August 20, 2010

IBD on GM’s IPO

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 7:40 am

GovernmentMotors0609Excellent and accurate take:

General Motors’ Stage-Managed IPO

The GM initial public offering filed Wednesday was hailed as a victory for an Obama administration that wants Americans to see the auto bailouts as a success. But that’s just what’s wrong with it.

… At a minimum, an IPO at this time of market volatility means GM will raise less capital than otherwise. Yet GM hopes eventually to raise up to $20 billion. Even if successful, that’s far short of what taxpayers have put in. So why now? Only when you consider the upcoming November election does GM’s puzzling timing make sense.

… Obama’s media cheerleaders have been happy to follow that story line, with Agence France-Presse hailing the IPO as a “welcome victory” for Obama, and gushy headlines like the Economist’s “Rising from the ashes in Detroit” suggesting happy days are here again.

But because the market isn’t driving this IPO, investors are wary:

Peter Flaherty at the National Legal & Policy Center notes GM couldn’t assure the accuracy of its financials in its 500-page filing because its internal controls remain weak. “How can GM offer and price shares if it cannot even attest to its own financials?” he asked.

… The Economist points out that investors are also wary of GM’s Opel unit in Europe being a money pit with $4.6 billion in restructuring liabilities, and GM’s $27 billion in unfunded pensions, brought on by bloated union contracts that don’t expire till 2015.

Dennis Virag, president of Automotive Consulting Group, told Bloomberg Television on Thursday that a GM management shakeup is exactly what you don’t want to see before an IPO. (Note: The reference is to CEO Ed Whitacre’s announced departure effective September 1 — Ed.)

“I think the IPO is more political than practical at this time,” he said. As evidence of that, GM plans another IPO tranche just before November’s election — suspect timing, to say the least.

… Had GM been permitted to go bankrupt like any other company, it might have reorganized — or its assets been sold to those who could use them profitably — and GM’s unsustainable practices discarded.

Here’s something GM could have considered doing in bankruptcy and didn’t dream of doing because of the government’s involvement: Truly restructure some or all of its dealer network.

Over four years ago (“The Car Dealer-State Government Racket”), I wrote: “Auto dealerships and the state franchising laws that protect them are Model T relics of a different world that pass on billions of dollars of unneeded costs to cay buyers every year.” So why not do something about it?

As I understand it, state franchise laws would not have prevented such a move during bankruptcy. GM could have arranged an emergence involving a reasonable payoff to dealers for their properties and the values of their businesses (they wouldn’t have had to do anything, but they would have needed the old owners’ expertise to get things going). They could then turn the ones they wished to keep into company stores, with the old owners staying on as facility managers for a time. Some of the larger, better-run dealers might have remained in place, but under brand-new, less complex, and more rational agreements.

This would have been difficult, but the payoff — and pressure on other competitors to rationalize their distribution network — would have benefited consumers immensely.

As it is, GM’s IPO is as IBD describes it, with one additional consideration: the amount of pressure the Obama administration might place on Wall Street to play along with a deal that is short on economic substance and viability, given all the new regulatory powers the recently-passed “financial deform” law gave to the star chamber known as the “Financial Services Oversight Council.”

The Ruling Class Takes Care of Its Own

Filed under: Activism,Business Moves,Economy,Taxes & Government — Tom @ 6:38 am

http://i739.photobucket.com/albums/xx40/mmatters/ManWithMoneyBagThe excessive pay and benefits are outrageous, and unaffordable.

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Note: This column first appeared at Pajamas Media and was teased here at BizzyBlog on Wednesday.

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It’s safe to say that the disconnect between the resourceful, wealth-producing private sector and the resource-draining, wealth-destroying public sector has never been greater. In his seminal, insightful essay at the American Spectator, Angelo M. Codevilla of the Claremont Institute characterizes the former as “the country class” and the latter as “the ruling class.”

To see that the ruling class currently has the upper hand, one need look no further than an August 10 USA Today report covering federal, state, and private sector compensation filed by Dennis Cauchon.

Here’s the rundown in round numbers:

  • The average civilian federal worker earns — I’m sorry, “gets paid” — over $81,000 a year. After adding in almost $42,000 for benefits, he or she receives total compensation of over $123,000.
  • For state and local government employees, the analogous figures are a shade over $53,000, almost $17,000, and nearly $70,000.
  • Private sector workers average about $50,500 in pay, $10,500 in benefits, and just over $61,000 in total comp.

For those keeping score, the average federal worker — oops, “employee” — is paid 60% more than his or her private sector counterpart, receives bennies that are four times greater, and a total compensation package that is more than twice as high.

You know things are out of whack when including UAW workers at government-controlled General Motors in the federal government’s numbers (they aren’t; GM — get ready for this — calls itself “a private company” in its regulatory filings) would more than likely bring those averages down.

According to Cauchon, the status quo’s defenders claim that “the compensation gap reflects the increasingly high level of skill and education required for most federal jobs and the government contracting out lower-paid jobs to the private sector in recent years.” I don’t think so, because USAT’s reported figures are averages, not medians. While there are upper limits on what federal workers can be paid, a relatively small but numerically influential group of extremely productive and successful private-sector participants makes quite a bit more. I wouldn’t be at all surprised to learn that the federal-private differentials using medians are even greater than those seen above using averages.

