Sunday, May 31, 2009

Nardelli Sticks It To Iacocca

Robert Nardelli, the consummate bean counter, has just stuck it to Lido “Lee” Iacocca, the greatest automotive genius of the past 50 years - a builder of cars. Nardelli has cut off Lee’s pension and life time car agreement. 1,250 other retired Chrysler execs are also losing their pensions, as well as being ordered to return their complimentary vehicles or buy them.

Why Chrysler wants more cars back when they can’t sell the ones they have is a mystery?

Nardelli is doing it because he says bankruptcy allows him to as they build a new Chrysler owned by the government, unions, and Fiat. Contracts and loyalty mean nothingto the bean counter. The secured creditors were also stiffed in the bankruptcy.

Lee Iacocca saved Chrysler from bankruptcy 30 years ago. He gave America the K-cars and the Minivan at Chrysler, and the Mustang earlier at Ford. He also revived Mercury at Ford. Nardelli has given us bankruptcy and bailouts.

Nardelli was appointed chair of Chrysler on August 5, 2007, and in roughly a year and a half drove it in overdrive to bankruptcy

Lee Iacocca chaired the successful Statue of Liberty/Ellis Island Foundation, celebrating the heritage of America.

Nardelli was passed over at GE and then canned at Home Depot because of extreme arrogance. He even treated the shareholders with contempt. He also took out over $500 million from Home Depot. He didn’t give that back.

So as the ultimate bean counter departs Chrysler, he has done yet more damage in his final days.

His vision of saving Chrysler was to cut costs by substantially reducing sales. He was successful by half. He cut fleet sales, leases, product lines, and even future product development because his spreadsheet said he could.

Bean counters look to numbers, but fail to understand people. Loyalty is an alien concept. They fail to understand that any enterprise is dependent on its people. Their myopia is numbers.

How you make money by reducing volume when volume is the key to overcoming fixed overhead escapes me?

The hundreds of thousands of vehicles cut from production had generated net marginal revenue for the company. For example, even if the Dodge Magnum only sold 75,000 units a year, that 75,000 was on the same assembly line as the Chrysler 300, shared the identical platform and components, and hence increased productivity. So too with the Chrysler Pacifica assembled on the minivan lines.

But having shrunk Chrysler into bankruptcy, he still believes he can sell more with less. Bean counters don’t learn from mistakes; they repeat them because the spreadsheet says they can.

Hence, a few weeks ago Chrysler summarily terminated 769 dealers, 25% of its total. Unlike GM’s termination, Chrysler said it would not have to honor its contractual obligations to the dealers. Normally, when a dealership closes, the factory buys back its new car inventory and special tools. Not Chrysler – because bankruptcy lets it.

Let’s look at some of the terminated dealerships.

John and Horace Dodge founded Dodge Brothers in 1914. Dealer number three was George T. Tator of South Salem, New York. Owned for three generations by the same family, through depression and war, boom and bust, great product and bad, the dealership prospered. But it could not survive bankrupt Bob.

Chrysler asked its dealer s a few months ago to buy extra inventory to help it out. One dealer stepped up and bought $500,000 in Chrysler product. Now he has to eat it because Chrysler cut him off cold turkey.

Union Dodge in Garden Grove was founded by a Korean immigrant pursuing the American Dream. Chrysler wanted to consolidate its remaining brands into single outlets. Thus his son acquired a Chrysler and Jeep franchise two years ago to become of only four consolidated Chrysler dealers in Orange County. Now he has $5 million in Chrysler vehicles to liquidate.

Chrysler has a funny way of selling vehicles in California. 38 million residents, and it just cut 32 of its 142 dealers in the state. Orange County with 3 million people is down to 6 franchises. Toyota and Ford (not including Lincoln Mercury) have 11, Honda 9, Lexus 4, Mercedes 4 and BMW 3. One of the Toyota dealers outsells all the Chrysler dealers combined. BMW and Mercedes both outsell Chrysler in Orange County. Less is not going to be more for Chrysler in the OC. Indeed, roughly 5 years ago a Dodge dealer, selling about 200 new vehicles monthly, acquired a Chrysler and Jeep franchise from a retiring dealer a few miles away. Monthly sales remained 200 for the combined Chrysler, Dodge, Jeep dealership.

Chrysler terminated its Dodge and Jeep dealer in El Centro, California. The nearest Chrysler dealer is 60 miles away in Yuma, Arizona. The Ford, Honda, Hyundai, and Toyota dealers will continue to sell cars in El Centro. Similarly, Chrysler terminated its two dealerships in Stillwater, Oklahoma. The nearest Chrysler dealer is 50 miles away.

Just because you can do it, just because the spreadsheet says you can, just because an accommodating bankruptcy signs off on it, doesn’t mean it’s the right thing to do.

We are all paying for the bean counter.

Saturday, May 30, 2009

Supreme Court Justice Sonia Sotomayor Has a Nice Ring to It

Some may be tone deaf, but Judge Sotomayor will be confirmed, probably by a 64-34 vote. The Republicans have as much of a chance of defeating the first Hispanic nominee to the Court, a Latina, as the Democrats had of defeating President Reagan’s nomination of Sandra Day O’Connor, the first woman on the Court.

Some whisper that the Judge lacks sufficient intellectual ability and sharpness.

Give me a break! I don’t care what her major was at Princeton, or whatever courses she may or may not have taken. She graduated second in her class, summa cum laude from Princeton. That has to be worth something in the way of intelligence.

Then she graduated from Yale Law School – one of only 160 a year from the nation’s top law school (sorry Harvard).

Ah, but she succeeded through hard work (she is a workaholic) rather than intellectual ability. Have we forgotten that success in America is a function of hard work?

President George W. Bush had a Bachelor’s from Yale and MBA from Harvard. He was smart enough. President Carter was an expert in nuclear engineering, but he wasn’t smart. Chief Justice Earl Warren and Justice Hugo Black graduated from public law schools, so they probably wouldn’t be considered smart enough by some.

She’s smart enough, as is her fellow Yale Law School alum, Justice Clarence Thomas.

Affirmative action will not be an issue in the confirmation hearings as to her personal success.

It may well, and should arise, with the New Haven firefighters, the decision in which is expected in a few weeks. (It will be interesting to see how the current Court now handles the decision – might they now affirm to avoid embarrassing her; it would do no good to roll it over to next term because she would recuse herself).

So what if three of her opinions have been overruled by the Supreme Court. Chief Justice Roberts did not win all the cases he argued before the Court.

If either Antonin Scalia or Samuel Alito had said “I would hope that a wise Italian male with the richness of his experiences would more often than not reach a better conclusion than a Hispanic female who hasn’t lived that life,” he would not be sitting on the Court today.

So what? It’s a different President and Senate and an accommodating media.

“Justice is Blind,” but every judge is the result of his or her background. Who we were helps define who we are. Our background forms part of the political calculus of a judicial appointment.

I remember an anecdote about President Johnson and Justice Thurgood Marshall. While it's not politically correct by today's mores, LBJ never was. Some of his advisors attempted to talk LBJ out of appointing Marshall because he was "too black." LBJ responded that if he was going to appoint a black to the Court, it would be a black.

Judge Sotomayor is clearly Hispanic.

The record of a nominee is parched, dissected, and flyspecked under an electron microscope.

