Posts tagged ‘bankruptcy’

Why Greek History Reminds Me of California and Illinois

From the WSJ, an article on how politicians who tried to point out the unsustainability of Greek finances years ago where not only ignored, but villified and marginalized.  Sort of like in places like California and Illinois.

In the past quarter century, Greece has had a handful of reformist politicians who foresaw the problems that are now threatening the nation with bankruptcy.

Their reform proposals were fought by their colleagues in parliament and savaged by the media and labor unions. They invariably found themselves sidelined....

Tassos Giannitsis is no stranger to this kind of war: His tenure as labor minister was more short lived, and the battles against him even more visceral. Mr. Giannitsis in 2001, again in the Pasok government led by Mr. Simitis, put forward a comprehensive proposal to reform the pension system.

Trade unions, opposition parties and Pasok itself unleashed menace on Mr. Giannitsis.

“Giannitsis was annihilated after his pension-reform proposals. There are few precedents for this kind of universal attack on a politician,” said Loukas Tsoukalis, a prominent economics professor here.

Mr. Giannitsis’s proposals, which would have reduced the pension levels Greeks receive and made the system overall more sustainable given the country’s demographic and labor-force trends, were never taken to parliament.

“From the fridge to the bin!” said the front page of newspaper To Vima on April 28, 2001, as the frozen pension-reform plan was scrapped for good.

“When I told my colleagues in the cabinet about the reforms I was proposing—which mind you were not the toughest available—the attitude I got was that I was spoiling the party,” Mr. Giannitsis said in an interview.

“They were, like, ‘everything is going great right now, why are you bothering us with a problem that may implode in a decade?’”

There are many other examples.

 

The Fatal Allure of the Sexy Business

The tech site Engadget directed me to this article on Visual FX and CGI as a "must-read".  What I found was one of the odder economics and business hypotheses I have encountered lately.

The article begins by relating that VFX and digital effects specialty houses all lose money, even when they are providing effects for wildly profitable movies (e.g. Avengers) and purports to explain why this should be.  The author believes that this is a result of Hollywood purposely criticizing the artistry of VFX movies as a way to keep returns in the VFX companies down (and thus increase the returns of film producers).

As the debate surrounding what visual effects are worth rages on, it is clear that the studios themselves have an interest in perpetuating the myth that VFX are the product of clinical assembly lines and the results are equally lifeless and mechanical. Blaming computers for the dumbing down of movies has become a journalistic trope that is bandied about to squeeze the one part of the Hollywood machine that has no union or organizational skill to push back. The right hand asserts they are something not worth paying top dollar for, while the left lines up an interminable roster of VFX-based box office juggernauts for the foreseeable future.

The author goes so far as to say that Avatar was denied the best picture Oscar specifically to support the anti-VFX sentiment and keep returns of VFX companies down (emphasis added).

In 2010, James Cameron’s Avatar became the highest grossing film of all time just 41 days after its release, raking in an incredible $2.7 billion by the end of its run. Weta Digital, the VFX studio that created the majority of the visual effects, along with Lightstorm Entertainment, invested years in developing the tools and talent necessary to create Cameron’s almost entirely computer generated vision, with the cost of making the film rumored to be upwards of $500 million. Cameron had promised to show the world what visual effects could do and he succeeded. The results were universally lauded as visually stunning and unparalleled.

Yet, rather famously, the film and Cameron were snubbed that year at the Academy Awards, both for Best Picture and Best Director. The blame was laid at the feet of the critical success of The Hurt Locker. However, awarding Avatar the Academy’s highest honor would have been acknowledging visual effects as not only lucrative, but high art as well, worthy of its astronomical price tag. And that was a bargaining chip Hollywood was unwilling to concede to an industry it continues to hold hostage with threats of outsourcing to unskilled laborers around the globe.

This hypothesis seems outlandish, and in fact the author never really provides any evidence whatsoever for her hypothesis.   At least equally likely is that Hollywood insiders are snobbish and conservative and reject new approaches to film-making in a way that the public does not.  Or it could be that Avatar wasn't a very good movie (go try to watch it again today, you will be surprised what a yawner it is).  So why are VFX companies really losing money on profitable films?   Let's take a step back, because there is a useful business lesson buried in here somewhere.  I think.

This discussion is a sub-set of an age-old business problem -- how do rents in a supply chain get divided up?   Think of the billion plus dollars the new Avengers movie will make.  Everyone in the supply chain for making that movie, from the actors to the caterers to the VFX houses to the distribution companies believe their contribution has immense value, and that they should be getting a solid cut of the profits.  But profits in a supply chain are not divided up based on some third party assessing value, they are divided up by negotiation.  And the results of that negotiation depend on a lot of factors -- the number of competitors, the uniqueness of the service, regulatory rules, etc.  The most visible example of this sort of negotiation we see frequently in the news is in sports, where players and team owners are explicitly negotiating the division of the end revenue pie between themselves.

If we return to the article, the author actually gives us a hint of the true dynamic that is likely bringing down VFX profits.

The international subsidies-driven business model under which VFX companies operate has been well documented. In pursuit of tax rebates offered by various governments to produce films in their jurisdiction, studios insist that VFX companies open branches in these locations or reduce their bids by the amount of the subsidy in question. Even as studios, directors, and audiences demand the latest in cutting edge technology, VFX houses must underbid one another to get the work and many have been shuttered due to operational losses in the wake of explosive blockbuster budgets. The cost of research and development, shrinking schedules, and the unlimited changes that are the building blocks of every tentpole film, are shouldered entirely by VFX houses.

