Sunday, September 20, 2009
Cerberus: The three headed dog, who in Greek and Roman mythology guarded the gates of Hades to ensure that those who entered could never leave.
H.M.S. Cerberus: The British frigate which transported three British generals to America during the Revolutionary War. The three, Johnny Burgoyne, Henry Clinton, and William Howe, were losers.
Cerberus Capital Management, L.P., an American private equity investment company which has led three corporations into the financial abyss: Chrysler, GMAC, and Mervyns.
One of the major ways companies like Cerberus prospered was to buy up other companies, strip assets from them to recover their cash investment, cut costs to maximize cash flow in the short term, and then flip them.
Mervyns was a discount clothing retailer similar to Kohls. It had been owned for decades by Dayton Hudson Corp. which used it as a cash cow to finance the growth of another major subsidiary, Target Stores.
Mervyns was sold to Cerberus and two other hedge funds in 2004. They split Mervyns into two pieces. They spun off the real estate to themselves, and then charged high rents to Mervyns. In addition they stuck Mervyns with $800 million in debt, of which $400 million was paid to the three. Mervyns lacked sufficient capital to survive the economic downturn a year ago and declared Chapter 7. It closed its doors after Christmas in 2008. Cerberus earned a profit on the deals and got out before the economic maelstrom struck, but tens of thousands of employees lost their jobs.
Cerberus acquired 51% of GMAC in 2006 for $7.4 billion. The primary purpose of GMAC had been to maximize the sales of new GM cars and trucks. As of 2006 its primary function was to maximize profits and minimize risk rather than promoting the sale of GM vehicles. Cerberus substantially raised the credit standards for GMAC loans, essentially cutting off the financing of GM cars. GMAC, along with the Cerberus owned Chrysler Finance Company, stopped financing the lease of cars and trucks.
GM was unable to sell new cars and trucks. GM had survived previous economic downturns through aggressive financing through GMAC. Not in 2008, costing it hundreds of thousands of new car sales.
One of the major investors in Cerberus was the celebrated financier, Ezra Merkin, who was named Chairman of the Board of GMAC when Cerberus acquired control. Ezra presided over GMAC’s economic collapse until he was booted out. He wasn’t terminated though because of incompetence, but rather because his financial genius was based on being a major feeder for Bernard Madoff.
GM entered bankruptcy. GMAC avoided bankruptcy, but only because taxpayers poured billions of dollars into it.
Cerberus acquired 80% of Chrysler from Daimler Chrysler in 2007.
Cerberus split Chrysler into three parts. It separately bought the Chrysler headquarters building in Auburn Hills, Michigan. Only the Pentagon is a larger office building than the 5.3 million square foot Auburn Hills complex, built at a cost of $1.6 billion. Cerberus mortgaged the building to pull cash out of the investment, and then stuck Chrysler with the mortgage payments.
Cerberus named Robert Nardelli, a consummate bean counter who had been fired by Home Depot, as CEO of Chrysler. Nardelli did his job well, all too well. He ruthlessly cut costs and product lines, laying off scores of Chrysler employees, and freezing all product development past two years. In short, Cerberus was preparing Chrysler to flip, but came up short. Chrysler had no future as an independent auto company since it lacked product.
Cerberus also pulled Chrysler Finance Company out of Chrysler in the transaction, viewing the finance arm of Chrysler as a profitable unit for Cerberus’ benefit.
Having raided the Chrysler piggy bank, Cerberus then refused to invest additional funds into it as it ran out of cash. Taxpayers have invested billions into Chrysler and GMAC.
Cerberus has refused since December to let investors withdraw their investments in the company. Merry Christmas! Much to the dismay, and seemingly surprise of a company which lost billions of investors funds in Chrysler and GMAC, 70% of the investors want out – not exactly a ringing endorsement for management.
Just like the mythical Cerberus, today’s investors can enter but not leave the economic Hades of Cerberus.
Tuesday, September 15, 2009
Lehman’s collapse though was not the underlying cause of the worse economic failure since the Great Depression. Detroit was being killed by $4-5/gallon gas. The transportation industries were reeling. Commodity prices, including food, were shooting through the roof, unleashing inflation upon America. The dollar was slipping. All levels of government were raising taxes and the housing market/bubble collapsed.
