Crime Scene Economics

Watching the economy collapse is providing lessons that might never have been learned among business writers. Some of them are pretty diverting, such as hearing Rebecca Jarvis this morning on the Today Show telling us glibly that "there are too many retailers". Nothing about, say, too few jobs, or too little salaries. Next, I suspect we'll hear that we should Go Shopping.

Today cruising through some of the local geniuses, I did find a little jewel. A former employee of Ken Lay (think Enron) has concluded that government did it, in the cloakroom, with laws. The article is by Houston Chronicle's Loren Steffy. I won't post all of it here, but just in case you wonder, no, he doesn't talk about the need for independent regulators and law enforcement, such as has just been proved by our economic disaster.

A few weeks ago, I had lunch with Robert Bradley, a free market scholar and founder of the Houston-based Institute for Energy Research. Bradley, a former speech writer for Ken Lay at Enron, recently published Capitalism at Work, which looks at the role of business and government.

Bradley laments what he calls a "cluster of errors" by companies, especially on Wall Street, that dragged the global economy into recession.

The problem, Bradley argues, isn’t that capitalism failed us, it’s that we failed capitalism.

"The recession is bringing us back to basics," he said. "All we’ve learned from all this is that long-term value is key."

We knew that, of course. But in recent years, soaring prices for everything from commodities to housing have caused us to forget that good investing and good business are about patience and perseverance, rather than instant rewards.

"The present situation seems to present a paradox of capitalism whereby instead of good companies driving out bad, we have bad companies driving out, or certainly hurting, good," Bradley said. "The very best corporations are getting tugged down by the sins of so many others."

Rather than building profitable businesses on sound practices, companies resorted to gimmicks and relied on government policy. The problem isn’t that government did too little to protect us from crisis, it’s that it did too much to help create the crisis, Bradley said.

For example, it slashed interest rates, which encouraged a home-buying binge and inflated housing prices. That fed demand for subprime mortgages and risky debt instruments that Wall Street peddled to investors.
(snip)
The answer may be that bonuses and incentives changed so that executives and employees lost sight of what was good for their firms. In a recent article in Portfolio, Michael Lewis, author of Liar’s Poker, the classic tale of Wall Street excess in the 1980s, traces the problem to the decision by many investment banks to convert from partnerships to public corporations.

In a partnership, individuals are responsible for the losses of the firm, making them more wary of risk. In a corporation, risk is borne by investors. Gambling is always easier with other people’s money. (Emphasis added.)

The point about CEO bonuses is apt, even though Bradley ignored much of the need for laws to protect investors from bad information, and actual regulators. As I said here previously, we are expecting firms' executives to work for profits for the firm, but that has not been rewarded as much as the short-term gains that trigger the big money bonuses. Sometimes those can come at the expense of overall health, as in the case of excessive SUV production in the face of inevitably rising gasoline costs.

The public interest has been revived in the coming administration, and a return to actual representation of our laws will be a real change. I am hopeful that oversight can be a saving grace for the country's business as well.

When we can see even the free marketeers admitting that their ideas were wrong, oh sorry, that the people they expected to use their ideas to do the right thing failed, MISSION ACCOMPLISHED.

Leveraging Turned Upside Down

Listening today to some economists trying to make their way through the garbage that our economy has become, I was brought up short by that old familiar term, "leverage". The term applies to use of loans based the potential worth of a firm to buy up the firm, and I first became aware of it as the means used for employee buyouts. Taking out a loan based on the potential for a firm's eventual worth, leverage was used to estimate what the employees could use for value. Later it was used as a tool for potential non-employee buyers.

The leverage factor assumes that the firm is going to be used for the purposes it was founded for. When executives take hold a firm in order to drain its worth, such as taking out huge CEO salaries, benefits, and even stock offerings, that potential is no longer actualized. Manufacturing widgets is no longer the firm's purpose, though it may be manufacturing widgets, if it is used for something else entirely. Future earning capacity was severely miscalculated, because the firm's purpose was misrepresented when executives began going after their own personal enrichment at the expense of the business they took over.

