Tuesday, December 30, 2008

Bring Back the Fairness Doctrine, and then Enforce it Fairly and Evenly to Bury it Forever

Conservatives are concerned that the incoming Democratic regime will reimpose the Fairness Doctrine on the broadcast industry.

The Fairness Doctrine has often been misunderstood. First, it was never a legislative enactment. It was promulgated by the Federal Communications Commission in 1949 and rescinded in 1987. The premise behind its adoption was the limited band width then available on the public airways. The Supreme Court in an 8-0 opinion upheld the constitutionality of the Fairness Doctrine, following this premise, but left open the issue of its constitutionality if it restrained speech.

The FCC Doctrine had two major components. First, broadcasters had to devote time to discussing controversial matters of public interest.

Second, broadcasters had to “afford reasonable opportunities” for airing contrasting views on matters of public importance.

The FCC did not technically require, contrary to popular perception, broadcasters to provide equal time.

Unlike three decades ago, the media has substantial alternatives in cable and the internet. Cable would technically not be covered under the original Fairness Doctrine because it does not use the public bandwidths.

Clearly, beginning with the path pioneered by Rush Limbaugh, talk radio has become the media outlet for conservatives, who comprise 75% of the market. Liberals thrive in the mainstream media, including newspapers and television, Hollywood, and the academic profession.

We are in a new cycle of campaigning. The Republicans pioneered small campaign contributions by millions of individual contributors, and then talk radio. The Democrats, led by Governor Howard Dean four years ago, and mastered by Senator Obama this cycle, have mastered the use of the internet.

Both House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid support it. Senator Reid has been singled out by Rush for special criticism. Senators Boxer, Durbin, Kerry, and Schumer want to bring it back. Their goal is to muzzle talk radio. While President Elect Obama has disclaimed any desire to reimpose it, he also singled out Fox News, Rush Limbaugh, and Sean Hannity for criticism during the campaign. Whether or not he will resist Congressional pressures remains to be seen.

If enacted, the Doctrine will be litigated on First Amendment grounds. One can assume that the lawyers for ABC and Clear Channel/Premiere Radio Networks have already drafted their complaints, and decided in which “friendly jurisdictions” to file suit. The constitutionality will ultimately be decided the Supreme Court, and if that’s a 5:4 decision dependant upon Justice Kennedy, then anything is possible.

Historically, the Doctrine should rank up there with the Alien and Sedition Acts and campus speech codes as gross violations of Free Speech.

Implicit in the Fairness Doctrine is the belief, or rather the misbelieve, that the government can, and should, define and enforce objectivity in speech.

Sometimes the best way to get rid of a stupid law or regulation is to enforce it. So let’s enforce the Fairness Doctrine.

Everytime NBC broadcasts a puff piece on the Obama Administration, demand equal time for a response. So too with ABC and CBS. The three major networks are the most at risk under the Fairness Doctrine. After a short time fighting a flood of fairness complaints, the networks will plea for relief from Congress or the FCC.

We witnessed this past year an incredibly entertaining, riveting, hilarious parody of Governor Palin by Tina Fay on Saturday Night Live. Demand similar treatment of Senator Biden. If David Letterman goes on a rant against Senator McCain, then request similar treatment of Senator Obama.

Absurd? Of course, but then so is the Fairness Doctrine.

The power of Saturday Night Live should not be underestimated. Governor Jimmy Carter won a close election in 1976 over President Ford. Carter carried Ohio’s 25 electoral votes by a popular margin of 11,116 votes. SNL throughout the campaign did a powerful parody of President Ford as a stumbling buffoon, characterized by the pratfalls of Chevy Chase. Chevy recently admitted he wanted Ford to lose and Carter to win. One assumes the same mindset existed this past election with SNL’s portrayal of Governor Palin.

Without Ohio, Carter still would have won, but only by a electoral vote of 272-265.

Let us note that “localism,” a more subtle alternative to the Fairness Doctrine is kicking around Congressional Democrats today.

Under localism, stations would have to create “community advisory boards” comprised of local officials and other community leaders. These boards would then advise the stations whether their broadcast content address the needs of the community, as determined by the advisory board. Localism by liberal local community activists will have a chilling effect on free speech.

John Podesta, who heads President Elect Obama’s transition team, is veritably salvitating that fines, perhaps totaling $250 million, for violating community needs would go the Corporation for Public Broadcasting, the parent of National Public Radio (NPR).

Localism is much more subtle than the Fairness Doctrine, but just as offensive to the First Amendment.

President Elect Obama supports localism.

Thursday, December 25, 2008

Joe Cao and Progressive, Reform Politics in Louisiana

The idea of referring to Louisiana as a state which has adopted integrated, progressive, reform politics would have been unimaginable just a short time ago.

Yet almost two years ago the state elected Republican Bobby Jindal as Governor. Governor Jindal, of Punjabi Indian heritage, born a Hindu and convert to Catholicism, was earlier elected to Congress in 2004. Jindal had lost the gubernatorial election in 2003 52-48% to Democrat Kathleen Blanco, whose demonstrated incompetence during Hurricane Katrina assured his election this time. Governor Jindal won 54% of the vote and carried 60 of Louisiana’s 64 parishes in the wide open election in 2007. He is the first non-white Governor of Louisiana since Reconstruction.

On Saturday, December 6, 2008 the voters of New Orleans and part of surrounding Jefferson County elected a Republican, Vietnamese American, Anh Joseph “Joe” Cao, to Congress in the Second Congressional District by a 50% to 47% vote over the incumbent Democrat, Congressman William Jefferson.

Louisiana is the state where David Duke, a former Grand Master of the KKK, ran for Governor as a Republican and won a spot in the runoff in 1981.

The election of Cao may be viewed in two lights: the rise of the Vietnamese Americans in America, and continuing public disgust with political corruption.

Cao ran as a Republican in a district that is 11% Republican by registration and 60% African American. Vietnamese Americans comprise only 3% of the registered voters in the District.

Unlike the earlier Chinese, Japanese, and Pilipino immigrants to America, the Vietnamese, Cambodians, and Laotians have only been here for less than four decades. These later Asian immigrants were not subject to the discriminations inflicted on the earlier Asian immigrants, especially the Chinese and Japanese, for about a century.

