Below The Crowd

Warranties?

I'm off skiing and finally able to turn my attention to writing and commenting on things for a bit.

I'm struck by the guys who are constantly saying on TV that the stigma of bankruptcy for GM can be avoided if only the government wer to guarantee the warranties on vehicles.

It strikes me as another example of theoretical academics who apparently still believe that the economists' theory of us all being rational actors is correct.  And if we were all rational actors, the only worry we would have as GM customers would be our warranties and future spare parts.

So let me say it here, because nobody else is saying it (except maybe Taleb):

We are not rational.  Our economic actions are not dictated by reason. And the big purchases we make are especially irrational.  Car purchases are particularly emotional, not rational.

Let's face it.  If we were rational, we would not buy huge SUVs just to drive solo to the supermarket twice a week.  We wouldn't spend extra thousands on amenities we never use.  Nobody in his or her right mind would buy a black vehicle in Phoenix.

So let's stop pretending that the stigma of bankruptcy can be solved by guaranteeing the warranties.  That's pure rational thought.  But the most profitable piece of GM is Cadillac, and Cadillac is in the business of selling image and exclusivity.  It's not about rational actors.

A bankrupt Cadillac ceases to be a viable brand.  You aren't going to spend those extra thousands in order to show off your bankruptmobile to your friends and members of the opposite sex.  You will, in fact, avoid it at all costs.

Unfortunately, all those people who are seeking solutions seem to be sold on the notion that we're rational actors.  They and their discredited theories could be the final nail in GM's coffin.

-btc

Bonus Time!

I've spent most of my life, including several years on Wall Street, in environments where the benefits came largely in the form of compensation above and beyond "base salary."  Whether it was the Wall Street bonuses or the options I received in a number of tech companies I worked for, the expectation was always that salary was what you survived on, the other stuff what what allowed you to really live.

Much of the discussion of Wall Street bonuses funded by the taxpayer has been focused on the sheer numbers, but that's the wrong discussion.  Whitney Tilson of T2 Partners begins to hit the point in this comment to his email list:

Glenn and I didn't earn a penny in bonus (i.e., promote) last year because we lost money for our investors -- and we have to make it all back for them before we earn another penny. That's the way it should be.

What's at the crux of the matter is that he and his partner Glenn Tongue have a known and understood compensation scheme, just like the vast bulk of people on "incentive compensation" schemes around the world.  I have no idea whether they get the "standard" 2-and-20 or some other variation, but you can be certain that his funds' investors know exactly how the guys managing their money will be paid and exactly what the criteria will be.  There's no after-the-fact negotiating, no last-minute discussion and no arguments about whether or not the amounts are seemly. The formula is determined in advance and the results can be easily calculated and validated by any limited partner with a pocket calculator.

Compare that to John Thain, who waited until early December to discuss what his 2008 bonus should be.  Compare T2's simple and straightforward compensation scheme to the excuses made by whining apologists for these CitiBoobs, who continue to drone on about how they need to be compensated so eggergiously in order to avoid them defecting to more lucrative environments like hedge funds, private equity, etc.

Anybody who's worked in a normal "pay for performance" environment has got to be outraged at this.  December 2008 is not the time to be discussing your 2008 bonus.  It's the time for calculating it.  The time for discussing it was in December 2007.  That's when Thain should have sat down with his Board of Directors or Compensation Committee, discussed goals and objectives for the firm for the upcoming year, established criteria for measuring it, and set a formula for determining his bonus one year hence using those measurable metrics and criteria.  In December 2008, the only thing left to do should have been to run the numbers, spit out the result and discuss how the formula should be tweaked to reflect the goals for 2009.

"Pay for performance" is a sham unless the goals and objectives are stated up front and the payment is directly related to performance against those goals and objectives.  Then, and only then can the shareholders judge whether the arrangement is appropriate.  Then, and only then, can the huge numbers be justified or not.  Then, and only then, can these guys honestly say this is what they're worth.

It's high time that every executive who has a "pay for performance" plan should be expected to disclose, to the shareholders, in advance, in the 10-K, what the criteria for the bonuses, options and other benefits are.  Then they should live with them.  Boards of Directors and shareholders should not settle for less.  If those executives can't do that, they probably don't deserve to get those bonuses, let alone claim that they are "incentive compensation" with all the tax benefits such a designation entails.

-btc

"...But We've Been Safe for Seven Years!"

Just listening to Diane Feinstein and Wolf Blitzer who happen to be yapping in the background.  The topic is Obama's orders of changes in the way we handle suspected terrorists and collect intelligence about them.