This is the best clue we get to the real problem.  Here is what I infer from this paragraph:

  1. This is a high fixed cost industry.  There are enormous up-front investments in research into new techniques and large investments in the latest technology, which presumably must be constantly refreshed because it has a short half-life before it is out of date.  The situation is worsened by government policy, which provides incentives for VFX companies to build extra capacity in multiple countries, losing economy of scale benefits from large concentrated production facilities.    One would presume from this that these companies' marginal cost of output, say 15 seconds of finished effects, is way way below their total costs.
  2. There is rivalry among VFX companies that seem to have excess capacity, such that bidding for work is very aggressive.  In such situations (think American railroads in the late 19th century) competitors lower prices down to marginal cost to keep their capacity and their trained people working.  Over time, of course, this leads to numerous bankruptices

I will add a third point which the author fails to cover.  To do so I will return to one of my favorite things I learned at Harvard Business School (HBS).  At HBS, in the first two days of strategy class, we studied two very different business cases.  The first was of a water meter manufacturer, a dead boring predictable unsexy business.  The second was a semiconductor company, which was hip and cool and really sexy.  It turned out that the water meter company coined money.  The semiconductor business was in and out of bankruptcy.

Why?  Well the water meter company had limited investment (made the same meters the same way for decades) and made most of its money off the replacement market, where it had no competitors since users pretty much had to replace with the same meter.  The semiconductor business had numerous shifting competitors and was constantly trying to scrape up enough investment money to keep up with shifting technology.  But there was one more difference.  By being sexy, tons of people wanted to be in the semiconductor business. They got non-monetary benefits from being in it (ie it was cool and interesting).  When there is an industry where lots of people are getting into the business for reasons other than making money, look out!  The profits are probably going to be terrible.   This is why most restaurants fail.  The business-for-sale listings are awash in brew pubs.   The aviation industry was like this for years, and I would argue this also suppresses rents in farming.

I don't know this for a fact, but I would bet that the VFX industry attracts a lot of people because it is sexy.  Yes, like a lot of programming, the actual work is detailed and dull.  But if the coding is detailed and dull, would you rather be doing it for Exxon's new back-office system or to put Ironman on the big screen (and have your name deep into the film credits, seen by the dozen or so people who hang around waiting for the Marvel Easter egg at the end)?

This is why I think a conspiracy theory to believe Hollywood is dissing the artistry of VFX movies as a way to keep VFX company rents down is silly.  It is totally unnecessary to explain the bad rents.  Had you told me it was a high investment business with huge fixed costs and much lower marginal costs and alot of rivalry driven by participants who piled into the business because it was sexy, I would have told you to stop right there and I could have immediately predicted poor returns and bankruptcies.

So what can VFX companies do?  I have no idea.  The first idea I would offer them is branding.  If you are buried deep in the supply chain and want to increase your bargaining power, one way to do it is to develop a brand with the end consumer.   If consumers suddenly latch on to, say, the CoyoteFX brand as being innovative or better in some way, such that they might be more likely to go to a movie with CoyoteFX sequences, then CoyoteFX now has a LOT more power in negotiations with producers.  Dolby Sound is a great example -- you probably don't even know what it is but movies used to advertise they had it.  Certain camera technologies like Panavision are another, where movies actually sold themselves in part on the features of one member of their supply chain.  As a digital house, Pixar effectively did this -- so well in fact its brand actually was bigger than Disney's (its distributor) for a while, and Disney was forced to buy them.  This does not happen just in movies.  I just bought a car that advertised it had a premium Bose sound system.  The car maker doesn't advertise who made, say, the fuel tanks, so my guess is that Bose, via branding, gets a better cut of the supply chain than does the fuel tank maker.

New Business Opportunity: Lolo's Eagle and Waffles Next to Large Solar Plants

From ReWire via Anthony Watts

A test of a solar power tower project in Nevada resulted in injuries to over one hundred birds, the federal government is reporting, though the project's owners say they've fixed the problem.

On January 14, during tests of the 110-megawatt Crescent Dunes Solar Energy Project near Tonopah, Nevada, biologists observed 130 birds entering an area of concentrated solar energy and catching fire. That's according to Rudy Evenson, Deputy Chief of Communications for Nevada Bureau of Land Management in Reno.

Evenson suggested that the birds may have been attracted by a glow the concentrated solar energy created above the project's sole tower.

...

According to Evenson, workers testing the plant moved approximately a third of the project's ten thousand mirrors to focus sunlight on a point 1,200 feet above the ground, approximately twice the height of the power tower at Crescent Dunes.

The test started at 9:00 a.m. on January 14, Evenson told Rewire. By 10:30, biologists working on the site began noticing what have become known as "streamers," trails of smoke and water vapor caused by birds entering the field of concentrated solar energy (a.k.a. "solar flux") and igniting.

By the time the test ended for the day at 3:00 p.m., biologists had counted 130 such "streamers." A subsequent test on January 15 reduced the number of mirrors aimed at the focal point above the tower, said Evenson, and that apparently ended the injuries to birds.

Oops.  It is amazing how solar gets a pass on things that other industries would be hounded into bankruptcy over.  ExxonMobil was fined by the Feds for 85 bird deaths at the company's natural gas facilities.  These deaths were spread out over 5 states and over 5 years.  This solar plant killed at least 130 birds in one location in 6 hours.  ExxonMobil was fined $7000 per dead bird.  Anyone want to bet on what the solar guys will be fined?  Vegas has set the over-under at zero.