The 2000 Census recorded about 1,200,000 Vietnamese Americans with the heart of the Vietnamese community in Orange County, California. 150,000 live in the County, with the largest concentration in Westminster and surrounding areas. The official nickname for this community is Little Saigon.

Tony Lam was elected to the Westminster City Council in 1992 as the first Vietnamese elected to public office in America. As of January a majority of the Council will be Vietnamese Americans. Others have been elected to the California and Texas legislatures, school boards, water districts, the Orange County Board of Supervisors, and judgeships. Quite a record of assimilation into America!

Joe Cao represents the American dream. He came to America at the age of 8 on a military evacuation plane during the Fall of Saigon. He has degrees in physics (Baylor), religion (Fordham) and law (Loyola of New Orleans).

The other lesson is just a significant. The American public is increasingly intolerant of public corruption. Congressman Jefferson was the nine term, 16 count indicted incumbent found with $90,000 frozen cash in his freezer.

Admittedly turnout was low in a District carried by Senator Obama with 75% of the vote. The white vote was 28% and the African American turnout was 14%.

A large amount of the Republican debacle in the midterm elections of 2006, carrying over into 2008, came in the form of voter rejection of ethically charged Republicans. The names were a veritable Who’s Who of Congressional Republicans: J.D. Hayworth, John Hostettler, E Clay Shaw, Jim Ryun, Charlie Bass, John Sweeney, Richard Pombo, Curt Weldon, Mike Fitzpatrick, Don Sherwood, Nancy Johnson, and Senator Conrad Burns.

Some were indicted: Bob Ney, Randy “Duke” Cunningham, and Rick Renzi. Senator Ted Stevens was recently convicted. Others were connected to Jack Abramoff, Mark Foley, and Cunningham.

Two ethically charges Florida Congressmen lost reelection last month: Republican Tom Feeney and Democrat Tim Mahoney, who ironically was Foley’s successor.

Let us not forget that a jury holds the fate on federal corruption charges of former Orange County Sheriff Mike Carona, “America’s Sheriff,” in its hands over this Holiday Season.

Louisiana has quite a history of corruption with Governors Huey Long and four term Edwin Edwards, whose famous quote about Louisiana’s voters was that they would continue to elect him “unless he was found in bed with a dead girl or live boy.”

Let us also not forget the New Orleans Police department, which was historically the lowest paid major police force in the United States on the premise that they would make it up elsewhere. Some of New Orleans’s “finest” distinguished themselves during Katrina by driving Cadillacs off a dealer’s lot in the Big Easy to Houston. Even prior to the hurricane, the city and state were initiating efforts to rid the N.O.P. D. of corruption.

Congressman Jeffferson’s defeat resolves one ethical problem for the Congressional Democrats, but Alan Mollohan of West Virginia, John Murtha of Pennsylvania, and Charles Rangel of New York remain in Congress. The Democrats turn at the Washington corruption trough has come.

Joe Cao may only hold the seat for two years as the Democrats will run a candidate against him in the next election, looking to Chicago as precedence. Chicago voters in 1994 voted out the powerful Chair of the House Ways and Means Committee, Congressman Dan Rostenkowski, after his indictment for petty corruption (postal stamps). His victor, Republican Michael Patrick Flanagan, lost the seat two years later to a rising star in Illinois politics, Rod Blagojevich.

Regardless, Joe Cao made political history in a year of political history.

Tuesday, December 23, 2008

News Flash: Toyota is Hemorrhaging

News Flash: Toyota is Hemorrhaging!

The widely admired Toyota, paragon of planning, quality, and foresight, the world’s largest automobile manufacturer, has reported an operating loss of $1.7 billion for 2008, its first such loss since 1934. Its sales in the United States have dropped by a third, with the Prius, the green environmental car of choice, plunging by 50%. Sales plummet and Toyota, yes Toyota, announces a loss. Honda, the equally great company, will report a profit for the year, but a substantial loss in the second half.

Toyota even stopped construction of a Mississippi assembly plant intended to build the Prius in the United States.

The much admired Toyota opened an assembly plant in Texas two years ago to build the Tundra, a full size pickup truck – clearly an unwise investment in hindsight. Toyota is renting storage space at the Port of Long Beach to store cars as they come off the boat, as are BMW and Mercedes.

Toyota’s President, Katsuaki Watanabe, responded to the stunning news in traditional American manner; he announced his resignation as president to become Chairman of the Board of Toyota. (Falling on one’s sword is apparently no longer acceptable in Japan!) We’re still waiting in America for the heads of the Big Three to resign, not to mention Robert Rubin and others involved in the financial debacle wrecking the global economy.

It seems that the importers are no better at predicting the American automobile market than the Big Three. Not all of Toyota’s products have been successes in the United States. Names, such as Tercel, Echo, and Previa, come to mind, but those failures are hidden by millions of Camry’s, Corollas, and Lexi. President Watanabe even apologized a few years ago for quality problems with Toyota. Mercedes similarly had quality issues.

The imports also suffer from global and American overcapacity.

The importers and the Big Three have been moving investment out of the United States into the expanding global market, especially in Brazil and China. All the major auto companies recognize that the American market is not a long term growth market.

And yet, no talk is heard of bailing out the Germans, Japanese or Koreans. They have sufficient capital reserves to weather out all but a great depression and should emerge stronger from this crisis than when they entered.

The problem for us though is that President Bush has simply kicked the $17.4 billion can down the road to the new Obama Administration. By March 31, 2009 President Obama has to decide what to do with Detroit.

The conditions imposed by President Bush are simply precatory. The manufacturers are required to show progress, whatever that means to the new administration.

President Obama can change these conditions, conclude they have been satisfied in principal, or cut off Detroit. His dilemma with the unpopular bailout is to save Detroit without appearing to give into the UAW. Anything short of a radical restructuring will result in a drawn out collapse of Chrysler and GM, and perhaps of Ford, at a substantial cost to taxpayers.

The problem is that nothing proposed in the short term will boost demand for cars in America, whether domestic or imported. Consumers, worried about the downward spiral in the economy, are either unwilling to invest in the substantial cost of a new car, or are unable to get credit. Demand has cratered quicker than the Dow Jones. No prognosticator's crystal ball is predicting a rapid turnaround for Detroit.

