Category Archive 'Business'
03 Jun 2009

Not All States Are Equally Affected

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50 states’ changes in GDP, jobs, and home prices in 2008

The Atlantic
links a WSJ chart which it then graphs (above), showing the varied impact of the recession on all 50 states.

North Dakota, Wyoming, Alaska, Texas, Hawaii, and South Dakota all managed modest increases (1.9-.2%) in home prices, while California real estate insanity exacted a ferocious toll not only within its own borders (-25.5%), but also in the neighboring California refugee destinations of Nevada (-28.2%) and Arizona (-20.6). Florida, of course, traditionally always jumps on board any real estate collapse and also came in the top ranks of disaster (-24%).

20 May 2009

Crime Wouldn’t Pay If the Government Ran It

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John Steele Gordon warns that Barack Obama’s plans for nationalized industries have plenty of precedents, all of which show that government-run business enterprises are a disaster.

The Obama administration is bent on becoming a major player in — if not taking over entirely — America’s health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government’s track record in running economic enterprises. It is terrible.

In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.

When the plant was finally finished, however — three years after World War I had ended — it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.

Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.

These examples are not aberrations; they are typical of how governments run enterprises.

Read the whole thing.

10 Mar 2009

Obama’s War on Business

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Kevin Hassett argues that Barack Obama couldn’t be doing a better job of destroying the American economy if he was trying to do just that.

Imagine that some hypothetical enemy state spent years preparing a “Manchurian Candidate” to destroy the U.S. economy once elected. What policies might that leader pursue?

He might discourage private capital from entering the financial sector by instructing his Treasury secretary to repeatedly promise a brilliant rescue plan, but never actually have one. Private firms, spooked by the thought of what government might do, would shy away from transactions altogether. If the secretary were smooth and played rope-a-dope long enough, the whole financial sector would be gone before voters could demand action.

Another diabolical idea would be to significantly increase taxes on whatever firms are still standing. That would require subterfuge, since increasing tax rates would be too obvious. Our Manchurian Candidate would have plenty of sophisticated ideas on changing the rules to get more revenue without increasing rates, such as auctioning off “permits.”

These steps would create near-term distress. If our Manchurian Candidate leader really wanted to knock the country down for good, he would have to provide insurance against any long-run recovery.

There are two steps to accomplish that.

Discourage Innovation

First, one way the economy might finally take off is for some entrepreneur to invent an amazing new product that launches something on the scale of the dot-com boom. If you want to destroy an economy, you have to persuade those innovators not even to try.

Second, you need to initiate entitlement programs that are difficult to change once enacted. These programs should transfer assets away from productive areas of the economy as efficiently as possible. Ideally, the government will have no choice but to increase taxes sharply in the future to pay for new entitlements.

A leader who pulled off all that might be able to finish off the country.

17 Jan 2009

Lithuanian Debt Collector Getting Tough With Deadbeats

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Vilija Lobačiuvienė

Atlanta Journal-Constitution:

[A] Lithuanian debt collector is offering an unconventional service to retrieve arrears: witchcraft. The Vilnius-based Skolu Isieskojimo Biuras (debt collecting bureau), has hired Vilija Lobačiuvienė, the Baltic nation’s most famous self-styled witch, to hunt down companies and individuals who are failing to pay up. Lobaciuviene, 53, who claims to use hypnosis, herbal medicines and “the bio-energy field,” promised Thursday to “do whatever I can to help people.”

15 Jan 2009

Facebook Sacrifices a Whopper of a Promotion

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FaceBook shut down Burger King’s Whopper Sacrifice promotion, citing privacy concerns. I agree with Michael Arrington that the decision was the kind of triumph of corporate stodginess over creativity and humor that demonstrates that the people in charge, with the power, haven’t a clue.

Original posting

13 Jan 2009

What’s Wrong With Silicon Valley?

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Business Week’s Steve Hamm says the problem is greedy investors’ short term thinking and aversion to risk, and those stingy VCs should start funding “bold new directions” while waiting for Uncle Obama to open up the federal tap.

Hamm’s article lit the fuse of Michael S. Malone at Live from Silicon Valley.