AIG, Fannie Mae and Freddy Mac all collapsed, joining Bear Stearns, IndyMac, Wachovia, Washington Mutual, New Century, and Countrywide. Citigroup was teetering on the abyss. Goldman Sachs and Morgan Stanley were threatened. This financial collapse was much greater than the S&L failures a decade earlier. Chrysler, GM, and their finance companies were headed into Chapter 11. 401K’s and other retirement funds evaporated.
And yet, Lehman Brothers had to die. The choice was Lehman or Merrill Lynch. Bank of America could not acquire both. J.P. Morgan Chase and Wells Fargo were digesting other financial giants. Merrill was simply too big to fail at that point. Had The Thundering Herd turned bearish, the consequences would have been much worse, perhaps the immediate unleashing of another great depression.
Three of the nation’s top five investment banking companies had gorged themselves on toxic sub-prime mortgages. Bear Stearns failed six months earlier.
Merrill Lynch, under new management, attempted to disengage from the housing market and build up its capital base.
Not Lehman Brothers though. It continued borrowing money, often on a short basis, while pouring tens of billions long into real estate, commercial and residential, at the top of the market. Merrill ran out of time, but at least it was trying to save itself.
Lehman’s top management (think CEO Richard Fuld) was arrogant, as out-of-touch as Bear Stearns’ senior management, addicted to slicing and dicing mortgages at high profits, intolerant of dissent, and obsessed with showing the world that Lehman could compete with the much larger Goldman Sachs and Morgan Stanley. Lehman had neither the capital not expertise to compete at their level. When Goldman Sachs pulled out of a deal, Lehman should have asked why, instead of jumping in.
The tone deaf Fuld at one point supposedly told Treasury Secretary Henry Paulson, former Chair of Goldman Sachs, that “I’ve been in my seat a lot longer than you ever were in yours at Goldman. Don’t tell me how to run my company. ”Paulson was warning Fuld and Lehman Brothers about its high leverage. The ultimate hubris of telling off your regulators is a recipe for economic suicide.
Instead of learning from the Bear Stearns collapse, and cutting back, Lehman continued to borrow. Its leverage at the time of collapse was about 33-1. In other words, it borrowed roughly $97 for every $3 it had of its own capital. It hid some deals off the books. The debt load was simply too great while the toxic assets too slim. Fuld was in denial as the firm failed.
On September 16, 2008 the Reserve Primary Fund announced it had broken the buck. The shares of the highly regarded money market fund were now worth less than $1/share because of its holdings of $875 million in Lehman paper. Small investors around the world discovered that they were invested in Lehman securities without their knowledge.
Business survives on unsecured short term commercial paper. The system is based on trust. The collapse of the Primary Fund sent financial shockwaves around the global economy in a nanosecond. Credit markets dried up. Even GE, the supposedly most solid of Blue Chips, had a liquidity problem. American Express was at risk.
Here’s the really scary part. If we parallel the Great Crash and Depression of 1929, we will suffer through at least another wave of distress selling on Wall Street.
We are told that one lesson should be greater regulation of Wall Street to prevent a repetition of the collapse. I thought Sarbanes Oxley of a few years earlier would solve our Wall Street problems.
The conduct of Fuld, Mozillo, Madoff, O’Neal, Pang, Raines, Stanford, and thousands of others violated numerous statutes and regulations. The problem wasn’t lack of regulation, but greed, pure, raw, unadulterated greed. Some genius will always devise a plan to get around laws and regulations. This time it was arms, cdo’s, clos, cmb’s, credit default swaps, rmb’s, siv’s.
A basic lesson of Econ 101 is that profit is a function of risk. The greater the risk, the greater the profit should be to compensate for the risk. These modern day titans of industry were blinded by the quick and easy profits, and dismissed the risks, relying upon computer models, which were not only based on false assumptions, but which cannot model human behavior and risk.
Garbage in, garbage out, and millions of Americans tragically out of work.
Goldman Sachs, J. P. Morgan Chase, and Greenlight Capital saw it coming. So did Warren Buffett. Fuld and Lehman stuck their heads into the sands of leverage.
Monday, September 14, 2009
Charlie was an offensive coordinator under New England Patriots Coach Bill Belichick, who has made many of his coordinators look good only for them to flop as head coaches. Weis is not a chip off the old Rockne.