Presumably President Obama will be no more willing than President Bush to preside over the demise of Detroit. Then again, Winston Churchill once said “I have not become the King’s First Minister in order to preside over the liquidation of the British Empire.” But he did.

Sunday, December 21, 2008

National Lampoon: From Animal House to the Big House

The SEC and the Justice Department announced last Monday a criminal prosecution against the owners of The National Lampoon for securities fraud. The SEC, which could not detect a $50 billion Ponzi Scheme, is rescuing us from an attempt to raise the share price of the Lampoon’s stock by $2.

From the sublime to the ridiculous; how low the Lampoon has fallen from its glory days!

The Lampoon was founded in 1970 by alumni of the Harvard Lampoon. The monthly National Lampoon soon received a cult following. Nothing was sacred to the early writers: Doug Kenney, P.J. O’Rourke, Michael O’Donoghue, Henry Beard, Robert Hoffman, Tony Hendra, Chris Miller, John Hughes, Sean Kelly, and Anne Beatts.

The most classic moment, if you can single out just one, was the Lampoon’s parody of a VW ad showing a Beetle floating in water. The Lampoon’s 1973 version had a caption under the floating Beetle:

“If Ted Kennedy drove a Volkswagen, he’d be President today.”

VW sued. As part of the settlement, the Lampoon had to razor blade the offending pages out of the unsold issues.

The monthly Lampoon was soon followed by classic specials, such as the 1964 High School Yearbook Parody and the 199th Birthday Book, which preceded the nation’s Bicentennial. I still use in my Torts materials their brilliant, satirical version of the Kent State shootings.

And then came the Radio Hour, albeit only for a year, LP’s, Lemmings, and from the crazed geniuses of the Lampoon, Animal House – still the classic three decades later.

Ah, but brilliant young artists move on and sell out. P.J. pens for Forbes. The Lampoon has gone through several owners, all of whom have lowered its aspirations. It exists now to collect royalties from licensing out the National Lampoon name to what appears to be a series of low quality movies, such as Dorm Daze and Dorm Daze II.

The magazine’s last issue was in 1988, R.I.P.

The share price of National Lampoon was $1.87 in mid March. Daniel S. Laikin, 40% owner of the National Lampoon, was indicted in Philadelphia for offering kickbacks to a stock promoter to raise the value of the stock to $2.50-5.00 per share.

The stock closed last Friday at .87/share.

From farce to farcical, the Lampoon now brings us the Idiot’s Guide to Securities Fraud.

The California Supreme Court Tosses a Lump of Coal to Good Samaritans This Christmas Season

Bah! Humbug! Said the California Supreme Court to Good Samaritans last Thursday in a sharply divided opinion, Van Horn v. Watson, 2008 WL 5246046.

The policy of most states is to encourage good Samaritans, a rarity in our country as shown by the Kitty Genovese case 45 years ago, to come to the aid of third parties in peril.

Kitty was returning to her Kew Gardens apartment in Queens, New York at 3:15AM on March 13, 1964 when she was repeatedly stabbed over a period of half an hour. The initial newspaper article portrayed 38 neighbors hearing and seeing the attacks without doing anything to assist her. One witness said: “I just didn’t want to get involved.”

The picture painted was one of callous, indifferent New Yorkers.

We now know that this version was incorrect, but the actual facts are still disturbing. No one actually saw or heard the whole scenario, and hence had a full understanding of the tragedy unfolding yards from their residences. Windows were closed because of the cold. At one point a neighbor yelled out to leave her alone, at which point the assailant left, but then returned ten minutes later to complete his gruesome task. The neighbor did not call the police.

One of the neighbors might at some point have taken the extra step to discover the unfolding tragedy and possibly save Kitty’s life, but didn’t. The law protects their failure to act.

The common law rule is simple; we have no legal duty to come to the aid of third parties, absent special relationships. Indeed, we can laugh at the misfortunes of others as they drown, burn, bleed, or jump to death. Such response may not be commendable, but it’s legal.

We have a moral obligation to act, but not one that is enforceable in law.

A corollary to the common law though is that even if we initially have no duty to act, once we begin to act, we must act reasonably.

California, like most states, witnessed the fear of litigation as deterrence for medical personnel to stop at the scene of an accident to render care.

The state in 1980 enacted a statute, which provides; “No person who in good faith, and not for compensation, renders emergency care at the scene of an emergency shall be liable for any civil damages resulting from any act or omission.” The plain language of the statute is a broad “Good Samaritan” statute, protecting all who come to the assistance of the victim.

That brings us to the California Supreme Court opinion. The Court rewrote the plain words “emergency care” to be “emergency medical care” or “emergency medical services” by looking to the broader context of the statute. Therefore, the statutory immunity extends only to “those persons who in good faith render emergency medical care at the scene of a medical emergency.”

The dissent, as does the United States Supreme Court, starts with the plain words of the statute. If the language is clear, and it certainly is with this statute, then the analysis ends.

Five co-workers went to a bar on Halloween to drink and dance. Several had smoked marijuana before going to the bar. They left the bar in two cars at 1:30AM. Alexandra Van Horn was a front seat passenger in a car driven by Anthony Glen Watson. Lisi Torti was a passenger in the trailing car.

Watson lost control of his vehicle at 45mph, and crashed into a light pole, knocking it over onto the car. The front airbags deployed. Torti rushed to Alexandra’s assistance, and pulled her out of the wrecked car. She saw smoke and liquids coming from the crashed car, and feared the car would catch on fire or explode.

Van Horn claims Torti yanked her out by her arm “like a rag doll,” the result of which rendered Van Horn a paraplegic. She denies that the car was in danger of catching on fire or exploding. She was paralyzed as a result not of the original crash, but of Torti pulling her out of the car.

Two famous clichés of the law seemingly apply here. The first, the great Shakespearean quote about lawyers: “The first thing we do, let’s kill all the lawyers” is taken out of context. The full text praises lawyers and the law.

The other though, the Dickens quote from Oliver Twist, is totally applicable here. “If the law supposes that,” said Mr. Bumble …. “the law is an ass - a idiot.”