So what’s her record?

She favors affirmative action, campaign finance reform, and gun control. She’s tough on criminal defendants, somewhat conservative on business issues, and an enigma on abortion and national security issues. She didn’t vote in two recent New York general elections.

The NRA doesn’t like one of her opinions, but they can’t stop her confirmation.

The Far Left is nervous because her record is silent on abortion; they are afraid that a Souter might replace Souter. They will support her in the end, as she follows the Kabuki path of Justices Thomas, Roberts, and Alito in navigating the abortion questions at the confirmation hearings.

So what if she is on YouTube saying the court of appeals judges make policy. Of course they do – that’s one of the basic principles even I learned at my not so elite, but excellent, JD law school. District court judges apply the law, and appellate judges decide the law. Since the cases often involve vexing policy issues, the Supreme Court is always free to reverse appellate judges, as the Court often does with the Ninth Circuit opinions.

I don’t want a Justice of “empathy.” I want a Justice who follows the law and doesn’t judicially legislate.

I don’t want a Justice who pursues amorphous concepts of “justice,” but one who follows the law.

However, right now the “law” depends mostly upon the views of one man, Justice Anthony Kennedy, who is the swing vote on the 5:4 decisions. That hardly results in the application of the “law,” but more of a personal perspective. He often partakes of internationalism in interpreting the Constitution.

I don’t need a Justice with a compelling life story. All nine Justices have such stories, as do all of us in our lives.

Frank Ricci, the New Haven firefighter, also has an equally compelling personal story. He is dyslexic, quit a second job, and spent $1,000 on readers to read aloud audiobooks to help him pass the promotion exam. No African American firefighter scored high enough for promotion on the Sergeants or Lieutenant’s exams, so the New Haven Fire Civil Service Commission tossed the tests. Ricci scored 6th on the Lieutenant’s exam. A judicial panel, including Judge Sotomayor, summarily affirmed the action in an unpublished opinion.

Policy is in Judge Sotomayor’s Yale DNA. Yale has pursued for decades its mission of educating the future leaders and policy makers of America. Presidents Ford and Clinton have Yale Law School degrees. So do Secretary of State Hillary Clinton, Pat Robertson, and John Bolton.

Both President Bush’s are Yalis, as are Senators John Kerry, Joe Lieberman, Arlen Specter, as well as Governors Howard Dean, George Pataki, and Jerry Brown.

Ever since the torpedoing of Judge Bork’s confirmation, the Supreme Court battles often become “down and dirty” political, partisan crusades of the lowest common denominator. Actually the process began earlier with the failed nominations of Judges G. Harold Carswell and Clement Haynsworth in the Nixon Administration. Both were tarred with charges of racism.

Everytime a Justice, or appointee, is trashed, the moral authority of the Supreme Court is tarnished. Once the Court is widely perceived to be a partisan branch of government, its opinions will lack moral suasion.

The politics of personal destruction are inappropriate in the judicial confirmation process. Let the debate be on issues. If the Republicans wish to bring Frank Ricci before the Senate and discuss affirmative action, they should do so, but in a respectful tone. They will not win the confirmation vote, but can pervail in the larger public battle over affirmative action in the Court of Public Opinion, while respecting the dignity of the Supreme Court.

Wednesday, May 20, 2009

Toke and Tax: California's Future

California voters last night blew up the five legislative budget “fixes” which either raised taxes or redirected existing revenue streams to the general budget. The California State Budget was up in smoke.

The answer to California’s economic distress lies in the smoke.

For California, it’s time to chill out as the answer is blowing in the wind. THC (Think Hashish and Cannabis)

California should now get off the pot, totally legalize marijuana, and then tax it.

Toke and Tax shall be the new motto of California.

Replace the old miner panning for gold with Mary Jane rolling a joint: “Eureka, I found a brick.”

Let Semsilla be the state flower.

Let grass become the NORML.

California has gone halfway there through the 1996 Prop 245, which legalized medical pot in California. Prop 245 created a hole wide enough in California’s ban on marijuana to drive a Mack Truck painted Panama Red through, and charted a new path in the classic game of Feds and Heads.

No longer should Californians fly to Vegas for pleasure. Now Nevadans can take one toke over the Stateline to California.

From Arizona, they can stop in Weed for some weed.

From Oregon, it’s just a short drive down the 101 to California’s Golden Triangle.

Californians won’t risk their lives in TJ for Acapulco Gold.

We can move the Annual Hash Bash from Ann Arbor to Berzerkey.

The legislators and the Governator celebrated with schnapps when they increased taxes. That was a critical error in judgment and an insult to Californians. Northern Californians may partake of brie and wine, and Southern Californians of Corona. All may puff the Magic Dragon, but stoned true Californians never stoop to schnapps. The legislators were dopes to think we couldn’t see through the purple haze to their tax increases.

Clear the air of pollution with a natural high in Tahoe.

No more wasteful uses of electricity to create artificial light in blacked out houses. Meter readers will no longer become Narcs.

Don’t waste limited law enforcement resources on CAMP.

Taxes by the kilos can make deficits go up, up and away.

Cannabis Dreaming has become a reality

Reefer Madness explains 2001 A Space Odyssey and Yellow Submarine.

Good grass no longer has to be green.

Weather forecasts by the Hippie Dippy Weatherman.

Worship with bongs at the Church of Cosmic Awareness.

Rediscover the lost art of rolling your own.

Remember, our Founding Fathers grew hemp for a reason.

Judge Douglas Ginsburg could qualify for the Supreme Court.

If only George Carlin were still alive.

Since California has a structural deficit, it now has the key to escape reality.

Monday, May 18, 2009

Notre Dame Is In An Identity Crisis

The University of Notre Dame du Luc must decide what it will be: a great Catholic university or a great secular university. It cannot be both, although either way it will remain a great university.

The invitation to President Obama to deliver the commencement address and receive an honorary degree brings the issue to the forefront. This post is neither about President Obama’s views nor the tone and tenor of his remarks. Nor is it about American views on abortion, although I do not believe the recent polls which say more Americans are pro-life than pro-choice. It is about Notre Dame.

The response by Catholic clergy and parishioners was underwhelming to say the least. Bishops protested, including the Bishop of South Bend, Indiana. Students demonstrated and protestors were arrested. Harvard Professor, and former Ambassador to the Vatican, Mary Ann Glendon, turned down a prestigious medal she was to receive from Notre Dame because she would not share the stage with the President.

Notre Dame, as a private university, has the right to invite or disinvite any speaker it pleases.

It could have had the President deliver the commencement address, but not award an honorary degree, as occurred a few days earlier at Arizona State. It could have simply stated that the invitation to President Obama follows in Notre Dame’s hallowed tradition of honoring our Presidents on a non-partisan basis.

However, President John Jenkins’ initial response was inappropriate to a Christian university. It reads as though it was written by a sophistic lawyer splitting hairs @$950/hour, and not a moral theologian.

The 2004 Directive of the United States Council of Bishops forbids Catholic schools from honoring “those who act in defiance of our [Catholic] fundamental moral principles.” Certainly, the Presidential support of abortions runs afoul of this prohibition.

President Jenkins wrote to the Notre Dame Board of Trustees that the invitation was faithful to the letter and spirit of the Bishops Directive. He asserted that his understanding was that the Directive only applied to Catholic politicians.

