The Cash for Clunkers brouhaha (translation: utter confusion) reinforces the view that the U.S. government’s doing an awful lot of improvising lately. (And not so lately – last fall’s rescue-the-economy efforts by the whithering Bush administration were most definitely off-the-cuff.) Obama’s healthcare reform effort has unfolded in an oddly ad hoc manner. One would have expected a savvier campaign – from the consummate campaigner, after all – to win over Congressional and, er, normal hearts and minds. The president’s impetuous comment about the Gates arrest was of a piece. And now, Cash for Clunkers: Is it being suspended or isn’t it? Will it get more money or will it stall at $1 billion? Answer: The House of Representatives has dumped another $2 billion into the program today but whether the Senate will okay the funding remains unclear – and what all this means for clunker-owners is murky. Peggy Noonan had it right when she recently wrote that the president’s trying to do too much, too soon and, I might add, a bit too haphazardly. Of course, it’s not just the Prez. The Congress is also deep in improv mode – especially the Republican Party as it continues wrestling with its post-Bush identity crisis. Who and what is the GOP, exactly? All this said, some of Washington, D.C.,’s machinations over helping Americans dump their rusty heaps would be charming if the attendant politicking wasn’t so very aggravating. Here’s WSJ colleague Joe White, coining the term “Clunker Follies,” with a Clunkers primer.
Archive for July, 2009
Auto Industry, Environment, Politics, Washington / 2 Comments
Corporate Finance, Corporate Governance, Executive Compensation, Securities & Exchange Commission, Wall Street, Washington / Comments Off
“Inappropriate or imprudently risky compensation practices.”
That’s the phrase that jumps out from just-passed legislation by the U.S. House of Representatives that aims to generally rein in pay for top executives of significantly sized, publicly traded financial institutions.
There are sweeping rules for all public companies, mainly a non-binding annual ‘say on pay’ for shareholders, but the banks and other financial services companies come in for the brunt of regulatory force in the House bill, passed today by a 237 – 185 vote.
That top quote promises the potential for an awful lot of mischief by federal regulators who are asked by the legislation to proscribe their perceived inappropriate pay as part of solvency regulation.
No argument here about who brought us to this pass – some reckless pay schemes at foundering financial firms, partly detailed Thursday by the New York attorney general.
But even the short termism, greed and utter lack of proportion described in the Andrew Cuomo report don’t justify this solution: a significant chunk of financial company pay plans subject to veto by unelected regulators who won’t necessarily have the best long-term interests of the companies or their shareholders at heart.
It is a sorry state of affairs. The bill, which according to Dow Jones Newswires reporter Michael R. Crittenden has an uncertain future in the U.S. Senate, also mandates board of directors compensation committees be populated only by independent directors.
That’s a good idea, but really, why bother when another part of the bill essentially tells boards of big financial companies (over $1 billion in assets) the boards don’t get to set executive pay – the unconnected regulator essentially does.
It makes the worthy effort to mandate all public companies allow “majority” votes for directors seem a bit beside the point.
Again, it’s easy to blame the boards, many of whom weren’t up to the task of truly aligning performance with pay, though a lot of lip service has been paid to the concept. But putting the government in charge of such an essential element of a free enterprise system doesn’t resonate as the right answer.
Maybe it would be better to suggest, or even force, some actual practices that likely would better align performance with pay, rather than giving regulators the veto gun.
Stop short termism by tying bonuses and other payouts to a years long system, with the caveat that if the corporate profits reverse because of overly risky or otherwise unsustainable strategies, so does the incentive pay.
New York Attorney General Cuomo’s report said “bank compensation structures lacked consistent principles and tended to result in a compensation system that was all ‘upside.’”
Granted, but the people likely to solve that issue are those with the most directly at stake: large shareholders and directors. Not Uncle Sam.
The global currency markets are enjoying (or enduring, depending on one’s point of view) a period of extraordinary stability, with major currencies like the dollar, euro, yen and sterling locked in tight trading ranges, according to an analysis by Katie Martin of Dow Jones Newswires. This reduced volatility – after a period of wild swings during the worst moments of the global financial crisis – is good news for companies seeking to plan ahead, but bad news for currency market professionals (foreign exchange traders tend to make more money during periods of high volatility). Another benefit for the corporate world is the cheaper price of hedging against future currency volatility. Katie quotes an analysis by Nomura, which calculated that currencies have been in an unusually tight trading range for a period of 90 days. In the past, there have been only two longer periods of such stability, the Japanese bank says, of 95 and 99 days. Indeed, the euro has been quoted close to $1.41 and the pound close to $1.63 for several weeks.