One explanation for the case is a trite saying we provide law students for seemingly inexplicable opinions: “Hard cases make bad law,” or as I often heard it in law school: “Heart cases make bad law.”

Plaintiff, a paralyzed victim of an auto accident, presents a compelling, sympathetic claimant, especially if, under disputed facts, her paralysis could have been prevented by defendant not panicking.

Judges are as compassionate as jurors, and hence moved to compensate deserving victims, interpreting, misinterpreting, ignoring, or changing the law, as necessary to facilitate compensation.

The result though is to once again, as in the days of the late Chief Justice Rose Bird, turn the California Tort system into a lottery system in which justice is dispensed through the forensics skills of the lawyers.

The message sent by the majority to good Samaritans is simple: Don’t get involved.”

The major issue is the extent to which society wishes to encourage rescuers.

Chief Justice Benjamin Cardozo of the New York of Appeals wrote that: “Danger invites rescue.” We expect rescuers to act almost instinctively in a split second, lacking the time to fully deliberate the reasonableness of a considered response. Their decisions should be assessed in the light of the apparent emergency, with the rescuer receiving the benefit of the doubt.

But the passage of time, discovery, and the liberality of pleading, allows for a breakdown, nano second by nano second, to parse and second guess the reasonableness of the responder’s act, leaving it to the jury with the clarity of time to decide if the response was reasonable or negligent.

Cardozo said “Danger invites rescue.”

California posits a corollary: “Rescue invites litigation,” the lesson being Don’t Get Involved, or you can join Torti as a tortfeasor.

Thursday, December 18, 2008

Beware of Bernies

When will we ever learn? Do not, under any circumstances, ever invest with a Bernie. Not a plugged nickel. Not a farthing. Not a peso, not a lira. Not anything with a Bernie – they’ll rob you blind every time.

Bernie Madoff. Good old Bernie. What a nice, genial, mild mannered, beneficent gentleman. What an honor, a privilege, to invest with this unassuming brilliant investor. He merely invented the modern OTC market.

Did I say brilliant, financial genius? He merely robbed the world’s most sophisticated investors, banks, financiers, movie moguls, NFL owners, hedge funds, Swiss bankers, financial advisors, charities and endowment funds, even a Senator of $50 billion. This Bernie has basically wiped out his admirers at the Palm Beach Country Club. Never spend a Weekend at Bernie’s.

He even duped the SEC, but that’s child’s play for a man of Bernie’s acumen. He knew the SEC couldn’t distinguish between real books and false books.

His Ponzi Scheme beats out the previous securities fraud earlier this Millennium of another Bernie, Bernie Evers of WorldCom. He only accounted for somewhere between $12 and 30 billion. Evers got 25 years in prison, but Madoff, that nice, sweet Madoff, only has to wear ankle bracelets for now.

Madoff wasn’t even the first Bernie with a Ponzi Scheme. That honors goes decades earlier to Bernie Cornfeld of the Investors Overseas Services (IOS) and his pyramid scheme Fund of Funds. Cornfeld was the opposite of Madoff - a certified rouge. He never had enough women wrapped round his shoulders. Names which come to mind include Victoria Principal and Heidi Fleiss. She screwed men; he screwed everyone.

Bernard is not always a safe name, especially when he is sometimes called Bernie. Thus, we have another mild manner, unassuming Bernard, an engineering grad of NYU, named Goetz, who as Bernard or Bernie Goetz, became known as the Subway Vigilante, who single handedly attempted to rid the New York City subways of muggers. The jury applauded his Clint Eastwood Make My Day imitation, acquitting him of all counts of assault and attempted murder.

One final Bernie comes to mind, Bernard “Bernie” Goldberg, six time EMMY winner for CBS. I love his conservative commentaries for FoxNews on the media bias of the Mainstream Media. But he turned on his employer of 28 years. I value loyalty.

One final, totally irrelevant comment. Barney is a fine name, especially if it's a retailer in New York. Barney, the purple dinosaur, is a load of barney.

Sunday, December 14, 2008

Detroit and Me

Why my fascination with the tragic collapse of Detroit?

I had a great professor at USF Law School, J. Thomas McCarthy, this generation's leading scholar on intellectual property. He was an even better teacher. He turned me onto Antitrust.

Between his classes, the literature of the 1960's, and my fascination with cars (like many males I could identify every car on the road), I became convinced that GM had too much power - not so much in American society, but in the largest industry in America at that time - the automobile industry, responsible for 1/6 of the GNP.

GM was at least a quasi-monopoly, if not an outright monopoly using the famous Alcoa case as the basis of analysis, and then dividing the broad automobile market into relevant sub-markets. While GM possessed about 60% of the general auto market, it's market share progressively increased with the prices of the cars.

The Johnson Administration in its closing months filed major Monopolization suits against AT&T and IBM. It came close to also filing one against GM, but choose not to.

I was very fortunate in 1970 to be offered a substantial fellowship by the University of Michigan Law School to pursue graduate legal studies. At my first meeting with my advisor, I suggested doing my dissertation on why GM should be broken up as a monopoly. As you might imagine at that time in Michigan, that suggestion was gently discouraged. That was not a surprise, but I had to try.

In any event, while writing my dissertation, and then upon entering the Academy, I continued working on the GM project and prepared a book length manuscript.

Alas, it never found a publisher, but I have recently posted several chapters of it on the SSRN network, available for all to read for free.

My thesis is that GM's power was so strong as to strangle innovation and competition in the industry. Like many monopolists, it became a follower in introducing new technology. It had the resources to follow without risking failure, or so it seemed at the time. For example,

Ford introduced the Mustang in 1964, but earlier the Edsel nearly bankrupted Ford. The succcess of Ford's Mustang led to the blander Camaro (which I've been told has an interesting translation in French) and the more explosive Firebird. GM never produced viable minivans to compete with Chrysler's.

Like most stogy oligopolists, and especially monopolists, the market would eventually respond in negative ways to the company. One of GM's biggest mottos was "NIH", "Not Invented Here."

The first blow was the 67 day UAW strike in 1970, which GM lost. Then came the two Arab Oil Embargoes of the 1970's, from which GM never recovered.