Last year witnessed an anomaly in the force. The Mighty Wolverines were declawed. Touchdown Jesus smiled on the Fighting Irish in the pouring rains as 6 Michigan fumbles gifted Notre Dame the victory. Touchdown Jesus lacks jurisdiction in Michigan. Power was left in the hands of a mere mortal, Charlie Weis, and what a lesser mortal he is.
Three minutes to go; Notre Dame up by three in possession of the ball. Second down with Michigan left with two time outs. Any football fan, including the drunken idiot sitting behind me, knows you run the ball, and even if you don’t get a first down, make Michigan exhaust its timeouts. Not Charlie! He throws the ball twice for incompletes, stopping the clock each time, and then punts to Michigan on its 43 with 2:13 and two timeouts on the clock. That’s all Michigan needed to win the Game with 11 seconds left. Ara Parseghian would have been proud. Tate Forcier, Michigan’s true freshman quarterback has the ice water in his veins previously possessed by Notre Dame’s Joe Montana, and Michigan’s Tom Brady.
Order has been restored with Michigan now 21-15-1 against Notre Dame. Charlie has taken Notre Dame from second in all time victories to third, now trailing Texas. Charlie might reach fourth if given the opportunity.
Charlie’s a graduate of Notre Dame, but never played college ball. He doesn’t understand the basics, much less nuances, of college football. Michigan’s coach, Rich Rodriquez, may or may not have outcoached Charlie Weis, but Charlie definitely outcoached himself.
The Notre Dame offensive line controlled Michigan’s defensive line throughout the game. If you can’t run the ball at the end, you don’t deserve to win. Notre Dame had 305 offensive yards in the first half. Jimmy Clausen had all day to throw and could pick his receivers at leisure. Michigan's line could not touch him. The always suspect Michigan secondary was torched with sophomore safety Boubacar Cissoko playing like the second coming of Morgan Trent.
Winning at the end of a game is often the function of conditioning. Michigan’s voluntary workouts have brought Michigan back from the dead. Thank you Charlie for the Lazarus revival of Michigan football.
The Catholic Church believes in life. Abortion is sacrosanct as is terminating life at the end. Notre Dame has a conundrum. Good Time Charlie isn’t even halfway through his sweetheart ten year contract. Does Notre Dame pull the plug? Kevin White, the AD who committed the mortal sin of hiring Weis and prematurely terminated the regime of Ty Willingham, is no longer at the university. He bailed for Duke in 2008, leaving the pieces to the current administration. The Blue Devil AD made a Faustian Bargain, gambling Weis would take them to the promised land of BCS riches. But Notre Dame had already made a Faustian Bargain with a true Faust.
God Bless Father Hesburgh, who built Notre Dame into the academic powerhouse that matches its football prowess. Even during that period of the Dark Ages known as “The Damnation of Faust,” Fr. Hesburgh honored the 5 year contract of Gerry Faust.
Jesus preached forgiveness, but the alumni giveth not to a souless team except to buyout the loser. Charlie Weis does not have a seat waiting for him at the Pantheon of the great Irish coaches, Knute Rockne, Frank Leahy, Ara Parseghian, the aptly named Dan Devine, and Lou Holtz. No drive is underway to deify Charlie Weis.
Charlie’s place may be in Notre Dame Hades with Joe Kuharich, Bob Davie, Gerry Faust, and Ty Willingham. Absolution is called for.
Pulling the plug on sanctimonious Charlie will be costly, unless he does the honorable thing and resigns. Otherwise, Weis may be feeling the blues, but he could land in the greens.
Fear not ye of little faith. Do not lose faith for Charlie will always rise to your expectations.
Charlie, Ann Arbor and Michigan thank you for boosting the economy. The bars and restaurants in Ann Arbor were festive last night, with lines winding around the corners.
God bless Charlie Weis.
Wednesday, September 9, 2009
He would sell health care as requiring a shared sacrifice.
It’s not and he didn’t.
Congress will not share in his/their proposed health care plan. They will keep their gold plated plan for themselves, and not pay the penalty on it that will be assessed private insurance companies on their gold plated plans for the privately insured.
No shared sacrifice for the trial lawyers, whose prolific malpractice suits drive up the cost of medical care and force doctors to engage in defensive medicine to minimize the risks of liability. Defensive medicine consists of ordering normally unnecessary tests and procedures, but which are undertaken for legal – not medical reasons. For example, defensive medicine can consist of hundreds of thousands of medically unnecessary C-Sections annually.