Wow -- Two Obama Administration Economists Write Paper Saying Obama Administration Policy Was Great

I followed a link the other day to this academic paper purporting to show that the bailout of GM and Chrysler was a success.  I was flabbergasted to see that the authors are Austan D. Goolsbee and Alan B. Krueger.  WTF?  These folks were part of the Obama Administration.  This is their own policy they are passing historical judgement on.  This is roughly equivalent to a economics journal seeking a paper on the success or failure of Obamacare and having Valerie Jarrett write it.  How does this kind of conflict of interest pass any kind of muster?

I only skimmed the paper.  I know these are two smart guys but it seems to include exactly the sort of facile analysis you would expect from a political hack, not two smart economists.  I can't believe these guys would have accepted many of the assumptions they make here had they not been directly involved.  Just to pick two things at random:

  • They seem to stick with the assumption that millions of jobs would have simply gone *poof* had the government not intervened.  Yes, this happened at Solyndra, but in most cases industries operate almost seamlessly in bankruptcy.  The odds are, for example, that you have flown on an airline in Chapter 11 and didn't even know it.  They make a specific argument that somehow it would be bad to have both in bankruptcy at the same time, but I can remember several times when there were multiple major airlines in bankruptcy.  In fact, if both went bankrupt at the same time, one could argue it would lessen their market share loss since a major competitor was in the same boat.  To the extent that the companies would have continued to operate under Chapter 11, which is 99.9% likely, then all the government did was insert itself into the bankruptcy process to overrule laws about who gets what in a bankruptcy to redirect spoils to their favored constituencies
  • Yes, GM and Chrysler are doing OK now, but they usually do OK at the top of a business cycle.  To my eye though, nothing fundamentally changed about how they are managed and operate.  The same structural and cultural problems that existed before exist today.  The same under-utilization of talented workers and valuable assets that existed before exists today.  No real reckoning occurred -- in fact the bailout looked to me at the time as an exercise to use taxpayer money to avoid a true housecleaning.  These companies have done OK, but what would they have done with a more thorough housecleaning?

From My Vantage Point, Social Security Disability is Totally Corrupt

Nicole Kaeding of Cato has an article on the SSD system heading for bankruptcy.  I can tell you from my experience that a week does not go by when someone doesn't come to me looking for work and saying something like, "I am on full disability but I am fully able to work.  However, I can't take any pay because that would screw up my disability payments.  Can I work for you and have you write my payroll checks to my wife?"

The easy answer to that is "no".  With a backlog of 25000+ people who want a job, why am I going to help them cheat, particularly when it would be me taking the legal risk?

I once had an ex-employee who was applying for a SS disability.  You may not understand that for many folks, getting a Social Security lifetime disability is like hitting the lottery.  This employee knew that if asked, we would have to tell the SS investigator that she seemed fully able to do her job and never demonstrated any reduced functionality.  So to pre-empt that, she and her attorney sent me a letter saying that if we in any way testified to her being able to work and prevented her from getting her disability payment, she would tie me up in court for years, suing me for sexual harassment, discrimination, and everything else she could think of.

So In The End, The VA Was Rewarded, Not Punished

Remember the whole VA thing?  It has mostly been forgotten, though we will all remember it again, or more accurately get to experience it ourselves, once the Democrats manage to get single payer passed.

People talk about government employees being motivated by "public service" but in fact very few government agencies have any tangible performance metrics linked to public service, and when they do (as in the case of the VA wait times) they just game them.   At the end of the day, nothing enforces fidelity to the public good like competition and consumer choice, two things no government agency allows.

I will admit that government employees in agencies may have some interest in public welfare, but in the hierarchy of needs, the following three things dominate above any concerns for the public:

  • Keeping the agency in existence
  • Maintaining employment levels, and if that is achieved, increasing employment levels
  • Getting more budget

But look at the VA response in this context:

  • The agency remains in existence and most proposals to privatize certain parts were beaten back
  • No one was fired and employment levels remain the same
  • The agency was rewarded with a big bump in its budget

The VA won!  Whereas a private company with that kind of negative publicity about how customers were treated would have as a minimum seen a huge revenue and market share loss, and might have faced bankruptcy, the VA was given more money.

Murry Rothbard via Bryan Caplan:

On the free market, in short, the consumer is king, and any business firm that wants to make profits and avoid losses tries its best to serve the consumer as efficiently and at as low a cost as possible. In a government operation, in contrast, everything changes. Inherent in all government operation is a grave and fatal split between service and payment, between the providing of a service and the payment for receiving it. The government bureau does not get its income as does the private firm, from serving the consumer well or from consumer purchases of its products exceeding its costs of operation. No, the government bureau acquires its income from mulcting the long-suffering taxpayer. Its operations therefore become inefficient, and costs zoom, since government bureaus need not worry about losses or bankruptcy; they can make up their losses by additional extractions from the public till. Furthermore, the consumer, instead of being courted and wooed for his favor, becomes a mere annoyance to the government someone who is "wasting" the government's scarce resources. In government operations, the consumer is treated like an unwelcome intruder, an interference in the quiet enjoyment by the bureaucrat of his steady income.

Legislators Pressuring Insurance Companies to Extend The Policies That Legislators Forced to Be Cancelled

Just to prove that there is no end to the arrogance and moral bankruptcy of politicians:

Federal lawmakers and state officials are stepping up pressure on insurers to allow consumers whose coverage has been canceled in response to the health overhaul to keep their policies beyond the end of the year.

On Tuesday, one of the largest regional health plans in the nation, Blue Shield of California, said it would relax its stance on terminated policies for about 115,000 people after state regulators demanded it do so. Customers now will have until March to decide which plan to choose for 2014, a three-month extension. Because the newer plans generally cost more, the extension could save residents as much as $28.6 million on premiums, said Dave Jones, California's insurance commissioner....