That response only fueled the fire and brimstone.

Abortion is one of the greatest social issues of our times. One of the early steps taken by the Obama Administration is to reverse the “moral conscience” clause promulgated by the Bush Administration. This clause protects medical providers from official retaliation for exercising their moral conscience in refusing certain medical procedures or dispensing pharmaceuticals.

By way of full disclosure, I am pro-choice with reasonable conditions, but I fully support the right, and I believe constitutional right, of Catholic hospitals to refuse to perform abortions. I also do not believe members of the medical profession should lose their jobs because of opposition to abortion or contraception.

Notre Dame is the preeminent Catholic university in America, surpassing Georgetown, Boston College, and all the other great Jesuit Universities. This once small school in a small Indiana city, where Studebakers were once manufactured, became the foremost American Catholic University by the 1960’s. It had subway alumni in every city, town, and burg in America.

None of the other Catholic universities, with the modern exception of Boston College, could maintain football – not Fordham with its great alum Vince Lombardi, not the Galloping Gaels of St. Mary’s, not the undefeated, untied, and uninvited 1951 Dons of USF (whose public relations director was a student by the name of Pete Rozell).

Football made Notre Dame, and the great Fr. Hesburgh, as President from 1952 to 1987, used football to build a great modern, research university, a modern Catholic research university. Notre dame had only a $5 million endownment when Fr. Herburgh was inaugurated. It exceeded $7 billion last year.

The Jesuits are preeminent educators. They are equally great humanitarians. Sometimes the Pontiff has had to call the Superior General of the Society of Jesus to the Vatican for a soul to soul talk, but the Jesuits never turn their backs on the fundamental teachings of the Church. They are Catholics first, and Jesuits second.

Students at Boston College recently invited Professor Bill Ayres to address them. The Administration disinvited Ayres. I disagree with the decision because I believe students should be exposed to the full range of political and social viewpoints, but the Jesuits of BC this year remind me of the Jesuits at USF (my first alma mater) during the 1960’s.

Boston College, USF, and all the other Jesuit universities remember their Catholicism and their roots as a means to educate the poor, often immigrants to America and their sons and daughters. It could have been Irish and Italians and Poles five decades ago and Vietnamese and Hispanics today. It doesn’t matter. There may not be as many Jesuits as four decades ago. It doesn't matter. They have built great educational institutions, but still unmistakably Jesuit.

Notre Dame is not what it was. A sign that it was leaving its honor behind came with the dismissal of Ty Willingham as football coach. Notre Dame had made mistakes earlier, since every hiring of a new coach by any university represents a gamble. Gerry Faust, a successful high school coach at Cincinnati Moeller, was such a mistake. The University realized early on that Faust could not fill the shoes of Knute Rockne, Frank Leahy, or Ara Parseghian, but the University honored his contract. They would lose games, but Notre Dame was Notre Dame. Two decades later, Ty Willingham was booted out with two years left on his contract. His mortal sin was not winning enough games.

Notre Dame was no longer Notre Dame, but just another football powerhouse for whom winning was everything.

And Notre Dame is becoming less of a Catholic University today. Will it follow the path of least resistence in the Academy and follow Marist University into secularism?

Sunday, May 17, 2009

Cheerios Is a Drug

Yes, indeedy, those tiny donut shaped, whole wheat Cheerios are now officially a drug, according to the Food and Drug Administration.

Amazing! You can’t get high on Cheerios. Nor can you OD on them. They’re not addictive; nothing happens if you cold turkey Cheerios, unlike caffeine - not that I recommend eating cold turkey and cold Cheerios at the same time. No law prohibits driving while under the influence of Cheerios.

Cheerios are among the healthiest breakfast cereal we can eat. They don’t contain excessive amounts either of sugar or salt. Trans fats are missing. They lack glaze, frosting, powdered sugar and sugared gel.

I don’t even know if Cheerios should be singular or plural, but I do know now that they now constitute a drug. They don’t cure any disease. Nor do they ameliorate symptoms. Noone gets vaccinated with Cheerios. They don’t fight colds, unlike Vitamin C.

But the FDA has declared they are a drug.

The Food and Drug Administration is probably, of all the regulatory agencies, the most critical to the health and safety of the American people. Its duty is to protect us against deleterious food, beverages, cosmetics, and drugs.

This task is impossible. No agency, no billions of dollars, no millions of food and drug inspectors can protect us against the infinite sources of contamination in our food and beverages, or even the adverse health effects of prescription drugs decades later. For example, third generation claims are arising out of DES ingested by grandmothers 4-5 decades ago.

In recent years the FDA has been bedeviled by scallions, onions, tomatoes, peanuts, pistachios, E-Coli, listeria, salmonella, hepatitis, wheat gluten, pet foods, heparin, and Vioxx. Earlier it wrestled with Red Food Dye #2. Politicians have taken pot shots at the agency for decades because of its inability to guarantee our food and drugs are safe.

The FDA was grew out of the Progressive Era as a response to Upton Sinclair’s great “novel” The Jungle. Revelations of human body parts in our meat processed by slaughter houses. In spite of the presence of FDA inspectors, a large slaughter house was recently caught on video sending downed cattle (downers) to be slaughtered and processed into our food supply, often as beef in our school lunch programs. Human digits still show up in our food.

For several decades the FDA was charged with an impossible task under the now repealed 1958 Delaney Amendment – a zero risk of cancer in humans or animals from food additives. Hordes of Norwegian white rats, which have little relationship to humans (except for the occasional lawyer joke) were sacrificed in tests for animal carcinogenesis. If they succumbed to cancer, then the food product or drug violated the Delaney Amendment. The rat and mice tests were so unreliable that lab mice and rats never developed lung cancer no matter haw many cigarettes they inhaled.

Unable to protect us from unhealthy foods, the FDA now proposes to protect us from healthy foods. The FDA~bureaucrats have found a food battle they can win.

The FDA wrote a warning letter dated May 5 to General Mills complaining of its claims that Cheerios “can lower your cholesterol by 4% in six weeks.” Dr. Steven Sundloff, in charge of the Center for Food Safety explains that the labeling “clinically proven to help lower cholesterol” carries a drug claim. Thus, General Mills was essentially marketing Cheerios as a drug. The FDA advised general Mills that if it wishes to continue these claims, it needs to file a new-drug application for Cheerios with the FDA.

Unless General Mills “promptly corrects” the violations outlined by the FDA, the agency reserved the right to take corrective actions, including seizing the product.

The problem is that the FDA will allow a company to clam, in a generic way, that its food product is healthy, but if it gets specific than the FDA will step in. The devil is in th efood details.

I miss the days of Wonder Bread builing healthy young bodies in 11 (or wads it 12) different ways.

Tuesday, May 12, 2009

Will The Donald Give Carrie Prejean a Second Chance?

Donald Trump, principal owner of the Miss USA Pageant, is expected to decide today the fate of Carrie Prejean, Miss California USA. Will he or won’t he strip her of her crown?

Tara Connor, Miss USA, presented him with a similar choice three years ago.

Allegedly, after Tara received her tiara, she partied, drank in public, used cocaine, snuck men into her apartment at Trump Place, and publicly kissed Miss Teen USA. These are, of course, acts that violate the morals clause signed by the beauty pageant contestants.

