing that any alternative is better than a Chapter 11 which must be staved off at all costs no matter what. (Remember how GM sucked up TARP funds for months before it eventually had to file for bankruptcy anyway?)

While it's true that the date of bankruptcy has been temporarily delayed, the bond rating agencies and the FDIC, by their actions or inactions, don't seem convinced that CIT's problems have been adequately addressed by this pathetic stop-gap measure. On the other hand, CIT has now given up any negotiating power it may have had in a Chapter 11 with billions of dollars of unencumbered assets at stake. Hey, maybe a regular unsecured creditor/bondholder would have rather taken its chances with an unsecured claim equal in priority to the PA Lenders unsecured bondholder debt (the outstanding debt prior to the new $3 billion or secured debt).

Now, even though only the new financing is secured, the excessive fees and interest will surely more than compensate the PA Lenders for the new loan as well as a way to make back some money on the old stuff outstanding.

There was an interesting wrinkle along with the new financing. CIT has initiated an exchange offer to buy back $1 billion of bonds maturing in August for 82.5 cents on the dollar. So, while the PA Lenders loot the remaining unencumbered assets, unsecured bondholders who would have had a right to share in the proceeds of those assets until last weekend are being asked to compromise their claims.

Why should they unless shareholders are wiped out? Why should they now that the PA Lenders have extracted unreasonable loan terms from an insipid CIT? Frankly, I am surprised that the bondholders with upcoming maturities haven't filed an involuntary bankruptcy petition to stop this mismanagement of CIT's assets as they know for certain they are not going to be voluntarily paid in full.

In sum, the new financing was not commercially reasonable. It encumbered at least $15 billion or more of theretofore unencumbered assets. The fees (and there are many in addition to the initial financing fee) and interest rate on the new financing are unserviceable for any length of time. The CEO and the BOD have completely mismanaged the company to the brink of bankruptcy while begging for another government intervention as opposed to coming up with an intelligent strategy for restructuring the company months ago before it got to the brink or instituting an orderly wind-down of its assets with sufficient notice to its customers to find alternative sources of funding.

The CEO and BOD of CIT have exhibited an unforgivable level of incompetence. The only saving grace would be for the CEO to immediately resign or be terminated and then the last act of the BOD before resigning themselves would be to appoint a new CEO who knows how to liquidate a company that others have screwed up.

Disclosure: No position in CIT.

Unintended Consequences of TARP Mentality: California IOU's

2009-07-08T20:20:00.016-05:00

It's hard not to get a bit disgusted by the lack of political will to resolve the California budget crisis within its own borders. It has been apparent for months that California tax revenues would be substantially lower than projected and that the budget would be impacted accordingly.

What did Governor Schwarzenegger and the California legislators do to prepare for and respond to this crisis? Nothing, nada, zilch. Instead of developing of plan to stem mounting costs, to issue municipal bonds to fund a portion of the shortfall and to temporarily increase tax revenues (with an automatic sunset), the bickering continued and the June 30 fiscal year ended without a budget in place for next fiscal year.

Since then, California has been operating in never-never land with no concrete plan yet on the table. But now that the state has bills to pay and no money to do so they've decided to issue paper IOU's to pay their liabilities bearing a 3.50% interest rate with an October 2, 2009 payment date. Problem is a paper IOU is of questionable value. Its value depends on whether California will ultimately get its act together and figure out a way to fund its obligations, something that is far from assured.

Bank of America set the tone for dealing with the IOU's which was quickly adopted by other California banks. BAC stated that it would accept them as cash equivalents but only through Thursday, July 10, 2009. Why not through October 2, 2009? Because BAC concluded that leaving the IOU's commitment open for several months would not exert the necessary pressure on the State of California to resolve its budget/fiscal problems.

Let's think about the irony of BAC's position. Just last year, Ken Lewis, CEO of BAC, entered into an ill-conceived and ill thought-out merger with Merrill Lynch. He basically decided to pay $50 billion for Merrill over a weekend without understanding the nature of potential losses and by paying a premium for a company whose stock price would have surely fallen to a fraction of the cost paid in just a couple days after Lewis acted. To add insult to injury, after he found out the extent of the Merrill losses, Lewis didn't even bother to tell BAC shareholders so that they could decide if the deal made sense. But that is not the point of this blog post.

I mention the BAC-Merrill deal only because at the same time as Lewis was galavanting around trying to satiate his ego as opposed to working on behalf of shareholders, BAC was also in a financial crisis exacerbated by the Merrill deal. In fact, BAC became one of the largest TARP recipients receiving a total of $45 billion of taxpayer funds.

But BAC was not alone as all of the large banks were required to take TARP funds whether they needed them or not, and most of them did. Stately more starkly, BAC and the other TARP financial institutions were bailed out by the U.S. government via the American taxpayer.

Fast forward. California doesn't solve its budget crisis and the longer it doesn't do so, the more call there is for some sort of bailout or assistance from the federal government. To date, the Obama Administration's, to its credit, has rejected those pleas due to the consequences of the dangerous precedent it would set, to wit: that virtually every other state would then also seek federal government assistance -- something this country cannot afford on top of the already trillions of dollars of debt racked up in the past year.

Having been turned down by the U.S., did California change its ways and get down to business?No, instead it continues to engage in a game of chicken with the American taxpayer, whether by design or sheer lack of leadership and discipline. Where does that leave us? Either the taxpayer bails out California or BAC and the other TARP banks in California will have to accept the IOU's past their current self-stated deadline of tomorrow. If the banks do stand firm on their threat, California will essentially be bankrupt from a liquidity perspective and hundreds of thousands of government employees will not receive paychecks and government services will grind to a halt in a matter of days.

On the other hand, if BAC and the other TARP banks do accept the IOU's for the next several months and the budget crisis in California is still not solved, we could have the unintended consequence of a TARP bank taking huge losses or write-downs on the IOU's they are then-holding. So either the TARP recipients bail out California indirectly (with implicit U.S. backing) or the U.S. government is likely going to end up bailing out California and a longer list of states that come calling thereafter.

Perhaps the most long-lasting problem with the TARP is that, even after TARP funds are repaid, there will not be an end to the mentality it created. It basically told irresponsible banks that they didn't have to pay the ultimate price of insolvency, even though they were insolvent, because they were "too big too fail". Now, the federal government is in the same position vís-a-vís California as it was with the TARP banks. Essentially, the question now becomes whether California is too big too fail and, if it is, the federal government will have no choice to come to its rescue. And so goes the TARP.

Signs Economic Recovery Not in Sight

2009-07-03T21:19:00.020-05:00

Here is just a sampling of signs that the economic recovery is nowhere is sight:

California is issuing IOU's for billions of dollars of current obligations. State workers to be furloughed three days per month.

Unemployment rate hits 9.5%, with 467,000 jobs shed. Job losses accelerating from previous month with estimates for unemployment to exceed 10% up to 11%.

Automobile sales are still suffering despite massive incentives. Consequently, gross margins are being compressed. Sales without profits is not a recipe for long-term survival. Lear and other suppliers to file for bankruptcy relief as sales slow and margins disappear.

Once the current buyers of vehicles have bought at heavily discounted prices, sales will continue downward cycle as all who could afford and wanted to buy will have already done so.

People who are unemployed or who fear job loss are not going to buy cars or fund an economic recovery. This is a nonsensical fallacy.

The recent stock market rally is not based on improving fundamentals. It is based more on the herd mentality of Wall Street. The investment laggards must buy into the fool's rally to supposedly avoid falling further being competitors. Unfortunately for them, their clients are not going to participate in the recent rally; instead, they will suffer further losses as the market retreats.

The FDIC has already shut down more banks this year than last year in its entirety by a factor of two.

Home prices are still declining. The only increase in home sales relates to foreclosured properties or those in the midst of foreclosure.

Consumer credit is constricting at a rapid pace and banks reduce credit risk and the cost of that reduced credit is ballooning. Hardly the condition for a return to prior consumer buying habits.

The U.S. dollar is being continually devalued due to outrageous defecit spending. The value of the dollar versus other currencies will continue to decline if the profligate spending continues. It may already be too late to stave of a tidal wave of inflation once the world economic recovery returns in full force, two, three or more years from now. Don't expect an economic recovery until unemployment begins to decline for a substantial period of time and consumer credit eases.

China has already indicated its intention to rely less on the dollar as the sole global reserve currency. As that movement expands, borrowing costs for the U.S. will continue to rise.

The American taxpayers is being stressed to the max even before the cost of a new health care system and of environmental "cap" and "trade" are factored in.

