August 17, 2010

ZBB BS: WSJ Editorial Scoops Beat Journalists on Financial Condition of Obama-Visited Company

Obama081610atNYTHere’s yet another example illustrating why one must treat the editorials at the Wall Street Journal as a primary source of hard news during Democratic presidential administrations.

On Monday, President Obama visited ZBB Energy Corp, a maker of high-tech batteries in Menominee, Wisconsin. Helene Cooper at the New York Times, where a larger version of the picture at the top right appeared, reported that “The company received a $1.3 million federal stimulus loan, which officials said would triple its manufacturing capacity and could lead to 80 new jobs.” Note the word “could.”

At least the Times mentioned the existence of ZBB’s stimulus loan. In three brief reports citing Obama’s visit during the past week, the Associated Press didn’t even do that.

The WSJ’s intrepid editorialists did everyone else’s work for them and peeked behind the curtain at ZBB. It is not pretty:

Uncle Sam, Venture Capitalist
Meet the battery company that Obama visited yesterday.

President Obama kicked off a five-state campaign swing yesterday with a stop at a “clean energy” plant in Menomonee Falls, Wisconsin. As it happens, Mr. Obama couldn’t have chosen a better company to demonstrate the risks that taxpayers are taking with their billions in green stimulus investment.

… Mr. Obama praised it for “pointing the country toward a brighter economic future,” but we’ll let readers decide if they’d write the same checks if they were investing their own money.

ZBB has been around for more than a decade, developing batteries and equipment to store energy from wind turbines and solar cells.

… last January, when the Department of Energy announced $2.3 billion in “clean energy manufacturing tax credits,” ZBB was one of 183 recipients—collecting $14 million.

We wonder who in government looked at ZBB’s filings with the Securities and Exchange Commission. Since going public in June of 2007, ZBB has been hemorrhaging money. The firm lost $4.9 million in fiscal 2008 and $5.5 million in fiscal 2009. In its most recent filing, in May, it said it had lost $6.9 million for the first nine months of its current fiscal year. It explained it had a “cumulative deficit” of $44.1 million and informed shareholders that it “anticipates incurring continuing losses.” It acknowledged that its ability to continue as a “going concern” was predicated on its ability to drum up additional funds.

… Meanwhile, a review by the company’s audit committee last fall discovered that ZBB’s former CEO had been wrongly compensated as both an employee and an independent contractor, and that the company had failed to withhold his proper taxes. He stepped down, and the management team was reshuffled. ZBB was also forced to restate its financial results after a separate audit committee review found the company had recognized revenue from a contract in the wrong quarter.

The company also acknowledged in its May filing that the 72,000 square foot manufacturing facility it bought in 2006 is “currently producing at less than 10% of its expected capacity.” That means it can’t currently access the $14 million in federal tax credits, which were supposed to help with equipment for a new facility. Meanwhile, private investors have soured on some energy-storage companies. ZBB’s initial public offering was priced at $6 a share in 2007, and it closed yesterday at 70 cents.

A visit to the company’s quarterly income statements at reveals that sales during the four quarters that ended on March 31 were less than $2 million; the revenue line during the most recently reported quarter was a whopping $189,000. During that time, the company lost over $8 million. During the four years ended June 30, 2009, ZBB burned through well over $20 million.

You have to wonder how badly stimulus efforts such as these are going if a company in ZBB’s condition is considered worthy of a campaign stop. How bad are the situations at the ones that didn’t make the cut?

The Journal gives a partial excuse to the White House press corps for not doing its work: “It has been dragged to so many of these energy events that it has lost interest in looking at the companies it visits.”

Sorry, I’m not as forgiving. Allowing yourself to get scooped by a bunch of guys sitting in New York offices demonstrates how inexcusably lazy establishment press beat reporters following the president have become. That laziness would also appear to be influenced by the likelihood that if they really did their job, they’d have to report unpleasant things about their guy in the White House and the mostly accomplishment-free results of “clean energy” efforts thus far.

You’ll know that they don’t even care about being scooped if, as I expect, the WSJ’s editorial is the first and last you’ll see of ZBB’s BS in the establishment press.

Cross-posted at

Edward Pinto on Housing Market Reform

Filed under: Economy,Taxes & Government — Tom @ 11:04 am

FredAndFanLogos1209In a Wall Street Journal op-ed, Pinto argues that real reform isn’t where today’s photo-op disguised as a “Conference on the Future of Housing Finance” is going:

The Future of Housing Finance
We’ll never get a rational mortgage system until the government’s affordable housing mandates are ended.

… A consensus is building around a three-part grand bargain:

• An explicit federal guarantee of a large portion of the mortgage-backed securities created to finance American’s home mortgages;
• A tax on these securities to fund low-income housing initiatives; and
• A requirement that issuers of securities meet affordable housing mandates.