'Deleveraging' is a term to me until recently, like 'upside down' mortgages that refer to a home that is worth less than its mortgage holder owes. It refers to those loans made on assumptions that a firm would do its best to make traditional profits. The loans instead were used to fund extracurricular activities to make funds for those executives that ran it. Those loans, like all those subprime mortgages, have been bundled and sold off to investment banks, to investors all over the world. They are just as toxic as the subprime loans. That is what you aren't hearing about. The toxic loans aren't just mortgages, not just bad credit. They include carefully crafted business loans that assume executives will be doing their job of running a profitable firm. That is the self-preservation factor. It is another myth, one that is making lenders really, really nervous.

Looking back at Alan Greenspan declare that he never envisioned that executives would not protect their own firms' 'self-interest', there is no way he could be sincere. Only total ignorance of the actual behavior of the market over several decades would allow him to have no knowledge of executives' acting against their firms' 'self-interest'.

Self-interest is nonexistent, of course, if the firm's well-being is not the source of executive remuneration. Under the concept of leveraged buyouts, executive motivation should always have been reviewed as integral to the value of the firm. In order to make a loan on the basis of future profit, it may well be necessary to institute contracts with penalties based on any executive misfeasance in the firm's purpose of being, whether making widgets or mortgage loans. I particularly would like to see Sen. Obama's work to keep jobs from being outsourced enabled, and am sure too that an emphasis on increasing jobs and salaries would be a basis for a sound economy. That might be the best requirement we can make of any firm changing hands, that it provide employment and living wages for its workers, rather than boundless enrichment for the CEOs.

Loans are the object of the occupied White House action, claiming its measuresare making the loans trustworthy again. That isn't going to happen as long as executives' self-interest does not equate with the firm's self-interest.

This is going to be a long, long workout for the market to reach stability again. Those at the top have destroyed its principles. Needless to say, its principals went into the tank with them.

Once burned, twice shy, for any investor. In the case of proven misfeasance, that shy effect is necessarily going to be factored in for some time to come.

Stalinist Health Care!

Having developed an allergic reaction to penicillin, I long have been aware that our medical treatments were limited and full of side effects. Now it seems we have stumbled back into a treatment that has existed alongside our antibiotic approach to treatment, that has a great deal of promise for actual treatment of patients with highly resistant infections. Why isn't out Big Pharma developing it like mad, since antibiotic resistant infection rates are skyrocketing?

Betcha already guessed part of it. It doesn't present the prospect for profits of the antibiotics. It has to be developed for each different variety of infection, so it is hard to mass-produce, and hard to patent. It has the great promise of not having a wide range of effects and lots of different bacteria-fighting elements all in the one dose. This is great for the patient. As stated, it doesn't make your Big Pharma its uber profit.

An old-fashioned treatment for bacterial infections which was once found in every Red Army soldier's kit bag is being touted as a new weapon against hospital superbug MRSA.
(snip)
The initial euphoria around the bacteriophage as a means of combating what had been incurable conditions subsided and the virus was all but forgotten.

But not in Stalin's Soviet Union, where a research programme was pioneered in his homeland of Georgia. Even today, the bacteriophage is used as standard treatment in parts of Eastern Europe for bacterial infections from gangrene to strep throat.

Meanwhile in the West, the love affair with antibiotics is drawing to a close.

Overuse means many bacteria have become resistant to many forms of the treatment, and the willingness of drug firms to bring new brands onto the market appears to be faltering. It can cost as much as £400m ($800m) to develop the drug and take as long as ten years.
(snip)
Phages are notoriously hard to patent, the process by which drug companies secure their future profits.

The promise of treatment for infections - that doesn't have all the problems of resistance - would normally be a great breakthrough, greeted by the healthcare providers with joy and optimism. If it weren't that those healthcare providers have lost the basic decency of their profession, they would be dancing in the streets. No more lost lives of patients by acquiring highly aggressive infections, some of them flesh-eating, would be great for anyone actually devoted to patient care.