Since Steve Hamm and Business Week aren’t willing to give you anything but their own big government/big business solutions to the perceived crisis, let me give you the real story – and real solutions – from somebody who has been on the ground here in Silicon Valley for 45 years:

Yes, Silicon Valley – and by extension, the U.S. high technology industry, is in something of a crisis right now. Part of it is the fact that, as the largest manufacturing sector in the US economy, electronics is not immune to the larger financial crisis currently impacting the world.

But there a lot of other problems as well. For one thing, the venture capital industry is in real trouble – not because of a lack of courage, but because government interference – most notably, Sarbanes-Oxley – has proven almost fatal to the new company creation process. With almost no potential for a big pay-out on the back end (because companies don’t ‘go public’ any more), VC’s are having to be much tighter on the front end. That’s good business, not gutlessness.

As for the entrepreneurs themselves, to charge them with a lack of courage or character is truly insulting. Instead of hob-nobbing with senior executives, Steve should have called me. I would have taken him to the little Peet’s Coffee shop in nearby Cupertino where I get my lattes twice per day. There, I would have shown him that on any given day you can see at least two entrepreneurial teams – a half-dozen guys huddled over a single laptop editing spreadsheets – almost always different, and all dreaming of starting the Next Big Company. There are hundreds of these start-up teams all over the Valley right now – indeed, I think there is more entrepreneurial fervor going on right now than just about any other time in Valley history.

Are these folks thinking small? Are they short on courage? No, what they are is pragmatic. That’s the essence of being an entrepreneur. They know what the business landscape is out there, and they are adjusting their plans to succeed in that new reality.

No, the problem is not that entrepreneurs and investors in Silicon Valley and the rest of high tech aren’t thinking big, it’s that they aren’t being allowed to. If Business Week would just take off its ideological blinders, it would realize that if Washington really wanted to help a sick Silicon Valley, it would get out of the way, and strip away all of those worthless regulations that are inhibiting the imagination and the creativity of this town.

07 Jan 2009

Waterford Crystal Maker Bankrupt

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Hard times are not only impacting large financial institutions like Lehman and AIG.

NY Times:

Queen Elizabeth, the Kremlin and the White House have been customers, but in the current economic climate, luxury crystals and ceramics are a hard sell as Waterford Wedgwood conceded Monday.

The company, which is based in Dublin and whose roots go back 250 years, makes and sells crystal vases, glasses and ceramic figurines and kitchenware. It made the ball that drops each New Year’s Eve in Times Square, and its crystal chandeliers decorate Windsor Castle and the Kennedy Center.

Waterford Wedgwood said on Monday that its 10 British units and 4 businesses in Ireland were placed into administration, similar to bankruptcy protection in the United States, after running out of money and failing to find a buyer. The remaining subsidiaries, including those in the United States, Germany and Canada, remain unaffected.

The auditor, Deloitte, was appointed as administrator of the troubled businesses, which employ 2,700, or more than half of Waterford’s 5,000 employees. The units will continue to operate until the administrator decides to sell, close or reorganize them.

“I am disappointed that certain of the group’s U.K. and Irish subsidiaries have had to go into administration and receivership, but we remain optimistic that ongoing discussions will result in a buyer being found for the business,” the chief executive of Waterford, David Sculley, said.

Waterford Wedgwood was created in 1986 when the Irish crystal maker Waterford acquired the British ceramics company Wedgwood. Both companies have a rich history. Wedgwood was founded in 1759 by Josiah Wedgwood in Stoke-on-Trent, England. Charles Darwin, who formulated the theory of evolution, married a member of the Wedgwood family in the 19th century and was able to finance his research with the help of the family fortunes.

Waterford was founded in 1783 by the brothers William and George Penrose and named after the Irish harbor town where they lived. Waterford faced difficult times in 1851, when it closed because of rising taxes, but the business reopened almost 100 years later. The Irish government gave Waterford glassware as a present to each American president from Dwight Eisenhower to Ronald Reagan, who kept his jelly beans in a Waterford dish.

02 Jan 2009

Poll Finds 77% of Americans Think the Press Has Worsened the Economy

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Markets are basically emotionally hysterical mobs and herds. They typically run furiously in one direction, until the mood changes, then they run just as furiously in the opposite direction.

Suddenly, in 2008, a nation-wide real estate slump led to a natural enough increase in mortgage defaults, generally on the part of no-down payment, or low down payment, buyers with no equity stake worth preserving. Single-digit mortgage default increases were reported in screaming headlines as clear evidence of catastrophe, and before you knew it, the credit markets were in a panic, and great and famous financial institutions suddenly found themselves in serious trouble as securitized mortgage debt almost overnight became non-negotiable.