After a personal appearance by Tara, The Donald forgave her, explaining that “I’ve always been a believer in second chances.”

Will he show similar magnanimity with Carrie?

He loves the publicity. The Donald is a shameless self-promoter; he thrives on publicity and hyperbole. He once described Marla Maples, with whom he had an adulterous affair before divorcing Ivana, as “the best sex I ever had.”

The great sex did not stop him from dumping Marla one week before the end of the four year limitations period in their prenup. Marla received only $2 million in the settlement when trump’s estimated worth was $1.6 million. One week later, the divorce would have been very costly for him.

One hopes that wife number three, Melanie Knauss, had a better lawyer negotiating her prenup with the Donald. For what it’s worth, he’s 24 years older than her, but love springs eternal.

His show may be The Apprentice, but he is the ultimate Survivor in one of the world’s most Darwinian real estate markets, New York City.

Like many real estate developers, the Donald has made and lost fortunes many times.

Forget second chances, he had three chances with his Atlantic City casinos, which have entered bankruptcy three times. He once gambled on the law by suing the Massantucket Pequot Indians for the allegedly illegal Foxwoods Indian Casino. He lost that bet.

He’s doubling down with the law on the recent real estate collapse, which has cratered many of his development projects, by claiming the collapse is “An Act of God” which excuses him from performance. He will lose that one too. He, of course, will not give a second chance to the purchasers of his condos, denying them an Act of God release.

He made his first fortune converting the dilapidated Commodore Hotel in Manhattan into the Grand Hyatt in partnership with the Pritzkers. He lost his interest in the Grand Hyatt decades later.

Even his degree from Wharton was a second chance. He transferred to Wharton after two years at Fordham.

If he dismisses Carrie, which is clearly what the Miss California USA want, then he will make her a martyr for straight marriages. He may love publicity, but he doesn't need that publicity. Magnamity is the call of the day.

Sunday, May 10, 2009

President Bush Fired the Wrong Prosecutors

President Bush, Attorney General Alberto Gonzalez, Karl Rove and others in the Bush Administration have been pilloried for firing 7, 8, or 9 federal prosecutors (the actual number seems to vary).

They fired the wrong ones!

Many of the U.S. prosecutors were terminated because they would not carry out Administration policy, which was to crack down on voter fraud. Norm Coleman would probably still be the Senator from Minnesota if Acorn had been reined in.

Others should have been fired because of grossly unprofessional conduct.

Federal prosecutors have much greater power than state and local prosecutors because they have the full weight and resources of the federal government, including the FBI, behind them. The Assistant U. S. Attorneys are the best and brightest graduates of our nation’s top law schools.

Claims of prosecutorial misconduct, and even judicial bias, are often raised by defendants so credence should not be extended to every such claim.

Yet, recent years have shown a number of major ethical violations by several federal prosecutors. They are not limited to a single prosecutor or even a single office. Many, but not all, occurred in the second Bush Administration. Their misconduct is an embarrassment to federal prosecutors, who fully understand their professional obligations..

Their actions rival those of North Carolina’s Mike Nifong in the Duke Lacrosse Players scandal, and other local prosecutors. As an extreme, 80 convictions in Queens between 1989 and 2003 were overturned because of prosecutorial misconduct. Shih-Wei Su, who had been wrongly incarcerated for 13 years, received a check for $3.5 million from New York City. The Second Circuit Court of Appeals found that “the prosecution knowingly elicited false testimony.”

Prosecutors become convinced of the justice and righteousness of their acts, and the guilt or innocence of suspects. They are certain of the guilt of those they choose to prosecute, and may let that belief cloud their professional judgment and perspective.

Most recognize that they are the prosecutor, not the judge or jury. They represent the public, but they are not a private lawyer arduously representing a client. They represent the cause of justice, which means also finding an accused to be innocent. The end does not justify the means. In our system, unlike most of the world, the accused are presumed innocent until proven guilty.

The Supreme Court in the 1935 case of Berger v. United States laid down the marker:

"The United States Attorney is the representative not of an ordinary
party to a controversy, but of a sovereignty whose obligation
to govern impartially is as compelling as its obligation to govern
at all; and whose interest therefore, ... is not that it shall win a case,
but that justice shall be done. As such, he is in a peculiar and very
definate sense the servant of the law .... He may prosecute with
earnestness and vigor - indeed, he should do so. But, while he may
strike hard blows, he is not at liberty to strike flow ones. It is as much
his duty to refrain from improper methods calculated to produce a
wrongful conviction as it is to use every legitimate means to bring
about a just one."

One of their fundamental, professional responsibilities is to disclose exculpatory evidence to defendants. That is the largest failure in many recent cases.

The professional misconduct has led to major outcries by federal judges in recent cases.

My interest was perked by the persistent misconduct of the prosecutors in the corruption prosecution of Senator Ted Stevens of Alaska. The prosecution was not by the United States Attorney for Alaska, but by the Public Integrity Section of the Justice Department.

The Senator with the Bridge to Nowhere may well have been guilty of improper acts in other situations, but the prosecutors had to prove his guilt of the charges file against him. They failed to disclose interview notes of their key witness. These notes of his statements show a vastly different story than he testified to. In addition, a prosecution witness was flown back to Alaska by the Justice Department right before trial because his testimony would have aided the Senator’s case. The Senator was convicted on all 7 counts shortly before the November election, and lost reelection by less than 4,000 votes.

Eric Holder, the new Attorney General, asked the Judge to reverse the convictions, and dismiss the charges. The Judge approved the request, held several prosecutors in contempt, and appointed a special prosecutor to investigate their conduct.

The Chief Judge of the Federal District Court in Massachusetts in January also sharply criticized the “egregious failure” of an Assistant U.S. Attorney to disclose exculpatory evidence to a defendant. Judge Mark L. Wolf noted at least nine cases he presided over in the past two decades in which federal prosecutors similarly withheld important information. The misconduct in several cases led to mistrials and convictions, followed by reversals.

In one case in 2007 he asked the State Bar to pursue disciplinary proceedings against an Assistant U.S. Attorney.

The U.S. Attorney in Boston abruptly resigned in April.

District Court Judge Alan Gold in Miami fined the government $601,795 in April for acting deceptively and “in bad faith” in the prosecution of a doctor acquitted of 141 counts of illegally prescribing painkillers. The prosecutors had secretly investigated and taped the defendant’s lawyers and tried to entrap them in witness tampering charges, using the same parties who were witnesses against the doctor. The jury acquitted the doctor once the recordings were revealed.

Judge Gold reprimanded three Assistant U.S. Attorneys and sent a copy of his 50 page order to the Florida Bar for review. He stated that the U.S. Attorneys Office “exhibited a pattern of win at all cost behavior … that was contrary to their ethical obligations as prosecutors and a breach of their heavy obligation to the accused.”

The U.S. Attorney in Montana filed criminal charges against W.R. Grace & Co. and seven Grace executives for knowingly contaminating the town of Libby, Montana with vermiculite containing asbestos, and then conspiring to cover up the contamination. About 200 residents of the town, population 2600, have died of asbestos diseases and hundreds of others have asbestos caused illnesses. W.R. Grace & Co. is the company made infamous in the book and movie “A Civil Action.”

