27 February 2009

What Will It Take To Save Borders Group Inc.?

When I was in law school, Borders Books in Ann Arbor, Michigan had a reputation as one of the nation's most fabulous independent book stores in the nation, with a headquarters on State Street near the independent movie theater and close to the University of Michigan campus, and a small number of other locations nearby.

Borders was then what the Tattered Cover bookstore in Denver is now.

Meanwhile, discount retailer Kmart, founded in 1962 to fill roughly the niche that Wal-Mart has right now, as the lowest priced big box retailer in the market offering half decent goods, acquired the mall based Waldenbooks chain in 1984. Waldenbooks was a bookstore for people who don't like to read. Almost nothing they sold was written at above then 10th grade reading level. It was like the pharmacy book rack, but bigger.

In 1992, Kmart bought the very dissimilar (by geographically local) Borders Books, on the theory that Kmart could provide the capital for Borders to expand, and Borders could provided books store operating experience that Kmart lacked. Borders expanded dramatically, Borders and Waldenbooks were merged in 1994, and neither chain was a good fit with Kmart so they were spun off in 1995. Kmart did half a dozen similar deals in other areas (e.g. Office Max. Sports Authority and Payless Drugs) at roughly the same time.

Kmart's deteriorating (and still shabby) core business fell into a Chapter 11 bankruptcy in 2002, left bankruptcy in 2003, and merged with Sears in 2004. Both the Kmart and Sears brands continue to operate struggling big box retail store operations, although market watchers suspect that the real value in the companies may be in their vast real estate holdings which have slowly been converted to other uses (including store within a store Land's End outlets at Sears stores).

Anyway, Borders Group has continued on its merry way for more than 13 years, painstakingly moving Waldenbooks upmarket so that they are smaller but nice mall based mini-Borders stores with a focus on popular titles, while expanding the Borders model to most metro areas in the United States until it has become the number two brick and mortar bookseller in the United States with the entire group having 27,000 employees.

But, the 2009 financial crisis was not kind to Borders group. Its sales covered only about 80% of its expenses. Its full speed ahead expansion has never really been tested either, until now. From shopping there, online and off, I know that its prices are competitive with competitors Barnes & Noble and Amazon.com, although sometimes ever so slightly higher. Anyway, the bottom line is that it has no real room to improve the bottom line by increasing prices. It has spent early 2009 slashing management costs and unprofitable operations, like a marquee downtown Chicago store, and has so far held onto enough financing to keep it afloat.

But, investors have lost faith. The current stock price of 58 cents a share is down from a 52 week high of $10.66 a share. This collapse basically has taken place from September of 2008 until January of this year. The company's market capitalization is now about $36 million.

This is despite the fact that the balance sheet of the company doesn't look all that bad. Its inventory of books and other media to sell are mostly financed with trade credit. Its plant and equipment are almost completely financed with short term debt and capital leases. It has almost no long term debt, and it does have some cash on hand. Still, if you make a loss of 25% of the sale price on everything you sell, you've got a problem.

It looks to me like the losses are basically a case of (1) stores that are too large and have too much overhead to support their sales, and somewhat related (2) too little focus on titles that sell.

Recent experience has also shown a very poor track record for retail companies trying to emerge successfully reorganized from Chapter 11 bankruptcy. So, unless Borders can slash costs, maintain cash flow until the 2009 Christmas season, and have much better sales in 2009 than it did in 2008, it is doomed. This is a shame because Borders really is the best non-independent brick and mortar book seller in the market.

What's Left When the Financial Crisis Is Over?

A newspaper dies today (The Rocky Mountain News), an automobile manufacturing division's demises was announced earlier this month (Saturn), an investment bank went bankrupt late last year (Lehman Brothers), so did some major commercial banking institutions (Washington Mutual, Wachovia), as well as hosts of lesser known names, printing companies, home building companies, electronics chains (Circuit City), department shore locations, and franchise restaurants.

More businesses, for example, thousands of car dealerships, are simply biding time until their demise. Corporate giants like Citibank, General Motors, General Electric, the New York Times and Borders Group have seen their stockholders virtually wiped out, and their bondholders have grown insecure.

The business assets that remain are changing hands in a blur. In the garbage industry, collection company BFI was bought by Allied Waste, only to have Allied Waste acquired by Republic Services before the logos on the BFI operations were changed. After thift World Savings was bought by Wachovia, they continued putting up Wachovia signs weeks after Wachovia was gobbled up by Wells Fargo. Wild Oats has irrevocably vanished into the folds of Whole Foods, even though the judiciary, after the merger was a fait accompli, cried "oops!" the merger actually shouldn't have been permitted in light of FTC objections.

When the Great Recession finally bottoms out, we are almost certain to emerge with vast numbers of jobs eliminated, many business enterprises discontinued, reduced competition in most industries, and a major rearrangement of who owns which significant assets. Whole industries like subprime lending and independent investment banking, will virtually cease to exist. Many members of the superrich elites that emerged in the last generation will have seen their fortunes evaporate to the level of mere prosperous families just above the ranks of the upper middle class.