The move by Mr. Jones, an elected Democrat, comes as some other Democrats are seeking ways to allow individual policyholders to keep their current health plans and to defuse the issue of canceled plans, which has become a headache for supporters of the law.

Cancellation letters are expected to be sent to as many as 10 million Americans who buy coverage directly from insurers, rather than through an employer or government program. While these individuals would have to buy new policies, regulators and lawmakers say the extensions would give them more time to shop for an affordable new plan—particularly because continuing problems with insurance exchange websites are preventing many of these consumers from finding new coverage.

This is incredible.  Senator Mary Landrieu, for example, has now introduced a bill that would reverse some of the rules that are forcing insurers to cancel policies, essentially the same bill she voted against 3-1/2 years ago.

More Totally Bogus Obama Excuses

Here is his new excuse for his "you can keep your health insurance" promise being broken.  It is -- wait for it, you will never guess -- insurance companies' fault.

"One of the things health reform was designed to do was to help not only the uninsured but also the under-insured," Obama said. "And there are a number of Americans, fewer than 5 percent of Americans, who've got cut-rate plans that don't offer real financial protection in the event of a serious illness or an accident.

"Remember, before the Affordable Care Act, these bad apple insurers had free rein every single year to limit the care that you received or used minor pre-existing conditions to jack up your premiums or bill you into bankruptcy."

This is absurd.   Kaiser Permanente cut zillions of policies.  Are they a bad apple?  My policy was cut by Blue Cross / Blue Shield of Arizona.  Are they some fly-by-night cut-rate insurer?

Money for Nothing, Detroit Edition

A huge portion of Detroit's operating costs go to police and fire.  If you include retiree health care and pensions, way over half of Detroit's budget goes to police and fire**.  That is an enormous increase since 1960.

detroit-bankruptcy-spending

So one might expect the schools to suck and the streetlights to be broken (which they do and are), but you would expect great freaking fire and police coverage.  But you would be wrong.  Detroit has one of the highest crime rates in the country.  This is what you get for your money there:

If you're a Detroiter who needs a police officer, it will take 58 minutes to get help -- more than five times what it takes elsewhere in the United States...

Here are some of the other problems outlined in the bankruptcy filing:

-- Response times for Emergency Medical Services and the Detroit Fire Department average 15 minutes, which is more than double the 7-minute averages seen in other cities.

-- The police department closes only 8.7% of its criminal cases, which the filing blames on the department's "lack of a case management system, lack of accountability for detectives, unfavorable work rules imposed by collective bargaining agreements and a high attrition rate in the investigative operations unit."

-- The city's violent crime rate is five times the national average, and the highest of any city with a population exceeding 200,000.

 

** This is in large part due to the power of their unions, and their ability in elections to translate hero worship for police and fire fighters into political power that will allow them to get anything they want.  As a politician, try to stand up for sanity and you will be deluged by union ads arguing that you don't respect our men who are risking their lives for you, etc. etc.

Absolute Fecklessness

I am still reading through the Detroit Free Press report on Detroit's financial history and it is really amazing.  All the stuff you expect to see is there -- over taxation, over regulation, crony gifts, huge government pay and pensions, etc.  But this was new to me, and even worse than I expected:

Gifting a billion in bonuses: Pension officials handed out about $1 billion in bonuses from the city’s two pension funds to retirees and active city workers from 1985 to 2008. That money — mostly in the form of so-called 13th checks — could have shored up the funds and possibly prevented the city from filing for bankruptcy. If that money had been saved, it would have been worth more than $1.9 billion today to the city and pension funds, by one expert’s estimate.

Outright gifts of taxpayer money to government workers, even beyond their already rich salary and pensions!  Folks on the Left from Paul Krugman to Obama are trying to portray Detroit as the innocent victim of economic and demographic exogenous forces beyond their control.  Don't let them.  The exodus from Detroit and the destruction of its economy were not random events the city had to endure, but self-inflicted wounds.

The Government, Nudging, and Delay Discounting

The theory behind the idea that government should nudge (or coerce, as the case may be) us into "better" behavior is based on the idea that many people are bad at delay discounting.  In other words, we tend to apply huge discount rates to pain in the future, such that we will sometimes make decisions to avoid small costs today even if that causes us to incur huge costs in the future (e.g. we refuse to walk away from the McDonalds french fries today which may cause us to die of obesity later).

There are many problems with this theory, not the least of which is that many decisions that may appear to be based on bad delay discounting are actually based on logical and rational premises that outsiders are unaware of.

But the most obvious problem is that people in government, who will supposedly save us from this poor decision-making, are human beings as well and should therefore have the exact same cognitive weaknesses.  No one has ever managed to suggest a plausible theory as to how our methods of choosing politicians or staffing government jobs somehow selects for people who have better decision-making abilities.

Here is a great example.  These are the people who think YOU have a problem with delay discounting:

When all the numbers are crunched, one fact is crystal clear: Yes, a disaster was looming for Detroit. But there were ample opportunities when decisive action by city leaders might have fended off bankruptcy.

If Mayors Jerome Cavanagh and Roman Gribbs had cut the workforce in the 1960s and early 1970s as the population and property values dropped. If Mayor Dennis Archer hadn’t added more than 1,100 employees in the 1990s when the city was flush but still losing population. If Kilpatrick had shown more fiscal discipline and not launched a borrowing spree to cover operating expenses that continued into Mayor Dave Bing’s tenure. Over five decades, there were many ‘if only’ moments.

“Detroit got into a trap of doing a lot of borrowing for cash flow purposes and then trying to figure out how to push costs (out) as much as possible,” said Bettie Buss, a former city budget staffer who spent years analyzing city finances for the nonpartisan Citizens Research Council of Michigan. “That was the whole culture — how do we get what we want and not pay for it until tomorrow and tomorrow and tomorrow?”