Similar to California, state governments throughout the country are on the brink of collapse due to the failure to align actual current revenues with prior outdated prognostications of revenue. State legislators lack the political backbone to curtail spending even in the face of economic catastrophe AND just as every individual household must do when sources of income decline.

There are no "green shoots" of any lasting consequence. Whatever "green shoots" supposedly existed were manufactured by government manipulation of our capitalist system.

When the government no longer respects contracts or the rule of law that has governed business relationship from time immemorial (with few exceptions) in favor of general notions of the public good or socialist tendencies, we are not fomenting the conditions for economic recovery but just the opposite as entrepreneurs and businesses can not rely on the sanctity of their negotiated arrangements.

Governor Sanford's Disappearing Act

2009-06-23T17:58:00.008-05:00

The bizarre behavior of Mark Sanford, the Governor of South Carolina, last weekend through today cannot be explained. He apparently decided to go on a jaunt outside of the state and basically remained incommunicado during his absence.

Aside from the fact that the story sounds a bit strange, particularly since he is a father and it was Father's Day Weekend, his wife didn't even know where he was or how to reach him.

All of this wouldn't be a matter of public concern but he is the Governor of South Carolina and he was derelict in his duty to simply take off without advising the Lt. Governor or Law Enforcement. His absence also set off a panic of sorts in South Carolina. Valuable police and security resources were wasted in efforts to determine his whereabouts.

His explanation: I went hiking and needed some down time. Unacceptable! No one is denying him the right to take a vacation but E.T. call home. To vanish without a trace seems odd, at a minimum, for someone who is the chief executive of a state.

Fortunately, there weren't any major crises in South Carolina the past several days, but what if there were? What if a hurricane was approaching? What if some other natural or man-made disaster occurred and Sanford was MIA?

Perhaps he is suffering from stress, perhaps he is hiding something, perhaps there is some other explanation. Who knows? But, even if there were, the complete secrecy in inexcusable under any circumstances and it surely eliminates him as a future presidential candidate in 2012. Unless the Republicans are so desperate and stupid to try to explain this away to the American public.

Public officials aren't perfect, but we shouldn't make excuses for them either. Sanford acted irresponsibly and instead of taking responsibility now he is acting as if his absence was either no big deal or a misunderstanding. This does not pass the smell test and he needs to answer some tough questions not only about his behavior and the power vacuum it created and the needless expenditure of state resources, but also about his mental condition generally.

Frankly, I don't think South Carolinians want an oddball running their state. And, right now, Sanford definitely falls into that category.

Are Starbucks and McDonald's Primarily Competitors or Fortuitously Engaged in a Symbiotic Relationship?

2009-06-22T03:55:00.007-05:00

A coffee war has been brewing for some time now between Starbucks (SBUX) and McDonald's (MCD). For years, Starbucks had the gourmet retail coffee market largely to itself. Sure enough, there were other large competitors such as Caribou Coffee (CBOU) and Peet's Coffee & Tea (PEET), but they didn't and don't possess the scale and cachet to eat into Starbucks' market share to any great degree. While McDonald's and other fast food establishments had always served coffee, it was merely a necessary menu item and certainly not a profit center.

Dunkin' Donut's is the obvious exception to this generality (along with 7-Eleven to a much lesser degree as it is a more direct competitor of Dunkin's transient and sporadic coffee customer), but it has always attracted a different demographic than Starbucks. Why do I make that statement? Because Dunkin' Donuts has been around since the 1950's and preceded Starbucks' existence by decades. Clearly, the two competitors played in different areas. And so it went for most of the 90's and the first few years of this decade. (The same analysis can also be applied to 7-Eleven.)

In the past few years, Starbucks finally awoke the sleeping giant. McDonald's, with at least 13,800 outlets in the U.S. and over 30,000 in the world,and continuing explosive growth in China and other areas of the globe, realized that Starbucks was not only eating into their coffee revenue but breakfast sales as Starbucks began selling more food items throughout the day, with an especially big push into the breakfast market.

After some fits and starts, McDonald's came out with a brand of speciality coffee drinks both hot and cold. And they tasted good and were cheaper than Starbucks' fare. McDonald's began to reverse the trend of market share declines and instead began to capture previous Starbucks loyalists. Starbucks' stock started a downward spiral exacerbated since 2007 coinciding with the overall economy. No longer was it affordable for many to spend $4 or more a day on their favorite Starbucks concoction.

Howard Schultz, Chairman of Starbucks and the mastermind of its phenomenal growth, took back the CEO reins in early 2008. He adopted a plan to ward off McDonald's and the economic malaise. While his leadership has reinvigorated Starbucks, his results to date have been mixed though he has seemed to stop the hemorraging to at least a slow bleed.

But in the midst of the McDonald's challenge and the economic crisis, a funny thing has come to pass. McDonald's and Starbucks have become stronger competitors of each other and many of the independent coffee shops and small chains have gone or are going by the wayside. For while Starbuck's always threatened the independents' survival due to its size, scope and customer loyalty, the additional assault by McDonald's has proven too much. As a result, the fierce competition between Starbucks and McDonald's will actually benefit both of them in the future at the expense of many former coffee retail rivals.

Based on the above, I believe that the coffee market will be left with three behemoths, Starbucks, McDonald's and Dunkin' Donuts, all of which compete for a limited common target market, yet each of which appeals and will continue to appeal to its diehard demographic due to the difference in qualitative experience.

For example, according to Howard Schultz, Starbucks is what he refers to as the " Third Place". That place away from home and the office where people can relax and hang out, surf the internet and conduct business with laptop computer in tow. It is a place for high school and university students to study and socialize, for yuppies to mingle with each other and their young kids. This is a predominantly Starbucks demographic.

McDonald's sells good coffee but is not a particularly desirable or "cool" place to hang out or go "wireless" via computer or other gadgetry. It primarily appeals to people in a hurry who are looking for value. They are not lingerers. It is not a "so-called" Third Place like Starbucks.

And then there's Dunkin' Donuts which has rejuvenated its coffee product line but still appeals primarily to the more middle-class demographic that it has always had before and after the emergence of Starbucks and the coffee ascension of McDonald's. Its growth story largely remains intact and it serves many rural markets that are not economically feasible for Starbucks. For this reason, I believe that McDonald's is actually a greater threat to Dunkin' Donuts than Starbucks because they do compete for the rural demographic. Having said that, Dunkin' Donuts owns the late-night crowd. It is typically open 24 hours a day in most locations not just for drive-thru but for in-store service.

While Starbucks has some stores that fit within that category, they are few and far between and, at least to this point, only seem economically sensible in large urban markets with a large clientele nearby a particular location that garners traffic in the wee hours. Similarly, McDonald's serves most late-night customers via drive-thru as it also only has a relatively small number of in-store service late night outlets, especially in comparison to the percentage of its outstanding restaurants vís-a-vís Dunkin'.

In conclusion, the brutal competition particularly between Starbucks and McDonald's has made each one stronger in relation to the overall retail coffee market. The competitive landscape has reduced the number of smaller competitors which benefits both of them. And while they have some overlapping clientele, they each present a different qualitative experience with a strong and loyal following and that is unlikely to significantly change in the foreseeable future.

Disclosure: Long: SBUX, No position: MCD, CBOU, PEET

The New Rules of Government Capitalism

2009-06-14T03:18:00.002-05:00

To My Fellow Citizens:

Please be advised that effective immediately (i) the economic system heretofore known as "Capitalism" in the United States of America shall now be known as "Government Capitalism", and (ii) the following rules, to the extent not already in effect, shall be implemented immediately.

1. Any person who purchased a home or other real property without sufficient income to afford the mortgage payments and/or without sufficient documentation of his income, and/or who was advised by a mortgage broker or lender that his mortgage could be refinanced in the future because real estate values always go up in value (and without question accepted such assumption as valid because of greed, stupidity or ignorance), shall be entitled to a modification of his mortgage to the extent necessary to ensure that the owner will not only be able to make the modified loan payments based on a reduced principal amount, but also will be entitled to realize all of the profit generated from a future sale of the property without having to repay the amount of the reduction of the mortgage. The cost of the mortgage reduction shall be absorbed by such person's neighbors and other taxpayers, who have continued to pay their mortgages without government assistance and who only purchased properties they could actually afford based on their incomes.

2. All banks and other financial institutions that failed to properly manage their risk and instead sought to increase their profits by use of excessive leverage that was based on a continued increase in the value of real estate, and whose failure would cause "systemic risk", as arbitrarily defined by the Treasury Department and the Federal Reserve (since no written definition thereof exists, or if it does nobody knows how to apply it except arbitrarily), shall be entitled to billions if not trillions of dollars of government bailouts to create the artifice of solvency. The U.S. Government will increase the deficit by up to or exceeding $2 trillion in the next fiscal year (and trillions more in subsequent fiscal years) by borrowing money from the OPEC nations, China and Japan and other countries that currently maintain massive trade surpluses with the U.S.

