Friday, February 27, 2009

Outrage of the Day II

The news is out that GE will soon be cutting the its dividend. Its not official official, but it appears to be official for all intensive purposes. Previously in Outrage of the Day I discussed that GE's CEO, Jeffrey R. Immelt was appointment to Obema's Economic Recovery Advisory Board. Apparently being appointed to Obema's Economic Recovery Advisory Board is more important than running GE, which is the job that he is being paid to perform. If Immelt wants to serve on Obema's Economic Recovery Advisory Board he should immediately resign since that is not what he is being paid to do.

Since my prior post the stock of GE has continued to decline from $11.10 to today's $8.51. So far, Immelt seems to have done what other failing executives have done: deny, deny, deny, and deny. Argus, a firm that rates companies wrote, on January 26th (a mere month ago), that: "We suspect the company would support its dividend payment over its credit rating, given CEO Jeff Immelt's vociferous commitment to the dividend. However, GE believes that is not a choice it will have to make and remains committed to retaining both." Obviously there is a credibility gap with GE management.

Furthermore, management seems to have a lack of concern for how this will look to shareholders and the world in general. I have yet to see any press release announcing that the executives will somehow "share the pain" and reign in their compensation as a result of their poor performance. At least the executives at Ford Motors, finally realized that they needed to forgo some of their compensation.

In the old days, when a ship was sinking, it was expected that the Captain would be the last off the ship after seeing to the welfare of the passengers and crew. Executives today, take all the lifeboats for their own us, are first off the ship, and don't even bother to inform the passengers and crew that the ship is sinking. No wonder our country is in financial ruin.

Thursday, February 26, 2009

Good Performance or Bad Performance - Excessive Compensation

The New York Times article: "After Huge Losses, a Move to Reclaim Executives’ Pay" It is amazing that corporate executive get paid big bucks irrelevant of the issue of how well their company actually performed. These executives are essentially running private fiefdoms for their own benefit. In theory they are supposed to work for the shareholders, but that is a joke. Below are some reader comments on the article posted on Times webpage.

Elsie wrote: "To heck with "shortly before problems emerged." These guys--all corporate CEOs--are the new robber barons. They steal from the government, they steal from the shareholders, they steal from their employees. They steal from their customers. And because we value capitalism and a free market nothing can stop them. We need a new Teddy Roosevelt to drag these leeches off our necks. I think better than nothing would be to just bring back all the regulations that were put in place after the last depression--Glass-Steagal, et al."

Maryann wrote: "CEO salary contracts are a joke. They are not based on performance as they would be for a lower level worker, but based on the flawed assumption that, without these astronomical salaries, these "highly competent (that's a joke) executives would flee to other companies. ... That's what we've been hearing for years whenever the subject of lofty executive compensation in an unprofitable company came up."

Sampson wrote: "Go get 'em. I am all for a clawback. Doesnt the IRS get a clawback if we've made a mistake in our tax filing and been audited? These guys have made "mistakes" (no, the correct word is "cheated"). They have cheated their shareholders, the public, the entire nation and now the entire world. The least they can do is payback. The best case is to punish them for POOR performance. They took money saying they delivered good work and they deserved it. They didnt deliver and they dont deserve. Clawback."

Foreclosure Loophole

CNBC has a good video related to our economic meltdown: Foreclosure Loophole. The theme of the video is that the mortgages have been securitized, tweaked, shuffled, and reshuffled to the point the banks holding the securitied can no longer "prove" that they even own a particular loan.

The significance of this video, from the perspective of our economic system, is that there are limits to the dogmatic assertion that markets need flexibility to promote economic growth. Having some flexibility in marketing mortgages can be beneficial. But here the securitization marketers sliced and diced the mortgages (for the purpose of generating transactions fees) to the point that a "concrete" asset morphed into an abstract security that required computer modeling to establish its value. Unfortunately, history has now demonstrated that the computer models were flawed. Beyond the flawed computer model, these securities were recharacterized to the point that the paper trail became shredded. Due to the lack of an adequate paper trail, the security holders now find themselves unable to prove that they even own the underlying mortgages that make up their securities!

Furthermore, one needs to question why these securities were even being created. It seems that they were being created as a means of selling the same asset (mortgage) over, over, and over again to generate commissions. Generating transaction fees does NOT generate wealth for the economy and is equivalent to churning, which is an abusive business tactic.

To make matters worse, the risk managers charged with insuring these security instruments (AIG as an example) failed to undertake due diligence in writing the insurance. So, as these security instruments failed, the insurance wasn't there to cover the losses.

The meltdown of our financial system is a clear market failure resulting from the willful purposeful actions of some individuals without any regard to the potential damage to society that could result from their actions. Our financial system is supposedly built on trust. If the financial system does not want regulation, don't abuse the trust that society expects of you.