Market confidence, or the lack thereof, had a great deal to do with the tone and volume of negative reporting, which was, to say the least, extreme. There is a natural conflict between the media, which needs the most exciting, easiest-to-sell story it can produce, and the interests of truth and the investing public. This Fall, there was an even greater conflict of interest between accurate and sensible reporting and the desire of the overwhelmingly liberal journalist community to amplify economic bad news during a presidential election.

Breitbart
reports an Opinion Research poll indicating the overwhelming majority of the public recognizes what the media has been doing very well.

Seventy-seven percent of Americans believe that the U.S. media is making the economic situation worse by projecting fear into people’s minds.

The majority of those surveyed feel that the financial press, by focusing on and embellishing negative news, is damaging consumer confidence and damping investment, making a difficult situation much worse. The poll was conducted via telephone, December 4 – 7.

01 Jan 2009

Looking For Work?

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Bloomberg reports that, while other businesses find sales plummeting, cybersecurity is booming.

Lockheed Martin Corp. and Boeing Co., the world’s biggest defense companies, are deploying forces and resources to a new battlefield: cyberspace.

The military contractors, eager to capture a share of a market that may reach $11 billion in 2013, have formed new business units to tap increased spending to protect U.S. government computers from attack.

Chicago-based Boeing set up its Cyber Solutions division in August “because of a realization by the company that it’s a very serious threat,” Barbara Fast, vice president of the unit, said in an interview. “It’s not a question of if we’ll be attacked but when and so how will we be prepared.” Lockheed launched its cyber-defense operation in October.

President George W. Bush announced a national cybersecurity plan in January to be supervised by the Department of Homeland Security, after an increasing number of attacks on U.S. government and private sector networks by groups linked to foreign governments, organized crime gangs and hackers. In a Dec. 8 report, a panel of experts said President-elect Barack Obama should create a White House office to oversee the effort.

“The whole area of cyber is probably one of the faster-growing areas” of the U.S. budget, Linda Gooden, executive vice president of Lockheed’s Information Systems & Global Services unit, said in an interview. “It’s something that we’re very focused on. I expect there will be a significant focus” under Obama.

The number of security breaches of U.S. and private-computer networks reported to the Computer Emergency Readiness Team of the Homeland Security Department almost doubled to 72,000 in the fiscal year ended in October from about 37,000 the previous year, agency spokeswoman Amy Kudwa said in an interview.

U.S. government spending to secure military, intelligence and other agency computer networks is forecast to rise 44 percent to $10.7 billion in 2013 from $7.4 billion this year, according to a report by market forecaster Input.

Security-system spending will grow 7 percent to 8 percent annually, “significantly faster” than information-technology, which has increased about 4 percent a year in the past five years, said John Slye, an analyst at the Reston, Virginia, company.

23 Dec 2008

Government Killing Incorporation

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Michael S. Malone explains in the Wall Street Journal why the 1990s boom in the creation of new technology corporations never came back. The news is not all bad, of course. The Accounting business has been booming like never before.

From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Faced with crushing reporting costs if they go public, new companies are instead selling themselves to big, existing corporations. For the last four years it has seemed that every new business plan in Silicon Valley has ended with the statement “And then we sell to Google.” The venture capital industry is now underwater, paying out less than it is taking in. Small potential shareholders are denied access to future gains. Power is being ever more centralized in big, established companies.

For all of this, we can first thank Sarbanes-Oxley. Cooked up in the wake of accounting scandals earlier this decade, it has essentially killed the creation of new public companies in America, hamstrung the NYSE and Nasdaq (while making the London Stock Exchange rich), and cost U.S. industry more than $200 billion by some estimates.

Meanwhile, FASB has fiddled with the accounting rules so much that, as one of America’s most dynamic business executives, T.J. Rodgers of Cypress Semiconductor, recently blogged: “My financial statements are a mystery, even to me.” FASB’s “mark-to-market” accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive.

But FASB’s biggest crime against the economy and the American people came when it decided to measure the impossible: options expensing. Given that most stock options in new start-up companies are never worth anything, this would seem a fool’s errand. But FASB went ahead — thereby drying up options as an incentive for people to take the risk of joining a young company and guaranteeing that the legendary millionaire secretaries would never be seen again.