3. In addition to U.S. Government borrowings, the Federal Reserve will print money to the extent necessary to fund any shortfall from the aforesaid borrowings. In addition, the Federal Reserve shall continue to loan trillions of dollars to the mismanaged financial institutions to guarantee that they make profits in the future at the expense of the American taxpayers and of retirees and other individuals who prudently saved money ("Risk-Averse Investors") on which they were anticipating a reasonable rate of return to fund their ongoing living expenses without having to deplete their principal balances.

4. Any financial institution that was insolvent based on FASB mark-to-market accounting rules in effect until FASB buckled under political pressure and quickly changed them, and which received U.S. Government and Federal Reserve assistance shall remain in existence. Shareholders whose interests were actually worth nothing and were not entitled to retain an ownership stake in such insolvent institutions without infusion of additional capital from them, will nevertheless continue to own their shares in such institution on a diluted basis. Such dilution shall be as little as possible even though private investors in such institutions received or would receive a much higher percentage ownership of in exchange for the same level government assistance in such institutions, whether in the form of bailouts or continuing policies to funnel money to such institutions by the manipulation of interest rates by the Federal Reserve at the expense of, among others, the Risk-Averse Investors.

5. If a federally-chartered bank is sufficiently large so as to possibly cause said systemic risk, the FDIC will not declare the bank insolvent under any circumstances. The U.S. Government via the Treasury Department, in conjunction with the Federal Reserve and and the FDIC will devise a plan to manipulate the bond market and the stock market to benefit those parties who are the least deserving of assistance.

6. In accordance with Rule 5 above and as alluded to elsewhere above, the U.S. will never wipe out shareholders and become the 100% owner of in an insolvent bank because to do so would require the exercise of honest judgment and transparent economic policies and equal treatment amongst all banks.

7. Any secured lender of an automotive company filing for bankruptcy protection such as Chrysler or General Motors, shall not be entitled to a greater return as a result of its secured position as compared to unsecured lenders or trade unions possessing unsecured claims. In fact, such a secured creditor requesting a greater return on account of its secured interest shall be ostracized by the Federal Government and shall be treated as a scapegoat by an over-reaching Executive Branch.

8. Any automotive company filing for bankruptcy due, in part, to rising health care costs, exorbitant union benefits as compared to non-bankrupt automotive companies and excessive corporate taxes, all of which costs impede the ability of U.S. car manufacturers to compete effectively in the global market, shall be entitled to sell all of their viable assets via a government-sponsored sale, the end result of which will ensure either majority control of the reorganized entity by the U.S. Government or the United Auto Workers or some combination of both.

9. Any government-sponsored bankruptcy sale in an automotive bankruptcy case shall not be required to distribute the proceeds thereof or such other value obtained for the bankrupt's assets pursuant to the the various contracts and agreements of the subject automotive company or the priorities established by the Bankruptcy Code and longstanding legal precedent unless the government, in its sole discretion, decides to abide by the law.

10. Any Risk-Averse Investor or responsible banking institution shall be required to bear the cost of the foregoing policies along with the American taxpayers. No Wall Street executive or other highly-compensated individual of those institutions shall be required to disgorge any bonus payments made with respect to highly speculative transactions which ultimately contributed to the insolvency of those institutions absent government bailouts.

11. In addition to the recent change of the FASB mark-to-market accounting rules that required an institution to write-down the value of real estate to the best estimate of its current market value based on actual real estate transactions occurring in the marketplace, all new accounting rules and regulations by FASB shall permit irresponsible banks to reflect real estate assets on their books based upon a fantasy model of the value of such assets in the future and the assumptions underlying such fantasy valuations shall remain within the sole discretion of such financial institutions that were unable to manage their risk properly in the first place.

12. The term "Generally Accepted Accounting Principles" shall be changed to "Sometimes We Feel Like A Nut And Sometimes We Don't Accepted Accounting Principles. The organization called the Financial Accounting Standards Board or FASB, as referred to above, shall hereafter be referred to as the Insipid Financial Board of Standards or "IF-B.S.".

13. This is just a preliminary list of the rules of new Government Capitalism that will go into effect. Additional rules will be adopted and implemented if and when any of either the U.S. Government, Treasury Department, Federal Reserve or FDIC have a wild hair up their respective posterior.

We welcome suggestions for further changes to the previous system of Capitalism in order to conform more closely with the principles and philosophical foundations of Government Capitalism. We look forward to working with you to develop as many regulations as possible so as to undermine the principles of Capitalism that have led to the unprecedented and unequalled economic success of the U.S. since its formation.

Good luck on surviving the new Government Capitalism without filing for bankruptcy, losing your job or the value of a substantial portion of your net worth due to massive inflation in the coming years,

Uncle Sam

Justice Ginsburg's Stay of Chrysler Sale Defends Rule of Law

2009-06-08T22:45:00.003-05:00

The problem with politicians, whether Democrats or Republicans, is that when the law doesn't suit their objectives, they simply disregard it or try to find around the intent and spirit of the law. When the Democrats believed that the Bush Administration had illegally tortured prisoners at Guantanamo, they expressed moral outrage, demanded hearings and requested the Justice Department to investigate for possible criminal wrongdoing. And they were entirely right to do so despite Republican objections and Dick Cheney's recent attempts to finger the Democratic Congressional Leadership as completely aware of interrogation techniques being utilized there. That is the nature of a system where the law is supposed to mean something -- people are called to account for their actions under the law.

But for all the moral outraged expressed by Democrats concerning the Bush Administration's failure to adhere to "the rule of law", that outrage seemed have dissipated when the Obama Administration chose to abrogate contract law and the entire bankruptcy process in the Chrysler Chapter 11 proceedings. In that case, the President Obama and his Democratic cohorts had no problems labeling legitimate secured creditors as holdouts for a Government bailout and unwilling to make sacrifices commensurate with other creditors despite the fact that by contract they has bargained for a senior security interest in Chrysler's assets in exchange for billions of dollars of loans. Based on the comments and heavy-handed actions of the Obama Administration, unsecured bank debt and UAW claims should either be treated equally with the secured lenders (in the case of unsecured bank debt) or receive significantly better treatment in terms of significant stock ownership in the reorganized Chrysler (in the case of UAW debt). Despite the fact that the Bankruptcy Code and substantial legal precedent did not support or justify any of the proposals of the Obama Administration which, blatantly, trample on the priority rights of secured creditors, there has been virtual silence from the Congressional Democrats about adherence to the rule of law. Conversely, the Republican who generally supported Bush Administration interrogation techniques are outraged by the debasement of the law in the Chrysler case.

So what is the takeaway? Is the rule of law important to Democrats and Republicans all of the time or only when it suits their provincial interests. The evidence to date generally suggests the latter. That is what is particularly intriguing about Justice Ginsburg's decision to stay implementation of the Chrysler asset sale, at least for the moment. Justice Ginsburg is unquestionable a liberal member of the Supreme Court and was appointed to it by Bill Clinton, a Democratic president. Therefore, it cannot be argued that her issuance of a stay was politically motivated and simply a means to carry out the Republican agenda. While more details will certainly emerge in the coming days, her action indicates that perhaps further thought should be given to the rule of law as it pertains to the Chrysler case. That is not to suggest how she or the entire court might ultimately decide the question, but is should give pause to the Obama Administration as to the limits of Executive Branch not only with respect to Chrysler but also with respect to the General Motors bankruptcy.

Justice Ginsburg with the stroke of a pen has implicitly if not explicitly stood up for the system of checks and balances set forth in the U.S. Constitution. For the proper role of the courts is to ensure that the rule of law is upheld despite the expediencies of the political process. Moreover, events have been happening so rapidly that a time to reflect on the long-term legal ramifications of trouncing on longstanding legal rights of creditors and other stakeholders just because the politicians prefer to do it their way.

In a way it is startling that the Chrysler case had to end up before the Supreme Court because the lower courts lacked the fortitude to seriously tackle the obvious legal injustices being perpetuated. This is also quite disturbing because it indicates that President Obama, a constitutional lawyer himself, the Justice Department, the Treasury Department and the Democratic Congressional Leadership and the Judiciary Committees in both the House of Representative and the Senate were willing to sacrifice the rule of law to buttress their political objectives regardless of their nobility.