Yes innovation is good. But it is atrocious when innovation is misused to convert something that is concrete (such as a home mortgage) into an abstract unfathomable security. To resurect an old phrase this is "Voodoo Economics".

Update 2/27/2009: As luck would have it, I ran across the following in the March 2009 issue of Newsmax. Newsmax writes: "Beware of financial innovation. Why? Because most of it is designed to enrich the innovtors, not the investors. Just think of the multiple layers of fees, to the salespeople, servicers, banks, underwriters, and brokers selling mortgage-backed debt obligations. These new products (credit default swaps are another example) enriched their marketers during 2005-2007, only to impoverish the clients who held them in 2008."

Wednesday, February 25, 2009

The Sacred Cow of Home Mortgage Deductions

The New York Times has an article by Edward L. Glaeser titled: Killing (or Maiming) a Sacred Cow: Home Mortgage Deductions. This is an excellent read. The point of this article is that the home mortgage deduction is a government subsidy where the effect is that: "Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets." On a broader scale, all subsidy programs (whether it be for college, oil exploration, or green vehicles) encourages unecomic investments and creates inflation. In the end subsidies do more harm than good.

There is News and there is Advertising

There is a line between real news and advertising. Regretfully some of the websites reporting "news" can't make that distinction. I realize that advertising is necessary to provide the money to support these free news services; nevertheless these services, such as MarketWatch, must clearly distinguish legitimate news from advertising dressed-up as news.

When companies such as MarketWatch fail to make this distinction, it cheapens their brand. Not only that, but companies that issue "false" news leave me with the impression that they are not all that honest to begin with. I have, of course, emailed MarketWatch several times, but I have not yet received a response beyond the automated "thank-you".


Stock Preacher Issues Technical Trade Alerts on: BAC, BP, BRK.A, C, COP

Last update: 7:00 a.m. EST Feb. 25, 2009
VALLEY COTTAGE, N.Y., Feb 25, 2009 /PRNewswire via COMTEX/ -- announces the availability of Trade Alerts on stocks making news today.

Investors can view all of the daily updates for free by visiting:

Today's Trade Alerts include: Bank of America Corporation (BAC:bank of america corporation com), BP plc (BP:BP p.l.c.), Berkshire Hathaway Inc. (BRK.A:Berkshire Hathaway Inc), Citigroup, Inc. (C:Citigroup Inc), ConocoPhillips (COP:ConocoPhillips)

The above, as can clearly be seen, provides nothing substantive in the way of genuine news and is simply an advertisement dressed up as a press release. In contrast, Zacks, when it issues a news blurb, actually provides a short paragraph describing why the company is being featured. This is real news. Reputable news agencies should reject disingenuous "news" such as that issued by the "Stock Preacher". It hurts us all.

Wednesday, February 11, 2009

Patents - A "Dirty Secret"

I am not involved in academia so I am not that knowledgeable about the "research game". What has been troubling me with the "research game" is that I kept reading articles on universities and professors suing each other over "patents". I had found these articles to be disturbing since most research is funded by the Federal government and I had assumed that the results of all publicly funded (taxpayer paid) research would be in the public domain.

Then one day, I ran across a TechDirt article that mentioned the Bayh-Dole Act. This act, according to Wikipedia, " ... gave US universities, small businesses and non-profits intellectual property control of their inventions and other intellectual property that resulted from such funding. The Act, sponsored by two senators, Birch Bayh of Indiana and Bob Dole of Kansas, was enacted by the United States Congress on December 12, 1980." Well, so much for our esteemed Congressional representatives protecting the taxpayers.

Once again the free market is being debased by special interest legislation that creates a favorable business environment for a privileged group. As an aside, I also had the Utopian belief that research was being performed for altruistic reasons to benefit mankind, I guess I was wrong. Add this to the list of "bad" legislation that "steals" taxpayer's property for the benefit (subsidization) of private enterprise.

Sunday, February 8, 2009

The Great Net Neutrality Debate III

What is the probability that that the visionary ideal of a neutral internet can be fulfilled?

That question emerged in my mind as a result of articles posted on TechDirt and AgainstMonopoly. Evidently ESPN is floating the concept that ISPs should directly pay ESPN for providing content rather than at the consumer level. WIRED quoted Ben Scott, policy director for media reform and net neutrality advocate Free Press, as saying: ""Ultimately, if you carry it to its logical extreme — that's everyone charging for their content, and depending upon where you are and which ISP you're using to connect to the internet, your internet experience is different — that's a really unsettling prospect," says Scott. "I think it undermines the foundational principles that make the internet such an engine of innovation and creativity.""