The company, which manufactured large, heavy vehicles, full of 8 cylinders, chrome, and fins, took decades to respond. GM engineers and execs either couldn't figure out how to build quality, gas conserving vehicles (then called small cars or compacts/subcompacts and now called green calls), or the resulting cars were designed by a committtee dominated by non-engineers.

Quality suffered with the public understanding that you do not want to purchase an American car built on Monday, Friday or the first day of hunting season. GM seemingly escaped unscathed from a series of poor cars, but in reality, Americans switched in ever greater numbers to the imports.

A series of marketing disasters ensued, with names like Vega, Chevette, Nova, Aztep, and Citation. Cadillac went from the classic Fleetwoods, Coupe d'Villes, and Sedan d'Villes to the Catera and Cimmaron. Pontiac lost all sense of identity, going from "Pontiac Builds Excitement" to "Pontiac Charges More For Rebadging Chevrolets." The Fiero looked great, but was poorly designed. Oldsmobile was finally scrapped. I rented an Oldsmobile about 7 years ago. The interior, especially the dash board, looked like it was recycled from the 1960's). Buick hangs on because it is selling in China. (Ford, of course, gave us the Pinto, and American Motors marketed the Gremlin and the Pacer)

GM's profits are in large vehicles, now called SUV's and pickups, when they sell.

GM's volume product was the Chevrolet, and it had a high profit margin from the Cadillac. Its bread and butter though was in the midsize market, dominated by the B-O-P lines, Buick, Oldsmobile, and Pontiac. B-O-P was where most of its sales and profits came from.

The Toyota Corona and Honda Civic started dribbling into California in the mid 1960's while the VW Beetle became the status car, and Hippies loved the VW Van. GM did not respond. It still couldn't effectively respond as the Camry and Accord sales soared because of higher quality and lower prices. America exported coal and iron ore to Japan, which returned them as steel and autromobiles at competitive prices.

And from the 1970's to now, GM continued to close assembly plants and eliminate jobs. From almost 900,000 employees in the 1960's, it has shrunk to less than 1/3 of that today. Ford and Chrysler, in true oligopolistic fashion, followed suit.

I believe that if Buick, Oldsmobile, and Pontiac had been spun off as three new automobile companies, then at least one of them would have found an effective strategy to compete with the imports.

The telecom revolution began after the Baby Bells were divested from AT&T. Sprint and the Baby Bells led the way into new technology in telecommunications while startups, like McCaw led the way into cellular communications.

Deregulation in the airline industry led to Southwest, Jet Blue and AirTran, which represent meaningful competition for travellers.

The new entrants into the automobile industry came from overseas, using their existing plants to produce quality veicles for Americans.

I still love Michigan. I drive an American car, although the Chrysler Pacifica was actually made by a German company, Daimler Chrysler, in Windsor, Canada.

I am truly sorry about the plight of Detroit the City and Michigan the State, but even more so about the progressive unemployment by over a million employees of the Big Three and all the businesses, large and small, dependent upon them for a livihood.

GM is no longer a monopoly. GM is a bankrupt, and we are all, Michigan most of all, paying for its market failure.

Saturday, December 13, 2008

Does Blagojevich Get Due Process?

Illinois Governor Rod Blagojevich pulled a Gary Hart at a rally on Monday daring investigators to wiretap him; they will find nothing, he said.

On Tuesday morning at 6:30AM FBI agents arrested the Governor at his home.

Calls for his resignation reverberated throughout Chicago on Wednesday. President-Elect Obama echoed the calls.

On Friday, Illinois Attorney General Lisa Madigan petitioned the Illinois Supreme Court to enjoin Blagojevich from acting as Governor pending impeachment on grounds that under Illinois law the Governor “was unfit to remain in office.”

Has anyone else noticed that the Governor hasn’t even been indicted, much less tried or convicted? He has yet to confront the witnesses or hear the tapes. He has had no access to the evidence against him, except in the 78 page complaint, of whch 76 pages are an FBI affadavit.

We do have a presumption of innocence in our country, and both procedural and substantive due process for the accused. Even the 9/11 conspirators in Gitmo are getting their day in court.

We teach our law students that there are two sides to every story. So far we have only heard Patrick Fitzgerald, the prosecutor, and that was in the form of a highly inflammatory, prejudicial opening statement that can well be held to contaminate the jury pool.

His statements at the press conference accused Blagojevich of “a political corruption crime spree”, “conduct that would make Lincoln roll over in his grave”, and “has taken us to a new low.” Fitzgerald’s words included “appalling”, “staggering” and “cynical.” These are all conclusions and not statements of fact. Professional ethics limit the prosector to statements of fact at this stage of the proceedings. We can draw our own conclusions from the facts.

The response is a rush to judgment against the Governor. Like the fall of Governor Elliott Spitzer in New York, no one in his own party has stepped up to defend him. Both governors lacked a friend in the legislature.

The grounds are apparently that his act of corruption, trying to sell the open Senate seat on a traditional “play to pay” basis, exceeds the recognized bounds of corruption in Chicago and Illinois.

The other basis is that he is an embarrassment to Illinois.

This in the state where three of the previous 8 governors, Otto Kerner, Dan Walker, and George Ryan, were incarcerated for corruption. Otto Kerner’s other claim to fame is that after the national riots of 1967 he was appointed by President Johnson to Chair the President’s National Advisory Commission on Civil Disorders (The Kerner Commission, followed by the Kerner Report).

This in the state where Senator Richard Durbin, Democrat of Illinois, has requested that President Bush commute the sentence of Governor Ryan, a Republican, to time served.

Illinois is the state where Paul Powell, the Illinois Secretary of State, died in 1970, and boxes containing $800,000 in cash were found in his residence.

Illinois and Texas are the states, which in 1960 through Mayor Richard A Daley of Chicago and Senator Lyndon Baines Johnson of Texas, which many believe may have stolen the 1960 Presidential Election. If true, that is political corruption of the highest degree!

The Governor’s real crime is that he has managed over the course of six years in office to antagonize almost every major political figure in Illinois, especially Lisa Madigan and her father, the powerful Speaker of the Illinois House of Representatives. His political opponents were waiting for The Opportunity, handed to them on a silver platter by Fitzgerald.