Nope, no meaningful tort reform in his proposal.
Not shared sacrifice by the unions. Indeed, the bill has buried in it a $10 billion sop to unions, especially the United Auto Workers, to cover workers who retire early under union contracts.
And no shared sacrifice by undocumented immigrants! Yes, President Obama stated, more than once, that undocumented immigrants are not covered by the bill.
However, Congress specially refused to include an enforcement mechanism that will determine if an applicant is here legally or illegally. Thus, all an applicant has to do is check the box that he or she is in the United States legally, and that ends the matter.
Two other realities nullify the ban against undocumented immigrants. First, a major proposal in the future is to pick up on the McCain-Kennedy Immigration Reform Bill and grant amnesty to all immigrants presently in this country. Hence, they will be legal and eligible for the government health insurance.
Finally, a provision in the bill provides health care for anchor babies, who clearly are American citizens, and deserving of the same benefits as all other Americans. However, a provision will extend medical coverage to the family members of the anchor babies.
The shared sacrifice will be by tax payers, insurance companies, the much maligned insurance companies by the President, hospitals, pharmaceutical companies, and doctors who will all see their reimbursement rates cut substantially, the privately insured who will see their rates rise, the young uninsured who don’t want medical insurance at this stage in their lives but will be forced to purchase or pay a substantial fine, and the elderly.
Sunday, September 6, 2009
Capitalism is wiping out the Holies’ fortune, built on capitalism and libertarianism, and
Raymond Cyrus (“R.C.”) Hoiles escaped from the unions of Ohio during the New Deal, fleeing to the rural libertarianism of Orange County, California in 1935. He purchased the Santa Ana Register and used it as the megaphone for his libertarian philosophy. The Chandler family of the Los Angeles Times was purely conservative, but in 1980 Otis Chandler converted it from conservative to socially and politically liberal.
Not so the Register. R.C. and his heirs maintained their libertarianism and turned the burgeoning Orange County into the heart and soul of the California Republican Party. Senator Berry Goldwater may have been from Arizona, but his Presidential campaign started in Orange County. Ronald Reagan’s base was Orange County, or as liberals often derisively referred to it, “The Orange Curtain.” Richard Nixon was first a Congressman from Orange County before moving up the conservative ladder.
Hoiles and the Register was behind them all.
Orange Country boomed in the Cold War, growing from 130,700 in 1940 to 216,244 in 1950, but then ballooned to 703,925 in 1960 and doubled again to 1,420,386 in 1970. The current population is over 3,000,000; roughly 1% of the nation’s population reside in Orange County.
The Hoiles’ and Register rode this growth to personal wealth and power. The Santa Ana Register was renamed the Orange County Register. Hoiles acquired a string of newspapers and TV stations around the country, all the while adhering to the libertarian view. The parent company was aptly named Freedom Communications. Often outside the mainstream political and media slant, his enterprise thrived, just as Fox News does today.
He preached for a smaller government, lower taxes, lower debt and less spending. Pursuant to his views, R.C. publicly opposed the internment of Japanese Americans in concentration camps during World War II and favored free and open immigration.
His successors at the Register continue his philosophy on the editorial and op-ed pages. Again outside the mainstream media, while pundits in 1992 were calling for President George H. W. Bush to drop the bottom of the ticket, Vice President Quayle, as a drag on the ticket, the publisher of the Register proclaimed that it was really the top of the ticket, President Bush, who was dragging down the ticket. The Register could never forgive Bush’s recanting of his “No New Taxes” pledge. Neither could Republican voters.
Freedom Communications, parent of 33 daily newspapers, 8 TC stations, and over 70 weekly newspapers, magazines, and specialty publications declared bankruptcy on Tuesday, September 1, 2009.
The reason: excessive debt. The conservative company borrowed too much money.
The Hoiles family owned Freedom Communications had a major problem in the New Millennium. Half the Hoiles family wanted out. They wanted to take their money and run.
A common problem with family businesses by the third generation is that many family members no longer have close ties to the business, except to draw dividend checks. They lack loyalty to the family business. The means to normally maximize the economic value of the business is to sell it, just as the third generation Binghams did with the Louisville Courier-Journal in 1986.