This is a dead end for two reasons. First, while supporters of an explicit federal guarantee tell us it will never be called upon, Americans have read this book before and know how it ends.

The second is much less well known but equally deadly: the central role in the recent real estate collapse that was played by the federal affordable housing policy created by Congress and implemented since the 1990s by HUD and banking regulators.

In 1991, the Senate Committee on Banking, Housing, and Urban Affairs was advised by community groups such as Acorn that “Lenders will respond to the most conservative standards unless [Fannie Mae and Freddie Mac] are aggressive and convincing in their efforts to expand historically narrow underwriting.”

Congress made this advice the law of the land when it passed the inaptly named Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (GSE Act of 1992). This law imposed affordable housing mandates on Fannie Mae and Freddie Mac.

Thus, beginning in 1993, regulators started to abandon the common sense underwriting principles of adequate down payments, good credit, and an ability to handle the mortgage debt.

… Compounding HUD’s forced abandonment of underwriting standards was a not-unrelated move to increased leverage by financial institutions and securities issuers. They were endeavoring to compete with Fannie and Freddie’s minimal capital requirements. The GSEs only needed $900 in capital behind a $200,000 mortgage—many of which had no borrower down payment. Lack of skin in the game promoted systemic risk on both Main Street and Wall Street.

… While the road to housing hell may have been paved by the government, the road back will be built by the private sector.

Pinto’s key historical point is that Wall Street became a negative influence only after the GSEs’ special status and the mandates imposed on them ruined the competitive landscape. Fan, Fred, and Congress’s determination to that they be run like candy stores handing out discount goodies instead of as real businesses set the stage for all that followed.

It should never be forgotten that while Fan and Fred handed out the goodies, it systematically misrepresented the quality of the mortgages underlying the securitized bonds it issued — for 15 years, to the tune of hundreds of billions and probably trillions of dollars. This problem gravely compounded what was already known about loosened lending standards.

Sadly, many Republicans who should have known better went along with much of this, because “affordable housing” sound so nice and consequence-free. But it should never, ever be forgotten that it was Democratic cronies like Franklin Raines — who not coincidentally walked away with millions himself — either sanctioned the systematic fraud perpetrated on bond rating agencies and investors, or conceivably were so detached from day-to-day operations that they let it happen.

The federal government should not even be in the home-lending business. The fact that it has been in the housing business and in the hands of a combination of allegedly high-minded and definitely not high-minded “progressives” explains why we are where we are. We should be undertaking the long and difficult process of extricating the government from the home-lending business. Instead, what the photo-op disguised as a “conference” will promote is heavy federal involvement into perpetuity. Down this road lies eternal housing hell.

Other Data vs. ISM: Follow-up

Filed under: Economy,Taxes & Government — Tom @ 10:18 am

On August 4, I e-mailed a set of questions to the Institute for Supply Management. Because of vacations and overly hungry spam filters, I was unable to get to the organization’s response until yesterday (thanks to all there for their patience and persistence, and for their responsive answers).

The questions arose because there is a significant divergence between ISM’s expansionary indices, especially in manufacturing, and the pretty consistently bad news contained in recent government reports. Another such example came in on Friday (HT to frequent commenter dscott):

The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for June, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,080.5 billion, down 0.6 percent (±0.2%) from May 2010, but up 9.2 percent (±0.5%) from June 2009.

This is yet more evidence, along with those cited here last week, why revisions to the annualized 2.4% growth in gross domestic product appear likely to be significantly downward, to perhaps as low or lower than 1%. by the time the last one is announced in late September, less than a week before early voting begins in many states.

What follows are the questions I posed, with ISM’s answers interspersed:

1. Has the design of the monthly surveys purchasing managers complete for either of these indices changed at all during the past two years? If so, how?

No, nothing has changed.

2. How would you characterize the make-up of the companies who report? Would you say they are predominantly large firms, a fairly representative sample of firms, or predominantly small firms?

We strive to maintain a mix of firm sizes. We check each responding company’s revenue, and match all company revenue within each industry to that industry’s contribution to GDP.

3. Is there a publicly available list of firms participating in each survey?

We guarantee confidentiality to the individuals and the companies responding to the survey. Therefore, names of companies or names of individuals are never disclosed by ISM.

4. (I believe this is an uncomfortable but necessary question) What assurance can you give the public that your organization’s chairman, Shelley Stewart, Jr., who donated $7,100 to various campaign committees supporting Democratic candidates in 2008, including $3,300 to funds supporting Barack Obama’s campaign, has had no influence on survey design, or the methods ISM is employing to obtain, compile, calculate, or present its indices?
5. If it is indeed the case, why was the ISM not concerned about Mr. Stewart’s political contributions when it named him chairman in February 2009?

