May 16, 2009
Hedge Fund Haters: Read Joe Nocera Today in the NYTs
Joe Nocera, in today's NYT business section, interviews a hedge fund manager, Neil Barsky, who is hanging it up. What a wonderful column. All critics of hedge funds should read this. The interview makes several points: hedge funds were not the cause of the current financial mess, hedge funds were and are a healty part of the financial system; hedge fund managers are -- well -- human and compassionate. The column does show two common missteps, however, the canards that hedge fund managers made too much money and that hedge funds "drain" our best minds away from more socially useful pursuits. The interview itself contradicts both propositions -- first, hedge fund managers were paid on real success not on phony measures of success (beating a market or industry index) and second- hedge fund managers, like Barsky, can change careers once they succeed (and do "good works"). In other words, the argument is for career focus -- when a manager focus on profits, when done, focus on social causes -- do not, do not mix the two in either capacity. Most hedge funds managers are not managers for life (Icahn, excluded). They make some money and change professional goals -- it is all good -- both parts, the making money and the change. You cannot have one without the other perhaps. Great piece, Joe, one of your best. Makes me want to subsidize the NYTs.
May 14, 2009
You Gotta Love Business Schools: Irrelevance is Always a Problem
Business schools, in their MBA programs, have a mandatory course, and often two, in writing a "Business Plan." In a business plan a group with an ideal and no money attempt to convince those with money and no ideas that the two of them should partner. Business schools talk about such plans incessantly -- They have business plan competitions (in house and nationally), that have clinics in which students write business plans for clients. The trouble is, no one asked the venture capital funds if business plansare valuable. Now someone has. In a study of 1,000 requests for funds, Godlfarb and Gera, of the Robert H. Simith School of Business, found that the plans are -- well -- worthless. "Nobody reads them." Business school business plan teachers have not given up -- now the argument is that the plans are good for those drafting them ("self-critical thinking" of some such garbage) although not those are targeted by them. By the way, business plans are never written alone in business schools, they are written by teams, who take "teamwork" and "leadership" courses. Students are taught how to work together and how to lead by "facilitating others" to work together. Little mention of quality of the decision or ethics in such training. We have now discovered (?) that teamwork is often "niceness" and "civility" training and groups being nice can make entire organizations very stupid. We have taught organizational stupidity. Look at our banks' boards of directors (not to mention the boards of auto companies, insurance companies, real estate companies, etc. -- organization stupidity, all in conformity with teamwork and leadership training. Making a decision in a team effectively is less important than whether a decision is a good one -- a little disagreement, openly and candidly expressed is healthy. We need to teach students how to develop a thicker skin rather than to pander to those who have thin skins. Teachers to often teach students what they want students to do (be nice so the world will be a better place) not what students need to do (make good tough decisions in a rough environment).
I am reminded of the students fifteen years or so ago that caused business school self searching -- students often did better in business by skipping an MBA program after an undergraduate degree. That's when business schools starting teaching "teamwork." Right problem; wrong solution. A new student suggest that fewer graduates from a top ttwenty MBAprogarm than from a "state school" end up as CEOs. This stuff hurts. Then there is the recent attack on business school finance professors -- the guys who make the big money and are the stars (they are often among the ranks of the highest paid in any university faculty)-- for teaching formulaic equations and mathematical formulas that -- well -- do not work. You gotta love business schools.
So you want to be a business person? Take a course on how to read financials, take a course on tax, take a course of valuation theories of future income streams, all from a professor who pushes you hard and tests you individually, take courses on the classics (not taught by crits, that is another problem) and play intermural sports.
Fiat's Sweet Deal
The details of the Fiat deal are leaking out in the Chrysler bankruptcy. Such a deal. Fiat gets 20% of Chrysler for a promise, no cash, to give technology. Fiat then gets another 5% if Chrysler builds a Fiat motor. No word on whetherer it has to be in a Chrysler or on what a Fiat motor is (is a head assembly enough). Easy enough. Fiat then gets another 5% if Chrysler builds a green car, a 40 mph car, with Fiat technology. No word on whether the car is any good or whether it must sell. Easy enough. Fiat already has the technology in diesel cars, cars that will not sell in the United States. Build a few a year, get another 5%. Finally Fiat gets another 5% and and option for 16%, if Chrysler sells $1.5 million cars abroad. Simple enough, rebadge a Fiat a Chrysler, finish building it (with just adding a door do?) in the United States and ship it to established markets abroad. Just like that, Fiat gets 51% of Chrysler without paying Chrysler shareholders or bondholders a dime. Moreover, the "partnership" of Fiat and Chrysler is governed by a board of three Fiat nominees and three Chrysler nominees from the beginning -- Fiat has 50% control of Chrysler from the get go even with only 20% of the stock. This deal is ridiculous and shows that the United States government, desperate to give unsecured creditors, union workers pension claims, priority over secured creditors, banks, would agree to about any partnership. It will not work, of course. Fiat wants to sell Fiats build in Italy in the United States, using Chrylser dealers. It will fudge and interpret the agreement to do so. Moreover, Chrylser's big problem has been quality control and Fiat's big problem in selling cars in the past in the United States is -- quality control. Finally, Italy has labor unions too and they will fight the United States unions for production wages. In the end, Fiat will split, keep some dealership, and the "partnership" will close some plants and sell a few, in a forced sale, to GM, another entity asking for government cash.