The Hoiles solution was to engage in a LBO, buying out the disenchanted family members. $1 billion was borrowed and the Blackstone Group and Provident Capital Partners invested $470 million for 40% of the company’s stock.
The politically conservative family went deeply in debt. Excessive debt load is usually not a good idea, but is especially bad in a shrinking industry, the print media. The writing was on the wall by 2004 about the prospects of the newspaper industry. Circulation of the Register dropped by 1/3 from 363,500 in 2000 to the current 231,000. Employees were bought out and laid off. Sections were cut or consolidated as advertising revenues tanked.
Through major budget cuts, especially buyouts and layoffs of personnel, the Orange County Register and the other units of Freedom Communications continue to turn a profit. The cash flow though from $700 million in revenue was inadequate to cover the debt load.
In the prearranged bankruptcy, debt will be cut from $770.6 million to a presumably manageable $325 million, with the current shareholders seeing their investment reduced to 2% from 100%. They will receive warrants to increase their stake to 10% under favorable conditions.
In essence the keys to the Register have been turned over to the banks. The banks in turn will name a new Board of Directors and Chief Operating Officer. The Hoiles beat back the Orange County invasion of the Los Angeles Times, but could not hold off the lenders.
Time will determine if the Hoiles and their libertarian philosophy can hold on.
The big winners: the family members who took the money and ran 5 years ago.
Thursday, September 3, 2009
The 2008 Wolverines were a team of high expectations and great trepidations. Sadly, they met the trepidations. A new coach, a new system, waves of players leaving, years of poor recruiting, no offensive line, no returning quarterbacks, a decimated defensive backfield, all combined for a record breaking 3-9 season. Even Lloyd Carr would have had difficulty winning with last year’s team.
The team self-destructed by being unable to hold onto the ball. Kickoffs- fumbles. Punts – fumbles. Handoffs – fumbles. Passes – no fumbles, just interceptions. Team total was 38 fumbles and 12 interceptions – a record of futility that few teams could have overcome.
What’s in store for this year?
Nothing other than the question will Rick Rodriquez survive to coach another year? The fans understood last year, but the coach has no more goodwill in the bank. 6-6 might do it, but 7-5 or 8-4 would be great, especially if accompanied by at least one win over one of these four opponents: Notre Dame, Michigan State, Penn State, and Ohio State.
1) If Rodriquez fails, does AD Bill Martin go down with him?
2) Will Rodriquez and/or his assistants and coordinators join Michigan’s 15% unemployment rate?
3) Will the State of Michigan have to look to Michigan State for football glory?
4) Can Ron English at Eastern Michigan gain a measure of sweet revenge by beating Michigan?
5) Can the defense learn to tackle and the offense hold onto the ball?
6) Which team will have the better record this year, Michigan or UCLA?
7) Will the Big Ten earn some respect this year?
Guaranteed predictions for this year: Michigan will not lose to Appalachian State, Utah, or Toledo. Nor will the Wolverines lose to Northwestern or Minnesota. They don’t play these teams this year.
Bo also inherited a soft team when he was named coach 40 years ago. Many of the returning players also bailed on him because he was tough. Bo had an advantage though, The NCAA imposed no scholarship limits on football teams. Thus, when players quit Bo in droves, he still had an ample number of quality players to draw upon with the depth on the team.
The NCAA imposed a limit of 105 scholarships in 1973, 95 in 1978, and lowered it to the current 85 in 1993 with a limit of 25 new scholarships in a given year. The Rodriquez Wolverines lacked depth at the offensive line, defensive backfield, and QB. It showed.
Western Michigan should be a guaranteed win for Michigan, but Michigan has lost the opening game the past two seasons (Appalachian State and Utah), so Western Michigan has a chance to join Toledo as the only MAC teams to beat Michigan
The key game is the second game of the season, Notre Dame. The Charlie Weiss coached Fighting Irish are favored to win, but until we are convinced that Weiss is a good coach, Michigan has a strong chance for the upset. If so, Michigan could be 4-0 going into Michigan State at East Lansing. Michigan should not lose to Western Michigan, Eastern Michigan, and Indiana in Ann Arbor, but then again, Michigan shouldn’t have lost to Toledo in Ann Arbor last year. Toledo also finished 3-9 and the coach’s reward for beating Michigan was to be fired at the end of the season.