We will also have the legacy of legislation passed to address the current crisis. Some of it, like stimulus packages, will quickly be spent and leave only a precedent for lawmakers in some future crisis. Other legislation, like mortgage broker regulation, rejiggered foreclosure timelines, and a deduction for private mortgage insurance are likely to persist.

Companies that had the capacity to self-finance will likely have done far better than those reliant upon big banks and the financial markets for their operating funds, as will generally, less leveraged companies. Housing will be more affordable.

The percentage of people who have experiences with marred credit and experiences with unemployment payments and/or welfare, will soar. Even more will have run up consumer debts that they incurred to maintain a standard of living in hard economic times, and will need to pay before they can consume what they earn or invest significantly. Many people will have given up their homes and become renters. Millions will have been forced to change careers, usually to less well paying ones.

More closets will be full of thrift store goods, instead of designer clothes. Many people will have taken a shot at growing some of their own food in their backyards (a trend that will likely vanish as a recovery dawns). Distrust of the stock market will persist for a generation. People who started working when I did have not made a dime of nominal investment returns, and have lost a good share of our investments once taxes and inflation are considered. Prospective business owners, meanwhile, will be keen to avoid debt that could ruin them if the economy takes another downward turn.

Veterans who served in Iraq and Afghanistan will finish their terms and return to the U.S., finding themselves in a country that thanks rather than jeers them, but has few jobs to offer. Many of those veterans will be changed men and women as a result of their experiences, in ways that make returning to their families and to the civilian economy particularly hard.

There will probably be a baby bust for a few years.

The aftermath of the Great Recession will vary a lot regionally. The continued demise of the American automobile indusry will hit the rust belt with a stern blow that may finally cause the region to hit bottom with permanent deep contractions of the industrial economy there, but it isn't clear that the new factories in the American South attracted to lower labor costs and weaker pro-union sentiments have taken nearly so heavy a blow, they may recover. New Orleans, as a result of this financial crisis, is far less likely to ever really recover from Hurricane Katrina as some had hoped initially.

Areas that have seen major real estate bubble collapses, like California, Arizona, Nevada and Florida may take a decade or more to recover in the real estate and construction areas. But, increased affordability may restore some of the economic vitality that higher housing prices had sapped out of those economies.

New York City will take time to get back on its feet with the slippage in the financial industry that drives much of its economy -- the city's recently acquired cleaner and safer image may slip back to the darker days of its history. But, if we return to a boom state, this could turn around on a dime.

Other areas will be comparatively unscathed. Seattle, Portland, Boston and Denver have received only glancing blows compared to many regions in the United States.

The agricultural economy has been mostly spared, arrested sprawl has reduced disruption to rural areas at the urban fringe, and the New Energy Economy, with biofuels and wind power as two key components, will provide new revenue streams to many who previously relied only upon food and textile oriented agriculture.

Private sector unions come out much worse, despite that fact that the current administration will probably make many union favorable legal and regulatory changes. Hard economic times have forced almost every union shop in the country to come to the bargaining table at which labor has had to make concessions. Some of the industries shedding jobs, like the automobile industry and newspapers, have high unionization rates (although others, like the jobs lost in the financial sector and car sales, do not, and still others, like construction, are a mixed bag). There are existing indusries, like the service industry, in the private sector where union organizing will speed up. But, few people expect big job growth in the union dominanted private indusry industrial sector after we start to recover.

Relatively few job cuts have come in the public sector, although it hasn't been enitrely spared.

This will continue the long standing trend in which public sector unions make up a large and growing percentage of the total labor movement. This could move the union movement upscale socio-economically. Historically, Americans have tended to think about unions as working class institutions united against "capitalists." But, increasingly unions represent securely middle class workers from fickle and sometimes incompetent political masters. They buffer workers against public outrage. The working class are increasingly working in non-union shops, not infrequently stringing together several part-time jobs in the personal services and retail industries.

In the charitable sector, the collapse of market and real estate based wealth may make grass roots and volunteer based organizations increasingly important relative to long established endowment based grant writing institutions and "checkbook organizations" that have massive fundraising operations that use their funds to forward centralized, professionalized core organizations. Private colleges and universities that have relied upon endowments to subsidize operations will have to increase their tuition and reduce financial aid, even at the cost of reduced selectivity, a change that increased federal government support for higher education is likely to only partially offset.

I don't have a crystal ball, but not knowing everything doesn't mean that you don't know something. Better to start with what seems probable and likely and acknowledge that we aren't sure how it all fits together, than to speculate wildly and with no basis at all.

26 February 2009

Last Rocky Mountain News Tomorrow

The last edition of the Rocky Mountain News is tomorrow (citing the Rocky Mountain News). The paper was owned by E. W. Scripps Co. Denver will now be a one [major] newspaper town.