Ultimately, Detroit ended up with $18 billion to $20 billion in debt and unfunded pension and health care liabilities. Gov. Rick Snyder appointed bankruptcy attorney Kevyn Orr as the city’s emergency manager, and Orr filed for Chapter 9 on July 18.

Corporate Welfare and the Thin Edge of the Wedge

The other day, the City of Glendale approved a deal which has the city subsidizing (more in a second) the buyers of the Phoenix Coyotes hockey team to get them to actually stay in town rather than move to Seattle.  The deal is arguably better than deals it was offered in the past (it gets shares of parking and naming rights it did not have before) and may even be a rational deal given where it is today.

But that is the catch -- the phrase "where it is today."  At some level it is insane for a city of 250,000 people to pony up even more subsidies for a team that has the lowest attendance in the league.  The problem is that the city built the stadium in the first place -- a $300 million dollar palace for a metropolitan area that already had a major arena downtown and which was built (no disrespect to Glendale) on the ass-end of the metropolitan area, a good 90 minute round trip drive for the affluent Scottsdale and east-side corporate patrons who typically keep a sports franchise afloat.

Building this stadium was a terrible decision, and I and many others said so at the time.  But once the decision was made, it drove all the future decisions.  Because the hockey team is the only viable tenant to pay the rent in that building, the city rationally will kick back subsidies to the team to keep it in place to protect its rent payments and sales taxes from businesses supported by the team and the arena.  The original decision to build that stadium has handcuffed Glendale's fiscal situation for decades to come.  One can only hope that cities considering major stadium projects will look to Glendale's and Miami's recent experiences and think twice about building taxpayer funded facilities for billionaires.

The deal the other night to keep the team went down in the only way it could have.  As I had written, the NHL was insisting on selling the team for its costs when it took it over in bankruptcy, which were about $200 million, which was well north of the $100 million the team was worth, creating a bid-ask gap.  Several years ago, the city tried to just hand $100 million to a buyer to make up the gap, but failed when challenged by the Goldwater Institute.  The only real avenue it had left was to pass the value over to the buyers in the form of an above-market-rate stadium management contract.

And that is what happened, and I guess I will say at least it was all moderately transparent.  The NHL came down to a price of $175 million, still $75 million or so above what the team is worth.   The City had already sought arms-length bids for the stadium management contract, and knew that a fair market price for that contract would be $6 million per year.  It ended up paying the buying group $15 million per year for the 15-year contract, representing a subsidy of $9 million a year for 15 years.  By the way, the present value of $9 million over 15 years at 8% is... $75 million, exactly what was needed to make up the bid-ask gap.  Again, I think the city almost had to do it, because the revenue stream it was protecting is likely higher than $9 million.  But this is the kind of bad choices they saddled themselves with by building the stadium in the first place.

This May Finally End NHL Hockey in Arizona

Let me bring you up to speed:  The NHL owns the Phoenix Coyotes hockey team, having taken them over in bankruptcy.  It needs to sell the team and is demanding $200 million for the team, having promised the league owners it would not accept anything less (so they will not take a loss in the investment).  The team is worth, however, something like $100 million, at least if it stays in Arizona.

The team plays in a stadium built by the relatively small city (250,000 people) of Glendale, which put something like $300 million of taxpayer money into the stadium and has provided operating subsidies to the team the last several years that probably total another $100 million, at least.  The city has a bad hand, but keeps doubling down on its bet to try to retain the team.

The problem, of course, is the $100 million difference in the bid-ask for the team.  Glendale first tried to fix this by agreeing in a previous deal couple of years ago to basically give the buyer $100 million of taxpayer money to bridge the bid-ask gap.  The Goldwater Institute sued, saying that the Arizona Constitution pretty clearly states the government can't directly subsidize commercial interests.  They prevailed (before it ever reached court) and the deal died.

The only way left for Glendale to make the deal happen was to give a buyer $100 million in taxpayer money but to do so in a more disguised manner.  The one option they had was in the stadium management contract.  If they agreed, say, to pay the buyer $10 million a year over market rates for the stadium management contract, over 15 years that has about a $100 million present value.  They can get away with this because there is no objective valuation of what a management contract would cost on the open market.

But their ability to do this is, thankfully, about to die.  Under intense pressure, and in a fit of good government that I am sure Glendale regrets, it actually went out and sought arms-length contracts for stadium management from third parties.  It is enormously unlikely the city will accept any of these bids, because it needs the stadium contract as a carrot for someone to buy the Coyotes at the NHL's inflated price.  Besides, I bid on large contracts a lot and I have often been presented with bid packages from an entity that had no intention of awarding, but wanted me to go through all the bid effort just to establish an internal price benchmark or to keep their preferred provider honest.  I can smell these from a mile away now.

The problem Glendale will have, though, is that when these 3rd party bids become public (which they inevitably will), it will then be impossible to hide the implicit subsidy in the management contract.  Presumably, taxpayers then will push back on any future deals using this dodge, though Glendale citizens seem pretty supine so one never knows.  Also, the city can also tweak the responsibilities of the stadium contract, thereby allowing them to claim that comparisons against these past bids are apples and oranges (though this will be hard as I expect arms-length bids around $5 million a year vs. $15 million they propose to pay the team buyer).

PS-  It is hilarious to see worried comments from Gary Bettman (NHL Commissioner) about how hard on Glendale it will be if the Coyotes leave town.  Merely lowering his asking price to something less than 2x the market price would solve the problem in an instant.