Judge Donald W. Molloy was unsympathetic to the government’s case from the beginning. Five of his pre-trial motions on behalf of the Grace defendants were overturned by the Ninth Circuit. He suppressed several pieces of the government’s evidence during the trial.

He denounced the government’s star witness, Robert H. Locke, a former Grace executive, during trial, and questioned the practices of the prosecution in front of the jury. The Judge questioned the judgment, ethics and tactics of the prosecution, singling out Kris A. McLean, the U.S. Attorney, for withholding evidence from the defense. He then dismissed charges against four of the execs.

The jury last Friday acquitted the remaining defendants on all charges after deliberating less than two days.

Another federal judge dismissed charges in 2007 against 13 former executives of KPMG, an accounting firm, because the government had pressured the firm into not paying their legal fees in the criminal case alleging they set up illegal tax shelters for clients. The decision was upheld on appeal in August 2008. In essence, the government was trying to coerce the defendants into pleading guilty because they would be unable to afford to defend the cases. The Justice Department changed its guidelines shortly thereafter.

The Justice Department suffered double embarrassment in a 9/11 case. Two North Africans were convicted on terrorism charges in a 2003 trial, but their convictions wee overturned in 2004 because of prosecutorial misconduct. The former prosecutor, Robert G. Convertino, was acquitted in 2007 of charges he had illegally withheld exculpatory photos. The prosecution was also by the Public Integrity Section of the Justice Department.

These misconduct cases are not chargeable to the Obama Administration, although a few may have occurred early in the Administration. One of the greatest contributions Eric Holder, the current Attorney Justice, could make would be to restore professionalism to the Attorney General’s Office. He has made a strong start by dropping the charges against Senator Stevens and by requiring federal prosecutors to be retrained. He also created a working group to review procedures to see if prosecutors have the necessary resources to fulfill their responsibilities.

Saturday, May 9, 2009

Are We Growing the Economy or the Government?

Our local Hallmark store is closing at the end of June. Alex, a Russian immigrant, successfully pursued the American Dream for 25 years. This entrepreneur, so typical of small business that creates most jobs in America, invested his blood, sweat, and capital into the store. He employed about a half dozen employees, including a vibrant 80+ year old retiree.

He pays his income taxes, workers comp, unemployment taxes, local business taxes, and generate sales taxes for the state and local community. He receives no special tax breaks or credits in return.

All he does is work hard and provide service. Customers are treated with respect. Alex, like millions of small business owners around the country, is the backbone of the American economy. He creates the jobs while the Detroits shed them.

Alex cannot beat the deteriorating California economy and the escalation in state taxes. How bad is the economy? He still has leftover 2008 Hallmark Christmas ornaments for sale at 60% off.

About 1/3 of the storefronts will be vacant when Alex closes. He will join the clothing store, restaurant, bagel shop, yogurt shop, bank, used bookstore, photography shop, water store, tv repair shop, and others which I cannot remember, which preceded him in calling it quits. An empty Mervyns sits across the street.

Tax increases kill business. They don’t necessarily do it by directly taxing a business out of business. Instead, substantial tax increases suck the discretionary spending out of consumers’ pockets. Studies have shown that these tax increases are essentially regressive with the greatest impact on the economically disadvantaged – the ones most likely to patronize neighborhood merchants.

I remember when Governor Lowell Weicker of Connecticut and the Democrats in the Connecticut Legislature “solved Connecticut’s budget problems” by imposing an income tax on the state. It cost the average family about $2,000 a year in state income taxes. That was $2,000 less to spend on restaurants, hobbies, recreation, movies, dvd’s, travel, newspapers and magazines, electronics, and cars. It also destroyed what was left of the commercial lifeblood of downtown Hartford, Connecticut, the state capitol. The added costs simply didn’t justify state residents in enjoying an evening in the dying downtown. The Hartford Civic Center became a cement mausoleum most days and nights.

Instead of letting individuals spend their money as they wish, and spreading it throughout the economy, the state takes the money and directs it to a few favored recipients in wages, grants, transfer payments, and corruption.

Legislators, Democrat and Republican, have an inherent bias in growing government by dispensing largesse to their constituencies. It’s easier to get elected by promising voters more benefits than by offering them cuts in services. Their solution to deficits is to raise taxes - income taxes, sales taxes, gas taxes, property taxes, vehicle taxes, alcohol taxes, tobacco taxes, and a host of nickel and dime fees and taxes, which can crush the entrepreneur.

Entrepreneurs, retirees, and the youth flee the high tax, slow growth states for the no income tax and low tax states of the Sunbelt. Florida and Texas are especially attractive.

A classic example is William Foley, an astute investor who acquired control of Carl’s, Jr. and Fidelity Title Insurance Company.

He moved his residence to beautiful Santa Barbara, California, but beauty does not outweigh taxes (California has a millionaire’s tax) and bureaucracy. He packed up and moved to Florida, costing California a substantial loss of tax revenue.

California’s unemployment rate is 11.2%, up from 6.9% last summer, as the state races to pass Michigan. At least Michigan has an excuse. It has ridden the vicissitudes of the auto industry for a century. The nation’s and world’s wealth poured into Detroit. The reign of MoTown is over, and the state’s recent tax increases have driven business out of the state.

Fed Chair Ben Bernancke testified to Congress last week that he sees signs of the country’s economy turning around by the end of this year. Wall Street and the government celebrated yesterday when the unemployment report showed only 539,000 jobs disappeared and the nation’s unemployment rate reached 8.9%.

The fine print showed that state and local governments added 6,000 jobs and the federal government 66,000 workers. A host of pink slips to government workers, especially teachers and other education workers, is about to hit as state and especially local governments face fiscal realities.

The Fed Chair has to remain publicly optimistic, but he would be wise to read the tea leaves in California.

California, with 1/8 of the nation’s population, and 13% of the nation’s gross domestic product, sufficient to rank 10th in the world if it were an independent nation, is not expected to bottom out until next year or even 2011. The national economy will not, cannot, turn around without California. Alex is personally facing unemployment.

The big fear is that a second wave of foreclosures may still occur – commercial real estate, such as the neighborhood strip mall, which Alex will son vacate. The financial system has factored in the home foreclosures and home builders failures, but commercial real estate is teetering.

Economists believe that three major causes existed for the Great depression: high taxes, protectionism, and tight money.

States and local governments have raised taxes much greater than the nominal cuts in President Obama’s Stimulus Bill, which also imposed substantial protectionism on the America economy. Money, especially credit, is still tight despite the heroic efforts by the Fed and Treasury to loosen it.

As with the New Deal, government spending, the Stimulus Bill, will not correct the underlying economic problems.

FDR in the New Deal was trying to provide jobs to tens of millions of unemployed Americans. The Obama Stimulus Bill, with all its Congressional earmarks, is really funneling large sums to a relatively few employed Americans. The unemployed are offered extended unemployment benefits.

Thursday, May 7, 2009

Bank of America Needs an Additional $34 Billion

The Obama Administration has leaked the results of its Stress test for the nation’s 17 largest banks. The Bank of America wins the award for the neediest, apparently requiring almost $34 billion in new capital infusions.

Let me repeat, the entire Board of Directors of the Bank should step down. Led by CEO Ken Lewis, they breached their fiduciary duties to the shareholders, violated securities laws, exhibited gross derelictions of duty, and otherwise were grossly incompetent. They sold out the shareholders and may well have to sell out the Bank to the government.