Advertising, Mergers & Acquisitions, Technology / 3 Comments
My colleagues are infinitely knowledgeable about the Microsoft-Yahoo search deal. So, I asked them about Steve Ballmer’s vocal defense of Carol Bartz today in comments to analysts. The Yahoo CEO has been criticized – her company’s share price battered- for not demanding more from Microsoft. Ballmer, Microsoft’s CEO, argues investors have failed to appreciate the value the deal will provide to Yahoo. “People haven’t figured it out,” DJN quotes Ballmer as saying. “Yahoo gets 88% of the search revenue they have today. They have 0% cost of goods sold against 88% revenue and they have no [research and development] expense and no ongoing [capital expenditure].”
Gabby: What’s in it for Ballmer to help out Bartz, under fire for the deal?”
Colleague A: It promotes good feelings between the management of both companies. Given the tortured history of the deal, it’s probably good for Microsoft to show its softer side. Plus, the deal’s success is dependent on the two companies working well together on search. No need for Ballmer to disrupt that with hubris.
Colleague B: A is right, I think the bottom line is that the two companies have to work together very closely now and he wants to draw a line under the bad blood of the Jerry Yang era. I think it also has to be seen in the context of his general sense of glee at having pulled the deal off…Also, as the general consensus is that Yahoo was stiffed he’s been magnanimous. Speaking of the need for good feelings between management – which is definitely important – this applies even more to people at lower levels in the two companies, particularly engineers and people working at the coalface on search and advertising technology, who are the people who are really going to have to live with the consequences of the deal.
Colleague C: I would imagine it’s intended to give clients confidence that the deal will go well. If potential clients are worried that there is a conflict developing between the partners because the financial proceeds haven’t been shared appropriately, it’s reasonable to assume that they might think twice about using Microhoo. That wouldn’t be in Microsoft’s interest (and obviously not in Yahoo’s either).
Photo credit: foxnews.com
Bank Rescue Plan, Banks, Corporate Governance, Credit Crisis, Politics, Treasury, Wall Street, Washington / 1 Comment
Andrew Cuomo, New York’s Attorney General, has outed a clutch of dysfunctional banks that took taxpayer bailout money only to bestow generous bonuses on their employees last year. “At many banks … compensation and benefits steadily increased during the bull-market years between 2003 and 2006,” Cuomo’s office said. “However, when the subprime crisis emerged in 2007, followed by the current recession, compensation and benefits stayed at bull-market levels even though bank performance plummeted.” As Captain Renault of the film “Casablanca” said: “I’m shocked, shocked to find that gambling is going on in here!” Renault, of course, knew exactly what was going on in wartime Morocco. Likewise, We the People threw TARP money at some of the world’s most blatant gamblers – financial institutions wagering clients’ and shareholders’ money. Surely we don’t now expect them to get religion and start behaving like so many chastened Puritans? Wall Street’s boom era culture is alive and well. After Cuomo’s report came out, “employees of major Wall Street companies were comparing notes about which companies paid the greatest number of large bonuses,” DJN reports. Who can blame them? Don’t we all want to know what the guy sitting next to us earns? Continue reading…
Earnings, Economy, Investing, Real Estate, Retailing / Comments Off
The commercial real estate market has been especially hard hit this year across all segments. But retail, with high profile bankruptcies by Circuit City and Linens N’ Things, along with store scalebacks by companies like Starbucks, has been particularly stressed.
That’s why it is impressive how Agree Realty has performed. The company owns, manages and develops single tenant properties with 90% of its lease revenues connected to national tenants. Close to 30% is Walgreens, with another 30% connected to Borders. About 11% are Kmart stores. The bet in this portfolio is how well Borders and Kmart perform. And while that’s no certain thing, the overall portfolio for Agree Realty has done fairly well.