The Missing Warning Label

Zero Hedge pointed out this ad for California state bonds:

20130404_cali

 

In light of the recent Stockton bankruptcy, this should carry a warning label:  "California reserves the right to repudiate up to 100% of these bonds whenever payment of the interest or principle interferes with paying state employees the maximum possible pension benefits.  These bonds are subordinated to any promises made at any time by any politician to state employees unions, past, present, or future."

Fisker Considering Bankruptcy

What a surprise -- apparently forced to make their case to private investors now rather than just DOE bureaucrats whose main criteria is "did this company support President Obama in the last election", Fisker is having trouble raising money and may declare bankruptcy.

Totally Depressing

I found this article on foreclosed homeowners vindictively trashing houses now owned by the bank to be really depressing.  An example quote:

Myra Beams, a realtor in Tamarac, Fla., said half of her foreclosed properties, regardless of the price range, have been vandalized by the former owners. "I think the former owners are angry, and for some reason, they think they're entitled to destroy properties," said Beams. "I guess they're angry at the banks for giving them the mortgage."

There is a lot more like that.  A couple of quick thoughts

  • The sense of entitlement here is stunning.  It is these homeowners, not the bank, that failed to fulfill their end of the bargain.  Who is the guilty party here, anyway?
  • These folks are lucky to live in the US -- we have the most lenient home mortgage system in the world.  Very, very few other countries in the world have no-recourse mortgages where one can walk away only with a ding on their credit record, without even a personal bankruptcy.  Almost anyplace else, they would be facing years of garnishments for whatever losses on the loan the bank had after they sold the home.
  • I always thought the critique of lower income people "trashing" housing projects in the 70s and 80s had a vaguely racial tone to them, as if this were somehow a proof of African-Americans being shiftless and irresponsible.   But here we have white middle class people actively trashing their homes.  Proving once again that being an inconsiderate jerk is truly a multi-racial, multi-ethinic behavior.

Update on Steve Rattner, Friend of Investors (as long as they are rich or voted for Obama)

Last week, I noted a piece by Steve Rattner who was horrified that individual investors, empowered by companies like Kickstarter, might one day be able to invest in startups without paying a fee to Goldman Sachs.

I noted that Mr. Rattner's concern for investors seemed to be coming rather late, given that "he was the primary architect of the extra-legal screwing of GM and Chrysler secured creditors in favor of the UAW and other Obama supporters."

A Detroit News piece by my Princeton classmate Henry Payne has more:

The administration has treated obstacles to its agenda with ruthless tactics. In April 2009, that agenda was to hand an outsized, 55 percent majority interest of embattled Chrysler to the United Auto Workers in a government-orchestrated bankruptcy. But by law secured creditors are first in line in bankruptcy, and bondholders — representing their working-class pension clients — refused to accept Obama's unfair deal for a measly 29 cents on their investment dollar.

Send in the muscle.

"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight," said Tom Lauria, lawyer for Perella Weinberg investment firm, on Frank Beckmann's Detroit radio program. Lauria later said the brass knuckles belonged to White House Auto Task Force leader Steve Rattner. Lauria's account was disturbing, too, in revealing the confidence that the White House has in its press allies to aid Obama's agenda. Sure enough, Washington reporters quickly attacked the messenger. "(Lauria's) charge is completely untrue," White House deputy press secretary Bill Burton told ABC News' Jake Tapper, "and there's obviously no evidence to suggest that this happened in any way." Actually, there was plenty of evidence. Jim Carney of Business Insider corroborated Lauria's account, reporting that "sources familiar with the matter say that other firms felt they were threatened as well." The White House escalated the threats when Obama himself singled out creditors for obstruction, accusing them of being "speculators" preying on an American auto icon — bullying words from a man with the IRS and SEC at his disposal.

"The sources, who represent creditors to Chrysler, say they were taken aback by the hardball tactics that the Obama administration employed to cajole them into acquiescing to plans to restructure Chrysler," continued the Insider. "One person described the administration as the most shocking 'end justifies the means' group they have ever encountered."...

"The president's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him," wrote Cliff Asness, a managing partner at AQR Capital Management. "Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power."

Congressional Ethics

I am sick and tired of politicians impugning the ethics of private individuals engaged in commerce.   There are certainly a small minority of fraudsters in the world of business, but there is a supermajority of unethical people in Congress, arguably approaching 100%.

My latest evidence for such is this article in the Washington Post about the ethical bankruptcy of the Federal budgeting process.  It is impossible to excerpt, but here is a representative example:

At the Census Bureau, officials got credit for a whopping $6 billion cut, simply for obeying the calendar. They promised not to hold the expensive 2010 census again in 2011.

By law, the next census is not until 2020.  There was never, ever going to be a census in 2011.  But Congress claimed $6 billion in savings for not having one none-the-less.  Here is more:

In the real world, in fact, many of their “cuts” cut nothing at all. The Transportation Department got credit for “cutting” a $280 million tunnel that had been canceled six months earlier. It also “cut” a $375,000 road project that had been created by a legislative typo, on a road that did not exist....

Today, an examination of 12 of the largest cuts shows that, thanks in part to these gimmicks, federal agencies absorbed $23 billion in reductions without losing a single employee.

You can impugn business ethics all you want, and I can add a few stories to yours, but I have worked at fairly senior positions in two Fortune 50 companies and as a worker bee in a third, and in all three it would be a firing offense to engage in this kind of Charlatanism.

More in my Forbes article from 2 years ago.