ISM’s Board of Directors is led by leading supply management executives who volunteer to serve. Their charge is to lead strategy for the organization, but they are not involved in the day-to-day activities of the staff. ISM staff is responsible for managing the Report on Business. The Board of Directors is not in any way involved in the survey design, data collection, report aggregation, or analysis. Neither the ISM Board of Directors nor the Board chair have any knowledge of the information in the report before it is released to the public. The Report on Business process has been audited by an independent auditor.

6. What is the ISM’s explanation for the current difference between its expansionary indices, especially in manufacturing, and data from the government and other sources indicating that economic activity is at best recovering weakly and at worst contracting?

Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee, responds to this question: The relationships between the ISM Report on Business data and the government data are noted for purely historical purposes. Over time, this has proved to be fairly accurate, but as with all other economic data, it is most suspect at turning points in the economy. The diffusion index methodology has remained unchanged since 1931. We make no representations other than the panel is selected based on the NAICS industry classifications, and that security is tightly controlled as respondents answer on a confidential basis and a security breach is not acceptable. If you choose to use the data to evaluate the current economy or build a forecast, recognize that a good evaluation or forecast should be built on multiple data sources.

So there you have it. Nothing has changed, and ISM’s responses are defensible and professional. In my opinion, Shelley Stewart’s political contributions present a problem with independence in appearance, but based on ISM’s answers, there is not a problem with independence in fact.

If one is going to try to explain the stark contrast between the relatively upbeat ISM indices and other economic indicators, you can rule out inconsistencies or changes at ISM, because they’re saying there haven’t been any. There’s no good reason not to believe them, and a long track record supporting the notion that one should.

Triticale, an early frequent commenter at BizzyBlog who passed away in 2007, would have reminded me that ISM is based on what’s really happening on the ground and is more reliable than other sources. I hope he’s still right. The alternative is not pretty.

RIP, James Kilpatrick

Filed under: General — Tom @ 9:36 am

Most readers here probably won’t recall James Kilpatrick because he’s been off the political beat for (OMG) two decades or more.

From the time he became syndicated in the 1960s until he stopped doing political commentary in the mid-1980s (it continued, but as a column on “The Writer’s Art” that was also extraordinary), he was an outstanding writer and a fine articulator of conservative values. He was also the conservative half of the “Point/Counterpoint” segment on 60 Minutes that was parodied on Saturday Night Live and was a more polite precursor of programs like CNN’s Crossfire.

RIP, sir.

Other tributes/obits:

Positivity: Hero of burning car rescue — No time to think, just to act

Filed under: Positivity — Tom @ 5:57 am

From Old Lyme, Connecticut:

Published 08/14/2010 12:00 AM
Updated 08/14/2010 03:48 AM

Lyme-Old Lyme grad tells how he saved woman from fiery wreck on Route 156

There was no time to think.

A car on Route 156 was on fire, its hood completely engulfed in flames. An unconscious woman was behind the wheel, her head against the window, her seat belt starting to catch fire.

Jesse Matarazzo, 18, parked his truck a safe distance away in case the burning Subaru Forester blew up. Seconds earlier, he’d had little else to worry about other than drop his girlfriend off at her car in the commuter lot and catch his early-morning flight to Indiana the next day to visit family.

With his girlfriend waiting by the truck, Matarazzo, a 2009 graduate of Lyme-Old Lyme High School, ran to the driver’s side to try to save the woman he feared was already dead.

The woman, whom Old Lyme police later identified as 31-year-old Jocelyn Berg of Manchester, survived the accident late Wednesday and was still at Yale-New Haven Hospital as of Friday evening.

“I just ripped the seat belt somehow,” Matarazzo, reached on his cell phone in Morresville, Ind., said Friday. “I don’t know. I guess I got adrenaline or something, ’cause I wasn’t going near that, ’cause it was on fire.”

Matarazzo, who had been enrolled in the nursing program at Three Rivers Community College but said he planned to take some time off from school, carried the woman out of the car and laid her down on the ground behind his truck.

“I put her behind my car just in case that car blew up,” Matarazzo said. “At least she was protected by my truck.”

Berg had been driving north on Route 156 near Talcott Farm Road when her car veered off the right shoulder and struck a tree, police said.

Matarazzo was unhurt.

“I just lost a little hair on my arm, that’s all,” he said.

Berg regained consciousness before the emergency crews arrived, Matarazzo said. Reached Friday in her hospital room, Berg said only that she wanted to thank Matarazzo “for saving my life.” …

Go here for the rest of the story.