Regardless, Cauchon in effect reports that for the time being the differentials, no matter how calculated, are on track to grow:

Last week, President Obama ordered a freeze on bonuses for 2,900 political appointees. For the rest of the 2-million-person federal workforce, Obama asked for a 1.4% across-the-board pay hike in 2011, the smallest in more than a decade. Federal workers also would qualify for seniority pay hikes.

So there will be a drop-in-the-bucket freeze accompanied by pay hikes for everyone else. Big deal.

There’s more. Those “seniority pay hikes,” known as “steps,” which typically average about 1.5% according to a related USAT report in December, will remain untouched. Thus, a typical federal employee will make almost 3% more in 2011, while the cushy benefits march merrily on. This is what the ruling class wants us to believe constitutes “austerity.” It’s nothing of the sort. How many country class readers are counting on a 3% raise next year, or for that matter got 3.5% this year, as federal workers did (2% across the board plus the 1.5% “step”)?

Oh, there I go again. I meant “federal employees.”

I deliberately included the three little digs above at our federal workforce to set the stage for a few important points.

The ruling class wants us to be believe that they and most federal workers are among the best and brightest society has produced. In many instances this is true, but Claremont’s Codevilla tells us that this is very often not the case in executive positions — in contrast to, of all places, France (italicized text is in original):

(In France) people get into and advance in that bureaucracy strictly by competitive exams. Hence for good or ill, France’s ruling class are bright people — certifiably.

… While getting into … France’s ruling class requires outperforming others in blindly graded exams, and graduating from such places requires passing exams that many fail, getting into America’s “top schools” is less a matter of passing exams than of showing up with acceptable grades and an attractive social profile. American secondary schools are generous with their As. Since the 1970s, it has been virtually impossible to flunk out of American colleges. And it is an open secret that “the best” colleges require the least work and give out the highest grade point averages. No, our ruling class recruits and renews itself not through meritocracy but rather by taking into itself people whose most prominent feature is their commitment to fit in.

One of two things results from this overabundance of arrogant mediocrity. Some mediocre execs never figure out how ineffective they really are, and run things poorly. Others quietly figure out that they really are in over their heads, and end up either finding a smart but non-ambitious assistant who will make them look good, generally hiring line employees who won’t be threats, or both. In either case, the result is far less than optimal.

Of course, all of this can and does happen in the private sector, with one important difference: It can’t and doesn’t last. Private-sector entities which let mediocrity run rampant eventually find themselves run over by competitors who haven’t. This forces them to rid themselves of the mediocre or die. An exec who resists doing what must be done will usually be replaced by one who will.

In the federal government, that doesn’t happen. The absence of competitive pressures enables managers to take the easy way out. Thus, the mediocre hang around. Some of them figure out that they can get away with being virtually nonproductive. Others figure out that the best route to job security lies in being “productive” in really destructive ways. These are the people who go crazy writing rules and regulations. Add in unionization accompanied by a built-in reflex to defend even their most obnoxious members, and out-of-whack pay and benefit levels which make even looking at private sector employment seem foolish, and you have a recipe for organizational inefficiency and bloat unlike any other.

Because they also lack direct competitive pressure, organizational ineffectiveness often reigns supreme in state and local governments. But at least state and local pay and benefits are much closer to the private sector’s than they are to Uncle Sam’s. That’s because of the nearly universal requirement that these governments must balance their annual budgets. If the states or locals want to pay more or hire more, they have to collect more in taxes. Though there are far too many glaring exceptions, e.g., Bell, California, it’s still generally the case that the taxpaying public will tend to resist unreasonable attempts at expansion and unreasonable pay scales, and will often vote politicians who have supported or implemented such efforts out of office.

The federal government has no such fiscal constraint. When its budget doesn’t balance, it simply prints more money.

The only remaining potential check on the out-of-control growth in federal pay, benefits, and spending in general lies in the electorate exercising its power at the ballot box. For decades, the country class has generally stood by while the ruling class, its servants and dependents have grown in number, wealth, and influence, regardless of which political party has controlled the Executive Branch and Congress.

Will this time finally be different?

Positivity: In Germany, Father saves girl from bear in zoo

Filed under: Positivity — Tom @ 6:00 am

From Berlin:

Aug 19, 8:55 AM EDT

Police say a Dutch man braved an angry bear to defend his three-year-old daughter after the girl climbed a fence in a German zoo and tumbled into the animal’s pen.

Trier police said Thursday the girl scrambled into the enclosure and fell into a moat during a visit with her family Wednesday at the Luenebach zoo in southwest Germany.

Police say her 34-year-old father quickly climbed after her, but the Asiatic black bear managed to first hit her forehead and hurt her.

They say the father succeeded in saving his daughter and escaping, but not before the bear also injured him on his leg.

Both were hospitalized with non-life-threatening injuries.

Go here for the rest of the story.