Cronyism and the GM/Chrysler Bailouts

Companies and assets don't go *poof* in a bankruptcy.   In fact, if any of you are even somewhat of a frequent airline flyer, over the last 10 years you likely flew an airline in bankruptcy.  Companies operate all the time, sometimes for years, out of Chapter 11.  In fact, that is what chapter 11 is all about -- helping creditors get more value from a company by keeping it in operation  (only in truly hopeless cases, like Solyndra, is liquidation a higher value outcome for creditors than continued operation).

As such, then, the Obama Administration did not "save" GM and Chrysler, it simply managed their bankruptcy to political ends, shifting the proceeds from those guaranteed them by the rule of law to cronies and political allies.  In the process, they kept these companies on essentially the same path that led them to bankruptcy in the first place, only with a pile of taxpayer money to blow so they could hang around for a while.

To this end, the WSJ has a great editorial on the whole mess

In a true bankruptcy guided by the law rather than by a sympathetic, rule-bending political task force, GM and Chrysler would have more fully faced their competitive challenges, enjoyed more leverage to secure union concessions, and had the chance to divest money-losing operations like GM's moribund Opel unit. True bankruptcy would have lessened the chance that GM and Chrysler will stumble again, a very real possibility in the brutally competitive auto industry.

Certainly President Obama threw enough money at GM and Chrysler to create a short-term turnaround, but if the auto makers find themselves on hard times and return to Washington with hats in hand, his policy will have been no rescue at all.

I will refer the reader back to my editorial way back in 2005 why it was OK to let GM die

And You Thought The Solyndra Handouts Were Over

Via the WSJ, the Solyndra scam continues

Having sold off its manufacturing plant, fired nearly 1,000 workers and proven the non-viability of its business model, Solyndra's only real assets are what the IRS calls "tax attributes." These are between $875 million and $975 million in net operating losses that can reduce future taxable income, which the IRS values as high as $350 million. Before it went toes up, Solyndra also accumulated $12 million in solar tax credits that can reduce tax liabilities dollar for dollar.

Tax-loss carry-forwards are routine but worthless if a company can't turn profits to pay taxes on. So Solyndra's owners are asking the court to liquidate the rest of the business and contribute a net $6.7 million to pay off creditors for pennies on the dollar. A holding corporation will then emerge from Chapter 11 that won't make products or employ workers, but it will get the Solyndra tax offsets.

The dummy company is owned by Argonaut Ventures I LLC, Solyndra's largest shareholder and the primary investment arm of the George Kaiser Family Foundation. Mr. Kaiser is a Tulsa oil billionaire who bundled campaign checks for Mr. Obama in 2008.

Wow, who could have predicted this?   Well, lots of folks, including me just over a year ago.   I actually underestimated the value, assuming the losses would be worth about $150 million in avoided taxes, not the $350 million the IRS now pegs them at.  If I can figure out this game, the Obama Administration had to know what was going on.

If the Administration allows this to happen (and remember that in the GM boondoggle,  Obama waived the traditional rules that have bankrupt companies losing their tax loss carryforwards, giving GM a multi-billion dollar tax subsidy almost no one counts in the bailout costs), this will make Kaiser's last cash investment in Solyndra one of the great crony deals of all time.

If you remember, Kaiser (via Argonaut) invested $75 million as Solyndra was going down the tubes.  No rational person could have thought that amount would have saved the company, and it didn't.  What it bought, we now know, is three things:

  • Kaiser got the US Government to give up their lead creditor position to Kaiser, basically putting the US Government behind the Obama donor to get repaid and reducing the taxpayers' influence in the bankruptcy
  • It gave Kaiser a few precious months to loot the company.  Between that $75 million investment and the bankruptcy, Solyndra sold off most of its liquid assets at a discount to .... Argonaut, the group controlled by Kaiser
  • It looks like Kaiser will get nearly a billion dollars in tax losses that can be used to reduce its future taxes by $350 million.

Sleep With The Dogs, Wake Up With Fleas

JP Morgan finds itself under the government microscope for having heartlessly... cooperated with the government four years ago

The U.S. Department of Justice and New York Attorney General Eric Schneiderman teamed up last week to sue J.P. Morgan in a headline-grabbing case alleging the fraudulent sale of mortgage-backed securities.

One notable detail: J.P. Morgan didn't sell the securities. The seller was Bear Stearns—yes, the same Bear Stearns that the government persuaded Morgan to buy in 2008. And, yes, the same government that is now participating in the lawsuit against Morgan to answer for stuff Bear did before the government got Morgan to buy it....

As for the federal government's role, it's helpful to recall some recent history: In the mid-2000s, Bear Stearns became—outside of Fannie Mae and Freddie Mac—perhaps the most reckless financial firm in the housing market. Bear was the smallest of the major Wall Street investment banks. But instead of allowing market punishment for Bear and its creditors when it was headed to bankruptcy, the feds decided the country could not survive a Bear failure. So they orchestrated a sale to J.P. Morgan and provided $29 billion in taxpayer financing to make it happen.

The principal author of the Bear deal was Timothy Geithner, who was then the president of the Federal Reserve Bank of New York and is now the Secretary of the Treasury. Until this week, we didn't think the Bear intervention could look any worse.

Somewhere there was a legal department fail here - I can't ever, ever imagine buying a company with Bear's reputation that was sinking into bankruptcy without doing either via an asset sale or letting the mess wash through Chapter 7 so there could be an old bank / new bank split.  But Bank of America made exactly the same mistake at roughly the same time with Countrywide, so it must have appeared at the time that the government largess here (or the government pressure) was too much to ignore.

Why We May Be Bailing Out Chrysler Again

I work in a small, four-story suburban office building.  I have seen our fire drills and can look out at our parking lot, and I would be surprised if there are 200 people in the building.    A few months ago some division of Chrysler moved in and took a bunch of the space.   A lot still remains empty (which is why I am here -- cheap!)