While it will be interesting to see how Justice Ginsburg and the Supreme Court resolve the stay and the pending appeal of the Chrysler sale order, none of us should feel comforted by the abuse of power at Guantanamo or in the Chrysler case. However, we can take some comfort in the fact that we do have a system of checks and balances between the branches of government and Justice Ginsburg apparently recognized that our very freedoms depend on the judiciary remaining independent and not swayed by the prevailing political winds. For in the end, adherence to the rule of law is all that prevents overreaching by the other separate but equal branches of government.

Unemployment is a Lagging Indicator: Not This Time

2009-06-08T04:10:00.002-05:00

The conventional wisdom filling the CNBC airwaives and the financial media these days is that unemployment is a lagging indicator. On this basis, the likes of Larry Kudlow and Jim Cramer, notably, dismiss continuing job losses and the burgeoning unemployment rate as essentially irrelevant. Not only is that shibboleth completely at odds with empirical economic data, but it masks the very real potential of a weak or non-existent recovery for the foreseeable future. See recent comments by Mohammed El-Erian of PIMCO and David Sokol, chairman of a Berkshire Hathaway subsidiary and a top advisor to Warren Buffett. That Kudlow and Cramer blithely ignore the unabated growth of the unemployment rate (notwithstanding the decline in job losses) and the correlative decline in buying power and from underemployment is, minimally, intellectually dishonest and dangerous.

Let's look at the so-called "rationale" underlying the "lagging indicator" myth. In the past, when the economy suffered an economic downturn or recession, job cuts ensued to rationalize expenses with income and to minimize the immediate blow to profitability. When the economy started to recover, job growth returned but at a much gradual pace than jobs were previously shed. Therefore, the notion was formulated that when the rate of job loss begins to slow, we are closer to a bottom or turnaround in the economy even though the unemployment rate continues to increase. But, this type of thinking inherently implies both that (i) a reduction of job losses (though still increasing) will likewise slow the rise of the unemployment rate, and (ii) those who are unemployed will be able to return to the workforce at or near their prior compensation levels. Unfortunately, both of these premises are questionable at best in the new reality of the current economic climate.

For the month of May, non-farm payrolls fell by 345,000, while the unemployment rate climbed to 9.4%. So, even though payroll losses declined by 159,000 compared to April losses of 504,000, the unemployment rate increased by 0.5%, from the April rate of 8.9, or 0.2% above consensus estimates. How can the unemployment rate increase at a faster rate than the decline in jobless claims? Easy. The number of newly unemployed encompasses a much larger group of people than those experiencing job losses, and the number of newly created jobs each month is unable to keep apace with the continuing surge in the number of unemployed.

Let's further analyze the May numbers to illustrate this phenomenon. The total number of unemployed persons rose to 787,000, representing more than a 440,000 increase of such persons above actual payroll losses. At first blush, the math doesn't seem to make sense. One would surmise that if job losses were 345,000, the number of newly unemployed would be the same or roughly comparable. But, as alluded to above and explained below, the rate of unemployment is not limited to only those persons actually losing their jobs.

Instead, the unemployment rate is designed to include all unemployed whether or not they are receiving unemployment benefits or became unemployed as a result of losing a job. For example, the unemployment rate includes the growing numbers of self-employed who are now searching for third-party employment. It includes those who have resigned or otherwise left positions without qualifying for unemployment benefits. It also includes new entrants to the workforce who are actively seeking work. Therefore, even if there were no new net job losses, the unemployed would still have risen by the 440,000 with a corresponding increase in the unemployment rate.

In my view, an increase of 787,000 unemployed is not anything to write home about as positive or irrelevant. It does not signal an end to the recession; rather, it demonstrates just how deep the recession really is and how long it will take for the economy to recover. Because a strange, though not wholly unexpected outcome, is occurring. As the unemployment rate skyrockets, more new job seekers are entering the market further increasing the unemployment rate. Why? Because if a household's income is adversely affected by a job loss, other currently non-employed members of that household will also be searching for work to make up the shortfall.

But the unemployment rate, though a more reliable economic indicator of the future health of the economy than measuring only monthly job losses, does not even attempt to measure the effect of underemployment on buying power. Underemployment occurs when someone assumes a position below their potential earning power based on prior employment and marketable skills. Numerous examples abound of this sort. Take the job losses in the banking industry and the manufacturing sector. Many of those now unemployed in those fields previously were earning substantially more than currently available jobs are paying, whether or not in the same sector, given their qualifications and experience. Consequently, while the unemployment rate is job neutral meaning that a replacement job at a lower wage or salary is treated the same from a statistical point of view as one who replaces a lost job with a new position at a similar rate of prior compensation, the economic reality is quite different. Disposal income is significantly diminished along with buying power. There are simply fewer dollars to spend for fewer goods by fewer people.

The point being that because of the fundamental restructuring of the U.S. economy since last Fall, which is likely to continue for some time, the overall unemployment rate is likely to remain high regardless of a reduction of monthly job losses. And the prospects for economy recovery will indeed affected by the adverse consequences of such unemployment on buying power regardless of those who are stubbornly unwilling or unable to differentiate the current recession from every other one since the Great Depression.

Increasing Foreclosures Equals Increased Consumer Spending: A Strange

2009-06-05T01:27:00.002-05:00

Just heard an intriguing observation on the CNBC show Fast Money from a guest commentator that the increase in foreclosures may actually be a cause of increased consumer spending. The argument is that people whose homes are in foreclosure stop making mortgage payments; therefore, they have more money to spend on other consumer goods. So, the more people who don't pay their mortgages, the better the consumer spending statistics appear.

If true, that means we are going to see a long list of foreclosures for a long time. If that occurs, home values will continue to decline or certainly won't rebound. And I don't think that reflects well on the economy long-term. If a significant segment of the population is soon to be potentially homeless, it is only a matter of time before the economy will see a downward effect on consumer spending.

Let's look at this simply. If people aren't paying their mortgages due to pending foreclosures, at some point they are going to have to find some place to live and that probably means paying rent. Moreover, many of these delinquent homeowners are probably going to have to file for bankruptcy to wipe out the debt secured by their home mortgages and other obligations. Under recent amendments to the Bankruptcy Code it is harder to file for a straight liquidation under Chapter 7 as opposed to paying a portion of current income to creditors under a Chapter 13 plan. If and when we see a continuing increase in bankruptcy filings, consumer spending will necessarily be affected.

Not only will real estate values drop because of foreclosures but automobile sales and durable goods sales will be impacted as well. If someone has to use his current income to pay living expenses and past debt, there isn't much left to fund new capital purchases. So maybe we are in the midst of a consumer spending fantasy period, before economic reality hits the severely indebted.

We constantly hear analysts say that unemployment is a lagging indicator. However, that assumes that the unemployed will find new jobs at comparable income levels as the economy rebounds. There is nothing to suggest that is going to happen this time around. Many jobs have been lost forever in the financial services industry, automobile industry and other manufacturing and service sectors. Unemployment statistics are also inherently unreliable because they don't count people who have exhausted unemployment benefits or never received them in the first place even though they are unemployed. It also doesn't count new entrants to the workforce.

It is therefore only logical that the unemployment rate will crest regardless of whether more people are actually working. This is a fundamental flaw in the computation of this statistic. A more reliable indicator would be the number of people who have jobs and whether that number continues to fall at a rate greater than the increase in the unemployment rate. As usual, many governmental statistics provide little value as to what they are intended to measure especially when they are continually revised within weeks of release.

The market is digesting all the bad news and sloughing it off as irrelevant. Is that a function of a fundamental belief in the economy's improvement or money managers jumping back into the market so as not to be outperformed by their peers? Certainly, the market's rise has become a self-fulfilling prophecy as the more conservative managers remained on the sidelines while the market swung back with very limited economic data confirming that the economy is improving to an extent to justify the rally. My concern is that the herd mentality is still with us. It has always ended in mayhem as the last of the holdouts buy into the rally. Soon after, the market will plunge as it usually does as there are no more buyers and those with profits will sell to preserve as much of them as possible.

The tepid volume in this rally should make one wary. The conviction isn't there signaling that a reversal could occur if sentiment takes a pause or economic data begins to reflect the reality that consumer spending is nothing more that a temporary phenomenon not based on an improvement in the economy but a redistribution of household income away from housing expenses due to an unintended consequence of the foreclosure phenomenon (i.e., the artificial temporary increase in consumer spending that would otherwise be spent on housing expenses). If the uptick in consumer spending is to any degree based on this, which I believe it is based on personal observation of spending habits of those in foreclosure, we are headed for a rude awakening as economic statistics eventually confirm this anomaly.