Lisa’s petition reeks of political hypocrisy and a conflict of interest. Not only was she interested in the appointment to the open Senate seat, but earlier announced plans to run for Governor in 2 years. Her office turned over to Fitzgerald in 2006 her own investigatory files on alleged corruption by the Governor.

If Blagojevich resigns, is impeached or removed by the Illinois Supreme Court, then the Senate selection will be made by Lt. Governor Pat Quinn, a true team player in the Illinois sense of the term.

That Chicago and Illinois are shocked by Blagojevich’s indictment is shocking! He has been under investigation since 2003, a year after election to the governorship. The only open question was when would the indictment come?

That he has sought pay for play for a Senate seat is hardly shocking, much less novel, in a country where not only senatorships have been sold, but so too have judgeships and pardons.

That a governor is corrupt is hardly a unique proposition either in Illinois or the rest of the country. Corruption is bi-partisan. Convicted Governors in addition to the Illinois trio include Dan Hunt (R Alabama), Jim Guy Tucker (D Arkansas), Edward DiPrete (R Rhode Island), Edwin Edwards (D Louisiana), Arch Moore (R West Virginia), John Rowland (R Connecticut), Don Seligman (D Alabama), and Fife Symington (R Arizona). Governor Ray Blanton (D Kentucky) was never indicted for the sale of pardons, but several of his aides were convicted.

Prior to George Ryan and Rod Blagojevich, Maryland had the record for a back to back twofer with Spiro Agnew and Marvin Mandel. Spiro Agnew was especially noteworthy because he was only indicted after he became Richard Nixon’s first Vice President.

Let me also add that here in Orange County we are witnessing the corruption trial of “America’s Sheriff” Mike Carona.

Blagojevich was reelected in 2006. His proclivity for corruption was widely known, or should I say, suspected in Illinois. The Chicago firm of Winston & Strawn has billed him $2,500,000 in legal fees for representation in the on-going investigations, but may have dropped him in this case. The Friends of Blagojevich Fund has paid $2,000,000 to date to the firm, but seems to have run out of fund raising ability.

Governor Rod Blagojevich may be a sleeze, but he’s still entitled to due process.

Thursday, December 11, 2008

Detroit, R.I.P.

Detroit died tonight. That’s just a formality for Detroit, especially GM and Chrysler, have been slipping fast. Bailout or bankruptcy, or both, that is Detroit’s fate. Any choice constituted radical surgery. No degree of euphemism will hide the fact that whether it be called a bridge loan or bailout, Detroit, or 2/3 of Detroit, is bankrupt. The Senate Republicans have decided; formal bankruptcy it will be.

According to a recent General Accounting Office report, GM has liabilities, as of September 30, 2008 of $169.4 billion and assets of $110.4 billion. It’s bankrupt in all but name, and soon it will be unable to pay its bills without the taxpayer bailout. GM is bankrupt and Chrysler is terminal.

Congress would have imposed conditions upon the auto companies, who are so desperate for cash that they would agree to almost anything, including an oversight committee or Car Czar.

Congress signaled two weeks ago what it was looking for from Detroit, and the industry responded last week with interest. Detroit sought $25 billion two weeks ago, and came back seeking $33 billion, with no end in sight. Negotiations between the President and Congress agreed upon a government car czar to oversee Detroit, green cars, salary cuts with no golden parachutes for execs, hair cuts for creditors and shareholders, first in line rights for the government, elimination of private jets, reduction of the product line, and perhaps union concessions. The Democrats reluctantly dropped some green requirements, but not the CAFÉ standards, which have hobbled Detroit.

The UAW, similar to the Chrysler bailout almost three decades ago, wants a seat on GM’s Board of Directors in exchange for more concessions.

Detroit is willing to promise Green, Green, Green eventhough they know Detroit Green will not sell cars. Chrysler, which has essentially stopped future product planning after 2011, is promising 500,000 electric cars within three years, which is as realistic as buying a bridge in Brooklyn.

GM’s CEO stated a year ago that the hybrid is not economically viable when gas prices are low. Indeed, the Prius was not selling a little over a year ago. Dealers were discounting it instead of packing the price. Even at the Prius’ peak, Ford F 150’s, Chevy Silverados, and Dodge Rams were outselling the it, as were a wide variety of SUV’s and MiniVans. They still do, as does the Chevy Cobalt and Malibu and Ford Focus.

Once again, Prius sales are in the tank. Sales of the Prius dropped 48% to 8,660 in October, exceeding the sales drops of Ford (30%), GM (41%), and even Toyota (34%).

Maybe if gas goes back up to $4/gallon, Detroit Green will sell, but not now.

Forcing Detroit to move its product line to green cars, which Detroit will have trouble selling, at the same time an unregulated Toyota is moving into full size pickups, and thus large vehicles, illustrates more than anything else the folly of central planning.

One need not be a Nobel Laureate in Economics to realize that if half an industry is subject to regulation and the other half, the more profitable and efficient half, is not, the regulated half will fail, the only question being how soon?

GM now wants $18 billion it cannot borrow in the private market. It’s currently paying out about $2.5 billion annually in interest.

Much attention has bee spent on the wages and fringe benefits of the Union members, but these come to only about 10% of the cost of a car. The difficulties are deeper than labor costs.

Missing in the plans presented to Congress were two critical elements of any meaningful plan: a business plan for economic survival and a marketing plan to attract purchasers.

How does GM expect to reverse its four decade decline, including 90,000 jobs in this century alone? We don't know because GM is clueless. Forget the spin over the Volt, a proposed electric car with a 1.4 liter, 4 cylinder engine costing $30,000-40,000 that would require 3 hours of recharging the battery to get 40 miles of driving on the battery!

Parents want larger vehicles, think SUV’s, for safety and transporting their children to various venues.

And how does Chrysler expect to reverse its decline into irrelevancy? Most of our new vehicles have been Chrysler products: Plymouth Horizon, Dodge OMNI 024, Plymouth Voyager, Dodge Caravan, Plymouth Sundance, and now a Chrysler Pacifica, so I will miss Chrysler.

Of course, Congress would not understand a real business plan, so the absence is probably not significant.

The absence of a marketing plan though goes to the heart of Detroit’s problem: getting Americans to buy Detroit’s cars, especially small vehicles. Can Detroit change the reputation of low quality and high prices? One statistic illustrates the decline of Detroit.