Credit Crisis, Credit Markets, Federal Reserve, Regulation, United States, Washington / 1 Comment
Opinion pieces are supposed to be provocative, so kudos to Donald L. Luskin, chief investment officer at Trend Macrolytics LLC. His “op-ed” view published in today’s Wall Street Journal (“Can the Fed Identify Bubbles Before They Happen?”) does make one consider again the important issue of the Federal Reserve’s role in trying to rein in asset price increases that divorce from reality.
Luskin’s view (worth reading in its entirety) was widely accepted before the credit crisis and had the backing of former Fed Chairman Alan Greenspan and others. Essentially, it’s this: it’s not the Fed’s role to try to prick asset price bubbles as they are rising. The reasoning is two fold: the Fed has no unique insight into what’s a developing bubble and what’s not and if it employed traditional interest rate tools to stop a bubble, it likely would also derail the entire economy.
Every other month or so, I pack up the car for a long weekend or a few days during the week and head to Virginia to visit family. The quickest way to get to Virginia Beach (where Mom and sisters and their families live) from New Jersey is a scenic stroll along Route 13 through Delaware, Maryland and Virginia – an area known as the Eastern Shores. It can be a slow 300 miles drive (6 hours) because of all of the smaller towns you pass through. And it can be really, really slow if you make the trip within a few days of a NASCAR race at the Dover International Speedway (on the Route 1 bypass you need to take on the trip).
In fact, I often plan the trip around the speedway schedule. If there is a race, I go a different week. NASCAR is more than racing. It’s a way of live for some people. The week before a race in Dover, people start showing up in motor trailers and set up their temporary homes. And these are camps that seem to snake along endlessly, with each one flying the colors of a favorite NASCAR team. Cookouts abound and likely spirited debate about the upcoming race. Don’t even think of driving by on race day. I did that one year and was delayed about 3 hours by horrendous traffic. These folks are more fanatical than the weeknight, summer league softball player.
DJN colleague Robert Flint does a lovely job of explaining what’s been going on in China this week as contradictory fears have mounted that 1) Beijing is creating a dangerous economic bubble by permitting its banks to lend at a torrid pace and in some cases to stock-market speculators; and 2) Beijing may suddenly and drastically slam the breaks on such lending by ordering banks to stop, as the government did in 2008. So far, most people seem to be worried about the latter possibility: The Shanghai stock market sank Wednesday after China’s banking regulator signaled it may crack down on banks lending to market speculators, and a well-known magazine, Caijing, cited two big lenders saying they’ll pull back their lending. In an apparent effort to reassure both jittery constituencies, China’s central bank spoke out late Wednesday; it issued a statement on its website – apparently a recently delivered speech by Vice Governor Su Ning – saying 1) the government won’t take administrative steps to curb bank lending, 2) nor will it stand by as banks make inappropriate loans. In his analytical piece, “Let 100 Banks Lend! Let 100 Bubbles Burst!” Flint muses that “Decades after Mao, China’s government is still concerned with the correct handling of contradictions – but now it’s more about contradictions within the financial system than among the people. Maintaining high levels of employment while fending off stimulus-inflated economic bubbles is one such contradiction the fourth generation of Chinese leadership is struggling to resolve. ” Have a look at Robert’s piece, which contains a reminder of the stunning ramp-up in lending that occurred in the months after Beijing launched its massive economic stimulus plan last November. Bank lending in the first half of 2009 totaled CNY7.4 trillion, which is equivalent to half of China’s GDP during the period. China’s industries stocked up on whatever they needed – and lots of stuff it didn’t need. At the same time, the Ministry of Finance found some loans were used by companies to invest in stock and property markets! All in all, “a very bubble-friendly environment,” as Flint puts it. Now we’ll all watch and wait to find out whether the central bank does as Su says and ensures “the mind and action” of all financial institutions are “as one” with the government.
Bankruptcy, Earnings, Economy, Investment Banking, Mergers & Acquisitions, Wall Street / Comments Off
It’s hard to imagine that as we remain knee-deep in a recession that has just about put the lid on mergers & acquisitions that there can be a way to make money as an investment bank. Especially if you are a boutique that doesn’t have a big position in numerous other businesses (trading, wealth management, asset management) to offset the drop off in M&A.
The answer – advise companies that get into trouble and need your help to get out of it. That’s exactly what Evercore Partners does.