General Motors: The Failure of Government Policy

2009-06-03T02:19:00.002-05:00

While the management of General Motors over the past quarter century or more doesn't deserve any awards for stellar performance, I do view the GM bankruptcy filing as just as much, if not more, a failure of patchwork, inconsistent and irreconcilable Government policies during that time span. From the second highest corporate tax rate in the world to the lack of a unified health care system, the Government has time and time again interfered with the ability of GM to remain competitive. While the Government has continually imposed standards on the auto industry to improve mileage and reduce pollution, however well-intended, these policies have never been well thought out. As a consequence, GM, in order to cover its ever-expanding financial and regulatory obligations, was left with little choice but to manufacture a greater proportion of larger vehicles with higher profit-margins to help pay the cost thereof than otherwise would have been necessary with a more enlightened Governmental approach. Stated differently, Government policy caused GM to concentrate its manufacturing operations on a narrow focus of the automobile market as opposed to developing a more complete and well-rounded portfolio of products.

Over the years, the Government has also thwarted efforts to drill for oil offshore or in Alaska due to exaggerated environmental concerns. The result: America became more and more reliant on foreign oil. Meanwhile, the rest of the world continued to exploit their oil resources wherever located, onshore or offshore. So, in effect, this country unilaterally withdrew from the oil exploration business in the most promising areas for development.

What would have happened if the United States had promoted its own oil industry until the transition to alternative energy was possible? One benefit would have been a significant reduction of billions of dollars paid to Saudi Arabia and other OPEC members and a corresponding salutary effect on the U.S. dollar as balance-of-trade deficits would have been significantly lower. Perhaps the original Gulf War, principally fought to preserve the flow of reasonably-priced oil from the Middle East, would not have occurred or at least in a more more limited form. Instead of striving to become energy independent from OPEC and to build up our own oil output through proven reserves, we chose to defend oil fields far away with American lives because environmentalists preferred pristine coastlines to economic independence. The environmentalists bear culpability for relegating our nation's overall national security to their provincial interests.

Of course, we would all prefer as little environmental impact as possible while achieving energy independence, but difficult choices sometimes have to be made. We have now seen what happens when this country is beholden to foreign interests for our energy consumption. We have turned the MIddle East into a bastion of radical Islam by the very fact that we and other Western democracies have funded the oil producers instead of controlling our destiny without them. The billions of dollars dispatched to the Middle East, instead of being used by the OPEC countries to advance their societies economically, educationally and politically, have been used as hush money to covertly fund terrorist groups intent on destroying America to preserve the concentration of power and wealth in despotic regimes. More recently, the wars in Afghanistan and Iraq over the past eight years likely would have been quite different as well. Had we developed our energy resources properly, our involvement in the Middle East would have been significantly lessened and Islamic terrorism and hatred against the U.S. would have had fewer seeds upon which to grow.

In addition to failing to develop our own natural resources, the Government has failed to develop a coherent policy to deal with social security and medicare. Every year, employers face increasing costs as these programs are headed for certain bankruptcy. The demographics simply do not support a system where in the not to distant future only two workers will be effectively supporting one retiree. In the initial stages of social security the ratio was 16:1. That ratio, by definition, had to decline unless U.S. population growth surged beyond any reasonable prognostication of birth rates. Moreover, increases in life expectancy continues to put a further economic strain on funding. But, the failure to adequately address this time bomb even now has certainly imposed great economic strains on businesses, particularly those which manufacture goods and are more subject to international competitive pressures.

I am not advocating a reduction of current retiree benefits, but I am advocating that the system has to be redesigned to maintain its solvency. Already, the retirement age is slowing increasing, but that should have been done years ago. The social security tax is like a quasi-flat tax with one glaring deficiency -- it is only assessed against a portion of an employee's personal service income. There is no reason for this. If social security taxes had been assessed against the entire portion of an earner's income from inception or gradually increased to that level over time, the system would be significantly more financially secure today. It is frankly outrageous that people earning hundreds of thousands, if not millions, of dollars are paying the exact maximum social security taxes of people earning a fraction of their incomes. Moreover, proportionally shifting the social security and medicare tax burden to the people who earn the most is not only logical but fair (to the extent one believes a flat tax is fair). Such a policy could also be structured to cap an employer's contribution per employee regardless of income level.

Consumer Confidence Perception v. Economic Reality

2009-05-27T03:37:00.002-05:00

Funny how economic statistics sometimes mean something and sometimes don't -- even when released on the same day and appearing to be somewhat inconsistent. But apparently perception is more important that reality because the Consumer Confidence Index (a simplistic measure of consumer sentiment and perception) rose to 54.9% in April from 40.8% in May whereas the S&P/Case-Shiller National Home Price Index fell at a record annual pace of 19.1%. Stated simply, home prices continue to decline at the fastest rate in history with no relief in sight. We have perception unsupported by behavior, on the one hand, versus a report detailing actual, not supposed or possible behavior, on the other hand. Stock market reaction: positive perception sounds better than negative reality ... let's rally on karma.

Aside from slumping real estate values, consumer credit continues to shrink and unemployment is expected to crest somewhere over 10% but not until next year. Sounds like eroding buying power to me, but I tend to prefer economic indicators based on facts, not unrealized fantasy. So how can consumer confidence rise so dramatically when home prices are falling so dramatically? A very good question but I doubt they asked it to the 5,000 households comprising the Consumer Confidence Index.

But let's try to look at this dispassionately. Where is consumer buying power going to come from as credit card debt limits contract and new credit card debt will likely carry higher interest rates at least once the just passed Credit Card Bill of Rights goes into effect. Moreover, home equity lines are no longer available at anywhere near the dollar level (we're talking trillions here) before the current financial crisis as 30% of the homes in this country already are underwater on their mortgages. So, who is going to fund the recovery when the statistical recession ends. The increasing number of unemployed and those who fear for loss of their jobs as well? Or others without access to credit?

Have you seen the empty stores lining the malls, at least in the malls that are not yet shuttered? Apparently, that doesn't matter to the bulls either because unemployment and lost real estate values are already factored into the the stock market. The bulls say, "it can't get much worse." Does that Orwellian thinking equate to additional dollars at the cash register or make you feel "confident"?

The market, say the perma-bulls explicitly or by implicaton, is discounting all of the actual negative news because there are people saying that they are more confident about the economy. I don't buy that Twitteresque status report. Rather, I think this rally is nothing more that a "ponzi" scheme of sorts. The Wall Street gang keeps telling everyone that the sky isn't falling so the retail investor, directly or indirectly through increased inflows to mutual funds, will buy stock even though there is very little, if any, real reason to do so. Finally, when the over $1 trillion of bonds supported by cratering real estate craters, the stock market will follow suit.

Have we learned nothing in the last year? Inflated real estate values, coupled with egregious underwriting standards and ill-conceived governmental policy, led to the real estate bubble. Now, the same robber-barons that levered us into this mess are trying to suck everybody back into the game. And the Obama Administration and the Federal Reserve are all adding to this frenzy. The FED is printing money with reckless abandon and buying back the Treasury Bonds it issues to finance the debt. In other words, the FED is buying back the debt it issued with phony money. The debt that the Chinese and the OPEC countries no longer want to purchase without assurances that their investment won't be flushed down the toilet with all the toilet paper being manufactured by the FED.

We are issuing debt in this country as if we don't have to pay it back or with the assumption that people will buy it and agree to be paid back with dollars that are worth less in the future. We are headed for inflation armageddon unless we can somehow snooker foreign investors back to the casino where they lose no matter how they play. What do I mean by that? If they continue to finance the U.S. debt unabated, they will surely lose value on their investment as the dollar is devalued due to gargantuan future U.S. debt obligations. If they stop buying U.S. debt, the FED still continues to crank out bogus money now (as opposed to later to pay back debt in the former scenario), thereby destroying the value of current debtholders' investments in U.S. bonds and currency.

But everything is rip-roaringly fine according to the same characters who didn't think they could lose with 30 or 40 to 1 leverage. Yet, they did. How's that consumer confidence going for you now?

Ken Lewis Should Be Fired as CEO of Bank of America

2009-05-03T21:46:00.003-05:00

Ken Lewis should be fired as CEO of Bank of America (BAC). At best, he is a distraction. At a minimum, he is no longer a trusted leader. At worst, he is an incompetent, self-aggrandizing buffoon for nearly singlehandedly bankrupting one of the most venerable companies in American history due to his unbounded arrogance divorced from even the most basic risk-management assessment.