Orange County, California is the nation’s fifth largest, with over three million residents, or roughly 1% of America’s population. The county has 130 new car dealerships, but only 40%, and dropping fast, sell Detroit’s products. Each of the 4 Mercedes dealers, four BMW, and 4 Lexus, not to mention the dozens of Toyota and Honda dealers normally sell more vehicles in a month than most domestic dealers sell in a year. Owning a Toyota or Honda dealership is the nearest thing to minting money in the County.

Did I mention that Toyota lost about $320 million in the United States last quarter, but is sitting on $40 billion in cash?

The defeated bailout proposals did nothing to help the nation’s dealers or parts manufacturers for the bill did absolutely nothing to increase demand for Detroit’s products.

Will Americans buy “orphan” cars from a bankrupt manufacturer? We will find out, but since we’re not buying GM or Chrysler products anyway, it may not matter. Let us note that we trusted our lives flying bankrupt airlines (Continental, Delta, Northwest, United, and U.S. Air).

If Congress really wants to save Detroit, it would be a lot cheaper and more efficient to offer a $10,000 tax credit to everyone who purchases a Detroit product through next year.
We can define eligible vehicles as those containing at least 51% North American content.

The cost to the Treasury will be less than pouring taxpayer money down the bottomless pit of Detroit.

Why Don't Republican Senators Support the Detroit Bailout

Some still believe in the free enterprise system.

The idea of a government “Car Czar” is repugnant.

The bailout is fundamentally unfair to the auto companies who do not need it.

Some represent states (mostly Southern) with manufacturing plants of imported cars.

Some do not believe the current bill goes far enough in ensuring a financial turnaround for Detroit. The Chrysler bailout of almost three decades ago required substantial sacrifices by equity holders and employees.

Only bankruptcy will provide a comprehensive solution.

This loan, a bridge loan into the new Obama Administration, is but the first into what appears to be a bottomless pit, also known as a black hole.

President Bush is a lame duck with 40 days left in office.

The government as creditor will jump in line ahead of all other creditors, including banks and secured creditors. This provision may be unconstitutional.

They want Cerberus, the hedge fund owner of 80.1% of Chrysler, to invest more capital into Chrysler. Cerberus also owns 51% of GMAC and is now threatening bankruptcy of GMAC.

The current plan was worked out between President Bush and the Democrats.

Some irrelevant goodies, “earmarks”, were included in the bill.

They felt a backlash after the earlier $700 billion Wall Street bailout.

It’s payback time. The United Auto Workers has spent $10 million in recent years in trying to elect Democratic Senators. Several of the retiring, voluntary or involuntary, Republican Senators still have a few weeks left in their term.

Tuesday, December 2, 2008

The Kabuki Dance of Congressional Hearings

We witnessed two weeks ago the leaders of GM, Ford, and Chrysler sitting before Congressional panels posing as zombies, following the earlier lead of tobacco execs, oil execs, and probably drug industry execs.

The execs sit in the well below the Senators and Representatives, acting stunned and stupefied as they respond to a barrage of questions by the brilliant, omniscient Senators and Representatives. Harvard, Wharton, Chicago, Duke and Michigan MBA’s are reduced to flaming incompetence.

These execs are extremely competent, have survived vicious corporate battles to rise to the top, have personal skills, charisma, and highly competent assistants. They are well briefed on the issues and questions to be asked. So why do they appear as red meat, indeed political human sacrifices, for our elected representatives?

The answer is simple. The rules of the Kabuki Dance before Congress are laid out to the execs in advance. They are to swallow their pride, suck it up, follow the script, and accept whatever verbal abuse is dealt out. Humility and ignorance are the orders of the day. Above all else, they are not to show up Congress.

Congress has the power to do a lot worse than talk. They can legislate, and if they do, it will not be to the advantage of the affected industry. Talk is cheap, and will pass in time whereas legislation and regulation are eternal.

Just once, wouldn’t you like to see the President of a major oil company respond to the Congressional interlocutors:

“While I am sitting here answering your questions, my company is
producing 500,000 barrels of oil to supply the American people. On the
other hand, all you are producing in Congress is hot air and balderdash.
When is the last time you actually produced oil? When did you explore in
120 degree weather, alligator infested swamps, or five miles out at sea
in treacherous waters? When did you devise innovative secondary and
tertiary methods of oil production, or safer ways of exploration and

It will not happen.

Neither will a pharmaceutical executive state:

“If we do not earn a profit producing the drugs that save lives and improve
the quality of life of Americans, then we cannot discover new miracles that
fight cancer, diabetes, ALS and all the other diseases that kill
Americans. Our research saves lives. Earnings pay for R & D. For every
successful drug we produce, we have to write off scores of what initially
seemed promising pharmaceuticals, often at a cost up to a billion dollars.
In addition, we pay billions in damages when claims are made that our
drugs are not perfectly safe or efficacious. One lawsuit in front of a jury of
six can wipe out the company and all our products that help Americans.

If the country does not wish to protect the intellectual property rights of our
great pharmaceutical companies, then we will end up with the health care of
third world countries. The industry has already reduced industry
employment by 25,000 chemists between 2003 and 2006. Ph.D’s do not
come cheap. Neither do clinical trials.

Once again, it will not happen.

Similarly, a tobacco exec could say, but won’t: “You revile us as a health hazard, but the reason you don’t ban us is because you are addicted to the taxes generated by our cigarette sales.”

Instead we are offered the sacrificial heads of industry for our enjoyment with Congress having a thumbs up or down vote.

Monday, December 1, 2008

Detroit Doesn't Get It, But Will

Detroit Just Doesn’t Get It, But Will

Two weeks ago the Big Three appeared before Congress, pleading for a bridge loan of $25 billion. The Detroit execs and UAW leaders expected pro forma approval of the loans by a friendly, Democratic Congress.

After all, the victorious Democrats owe much of their success to Big Labor, and the UAW was historically the greatest of the unions. The governors of six states, Michigan, Ohio, Delaware, Kentucky, New York, and South Dakota, sent a letter to Federal Reserve Chair Ben Bernancke and Treasury Secretary Paulson, seeking immediate assistance for the auto industry. Congress had just enacted a $750 billion bailout bill, which included funding of a $25 billion loan to the auto makers to retrofit their assembly plants for fuel efficient vehicles. Under the circumstances, an additional $25-50 billion would seemingly not pose a problem.