If you see anyone who meets this description in your local pharmaceutical company, don't tell the boss. That would not promote their bottom line, and would count, in terminology "Sicko" discovered among insurance companies, as "medical loss". When your profits are diminished, if you're a healthcare provider without any care for patient well-being, that's loss. Your patient's survival costs you, flush him/her.

The Big Pharma interests may be threatened by the Stalinist bacteriophage! Can't wait to see the commercials about the latest Red Threat to sacred profits. Saving lives has just turned evil, and insidious, to the Big Pharma firms. Stay tuned.

Free To Be....

Does a Newest Crime category hang out in the Guinness Book of World Records, Vanity Fair's roundups, somewhere like that? Add to it "working while brown", as the nation discovered yesterday. Raids on processing plants in such places as Cactus, TX, netted a haul of those evil criminals who work for a living in places where they can find jobs. Not great jobs, by the way, and from living on the Eastern Shore of Virginia where chicken processing plants employ large numbers of immigrant workers who in many cases live in shifts in packed trailers, I am aware that keeping us fed is a pretty dreadful industry. I have been told by a friend who worked in the Employment Office here that serious injuries are commonplace, and disability is often the result.

What great matter of concern then did I see the Dallas Morning News taking up this a.m.? The problems Swift industry, the employer, had encountered from the raids. Seriously.

For business owners already trying to comply with federal immigration laws, Tuesday's nationwide raids at Swift & Co. meat processing plants served as a stark reminder that their best efforts may not be enough.

The largest raids in the nation's history highlight the problems faced by businesses in verifying the status of immigrant workers. And they place a spotlight on Basic Pilot, the federal government's voluntary program in which employers use government databases to check Social Security numbers.

Around the country, employers are asking whether Basic Pilot vaccinates the worksite from an immigration raid and legal problems. And how does it protect a company from identity fraud?

Wednesday, Homeland Security Secretary Michael Chertoff said that Swift would not face charges in a nearly yearlong identity fraud investigation because of its "good faith" participation in Basic Pilot and its cooperation with immigration authorities. But Basic Pilot is a program that doesn't detect identity fraud.

"While Basic Pilot inoculates a company against one kind of illegal immigration fraud, it doesn't inoculate against all kinds of fraud," Mr. Chertoff acknowledged Wednesday in a Washington news conference.

While I am pretty amused that the federal government's lax regulations are once again threatening industry, in this instance by 'Basic Pilot, the federal government's voluntary program', it's just objectionable that businesses are the only object of concern on our newspaper's business page.

Families were torn apart, children left abandoned, hardworking laborers deprived of their livelihood, but avoiding prosecution is the real threat in this mentality.

In an atmosphere of this sort, it's no wonder that the removal of consumer protections from frauds like Enron and Tyco are being proposed by this administration.

The Securities and Exchange Commission agreed Wednesday to ease financial-control rules for smaller public companies, proposing changes in how U.S. companies must apply a sweeping antifraud law enacted in 2002 amid the wave of corporate scandals.

The SEC also proposed to raise the minimum financial requirements for individuals wanting to invest in hedge funds, a burgeoning industry that has seen a rise in fraud as well as an increase in the number of ordinary investors getting into the high-risk pools.

The five SEC commissioners voted unanimously at a public meeting to tentatively adopt the control-rules plan, which gives corporate managers more flexibility in assessing the strength of internal financial controls. It could be formally adopted sometime after a 60-day public comment period.

The vote culminated an intense monthslong lobbying campaign by numerous companies, which complained that Section 404 of the Sarbanes-Oxley law -- requiring companies to file reports on the strength of their internal financial controls -- is overly burdensome and costly.


Thank you, protectors of the wealthy and those who can afford attorneys to look out for their interest from the marauding consumer/investor and weak system of checks for proper i.d.'s. What would we do without this brave crew of law enforcement officials to keep our businesses safe?

Live better, I would suspect.