For whatever excuses and explanations he can now muster, the fact is that BAC, at Lewis' urging, should never have purchased Merrill Lynch for the price it offered (after only two days of due diligence!) and Lewis relented to government pressure to close the deal even after BAC learned of almost $16 billion of losses that were not factored into the closing price and which should have nixed the deal. Instead, not only did Lewis and the BAC Board bow to pressure and close the deal but they didn't even present the new findings of such losses to shareholders prior to the vote -- information that clearly would have had a material effect on shareholder consent to the deal at the original price. In a nutshell, the entire corporate governance of BAC, designed to protect shareholder value, was trampled for as yet inexplicable reasons, but certainly having nothing to do with what was in the best interest of shareholders.

Reports have surfaced that Lewis was effectively coerced to do the deal lest he be possibly ousted by the Government from his role as either Chairman of the Board of BAC and/or its CEO. But, even if Lewis was put in that awkward position, the right thing to do -- the lawful and obligatory thing to do -- would have been to honor his fiduciary duty to shareholders, disclose the additional Merrill losses to them and let the chips fall where they may concerning his continuing personal role. That the Board of BAC aided and abetted Lewis' action reflects poorly on its members and its ability to exercise independent judgment in the best interest of shareholders.

But now that the facts are out, in part, who is taking responsibility? Has Lewis apologized or resigned? Has any Board member convincingly explained how his actions in supporting Lewis and the Merrill transaction served shareholders' interest or why shareholders were kept in the dark about material information concerning that transaction? Regrettably, the answer is no. Hence, BAC is now in the position of having to defend the indefensible behavior of its leaders thereby diverting attention away from righting its tattered image and business.

The legality of the actions of Lewis and the Board will undoubtedly play out in courtrooms over the next few years. Regardless of the legal niceties, it is unquestionable that Lewis can no longer be trusted by shareholders to serve their interest. Moreover, the Board can no longer be trusted to act as a check on management actions or to ensure that such actions are in the best interest of shareholders.

While the Board was just re-elected to another term, that vote is tainted because the truth still hasn't come out as to the Board's role in reviewing the Merrill transaction and the related non-disclosure of material losses. When it does, a shareholder vote of confidence or no confidence would be more meaningful and valid. Having said that, the shareholders still sought fit to oust Lewis from his role as Chairman, an act virtually unthinkable less than a year ago.

While some might argue that the same result would have befallen BAC even if the Chairman and CEO roles had been separate, the era of cavalierness of board of director conduct seems nearing an end. A board is not supposed to rubber-stamp the conduct of management. And it should possess more than a healthy degree of skepticism, particularly when the very existence of the company hangs in balance by any transaction sought to be approved by management. For the fact is the BAC would have failed but for unprecedented action by the Federal Reserve and the U.S. Treasury. Consequently, neither Lewis nor the Board should be congratulated for the survival BAC. Instead, they should all be cast aside as unworthy and incompetent to serve in their respective positions starting with the most culpable, Ken Lewis.

Peeling An Orange and the Seeds of Human Potential

2009-05-03T02:58:00.002-05:00

I have an odd habit. I peel an orange by first piercing it with a spoon and then moving the spoon all around under the rind until it easily lifts away. I have always done it this way since childhood and didn't know this was odd until one day when I was much older someone pointed it out to me. From then on, I began to notice that everyone else would peel an orange with a knife or more often simply cut the orange into quarters. To conform to societal norms, I started to use the other approaches but I still liked my way better. It just worked for me.

Life is kind of like that. We find out through education and our life experiences what works best for us. What habits lead to success and which don't. It doesn't matter whether someone else does something differently or not. We must integrate the knowledge that we continually acquire to develop and modify our habits for whatever purpose we seek to use them.

Let me refine this further since I am not suggesting that any sort of personal conduct you like is acceptable under any circumstances. Nor I am suggesting that we can't and shouldn't learn anything from anyone else regardless of its value. Quite to the contrary. We must constantly incorporate and build on the knowledge and lessons of others. But what I am suggesting is that there are often varying rational and legitimate ways of accomplishing a task and that within such realm of reasonableness, personal preference or comfort as to approach as opposed to regimented rigidity is often the distinguishing characteristic leading to success or failure.

There is no one right way to cook a meal or dance or play an instrument or to think. Each of us is unique in that we have different backgrounds, families, education, religious beliefs, likes and dislikes and interests. That diversity should be celebrated as it will inevitable lead to different options that would never have been discovered had only one methodology been deemed acceptable. We can often judge the quality of our personal and professional relationships by the freedom we are given to think and act in a manner that allows us to investigate and exploit our talents. For nothing is worse than enabling or permitting someone else, by complacency, fear or subjugation, to stunt our growth in the name of uniformity, when the seeds which enable us to continue to blossom intellectually, spiritually, emotionally and in all ways that a human being can are inextricably linked to such growth.

Virtually every significant scientific discovery or innovation has started with the question as to how can we do something either completely new and different or improve something that already exists. Every field of endeavor starts with or continually reverts to these questions.

Hundreds of years after Mozart and Beethoven penned their masterpieces, musicians are still interpreting their compositions to this day, to express their own unique point of view. And still hundreds of years from now people will still be doing the same as human imagination and experience are ever-evolving.

The nature of the human condition is to adapt to change. While that may lead to bouts of discomfort, it will also incite man's potential to do what has yet to done before. So, in homage to that same "can-do" spirit, consider using a spoon the next time you peel an orange. You may actually enjoy a new way of doing something so simple that never occurred to you before. At worst, the silliness of it will put a smile on your face.

Obama's Blame of Hedge Funds in Chrysler Affair Sends Ambivalent Message

2009-05-02T15:17:00.002-05:00

In announcing the collapse of negotiations to stave off a Chrysler bankruptcy filing, President Obama yesterday squarely blamed a "small group of investment firms and hedge funds" for the impasse. After commending the efforts of Chysler's management, the United Auto Workers, the Task Force of Autos and the substantial majority of lenders, he singled-out the hold-out creditors that were unwilling to accept the Government's offer to resolve approximately $6.9 billion of outstanding loans for $2.25 billion. In doing so, he chastised the recalcitrant lenders for failing to act in their own best interest and those of the other parties who had contributed and sacrificed to achieve a global resolution.

What Obama failed to mention is that the supposedly "unwilling" creditors consisted of 20 lenders owed $1 billion possessing the highest secured interest in Chrysler's assets and are first in-line to be paid in the event of liquidation. So, what Obama was really saying is that even if, in actuality, a not-so-small group of creditors negotiated an arm's-length lending arrangement with Chrysler granting it a superior right of repayment, such creditors should voluntarily relinquish that right because everyone else would be better off it they did. This is a shocking statement, fundamentally contrary to property and contract rights and to principles of capitalism and smacks of Western Europe's Socialist tendencies.

Let's take a basic "garden-variety" secured transaction for comparison's sake. A person buys a home or other piece of real estate, subject to financing. The lender, after reviewing the credit-worthiness of the borrower and the underlying assets to be financed, agrees to loan the balance of the purchase price secured by the property. In the event, the loan is paid according to the terms negotiated, the lender continues to receive payments during the life of the loan until satisfied in full. On the other hand, if the borrower is unable to make the required payments, the lender is able to foreclose its security interest in the property, become the owner of the property and to sell it to satisfy some or all of its remaining debt. Without such a financing mechanism, the vast majority of people would never be able to afford a home or only be able to purchase a home up to the amount of his available cash resources. In that instances, the value of real estate and the corresponding market would collapse due to a lack of qualified purchasers.

The same is true of commercial finance. Many borrowers would not be able to obtain loans to finance inventory, payroll and other operating expenses without granting a lender a security interest in its assets. Other loans may be made on an unsecured basis, but usually at a higher rate of interest than a secured creditor because of the increased risk of non-payment. Such lenders understand the increased risk is due to the fact that there is senior lender ahead of them that must be repaid before they receive anything. So, when Obama was complimenting the "majority of lenders" going along with a debt-reduction repayment plan, this was nothing more than pure political posturing. Essentially, Obama was complimenting lenders who agreed to receive more than they had otherwise initially negotiated to receive when making loans to Chryslers, being fully aware of their junior payment priority status. He, instead, chose to criticize the very lenders who negotiated for a higher priority of repayment in the event of default.

Why is this troubling? Because our entire commercial financing system is based upon a basic understanding of borrowers and lenders as to what rights they possess in the event of non-payment of a loan according to its contract terms. The lenders understand how they will be treated in relation to other lenders and price the risk via the interest rate charged on the loan plus any additional fees such as up-front points on a typical home mortgage. The borrower also understands that certain lenders have a priority right of payment and others may possess a lower priority security interest and still other may not possess any security at all for their loans. In the commercial world, as pointed out, these greater or lesser risks of repayment are priced according to relative risk.