The “stress test” is a peculiar test. It is a novel, non-legally required analysis. Apparently, it is a semi-worst case scenario, in which the banks are asked if they possess sufficient capital to withstand a further financial crisis. The technical test is to estimate their losses in an unlikely continual financial meltdown over the next two years, and then subtract current capital and projected profits for the next two years. The balance is the capital “deficit” which must be accounted for by June 7.

The banks currently meet the mandated capital requirements with a cushion.

Yet, even the well managed, and well-capitalized Wells Fargo Bank, is $15 billion short on the stress test.

Something is critically wrong with the government methodology!

But back to the B of A.

The shareholders recently voted to strip Ken Lewis of his position as Chairman of the Board, voting that the Chair and President should be held by different persons. The victory may be pyrrhic.

The response of the Board was to thumb its collective noses at the shareholders. It replaced Lewis as Chair with Walter E. Massey, a distinguished academician and Board member for 11 years.
Dr. Massey is 71 years old, and must step aside from the Board next year because of the Board’s mandatory retirement age of 72.
Lewis retained all his major powers, including the CEO position. In other words, the Board rearranged the desk chairs on the Titanic.

The Directors were gratified that they were reelected with about 2/3 of the shareholder votes. Since board elections usually receive the same 99.9% vote as Communist dictators, the loss of 1/3 of the vote is a stinging rebuke. Had the stress test results been released before the vote, the Directors would have been less gratified with the results.

The Directors won because brokerage firms currently vote for management their custodial shares unless individual shareholders request a contrary vote. The SEC is changing the rules next year.

However, in light of the stress test, B of A is considering changes on the Board.

The problem for the Bank, which accounts for roughly 45% of the cumulative $75 billion the banks must raise, is how to raise $34 billion in new capital. The capital markets cannot fill that need today, and issuance of that much common stock will further dilute the current shareholders.

The Bank can sell assets, which are usually the most valuable with the greatest potential for growth, in a bear market. It is considering selling $8 billion in stock in the China Construction Bank, a leading bank in China.
That will still leave the Bank $26 billion short, but bring needed cash into the Bank.

It can also encourage the current holders of about $33 billion in preferred stock to convert to common. Therein lies the absurdity of the stress test. Such a transaction will neither add to, nor subtract from, the actual solvency of the Bank. It is simply a bookkeeping transaction which does not add to the financial resources of the Bank.

The final recourse will be to go back to everyone’s favorite uncle, Uncle Sam, and either issue new securities to the federal government or convert their preferred into Bank of America common stock.

Ken Lewis, twice national banker of the year, should have bailed out of the Merrill Lynch acquisition when he realized it was a disaster.

Wednesday, May 6, 2009

Senator Specter Switches Parties Again

News Alert: Senator Specter Re-Registers as a Republican

No, not today, but in 1966. Specter was first a Democrat, then a Republican, then allegedly a Rhino, and now a Democrat again - for now.

Arlen Specter was elected Philadelphia District Attorney in 1965 on the Republican ticket eventhough he was still a registered Democrat. He made the formal switch the next year.

Prior to his election, which in and of itself is noteworthy, he worked as an staffer on the Warren Commission investigating the assassination of President Kennedy. In that capacity, he either authored or co-authored (the record isn’t clear, and memories have been very selective by the Commission members and staffers) the famous/infamous single bullet theory whereby one bullet wounded Governor Connolly and killed the President. Any other theory would have inevitably led to a conspiracy of at least two shooters.

The single bullet theory by itself earns the Senator a significant footnote in history.

Senator Specter remained a moderate Republican in the East Coast tradition of Rockefeller Republicans. He formed his opinions independently and did not follow any party line – a rare breed in Washington today.

Thus, he opposed Judge Robert Bork’s nomination to the Supreme Court, but supported Judges Clarence Thomas, John Roberts, and Sam Alito. He was one of several Republican Senators who opposed the impeachment of President Clinton.

Conservative Republican voters in Pennsylvania were increasingly turned off by his independence, especially on issues they felt strongly about.

His positions bring up the classic question: Who do you represent? The primary voters, the statewide voters, your state, or yourself? Voters, of course, always have the final vote.

Senator Specter barely won renomination in the Republican primary five years ago. President Bush campaigned for him, as did conservative Senator Rick Santorum. Even with their help, he only won 51% of the vote in the Republican primary. He cruised to victory in the November election.

He did not return the favor to Senator Santorum, who went down to an ignominious defeat, 59-41% in 2006. Loyalty runs one-way for the Senator.

His vote this year for President Obama’s Stimulus Bill doomed him with Republican voters. His positions against card check and the President’s healthcare proposals did not redeem him. He was headed to a lopsided primary loss next year to former Congressman Pat Toomey, who almost beat him five years ago.

Hence, yet another switch, this time back to his Democratic roots.

Let the independent pain in the gluteus maximus for the Republicans be a similar pain to the Democrats.

They announced today that they will not tolerate his apostasy. Normally, switchers retain their seniority. He claims Senator Harry Reid, the Senate Majority leader, promised him the seniority.

However, the Democratic Caucus moved him to the bottom of the seniority list on his five committees. That means he will not play a prominent role in the Judiciary Committee’s questioning of judicial nominees, including the Supreme Court. His comments about Professor Anita Hill being a “flat out perjurer” have come back to haunt him.

In addition, he has to lay off several staffers since a smaller staff comes with reduced seniority.

They will reassess his seniority after next year’s elections. In short, not only he must get reelected, but also toe the line on critical issues.

Senator Spector is acting like the aging prize figher or quarterback (think Johnny Unitas, Joe Namath, Joe Montana, Bret Farve) who doesn't realize it's time to retire.

Sadly, his expression of grief over the passing of Jack Kemp diminished the presence of the two time cancer survivor. He said Congressman Kemp, who died from cancer, would still be alive if Republicans hadn’t cut funding for cancer research.

Last tuesday he had to apologize to the Democrats for a statement in which he said he hopes the Minnesota courts rule for Senator Norm Coleman instead of Al Franken. His explanation: he forgot "what team" he was on.

How sad!

Sunday, May 3, 2009

Biden for SCOTUS

Justice Souter’s pending retirement provides President Obama an immediate appointment to the Supreme Court. Elections matter. With 60 seats in the Senate, and overwhelming momentum from November’s election, President Obama has in essence carte blanche to appoint whoever he wishes.

Republican opposition may be loud, but essentially ineffectual. In addition, since a liberal will replace a liberal, the opposition will mostly be for show, as it was with the nominations of Chief Justice Roberts and Justice Alito.

Let us look therefore at the President’s criteria for the new Justice. He has laid out four major ones:

1) “Someone who understands that justice isn’t about some abstract legal theory or footnote in a casebook;”
2) Someone with empathy for peoples’ hopes and struggles;
3) A sharp and independent mind; and
4) A sense of compassion.

Let us also assume that the odds favor a woman appointee from a minority background. We are never bound though to play the odds. We dislike conventional wisdom in politics, whatever it may be.

Note elsewhere that President Obama, as well as many Senators, express a preference for one who lived a diverse life experience. That would, of course, exclude a hermit from New Hampshire.