Yet, the original bailout bill was politically unpopular, with the backlash leading to the defeat of some Republicans in the November election. It also became clear that a bridge loan would not save Detroit. Detroit wanted a $25 billion bridge to nowhere, right up there with Senator Ted Stevens’ infamous Bridge to Nowhere.

The Big Three is the industrial equivalent of Dead Men Walking. Americans were not buying their vehicles, and the companies lacked financial reserves to ride out the perfect storm: high gas prices and a severe credit crunch. Consumers who do not purchase Detroit products do not favor bailing out the industry.

Thus, the Congressional hearings became a veritable turkey shoot with the Detroit execs providing target practice. The media immediately criticized their performance in running an industry totally out of touch with the market, failing to note the irony that the media is similarly unable to adapt to changing market conditions.

That the execs flew to Washington in private jets gave rise to a chorus of jeers, ignoring the practical reality that for security purposes, business no longer wants its leaders traveling on common carriers.

Congress sternly told Detroit to come back on December 2 with revised plans to reflect the new market conditions.

Detroit will return tomorrow with proper obsequiousness, and Congress will attempt to give Detroit what it needs, or so it will seem, for both President Bush, most of the Republican legislators, and Democrats representing districts and states with imported car manufacturers are opposed to a new bailout. Detroit may have to wait until January 20, 2009 for Congrssional salvation, but enacted it will be.

They will come in vehicle caravans, with execs, union workers, and retirees in solidarity to plea their cases to a compassionate Congress.

GM will sell a few corporate jets, divest itself of Suzuki, and phase out all or part of Pontiac, Saab, Hummer, and Saturn. Ford has already left Aston-Martin, Jaguar, Mazda, and Rover in the rear view mirror, and will divest itself of Volvo. Chrysler will be on a respirator. The UAW will sacrifice what’s left of the Jobs Bank. The companies will impose limits on executive salaries and dividends.

All of which is either symbolic or meaningless unless the public starts buying millions of Detroit vehicles in the near term – not a likely prospect.

Detroit as we know it is dead; it’s had a wonderful, century long run. Most businesses and industries do not last that long. For example, the Route 128 mini-computer industry in Massachusetts barely lasted a decade. Names like DEC, DG, Prime, and Wang rose like a meteor, and collapsed even quicker. Whatever happened in the PC market to Atari, Commodore, Northstar, Osborne, Packard Bell, VisiCalc, or even IBM? Only GE is left from the original Dow Jones index of 12 stocks.

Many are dumping on Detroit for the failure to adjust to a changing market. The reality is that only a year ago Toyota was having difficulty selling the Prius. Dealers were discounting it. Consumer preferences can change on a dime but industrial production lacks that flexibility. GM was selling 1 million SUV’s only a few years ago at a gross profit of $10,000-15,000 per vehicle. That sounds like satisfying the market.

The unspoken truth is that the fate of the UAW and its medical plan are at risk. The union and companies recognized a few years ago that the status quo was no longer viable. Pensions, medical plans, and the job bank could not be sustained by an ever shrinking sale of new vehicles. Thus, the auto makers spent billions buying out existing workers while the UAW agreed to a two tier wage system for new workers.

They had plans to adjust. The sudden balloon in gas prices, followed by the credit crunch today, changed everything. Detroit simply ran out of time.

Just as significantly, the UAW and the Big Three entered into an agreement, effective in 2010, in which the union will assume in a trust fund the medical coverage of the UAW retirees. The Union recognized that while some federal protection exists for pension rights, none exist for medical benefits, especially if the employer enters bankruptcy. The Big Three was on course to fully fund the Voluntary Employee Beneficiary Association when the market collapsed. Thus, the VEBA is currently underfunded and cannot be implemented without additional employer contributions.

The Big Three are due to contribute an additional $12.5 billion to $18.1 billion to the fund, with GM alone owing $7 billion. The companies don’t have the money.

However, the proposed $25 billion bailout includes $10-12 billion for GM, $7-8 billion for Ford, and $7 billion for Chrysler. No one from Detroit, the UAW, or even Congress was going to state the obvious two weeks ago. The bailout funds are destined for VEBA, and that is why it will pass.

In addition, no one, especially in the Democratic Party, wants to put Detroit, the city, the industry, and the state (Michigan), out of business. They have been bleeding to death for four decades, but pulling the plug is not a viable political option.

A bankruptcy of GM or Ford will enter unchartered waters. Any bankruptcy will be on a scale never contemplated before - not even Enron’s.

The fear is that consumers will not buy an “orphan” car, although they have flown bankrupt airlines. Considering the poor reputation in quality, price, style, and fuel efficiency of Detroit branded cars, the fears may not be exaggerated.

An investment of equity funds in Detroit will be as ineffective and money draining as the British investment in British Leyland Motors. Nothing short of $.89 gas and easy credit can revive Detroit.

An argument can be made that all three do not deserve a bailout. Chrysler has already been saved once by federal funds in 1979 with Lee Iacocca leading Chrysler to success with the K-cars and the Minivan. Today’s CEO, Robert Nardelli, was passed over at GE and then led Home Depot for 6 years until he was forced out, albeit with a golden parachute of $210 million. He is a consummate bean cutter, who purportedly has cut all product planning past the next two years. Regardless of its past, Chrysler has no future under these circumstances. By way of contrast, Ford is replacing 60% of its fleet over the next two years and is best positioned for survival.

GM has sold an amazing variety of assets over the years to raise capital, including 51% of GMAC to Cerberus – a hedge fund which also acquired 80.1% of Chrysler from Mercedes last year.

GMAC was established as a means to provide financing to GM purchasers. Just when it is most needed, GM can no longer turn to GMAC for sales assistance. GMAC had diversified into sub- prime mortgages and incurred a $2.5 billion loss last quarter. GMAC sadly can no longer borrow funds to finance GM sales (DiTech should be a four letter word in Detroit).

The bleeding will continue in Detroit. Congress should simply fund VEBA and leave Detroit to the market.