Suggesting that the senior creditors agree to receive a lower amount than they would be entitled to in the event of liquidation or, worse yet, an amount equal to or similar to the rate of return of junior creditors, has no basis in the law. It was merely an attempt to demonize creditors for exercising their rights, where their rights were substantially superior to other lenders. Vilification should be reserved for unconscionable or abhorrent behavior fundamentally at odds with acceptable moral behavior, none of which is even remotely present here. It should be used even more rarely as a political tactic especially by The President of the United States.

We are a country of laws and for someone to exercise his rights, especially those rights no one has seriously challenged as of yet as valid, is alike to purposely poisoning a jury pool before a trial begins. This is not behavior to be celebrated; rather, it should be scorned. For if anyone is bludgeoned into foregoing his legitimate rights due to political pressure or for the betterment of the "whole", we are taking a great stride away from the premises upon which our legal and financial system depends.

While President Obama may have been disappointed in the outcome forcing Chrysler into bankruptcy court, a substantial portion of the work to reorganize the company has already taken place. He and his administration and the other parties contributing to those efforts should be praised. But, now is the time for the court to decide the legitimacy of the claims asserted by the unfairly castigated lenders. If they succeed in the end, they deserve an apology, not only because they will have been right but because they correctly resisted intimidation coming from the most powerful person in the world.

Whether the actions of these lenders will have adverse political consequences on hedge funds or the like in the form of increased regulation or tax policy should be judged on their merits. But it would truly unfortunate to penalize a group of individuals or entities simply because they chose to exercise their rights as every American citizen should feel equally free to do.

May 1, 2009 (Updated)

The Case Against Bonuses For Citibank "Key Employee" Traders

2009-04-29T21:26:00.003-05:00

Here we go again. Wall Street has yet to take any real economic responsibility for the financial crisis they created (with the government's "help"), but once again they are seeking excessive bonus compensation. Haven't we already seen this movie before with AIG. In that case, AIG was seeking to pay approximately $280 million in "stay" bonuses to a select group of employees -- employees without whom AIG could have functioned effectively for several months after it became an effective ward of the U.S. Government. However, in that situation, there was a contract in place that had been approved by Treasury and relied on by the employees. Whether or not the employees were legally entitled to bonuses was at least an issue in play. In the end, after the public hue and cry, a substantial portion of the intended recipients "voluntarily" agreed to forego all or a substantial portion of the bonus payments. But what the episode made very clear is that when the American taxpayer has bailed a company out from impending bankruptcy, don't come hat in hand expecting to be paid like business as usual.

Frankly, the outrage was justified on an economic basis, while legally perhaps less so. In the real world, when a company files for bankruptcy, it does not matter whether an individual was entitled to a bonus or not based on his individual performance; if the company doesn't have the money to pay the bonus, it doesn't get paid except to the extent other creditors eventually get paid. So, because the government bailed out AIG, Citibank and Bank of America and many others, they didn't technically go bankrupt even though they were insolvent and would have failed without government intervention for better or worse.

So here we have a group of traders at Citibank who, without regard to the fact that shareholders have been substantially wiped out due to their company's poor risk-management and performance, are demanding bonuses for the trading profits generated by Citibank in the first quarter of this year. I am not convinced. Due to Federal Reserve policies of lending billions to Citibank and others at almost 0% and guaranteeing billions more of Citibank obligations, their trading strategies were far from unique and apparently reasonably easy to replicate at other large institutions. To wit: Goldman Sachs, Wells Fargo and even Bank of America profited from substantially similar business tactics. Consequently, the traders at Citibank were merely meeting the benchmark achieved at other firms. In this sense, nothing extraordinary occurred. In fact, the profits at Goldman Sachs were substantially higher than those generated at Citibank.

The point is that the traders at Citibank, while generating substantial profits for the firm, did so under almost "lay-up" like conditions given the government actions to virtually guarantee the banks a highly profitable first quarter. And the traders at Citibank at best correlated with their peers. There is also a real argument as to whether these financial institutions actually even made a "GAAP" profit since the mark-to-market rules were only adopted after the quarter's end with permission thereafter given by FASB to apply those rules retroactively to first quarter results. Thus, if the prior GAAP rules had remained in effect, there is a serious question whether there would have been any profits to crow about. But never let the facts stand in the way of Wall Street greed.

This mentality of being compensated at obscene rates, after massive, unprecedented government bailouts and only peer equivalent performance is questionable at best and evidences a lack of understanding (i) that their bloated bonuses of the past probably really weren't earned given the mess that ensued from those "profitable years" in which they were "earned", and (ii) that they should never return to those levels especially based on short-term government-primed performance. If bonuses are to be paid, let these key employees receive common stock in Citibank vested over three years. Then we will truly see if their one-time juiced performance resulted in shareholder value for the long-term.

By the way, the one-time FASB rule change benefit was reflected in first quarter numbers. Let's see if these so-called "key employee" traders can replicate their performance without continual government intervention bolstering them and whether their performance exceeds peer performance at other institutions. If it does, maybe there is something to talk about bonus-wise. Are you listening Treasury Secretary Geithner?

Roland: Whose Interest Are You Serving?

2009-01-11T19:22:00.002-06:00

Roland Burris doesn't get it. Either he truly doesn't understand why people are upset with his squirrelly appointment to the U.S. Senate or he doesn't seem to care. Under the present circumstances, Burris' appointment is not about the best interest of the voters of the State of Illinois. It's about taking unseemly advantage of a temporary void coupled with personal ambition -- an opportunity to inherit a position that he never attained or even sought by election.

Contrary to insinuations of his staunch supporter, Representative Bobby Rush, this conundrum has nothing to do with race. Nor is this an issue of the qualifications or competence of Burris. This is about process -- the process under which Burris was appointed by embattled (now impeached) Governor Rob Blagojevich -- the very person against whom a criminal complaint was filed with special urgency by the U.S. Attorney, Patrick Fitzgerald, to prevent him from making such appointment. Blagojevich, according to the complaint and his own words on tape, was attempting to sell the appointment for his own personal enrichment. Thus, anyone appointed by Blagojevich necessarily would be tainted under these sordid circumstances, regardless of his or her personal character. And nobody seriously disputed that axiom until Burris became a willing beneficiary and enabler of Blagojevich's chicanery.

But despite the surreality of Blagojevich's shenanigans to date, the issue has steadily narrowed to the technical legality of Burris' appointment by a sitting governor, not whether the appointment process itself is fatally flawed which Blagojevich is at the helm in Illinois.

When news of the criminal complaint became public in shocking detail, well before Burris' appointment, there was nearly universal agreement by Barack Obama as President-Elect and former holder of the very Senate seat vacated and leaders of the U.S. Senate that any appointee of Blagojevich should be rejected as invalid. Jesse White, the African-American Secretary of State of Illinois, indicated that he would not certify any such appointment. And the candidates previously maneuvering for the appointment indicated that they would not accept it from Blagojevich even if offered due to the untoward circumstances.

Yet, Blagojevich did not relent; rather, he chose to ignore the imploring of Obama and the others as well as the will of the Illinois public and decided to use the appointment in an effort to partially cleanse himself of wrongdoing or to mitigate it by pandering to the African-American community. Indeed, after Burris' appointment, many supporters of Burris seem as equally unconcerned as Blagojevich about the validity of the process choosing instead to focus singularly on Burris' bona fides to serve in his appointed capacity. Apparently, the new refrain among Burris diehards implicitly appears to be that the ends, i.e., Burris' appointment, justify the means, i.e., Blagojevich's fiat appointment. Consistently, those who support Burris' appointment now argue that Blagovejich's taint should not transfer to Burris who is constitutionally qualified to serve. Surprisingly, no mention bawas made as to whether Burris' appointment by Blagojevich is a service or disservice to the people of Illinois or even supported by them.

Sadly, it also appears that the "race card" has been played. Both Representative Rush and Burris, to a lesser extent, have more than intimated that the Senate seat should rightfully be filled by an African-American because it was vacated by one (ironically, in this context, due to Obama's election as President of the United States) and, because of Obama's ascension, there is no longer an African-American serving in the Senate. This argument is not only not based on any legal principle, it is especially insulting to the people of Illinois who have twice elected African-American Senators, Obama and Carol Moseley-Braun before him. In fact, Illinois is the only state in the union that has elected an African-American to the Senate in several decades.

So for Representative Rush to make this argument is to deny that America is long on its way to moving beyond racial politics, certainly at the federal level, by the very fact of Obama's election. Why he can't pridefully embrace or at least acknowledge the new reality raises a basic question about whether he will remain rooted in racial divisiveness as a political strategy. As for Roland Burris, why he is so willing to be a party to this charade by Blagojevich and blatant end-run around the Illinois electorate is base self-aggrandizement and opportunism run amuck and anathema to his past record of public service to the citizens of Illinois.