Based on what I have been reading concerning the ongoing verbal assaults on network neutrality; Scott's comment makes me wonder if the concept of a neutral internet will eventually be eroded and debased into oblivion. We have already seen companies such a Comcast use abusive tactics euphemistically referred to as "traffic shaping" to control the flow of packets in violation of neutrality concepts. The RIAA and the MPPA are attempting to require that ISPs act as their private police force by reading (filtering) the flow of packets. Additionally, there are special interest groups that believe that the internet should somehow be "censored" to protect the unsuspecting public from the "demon of the day". The question naturally arises, if there is a constant unrelenting barage on a neutral internet, how long can the internet really remain neutral?

Unfortunately, it seems to me that the network neutrality debate remains myriad in the dogma that if the internet is not regulated that the free-market will magically keep it neutral. The anecdotal evidence, however, demonstrates that this is a false belief.

First, those who believe that the free-market will somehow protect a neutral intenet seem to be overlooking the obvious continued and repeated attempts of some network players to destroy network neutrality. Basically, if you don't initially succeed try again and again until you do succeeded, which seems to be the strategy being pursued by Comcast, the RIAA, and the MPPA.

Second, we seem to missing a call for companies to pursue an ethical course of action. If we do not want the internet to be regulated by an "oppressive" government, the obvious solution is to be proactive and solve the problem before aggravated citizens demand government intervention. I urge that those who analyze the network neutrality issue begin to demand ethical behavior that is outlined in an industry code of conduct that clearly defines network neutrality and obligates the players to work within the code of conduct.

Friday, February 6, 2009

Outrage of the Day

The news concerning General Electric (GE) continues to be abominable. The stock price has declined from nearly $40 per share to $11.10 today, the dividend may be cut, and GE's AAA bond rating is expected to be cut. In the face of all this bad news, what do I read? That GE's CEO, Jeffrey R. Immelt has been appointment to Obema's Economic Recovery Advisory Board.

To me this is an outrage. Here we have the CEO of failing company accepting the task of serving on a committee rather than saving the company he supposedly works for. This also creates a credibility problem. It seems illogical to have the head of a failing corporation provide advice on saving the economy! Even if one were to accept the premise that serving on the committee really isn't all that distracting from working to save GE, it does send send a powerful message to the public that Immelt is out of touch with reality.

That Immelt would accept such an appointment demonstrates a degree of arrogance concerning his supposed priorities and public relations. This would be similar to the outrage of auto executives flying on expensive private jets in luxury to Washington DC to beg for money because their companies were "impoverished". Like the auto executives, it seems to me that Immelt has an ego problem that precludes him from realizing that he is out of touch with reality. He should be focusing on saving GE not kissing up to the President.

When I got home from work, I was "greeted" by Glen Beck of Fox news who just happened to be on with "GE in bed with Obama" (The transcript unfortunately does not read well at all. As I am writing this he is now rehashing this with Laura Ingraham). Regretfully, this discussion reinforced my perception that Immelt and the GE board of directors are not managing GE for the benefit of the shareholders. Technically, Immelt and the board work for the shareholders. So it seems that Immelt and the GE board of directors view GE as a private fiefdom that is to be run for their benefit.

We are constantly barraged by many economic pundits with the statement that if the company does well, its leaders should be rewarded. Here we have a company that has a falling stock price, the AAA bond rating may be cut, the dividend may be cut, and earnings are down. The New York Times wrote "In announcing executive pay limits on Wednesday, President Obama is trying to hold the financial industry accountable to taxpayers while aiming to change an entrenched corporate culture that endorses outsize bonuses and perks that often bear little relationship to corporate performance." (emphasis added) I have not seen a public press release from GE announcing how management will share the stockholders pain.

Also, it is not simply an issue of GE management sharing the pain, but recognizing its fiduciary relationship to the stockholders. GE management is supposed to manage the company for the benefit of its stockholders. Many of these stockholders have their retirement savings in GE stock. The decline in the value of GE stock and its dividend mean that people who earn a lot less than Immelt will suffer. It seems that we have to many corporate managers who care very little for the people they hurt. I seriously hope that GE management is not pillaging the company for their own benefit.

According to Jeff Beck, Immelt was paid nearly $20 Million dollars in compensation last year. Based on the decline of the stock price, the potential bond downgrade, the potential cutting of the dividend, and the decline in earnings, one would think, if Immelt were honorable, that he would take a pay cut and refund some of his prior compensation. All that I have heard is silence. I hope that GE management will not destroy GE like the managers of Washington Mutual did.

Update 2/16/2009 Barron's video: Can Immelt Resuscitate GE's Value?

Update 2/18/2009 New York Times article: G.E.’s Immelt Declines His 2008 Bonus

I hope that the shareholders will be able to organize to vote Immelt and the board of directors out of office before it is too late.

Disclosure: We are shareholders in GE