The Chrysler folks put a sign downstairs a few days ago saying that they would be hosting a luncheon for the building.  Great, I thought, a free hot dog and some fruit salad.  Imagine my shock when I saw this when I arrived today:

Chrysler sent three full semi-trailers, one of cars and two of convention-type booths and displays, plus a whole crew of people to set this up, all for a lunch in our building with less than 200 people.  I thought maybe that we were just getting a preview of a larger public event, but I am looking out my window now and they are tearing down again.  Crazy.

One thing that even many libertarians get wrong:  Wasting money is not unique to government entities.  Private and public entities can become senescent, and grow bureaucracies that lose focus on what they are supposed to be doing.  The difference between the private and the pubic sphere, though, is that for private companies, markets eventually enforce discipline (either forcing change or killing off the bloated entity).   There is no similar mechanism for state agencies short of perhaps absolute bankruptcy, and Greece is proving even that is not enough to force change.

Of course, when the government gives large private entities with political pull special protections and bailouts, then no such accountability is enforced.  The same people are operating the company with the same false assumptions and unlearned lessons.

Enjoy the NFL This Weekend, You May Not Have It For Long

I think Walter Olson is dead on with this:

Steve Chapman at the Chicago Tribune looks at the cultural and legal responses to the mounting evidence that professional football inflicts brain damage on many of its players. He quotes my view that if the litigation system carries over to football the legal principles it applies to other industries, the game isn’t likely to survive in its current form.  [sorry for quoting the whole thing Walter, I just couldn't figure out how to excerpt it]

There is a very good chance that the NFL could go the way of Johns Manville or Dow Corning.  Those companies still exist after being sued into bankruptcy, but that is only because they had other businesses to shift into.  The NFL just has football.  And after reading the concussion stories recently, plaintiff's lawyers are going to have a hell of a lot better scientific case than they had with breast implants.    I honestly think it will take an act of Congress to keep the NFL alive, giving them some sort of liability exemption similar to what ski resorts got years ago.

And don't think the NFL does not know this.  If you are wondering why they handed out insanely over-the-top penalties for bounty-gate in New Orleans, this is why.  They are working to establish a paper trail of extreme diligence on player safety issues for future litigation.

As an aside, I find it frustrating that there is not a better helmet solution.

As a second aside, there is a guy here in Phoenix who was showing off an accelerometer for football helmets, with some kind of maximum single g-force or cumulative g-force trigger that would cause a player to be pulled from a game, sort of like how a radiation badge works.  Good idea.  Look for these to be mandatory equipment in high schools in colleges.    Takes the absurd guess work out of concussion diagnosis today, particularly since this diagnosis is done by people (the player and their team) who have strong incentives to decide that there was no concussion.

As a third aside, there are those who argue helmets are the problem.  Just as people drive less safely with seat belts and air bags in cars, helmets lead to less care on the field.  I will say I played rugby for years (without a helmet of course) and never had one concussion, or any head hit anywhere close to a concussion.  In amateur rugby in the leagues I played in, reckless behavior that might lead to injuries was strongly frowned upon and punished by the group.  Teams that played this way quickly found themselves without a game.  There were plenty of ways to demonstrate toughness without trying to injure people.

Too Big To Fail

Just in case you believed all the BS around the passage of Dodd-Frank that in the future there would be no such thing as too big to fail, just look at yesterday's JP Morgan hearings in Congress.  

U.S. lawmakers on Wednesday interrogated J.P. Morgan Chase Chief Executive James Dimon in a much-anticipated and sometimes-heated exchange after the bank registered more than $2 billion in derivatives losses

No one grills Exxon-Mobil executives when the company loses a couple of billion to a nationalization somewhere or grills Sears executives as the blunder their way towards bankruptcy.  These are private business losses.  The only reason to grill JP Morgan is if Congress still considers the American taxpayer to be ultimately on the hook for trading losses (above and beyond deposit insurance requirements, which the Bear Sterns and AIG bailouts certainly were).

Another One Bites the Dust

Another solar company which received $2.1 billion in loan guarantees from the Obama Administration has gone bankrupt.  The good news is that it has not spent much of that taxpayer money, and its bankruptcy is probably due more to the bankruptcy of its German parent, which in turn is likely related to the huge cuts Germany has made in its feed-in tariff subsidies.

The big asset possessed by Solar Trust is the Blythe solar project, a planned 1000MW facility that apparently has all of its permitting in place.  The Blythe facility was originally going to be a solar-thermal facility, with adjustable mirrors focusing the sun on a central boiler that would in turn power turbines.   This plan was scrapped last year in favor of a more traditional PV technology, and I know local company First Solar has been hoping to save itself by getting the panel deal (First Solar also has been hammered by the loss of German subsidies).

If we take the cost of this planned 1000MW facility as the stated $2.8 billion (of which 2.1 billion would be guaranteed by US taxpayers), we see the basic problem with solar.   A new 1000MW  natural gas powered electric plant costs no more than about $1 billion.  It produces electricity 24 hours a day.  This solar plant, to be the largest in the world, would produce 1000 MW for only a few hours of the day.  That area of desert gets about 7 peak sun hours per day (the best in the country) so that on a 24 hour basis it only produces 292 MW average.  This gives it a total capital cost per 1000 MW of $9.6 billion, making it approximately 10 times costlier than the natural gas plant to build.  Of course, the solar plant has no fuel costs over time, but solar is never able to close the gap over time, particularly with current very low natural gas prices.

Update:  Apparently the $2.8 billion was just for the initial 484 MW so you can double all the solar costs in the analysis above, making the plant about 20x costlier than a natural gas plant.