A supreme irony will exist if Eastern Michigan upsets Michigan. EMU is coached by Ron English, the former defensive coordinator of Michigan and once rumored to have been the anointed successor to Lloyd Carr. That ended with the defeat to Appalachian State.
Last year’s defense had a problem. With the porous secondary, Coach Rodriquez wanted to play a 3-4 to help out the secondary. Defensive coordinator Schaefer and the players wanted a 4-3, which would bolster the line. They didn’t know what to play during the games, enabling many quarterbacks to look like All American, Number 1 draft picks.
If the football Gods smile on Michigan this year, the Wolverines could go 8-4, but don’t bet on it. Wins could include Western Michigan, Notre Dame, Eastern Michigan, Indiana, Delaware State, Purdue, and possibly Iowa and Illinois with losses probably to Michigan State, Penn State, Wisconsin and Ohio State.
So confident is he that he voted to increase taxes in a way that even Governor Michael Dukakis did not dare, and Dukakis, God Bless him, never met a tax he didn’t like. America is blest that Governor Dukakis was not elected President.
Massachusetts adjoins New Hampshire, which has no income or sales tax. Therein lies the rub. New Hampshire residents working in Massachusetts have to pay Massachusetts income taxes on their Massachusetts income, so increasing the income tax rate is not a problem. Even Governor Dukakis recognized that increasing the Massachusetts sales tax above the existing 5% could destroy Massachusetts retailers near New Hampshire as state residents would drive across the state line to purchase high price merchandise in New Hampshire, saving on the sales tax.
The New Hampshire State Liquor Stores feature low prices and no sales taxes. They reap a tremendous volume from non-residents driving up to the state liquor store on I-95 across the border from Massachusetts.
Connecticut tried several decades ago to crack down on Connecticut residents purchasing booze in New Hampshire. Connecticut sent a couple of state troopers to stake out the New Hampshire State Liquor Store and write down the license plate numbers of Connecticut vehicles parked at the Store. The drivers would then be confronted when they returned to Connecticut.
That ploy ended when New Hampshire troopers arrested the Connecticut troopers for trespassing.
So what did Assemblyman Rodrigues do to win notoriety in a state known for political corruption? He voted to raise the sales tax by 25% to 6.25% and to impose it for the first time on the sale of alcoholic beverages.
The effect was obvious. One Massachusetts liquor store owner reported an immediate 10% drop in sales while booze sales rocketed in New Hampshire when the tax went into effect August 1.
Many Massachusetts residents are now willing to waste energy by driving to New Hampshire to stock up.
Among them is Representative Rodrigues, whose district is nowhere near the stateline. He was photographed on a cell phone camera with his vehicle parked outside the New Hampshire State Liquor Store on I-95 across the state line.
How, you might ask, do we know the Ford Crown Victoria was his? It had on it his official Massachusetts State Assembly License Plate, Number 29. The plates stood out. When confronted stashing booze into the large trunk of the Crown Vic, he told the Massachusetts citizen to “mind your own business.” The citizen did by emailing the photo to the Boston Herald.
The Representative then explained that he and his wife had stopped at the Liquor State to use the facilities while on a weekend getaway.
Massachusetts is a beautiful state, and if he ever journeyed to the Western part of the state, such as the Berkshire Mountains, he would have found many delightful sites for relaxation – a few of which are close to another New Hampshire State Liquor Store.
Rodrigues has since refined his story by blaming it on Republican demagoguery. Massachusetts has no Republicans. The Commonwealth of Massachusetts keeps reminding us that it was the only state to vote for George McGovern when he lost in 1992 to President Nixon.
Representative Rodrigues should have simply said he was following his constituents up to New Hampshire.
Of course, stashing booze in one’s trunk is not as bad as Massachusetts State Senator Dianne Wilkinson, who was videoed last year stashing $1,000 in bribe money in her bra.
Nor does it match the Massachusetts trifecta of three recent Assembly speakers, Salvatore DiMasi, Charlie Flaherty, and Tom Finneran, being indicted for corruption. Illinois, New Jersey, Rhode Island, Connecticut have nothing on Massachusetts when it comes to corruption in the Statehouse.
And yet, arrogance, hypocrisy, stupidity and a $160,000 campaign fund may led to reelection in Massachusetts.