As usual, Blitzer started with the usual bullshit.  "We haven't been attacked at home since 9/11.  Are these changes going to weaken our defenses," or something to that effect.  The implication is that the Patriot Act and other measures enacted since then are responsible for keeping us safe for all these years.

But look at reality for a moment.

The first major attack by Islamist extrimists on US soil took place on February 26, 1993.  Despite an arguably inadequate response, it took Al Quaeda more than eight years to hit us again.  It took them a bit more than eight and a half years to muster the strength and logistical capability to strike again on Sepetember 11th, 2001.

It's understandable that some Americans want to think of 9/11 as opening some new level of activity in the Islamist war against the US.  Realistically though, it was only unique in that it was the first extremely successful attack.  These same groups have been trying to hit us as much as they could since the late 1980s.  The fact that there have been few attacks and that most of those attacks took place outside the US is suggestive of their own limitations as much as anything else.

It has been less than seven and a half years since the 9/11 attacks.  During that period, the AQ leadership in Afghanistan and the Pakistani tribal areas has been signficiantly weakened, their training camps destroyed and their financial networks severely impaired.  Given this, it should be no big surprise that nobody has hit us recently.  Patriot Act or not, waterboarding or not, AQ was not capable of repeated regular attacks then and they aren't now.  Giving credit to these new laws and procedures is giving too much credit too soon.  AQ may have attacked us had those not been there, and they may not have.  We don't know.  History suggests that they probably would not have been able to.  History suggests that their capability to launch frequent attacks has always been limited, and that their ability to pull them off even when they are planned is also not great.

I'm not suggesting that there isn't a debate to be had here.  But let's not pretend that seven and a half years of no attacks at home suggests that we're succeeding, because so far our "success" hasn't even lasted as long as the "success" following the first attack.  It may be years before we really know whether these tactics made a difference.

-btc

Spoke too soon about Ken Lewis and the Banks

Obviously, my comment last week, quoting Jeff Macke looks rather silly considering that Bank of America (NYSE:BAC) has since effectively gone bankrupt over their misguided Merrill Lynch acquisition and survives now only with the support of the US taxpayer.

It's become quite obvious that the financials -- and likely the rest of the market -- cannot rally unless there is a sense that the government can and will provide limitless support with no conditions attached.  It tanked when "conservatives" in the House of Reprentatives killed the initial bailout bill, and it's tanking again now that "liberals" like Barney Frank are suggesting that if you want to take money, there should be strings attached.

The message from Wall Street has become clear and two faced.  On one hand they are essential institutions that can't be allowed to fail because the economy can't survive without them.  On the other hand, if they are rescued, they shouldn't be asked, let alone required, to use the money to perform their supposedly essential and irreplacable functions because that would be an inefficient use of their funds, while paying high dividends and salaries along with inexcusible perks is apparently necessary and efficient.

Ultimately what Wall Street is asking for is more of the past 20 years.  More government guarantees, now explicit ones to replace the old "Greenspan put" that will allow themselves to pay themselves and their investors huge sums while selling their "essential insitutions" down the river.  If they don't get it, they know, their incomes and institutions are toast, and the selling continues.

Wall Street has figured out what I've believed for a while. Both sides of the aisle in Congress are less and less willing to play along.  Whether it's Democrats looking for restrictions in the name of "social justice" or Republicans looking to cut off the funds in the name of the "free market," the answer from both sides is moving towards a single solution: wipe these institutions, their shareholders, some of their debt and their corrupt managements out completely.  I doubt the government will allow them to fail catastrophically like Lehman did, but fail they will.  The only question is what RTC-type mechanism is created to supplement the bankruptcy courts and allow them to wind down in an orderly manner.

Ken Lewis -- who looked like a genius a week ago -- and his ilk will be further revealed for what they are and will go away.  We'll be better for it.

-btc

A Porcupine's Life

A porcupine climbs to get at the latest new growth atop a 50 foot tree.  This was just adjacent to the Sugarloaf liftline at Alta, and the entire holiday weekend crowd stopped to watch it slowly climb for the top, chew at a few branches and pine cones, then slowly retreat.

-btc

Comments Problem Fixed

Sorry for the issues with the (still new to me) environment.  It seems that some of my initial settings didn't take and everybody was being forced to get a typekey ID to comment.  That's now fixed.  Those who are typekey-enabled can comment that way and anybody else can comment with just a name and email address, which will be kept private.

Thanks to Nigel for cluing me in to this problem, and sorry you're still having problems with the Google/Blogger people.

[And people, does anybody have a clue how to get Nigel off of Google's "spammer" list.  He was catagorized as a spammer for no reason he can identify other than that he operates several blogs.  (OK, I suspect a few asshats who have personal issues with him decided to complain...)  Now he can't even access his own material anymore and can't figure out how to get off that list.]