With these criteria in mind, the possibilities soon present themselves.

A justice of the people is African American Congressman Alcee Hastings of Florida. Alcee served as a federal district court judge for a decade from 1979-1989. He has continually served in Congress since 1993. He is therefore from the People’s House. His college education was at Fisk University, Howard University, and a law degree from Florida A & M. All three are historically Black universities. .

Alcee’s only blemish in a long career of public service is that the Democratic House of Representatives voted to impeach him in 1989, followed by the Democratic Senate voting to convict him, thereby removing him from the judiciary, but not disqualifying him from Congress. Alcee’s indiscretion was corruption, but presumably he has learned from his youthful indiscretion. He voted against impeaching President Clinton

One of his supporters in the Senate could be Democratic Senator Arlen Specter, who voted against Judge Hastings’ conviction.

If humility is a qualifying factor, then let us look at Professor Kathleen Sullivan, Stanley Morrison Professor of Law at Stanford. She has truly impeccable academic credentials, with degrees from Cornell, Oxford (Marshall Scholar) and Harvard Law School. She served as Dean of Stanford law School from 1999-2004. Few law school deans have ever made it onto the Supreme Court.

With the resignations of the Stanford Twins, Chief Justice Rehnquist and Justice O’Connor, from the Supreme Court, a strong argument exists for another appointee from Stanford.

Her biggest qualification though is a public act of humiliation four years ago. Professor Sullivan failed the California Bar Exam on her first sitting.

However, as a Constitutional Law expert, she has probably read too many footnotes and delved too deeply into abstract theory. She has filed many briefs with the Supreme Court on cases involving gay rights.

Another highly qualified academician is Professor Catharine MacKinnon, the Elizabeth A. Long Professor of Law at the University of Michigan. Her father was an appellate judge on the District of Columbia Circuit Court of Appeals from 1969-1995.

Her nomination would be a great spectator sport as the decibel levels rise to record levels as Rush, Sean, Glen, and Ann fulminate.

Her academic credentials are also outstanding with degrees from Smith College and Yale Law School. She is a pioneer in women’s rights, especially in sexual harassment and pornography. She may not have read many footnotes, but she certainly penned many pioneering ones. Her views have, at least, been adopted in Canada.

She would however be a more suitable replacement for Justice Ginsburg when that seat opens up.

Liberals have always been displeased with the appointment of Justice Clarence Thomas to the Court. A counter balance to him would be the nomination of his former colleague, Professor Anita Hill. Her degrees are from Oklahoma State and Yale Law School. She currently teaches at Brandeis, and speaks truth to power. I do not recall anyone from Oklahoma ever serving on the Court.

Since neither a law degree nor even a license to practice law is a constitutional condition of appointment to the Court, the perfect representative of the people is Professor Ward Churchill of Colorado. Ward is a self-proclaimed Native American, perhaps of several tribes, and just won his own lawsuit in federal court, giving him more court room experience than many justices.

His bachelor's and masters 'degrees are from Sangamon State, now the University of Illinois at Springfield. He has climbed a long way from his humble roots.

Ward is also not bound by the printed text of any document, much less the Constitution.

Governor Jennifer Granholm of Michigan, with degrees from Berkeley and Harvard Law School, is another often-mentioned candidate. She is a representative of a distinct, and yet to be recognized minority in the United States, Canadians. As a Canadian, she is too worldly to be bound by the United States Constitution, but would look approvingly to international law. She would also, undoubtedly, be the only Justice who ever worked as a tour guide at Universal Studios in Los Angeles.

Unions would strongly support her because she has shown she will sacrifice taxpayers to the public unions. That the Great State of Michigan has collapsed on her watch should not disqualify her because failure never disqualifies liberals.

Vice President Joe Biden though is as close to a perfect selection as possible. He is truly of the people. From humble beginnings in Scranton, Pennsylvania, to college at the University of Delaware, and law school at Syracuse, where he graduated in the bottom 10% after readmission for plagiarism, he truly understands the common American. Reading from a text has never been a constraint for him, and he undoubtedly missed all those casebook footnotes at Syracuse.

No one who has ever sat through a long Biden discourse will doubt his independent, uncontrollable thinking.

No Fightin’ Blue Hen from Delaware has ever served on the Court.

No way can today’s Justices understand, much less empathize with, the commoner, since the current court consists of 5 ½ graduates of Harvard Law School (Justice Ginsberg transferred from Harvard Law to Columbia for personal reasons), 2 grads of Yale Law School, and one from Northwestern. Syracuse Law would bring a leveling influence to the Court.

Joe is as empathetic of the common American as any politician in America. He wears empathy on his sleeve. He is probably the first common man since President Andrew Jackson to be President or Vice President.

As a Senator for 36 years, and as Chair of the Senate Judiciary Committee during the contentious Robert Bork and Clarence Thomas Hearings, he would undoubted remind his former colleagues that none want to relive those experiences. Thus, Senatorial courtesy would allow him to cruise to an easy confirmation vote.

SCOTUS would also get Vice President Biden out of the White House, or at least the West Wing, where he is again proving to be a verbal embarrassment to POTUS.

After mocking Chief Justice Roberts for flubbing the administration of the Oath of Office to President Obama, the Vice President flubbed it a few days later in swearing in Secretary of State Hillary Clinton.

Just a few days ago, he advised Americans not to fly or take subways because of the fear of the Swine Flu. In the case of a major pandemic, staying away from crowds is a major control on the spread. Mexico essentially shut down in recent days to contain the spread.

However, Biden’s advice is damaging to the already suffering travel industry, and was not on key with the President’s message.

Vice President Biden would be right at home on the United States Supreme Court. He meets all of President Obama's stated criteria for the exalted position.

Saturday, May 2, 2009

Jeep is a Four Letter Word for Albatross

Jeep is an iconic vehicle. It is an icon. Veterans of World war II and Korea loved it. I had a great physics teacher, Carl Koenig, in high school. Koenig would buy beat up Jeeps for $250, fix them up, and then sell them at a large profit (this was when school teachers were still grossly underpaid).

Ford and GM might outsell Jeep in SUV’s, but no Ford, Chevy, GMC, or Dodge SUV has the cachet of Jeep. The Toyota Land Cruiser or Leyland Land Rover sell well, but they are not Jeeps.

Jeep later parented an illegitimate offspring, the Humvee/Hummer.

Jeep is also an albatross, a bad karma, for any company which acquires it. Fiat’s acquisition of Chrysler (Jeep) is a guaranteed loser. It’s as certain as death and taxes. You can bet on it.

Every prior Jeep relationship has failed. Jeep is a beautiful, seductive, somewhat husky and masculine, serial bride. Hope always springs eternal, and is ever dashed with Jeep.

The first “Jeep” was designed by the small American Bantam company in response to a government invitation for bids shortly before America’s entry into World War II. Like seemingly all defense contracts, the Jeep came in oversized and above budget, whereupon another small auto company, Willys-Overland of Toledo, Ohio made some design modifications.

Willys’ modifications became the standard design of the Jeep. Production during the war was split between Willys and Ford, which had large production facilities.

The sinking Kaiser-Frazer Motors acquired Willys Jeep in 1953, and became Kaiser Jeep. American Motors acquired Kaiser Jeep in 1970. The Jeep product line was actually losing money at the time.