Not to be outdone, the SEC has, through the minefield of “full disclosure” requirements and other regulations, made sure that corporate directors would never again have financial privacy and would be personally culpable for malfeasance anywhere in the company. This has led to a mass exodus of talented people from boards of directors in places like Silicon Valley. Full disclosure was supposed to make boards more responsible. Instead, it has made them less competent.

Read the whole thing.

17 Dec 2008

How to Punish Bernie Madoff

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Holman W. Jenkins Jr. swats away the predictable outcry for more regulation, and observes that when one finds oneself with a problem involving lemons, one should simply make lemonade.

Where was the SEC? Such is the plaint lofted in the wake of the Bernie Madoff scandal.

Huh?

When has the Securities and Exchange Commission ever found a fraud except by reading about it in the newspapers? …

What makes the Madoff story interesting, though not evidence of systematic failure of the regulatory or legal system, is that Mr. Madoff and some of his clients had dealt on a basis of trust for more than a generation. True Ponzi schemes, in which early investors are paid a “return” out of funds deposited by later investors, tend to falter at the first market downturn. Waning investor enthusiasm dries up new funds required to pay off earlier investors. The scheme collapses.

In all likelihood, Mr. Madoff was not running a pure Ponzi scheme, but had real assets. He was operating a blind pool, in which investors had no real idea what they owned or how it was performing, relying on Mr. Madoff who reported metronomic returns, brooked no nosiness into his methods, and seemed always willing to pay off investors who wanted to withdraw their money.

He may have been casual from the start about what money he used to pay withdrawals. It is almost inconceivable, though, that he could have built a true Ponzi scheme to a height of $50 billion, in which there were never any real assets, just his superhuman 40-year juggling act to ensure new investors were recruited as needed to provide funds to meet withdrawal requests from earlier investors.

If so, he is a genius who should immediately be put in charge of the Social Security and Medicare trust funds.

10 Dec 2008

Social Justice and the Mortgage Mess

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Investors Business Daily debunks the spinning regulators trying to deny responsibility.

Four federal agencies enforce the CRA, a banking regulation whose original purpose of encouraging homeownership among the poor was well-intended. Abused by the Clinton administration, however, the act triggered the subprime crisis by relaxing lending standards across both the primary and secondary mortgage markets.

These agencies, which over the years have become entrenched in pushing the act, include the FDIC, Office of Thrift Supervision, the Comptroller of the Currency and the Federal Reserve. Top agency officials each took a turn Monday defending the CRA during a C-SPAN-covered panel discussion on the housing crisis.

OTS director John Reich insisted it “had absolutely nothing to do with the mortgage crisis.” FDIC chief Sheila Bair said it was a “myth,” adding that “it’s really unfortunate that this is out there.” “It’s simply not true,” she asserted. Next up was Comptroller of the Currency John Dugan, who agreed the CRA “certainly was not the cause of the subprime crisis.” …

In a more aggressive pursuit of “social justice,” the Clinton administration revised the CRA in April 1995 to mandate that banks pass lending tests in “underserved” communities and suffer tough new sanctions for failing to make enough loans there.

According to the language of the new Clinton regs, banks that used “innovative or flexible lending practices” to address the credit needs of low-income borrowers passed the test. Banks with poor CRA ratings were hit with stiff fines and blocked from expanding their operations. Soon, “flexible” lending became the norm, and banks used subprime loans, which charge higher interest rates, to cover the added risk.

But it wasn’t enough. So Clinton ordered HUD to pressure Fannie Mae and Freddie Mac to buy the higher-risk loans from private banks and lenders, while adopting the same “flexible” credit standards. By 2000, HUD had mandated that low-income mortgages — including CRA-related loans — make up half of their portfolios.

To further spread the risk, Clinton legalized the securitization of such mortgages. In 1997, Bear Sterns securitized the first CRA loans — $385 million worth, all guaranteed by Freddie Mac. Thus began the massive bundling of subprime mortgages that wound up poisoning the entire industry.

The cause and effect is clear. As ex-Fed chief Alan Greenspan recently testified: “It’s instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA.”

It strains credulity for top regulators to now say the CRA had “absolutely nothing” to do with the subprime crisis. It smacks of political spin and bureaucratic CYA.

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