-btc

Why there's no accuracy in financial media

Jeff Macke hits it on the head, writing about media coverage of the problems at Merrill since Bank of America bought it out of near bankrupcy:

[Bank of America] CEO Ken Lewis is 61 years old. He didn't save Merrill from going to zero because he was looking for a successor in the form of John Thain or anyone else. I said it last week and it still holds: Ken Lewis has put together more mergers, more effectively, than any other banker still standing. Including Jamie Dimon.

If Bank of America was based in NYC, the media would have their lips firmly affixed to Lewis' backside 24/7. As it is, we've just got a bunch of folks whining about the redneck pruning the deadwood.

He reveals a truth that nobody in the media wants to admit.  They are one and the same as the people they cover.  They come from the same places, many of them worked together at one time or another.  They pal around after hours.  (Maria Bartiromo's use of Citi's corporate jets being just one of the more eggregious examples.)  They love each other and are loathe to be critical.

This is why the $15b auto bailout got weeks and weeks of endless diatribes from virtually every one of the "journalists" commenting on it from each and every one of the financial networks, while the $150b for AIG got scarcely a peep.  Those auto people are living in someplace out there we've never heard of in... Michigan.  AIG?  They're the life of the party in the Haptons and Aspen.  And who would want to risk being disinvited to one of Hank Greenberg's shindigs by being overly critical of him and his baby?

This is also why the only financials I would even consider are the ones based outside of New York.  They're the ones who are climbing a wall of skepticism in the press and among the Wall Street analysts (who are no more interested than the guys at CNBC in traveling down to North Carolina to see Lewis), and thus are most likely to be fully exposed.  Not that I'd touch any of them right now, but I'd especially avoid those whose friends in the media still seem intent on defending their misdeeds.

-btc

The Death of Equities, The Death of Growth?

One of the refrains I hear over and over from some of the commentators on TV about the Madoff and other scandals is "buyer beware, you're on your own, you shouldn't expect anybody to watch out for you, because nobody can do it anyway."

Nice "free-market" talking there.  Though it ignores the basic tenet of free markets going back to Adam Smith, which is that the market, while free, still needs rules and by definition needs somebody to enforce the rules.  Smith was a very religious guy and hoped that market participants would be governed by their inherent desire to be holy before god and seen as such in their community.  History has suggested that many of us need a bit of "help."

These commentators seem not to realize that telling the average investor -- even most sophisticated investors -- that they're on their own against the guys at Goldman et. al. is to tell them in effect "you can't win, might as well not play."  That's not a conclusion that would be good for our economy.

Those who think otherwise should be careful what they wish for.  Most of them, it seems, are younger than me and probably don't have the same recollections I do of my grandfather and his money management style.

What's wrong with this article?

What's wrong with this article from Minyanville?

Porn Tries to Get a Rise Out of Congress

 

Finally! Congress gets a chance to bail out an industry it understands: porn.

With Washington seeming even easier than a starlet on a casting couch, even smut peddlers are clamoring for their share of the bailout pie?

Perhaps the issue is that it seems odd that in an article discussing an appeal by adult entertainment executives to congress, it is the job-creating, tax-paying, wealth-generating folks who end up getting labeled as "smut peddlers" while the corporate-welfare giving congress is given a pass?

 

-btc

 

Archives Redacted! (And I'm back online.)

Moving the blog has turned out to be a lot of work.  Moving the text and comments has been pretty easy.  But lots of the links got trashed and all the links to photos got wiped out completely unless the images were hosted elsewhere.

Reluctantly, I decided that the right thing to do was to go through and carefully edit the archives, in large part to save me the trouble of going back and fixing links on hundreds of old posts, but also because in retrospect, those older posts lacked any kind of "staying power" or relevance beyond the moment.

This has taken quite some time, in part because I forced myself to read through every single post before deciding to delete it.  I deleted more older stuff than recent, but I was surprised at how many pieces I wrote that seem to have stood the test of time and also at how frequently they tended to come in "streaks."  There were some great moments and along the way there were lots of great people encountered, many of them also in the real world.

It's been a fun exercise and a great trip down memory lane.  One of my New Year's resolutions has been to write more rather than yelling at guys on TV, and to get the word out a bit more effectively than in the past, so you'll be seeing more.  I'm not sure how that will change the nature of things, but it'll be fun to do.

I've also found a bunch of posts I want to revisit, so you'll be seeing some of that too.  And with most of my old links now broken, I'm somewhat free (for better or worse) to make something different of this.

Finally, I've revised and simplified the categories to be more reflective of the types of content the blog has contained and that I wish to continue writing about.

I hope this makes this blog easier to read and more informative going forward.

-btc