Renault of France started acquiring shares in the floundering AMC in 1979, and soon owned 49% of AMC. The combination was often referred to as “Franco-American Motors.”

Lee Iacocca, the last great leader of Chrysler, saw the potential in Jeep; Chrysler acquired AMC in 1987. Chrysler then had a “six pack” of dealers: Chrysler, Plymouth, Dodge, Dodge Trucks, Jeep, and Eagle, soon to become three, Chrysler, Dodge, and Jeep.

Daimler-Benz acquired Chrysler in 1998, becoming DaimlerChrysler. That relationship was ill-fated from the beginning.

Cerberus, the hedge fund, rode to the rescue in 2007, acquiring 80.1% of Chrysler Jeep from Daimler.

Cerberus hired Robert Nardelli to run Chrysler. Nardelli was a failure at his previous position, CEO of Home Depot, but no one ever doubted his bean-counting ability. He cut costs at Chrysler. partially by cross-badging Dodges as Jeeps, and Jeeps as Dodges. The iconic uniqueness of Jeeps is no more.

Fiat now comes to the rescue of Chrysler, putting up no money in the acquisition. A fundamental rule of law is that you get what you pay for.

First Renault, then Daimler, and now Fiat – three European auto companies got their hands on Jeep. The first two failed, even though Mercedes knew how to build quality vehicles. Both Renault and Fiat previously left the American market because their poorly designed, poor quality vehicles did not appeal to American consumers. Renaults and Fiats never could have competed in the Baja 500.

Fiat, nearly bankrupt a few years ago, wants another try at the American market, or is it the Japanese-American market?

The two remaining questions are:

How many years before the Fiat-Chrysler merger fails?

Who will be the next suitor of Jeep?

Friday, May 1, 2009

The Catalyst for Chrysler's Bankruptcy Was the Cramdown of Chrysler's Secured Creditors

May 1, 2009.

And on the 101st day of President Obama’s Administration, Chrysler Corporation filed for bankruptcy.

Chrysler was undoubtedly heading for bankruptcy and perhaps dissolution sooner or later. It lacks products, quality, capital, and a captive finance company. Daimler ran it for cash flow, and then Cerberus stripped out its headquarters building and Chrysler Finance to reduce its investment, and followed up by cancelling future product lines to prep it for flipping.

Chrysler had been saved in the past by such cars as the Chrysler Cordova (with Corinthian leather), the K cars, minivans, and Chrysler 300 (with the Hemi). No such future products exist!
Essentially debt free when Cerberus acquired control of Chrysler two years ago, Cerberus immediately mortgaged almost every asset of Chrysler, borrowing $10 billion.

President Bush punted the Detroit can down the road to the Obama Administration to avoid Detroit collapsing on his watch.

The Obama Administration has two major objectives, sometimes consistent and sometimes contradictory, with Chrysler and GM:

1) Nurse them through the 2012 election (Michigan and Ohio are critical states in the Presidential election with Missouri and Illinois close behind)
2) Give as much as possible to the UAW.

President Obama owes Labor; he must do what he can to save it.

Loss in the equation are the interests of the shareholders, creditors, taxpayers, and consumers.

We know that shareholders will essentially get wiped out in a bankruptcy and often in a reorganization. Indeed, Daimler has already written off its remaining 19.9% stake in Chrysler, and even kicked in $600 million to the Pension Plan. Cerberus has been unwilling to provide financing to Chrysler, and has decided to walk away, perhaps retaining Chrysler Financial.

The Administration announced last weekend plans for GM to be majority owned by the federal government and Chrysler by the union. Both were dependent upon approval of the creditors, who in turn were being forced to agree to substantial cramdowns.

GM’s creditors would exchange $27 billion in unsecured debt for stock worth 10% of the outstanding shares, and existing shareholders would be reduced to 1%. However, the UAW would surrender half of the $20.4 billion of unsecured debt for the healthcare plan of GM for stock, giving it 39% of the company.

The Chrysler proposal would give the creditors with $6.9 billion in secured debt $2 billion in cash, subsequently raised to $2.25 billion. They asked for an additional $250 million. The UAW would end up with 55% of Chrysler (through the new union health plan, the Voluntary Employee benefit Association), the federal government 8%, Fiat 20-35%, and the governments of Canada and Ontario 2%.

Four major creditors owning 70% of Chrysler’s debt agreed, but the remainder refused, scuttling the plan and sending Chrysler into Chapter 11.

President Obama called the holdout “speculators” who were greedy and placing their interests above others. That was mild! Governor Granholm of Michigan and Congressman Dingell referred to them as vultures.

As I write this posting, ironically on May Day, the international day of worker solidarity, President Obama has clearly adopted the Marxist-socialist approach of subordinating capital to labor. Both are necessary for economic success and should work as partners.

The creditors were merely asserting their legal rights. Under bankruptcy law, secured creditors have priority over unsecured creditors. Their debt is secured, but the UAW, an unsecured creditor, would exchange $10 billion in unsecured promises for 55% of the company.

The four banks agreeing to the deal, J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, and Citigroup, were in a difficult position. They have received billions in TARP funds from the Treasury and could not refuse.

Fiat is not bringing any cash to the deal. Indeed, it can’t, having lost $543 million last quarter and witnessing its debt rise 12%`to $8.7 billion. It will be giving Chrysler “technology.” In other words, Chrysler will be building Fiat automobiles in its remaining factories. Even if you put a Chrysler, Dodge, or Jeep name on them, they’re still a Fiat.

The government, which has already advanced $4 billion to Chrysler, will throw in another $8 billion. The expectation is for a quick 30-60 day turnaround in bankruptcy with the bankruptcy court approving the rejected plan. The plan is to quickly sell off major Chrysler assets to Fiat, with the remaining facilities being closed by Chrysler.

Perhaps, but debtors are due their day in court, and that includes the secured creditors, the unsecured creditors (suppliers, dealers, tort claimants), and workers. The government’s hope is also that the bankruptcy judge will also quickly rescind Chrysler’s contracts with dealers, override state dealer protection laws, and then let Chrysler terminate about half of its 3,300 dealers. They too get their day in court, and right to appeal.

Other claimants have appeared, such as the Ad Hoc Committee for Mesothelioma and Lung Cancer Claimants.

Delphi Corp., the parts subsidiary spun off by GM, has been in bankruptcy for four years with no end in sight.

The concept of the Obama Administration of a “surgical bankruptcy” is probably an oxymoron.

Most dealers are small business entrepreneurs, who have invested their own capital into their facilities. As they lose their investments, 100,000-200,000 employees will lose their jobs.

In the meantime, Chrysler has shut its assembly plants hoping to reopen them when the bankruptcy plan is approved. The UAW workers will receive 80% of their regular pay during the shutdown.

Chrysler shut the plants because it cannot sell cars, trucks, or Jeeps. Indeed, it even shopped itself and its pieces around to auto companies everywhere. Only Fiat, a company with a near economic death experience three years ago, bit.

Remember Chrysler Finance, Cerberus ran that into the ground too. It can no longer finance the sale of Chrysler products, and will even discontinue floor financing of dealers. Both customers and dealers will have to turn to GMAC, 51% owned by Cerberus, for financing.

Will GM and the Obama Administration learn from the Chrysler debacle?