May 12, 2009
A Fundamental Change in Governing Philosophy
Many of the changes in government stem from one very fundamental philosophic change. The leaders of the federal government, from the President on down, believe that the market's power to self-correct is weak (or illusory) and that government is the "only" (to quote Obama's first press conference) answer. This explains the bailouts, Schumer's bill on corporate governance, the new Assistant Attorney General's speech on antitrust enforcement, and the list goes on. The change is mistated. It ought to be that "the markets ability to self-correct is inferior generally to the government's ability to correct and/or self-correct". Stated in this way, the philosphy falls in on itself. The new administration is going to inflict some long run damage on our economic system.
The Schumer Corporate Governance Bill: Effect on Delaware Courts?
Senator Schumer will introduce next week and new bill, The Shareholder Rights Act of 2009, that will federalize the corporate structure of our publicly traded companies. It is a slap to Delaware -- both the courts and legislature. I do not know if the bill will pass; it might. This debate has a long, long pedigree. Even if the bill does not pass, it will undoubtabily affect the future of Delaware jurisprudence and SEC rule making. Delaware will lose its privileged position as the home of corporate governance law in the United States. Delaware will have to find a new niche. It has already begun to developed it. Delaware courtsare establishing a case law on the strict interpretation of contract language and encourage parties to elect Delaware as the forum of choice for interpretation and litigation of large scale business contracts. Why is Schumer doing this? He carries the water for the NYSE in New York and his bill will reduce the power of the exchange to set listing requirements that give it an edge in the market for company listings. Is he acknowledging that the NYSE listing requirements are a burden not a benefit and that the NYSE will not change them??
Hartmax Bankruptcy: A Right to Not Lose a Job?
The New York Times, on page one of the the Business Section today, has a story on the Hartmax bankruptcy. Workers, in league with politicians are attempting to use public pressure on the companies major lender, Wells Fargo bank, to keep the company factory in Illinois open. There are worker meetings and demonstrations attacking Wells Fargo and politicians are talking tough with the press ("I will be there [Wells Fargo] worst nightmare."). What has Wells Fargo done?? The business makes high end mens' suits in the United States. The trademarks are valuable but the revenue of the business is way off given economic conditions. The obvious choice is to sell the trademarks to another company that can manufacture the suits less expensively -- probably with foreign labor. The company has lost 30 million dollars the last two years and has defaulted on a 115 million dollar debt to Wells Fargo. Wells Fargo 1) "reduced" its outstanding credit line 2) forcing bankruptcy and 3) is shopping the company. What do workers and politicians want?? 1) A more robust credit line or 2), if necessary, a sale to a company that will guarantee to keep the losing facility open. How do you demand 1) with a straight face, asking a bank to put more money in a losing company? The answer: Wells Fargo has government bailout money and should pass some of that largess on to Hartmax. This is the cancer of government bailout decisions. How do you demand a sale to a company that will keep the company open, if Wells Fargo will lose money relative to a decision to liquidate the company and sell the brands?. Same answer, Wells Fargo should pass on some of the government bailout money it has received. Workers and politicians are demanding that a private bank invest in a losing venture on their behalf because their jobs are at stake. The expectation that the bank should respond to this pressure reflects a basic misunderstanding of the core mechanisms of our economy. Do we now have new enforceable right, the right not to lose a job due to economic conditions?
May 11, 2009
Auto Bailout Woes
The government's role in the auto bailouts has been a total mess. Consider Chrysler first: First creditors and union reps refused to budge in the negotiations until thegovernment declared, whichh drove the negotiations into Chapter 11. The creditors and union reps were banking on the governments political stake in the outcome, not its economic stake. The administration was on record with a series of pro-worker statements; it could not let the auto makers "fail." Second, when the government got tough it did so by threatening to bring nasty public pressure on the creditors. Creditors that were already on the government dole with TARP money caved immediately; hedge funds held out a bit longer - took incredible public heat - and eventually caved as well. The hedge funds, by the way, are the players the government needs to get into it public/private partnership program and its TALF program for either to succeed. So the government ended up ripping players it needs to play in the future for the success of its programs. Third, the winners were the unions (who are ending up with control of the companies in trust funds) and Fiat. Fiat has quality control problems, Chrysler's bid problem, has failed twice in the United States, is losing money itself, and really only wants Chrysler dealers to sell new Fiat cars. Fourth, the bailout of Chrysler has hurt Ford who must still pay 100 percent of its debts because it is trying to make a go of it without government money and outside of Chapter 11. The bailout has hurt the one company that should be rewarded. What a terrible mess.