Notable Differences Between Tango in Buenos Aires and Chicago

2008-12-30T05:28:00.002-06:00

In Buenos Aires, a couple never starts dancing immediately when the music begins. They listen to it first, to recognize it, to sense the mood, to let their bodies absorb the feelings and emotions evoked and thereby to inform their dancing. In Chicago, many people start dancing on the first note without even considering these or other variables as if the bell had rung to commence the next round of boxing.

In Buenos Aires, the entire dance floor starts moving at the same time, when the prelude has concluded, like a well-rehearsed collective exhale. In Chicago, people begin without order, without a unifying effect and without even letting the song's introduction complete.

In Buenos Aires, people follow the line of dance and the etiquette of tango. In Chicago, people don't know how to follow or stay in the line of dance, and perhaps don't even understand the concept of the line of dance or tango etiquette and why they exist.

In Buenos Aires, the lesser experienced dancers with undeveloped navigation skills flock to the center of the floor, leaving the perimeter for the more experienced and careful dancers. In Chicago, some dancers prefer the limelight of the center presumably to showcase themselves, for acclaim or disdain.

In Buenos Aires, people do not constantly enter and exit the line of dance. In Chicago, people do so willy-nilly thereby making it dangerous and difficult for those who adhere to the line to navigate around or away from the zig-zaggers.

In Buenos Aires, people understand the difference between salon tango and performance tango and no one dances performance tango during a crowded milonga. In Chicago, many people only know how to dance some diluted form of performance tango without ever learning or attempting to learn, understand or appreciate salon tango or its fundamentals.

In Buenos Aires, even highly-experienced and trained professional dancers don't lift their partners off the ground or execute jumps or other dangerous stage moves at a milonga except when the salon floor is almost empty and there is plenty of room between the remaining couples. In Chicago, those who don't respect the other dancers on the salon floor grotesquely and inconsiderately perform such stunts as if the rules and etiquette of tango don't apply to them.

In Buenos Aires, people wait for sufficient space to merge into the line of dance after the song has begun. In Chicago, people enter the line of dance without even considering the effect and possible dangers on the other dancers already in motion.

In Buenos Aires, the greatest compliment a tango dancer can receive is that you walk well. In Chicago, people don't know how to walk to the music, and sadly for the most part they don't.

In Buenos Aires, they understand that the embrace is the foundation of connection between partners. In Chicago, a tango embrace barely resembles a resolute embrace between a man and a woman, let alone sufficient for dancing in close proximity together.

In Buenos Aires, the experienced dancers don't just dance for themselves; they dance for their partners and to present their partners in the best possible light. In Chicago, there is too much dancing for oneself, without enough emphasis on one's partner and the underlying connection between them.

In Buenos Aires, even those professionals who have heard and danced tango music since childhood, continue to practice and improve their skills and take lessons and instruction and constructive criticism from those with more or different experience and knowledge. In Chicago, too many dancers overestimate their skills and are unwilling or unable to critically analyze their abilities and shortcomings, let alone listen to or learn from those who have been through their same experiences before and who sincerely want the overall quality of tango dancing to improve in Chicago.

There are many other differences between tango in Buenos Aires and Chicago, too numerous to recount. But, the most important one, which is obvious to anyone who has ever visited there, is that the tango and its music, and the lineage of its patriarchs and disciples, are part of the Argentine culture and lore, a source of national pride. That, of course, will never be true in Chicago or anywhere else in the world. However, we can continually try to incorporate some of the knowledge and wisdom that the Argentines and their tango progeny have garnered over the past century living and breathing tango. Not only as a sign of glowing respect for the wonderment of tango, but also as a sign of our own maturity in the recognition that there is so much more to learn about tango by everyone in the Chicago tango community.

The Cult of Celebrity and Bernie Madoff

2008-12-23T01:34:00.002-06:00

From legendary investor and trusted advisor to scam artist and thief in a New York minute. How did Bernie Madoff -- a man with star-studded connections and a venerable clientele -- pull off the biggest Ponzi scheme in recent financial history, one that has virtually destroyed fortunes and cratered scores of philanthropic organizations without anyone suspecting? In a phrase: the cult of celebrity.

A simplistic answer, perhaps. But the main earmark is there: the willingness of intelligent and sophisticated people to suspend belief that someone like Madoff could ever possibly do something like this. Someone with his reputation and history and character demonstrated over a career spanning decades.

"And Madoff is an honourable man."

Yes, in many ways, Madoff is a modern-day Brutus. One who "appears" honest and trustworthy but who hides under that cloak. The lies and larceny that must have been committed by Madoff over the years reveal a character devoid of protracted decency. A self-aggrandizer, a poseur, always with malevolent intention to perpetuate his scheme regardless of his avuncular veneer.

People were fooled because they wanted to believe that their friend and trusted advisor was who he appeared to be without really scrutinizing him as they would anyone else with whom they had entrusted their financial security, status, wealth, charitable legacies and lifetime of work. One doesn't do that lightly. In fact, one doesn't do that except with someone you would entrust your very life.

For some, greed may have been a motivating factor. The consistent and inexplicable out-sized returns. For others, the status of being worthy to touch the cloth -- to be privileged enough to invest with Madoff. For the majority, possibly some of the above, but mostly an abiding faith in the goodness of Madoff.

The Consequences of Madoff Cultism

When we elevate anyone to nearly cult-like status, when we treat celebrities, athletes, business leaders, politicians, religious advisors and others in an exalted manner and when we lose sight of rationale thought, we are planting the seeds for the Bernie Madoffs of the future to emerge.

Madoff took more than peoples' money; he took a part of their souls and humanity and their fundamental belief in the virtues of trust, honesty, integrity and friendship and in the goodness of people.

Chicago's Short-Sighted Snow Removal Policy Comes At Steep Cost

2008-12-21T04:56:00.000-06:00

It's been snowing all week with nary a snow plow in sight. Chicago has a new snow removal policy and it's illogical and ill-conceived at best. A knee-jerk political reaction to a budgetary crisis that promises to do more harm than good.

It used to be that Chicago was well-prepared for winter storms and its citizenry could depend on a swift reaction from Streets and Sanitation to clear the highways and roads and generally to keep traffic moving apace. Things are different now that Chicago and virtually every other governmental entity in the country are experiencing unexpected budgetary shortfalls. No one could have expected this result only a few months ago. But, then came the financial crisis and the TARP and the loss of jobs and anticipated tax receipts.

How has Chicago responded to this crisis? By cutting back on virtually all non-emergency governmental services, including snow removal. The justification for which is that, like many other governmental services, it can still be adequate with less capacity and frequency. (Remember, we are talking about winter in Chicago, not Las Vegas.) While it is true that a reduction in expenditures for snow removal will save costs for that budgetary line item, it will not result in overall economic savings for the City. Nor will it buttress the budget. Rather, it will come at a steep and incalculable price and a net economic loss for the City.

Here we are the weekend before Christmas, typically the busiest shopping weekend of the year and we are beset not only by freezing temperatures and incessant snowfall, but also by transportation gridlock. What should be a last minute surge of holiday shoppers with money to spend is turning out to be one big traffic headache, that is if one can even navigate the roads at all.

And here is the problem inherent in the type of short-term thinking leading to the ill-conceived government policy of which I speak and for which government is so notable: Oftentimes it actually achieves the exact opposite result intended on a macro-economic basis. As noted, the City will save some snow removal dollars but to what end? To leave the streets unpassable and cars immobilized from heaps of snow. To discourage City residents and suburbanites from journeying to Michigan Avenue and Downtown and elsewhere in the City for a final holiday shopping spree. To find stores and other retail outlets of every kind with substantially fewer customers than projected in the final days before Christmas. Did the policymakers even consider these consequences when they effectively allowed Chicago to be snowed-in?

The economics of Chicago's snow removal policy will become abundantly clear in short order. Retail revenues of all forms will be substantially lower and, consequently, so will sales and other tax receipts. Emptier stores, restaurants, movie theatres and service stations necessarily leads to this inevitability. Hence, from a macro-economic point of view, without even considering the increased safety risk to people and property from a laissez-faire snow removal policy, Chicago gambled on a mild winter and so far has lost.

In the end, the taxpayer will be on the hook. More taxes and fees will be demanded because the budget shortfall will be worse than forecast as a direct result of the unsound snow removal policy. A policy that was economically flawed at the outset. A policy that only considered the short-term political benefit of saving relatively meager budgetary dollars as compared to the staggering loss of tax receipts, not to mention increased business hardships and loss of jobs -- the ultimate sources of Chicago's tax base.