[C.E.O. of Scripps Rich] Boehne said there was an out-of-state nibble from only one potential buyer, who withdrew after realizing that it would cost as much as $100 million "just to stay in the game."

Scripps said it will now offer for sale the masthead, archives and Web site of the Rocky, separate from its interest in the newspaper agency. . . . Staffers were told to come in Friday to collect personal effects.


Readers: This may impact links in this blog. Beyond my control. Sorry.

The closure was done in bad form.

The closure took place just a few weeks before the symbolically important 150th anniversary of the paper this April.

Scripps isn't even finishing out a complete week, leaving the city with no one running any newspaper on Saturday, unless the Denver Post creates a Saturday edition for the day after tomorrow on an emergency basis. Do the guys at Scripps even realize that?

There was also no advanced communications to hundreds of thousands of subscribers who have partially paid subscriptions and they have had no opportunity to make alternate newspaper arrangements.

Finally, the timing indicates a deep and unfounded lack of trust from management towards a loyal group of newsroom staff would run the paper responsibily with advanced notice of a closure, in order to preserve their own reputations.

I would think that E.W. Scripps, as a newspaper company continuing to do business in other markets, would ahve more self respect.

UPDATE: The Denver Post is starting a Saturday edition starting this week, and Rocky Mountain News subscribers will get the Denver Post whether they want it or not. Most advertisers will pay the same rates, but not necessarily all of them. From Elevated Voices (the 5280 blog). The Denver Post has also hired a number of the "stars" from the Rocky Mountain News, mostly columnists.

Global Warming: How Much? How Soon?



So, what does this graph say? It says that in a business-as-usual ("no policy") scenario, there is a 50% chance that the temperature will 5C (9F) or more warmer in 2095 and there is a 95% chance that it will be 3.5C (6.3F) or more warmer in 2095!

Scientists tell us that going past 2C (3.6F) warmer will be disaster. As I said in my previous post, 2C (3.6F) warming will be really bad, 3C (5.4F) will be biblical, and at 4C (7.2F) and above, we face the possible collapse of agriculture, the economy, and perhaps civilization itself. It may be "Game Over" at 6C (10.8F) and above.

We can see from the graph that there is a 50% chance we will cross the 2C (3.6F) "danger line" between 2040 and 2050, and there is a 95% chance will will cross it by 2060 or before.


From here, citing this report.

The red lines are the current predictions. The blue lines are the predictions made in 2003 by the authors of the current study.

Who would have guessed that air pollution is more likely to do us in than nuclear war or a comet?

25 February 2009

Poodles, Chihuahuas, St. Patrick's Day and Purim

When "Poodle kills Chihuahua at park" makes the online front page headlines in the metro Denver oriented Rocky Mountain News, despite the fact that the incident took place across the mountains in Grand Junction, we may just be having a slow news day. It almost reads like a headline out of The Onion, but The Daily Sentinel, which I subscribed to for three years when I lived in Grand Junction, is a legitimate and serious, albeit underwhelming, newspaper.

It is also set to be a glorious sunny day in Colorado. Maybe we're all just sick of hearing heavier news.

Today is also Ash Wednesday, the first day of Lent for liturgical Christians. Lent, and its Islamic counterpart Ramadan, are extended periods set aside for self-denial in later winter/early spring. Historically, they coincided with the lean days when food stores from fall harvests would run low before spring harvests arrived, in part due to the perennial inability of people to plan well for the future, and in part due to inadequate means of food storage.

In the Lutheran Church I attended growing up, Lent meant Wednesday night church services followed by soup and bread suppers, sometimes a sedar service to familarize us with what Passover involved for Jews like Jesus, the removal of decorations from the sancturary, and giving something up enjoyable and a little decadent for forty days (New Year's Resolutions have been safely abandoned by then). It began with Ash Wednesday annointing with ashes (traditionally from the burning of Palm Sunday palms from the year before), for the truly hard core, and wraps up with an intensely meditative and worship filled Holy Week, and finally with a festive sunrise Easter morning service and candy.

I was pondering, as I noted this date today, why St. Patrick's Day, and the Jewish holiday of Purim, both of which are traditionally observed with heavy drinking, during this period normally reserved for underconsumption.

The fact that Passover and Easter are moveable holidays in our conventional solar calendar (the latter because of the former), somewhat obscures a plausible reason, but this year, St. Patrick's Day, March 17, lies almost exactly halfway into Lent. So, perhaps St. Patrick's Day and Purim served as times to blow up the pent up frustration and crankiness of the midpoint of the lean days of the year.

Lutherans, in practice, believe in not sinning in the first place, perhaps because they banned indulgences and don't fully trust the whole forgiveness concept deep in their hearts. So, we never made all that much of St. Patrick's Day. It is also tainted for me by the memory of one of my high school peers who killed himself after getting drunk with green beer in our college town. Instead, we worried mostly about getting pinched at school if we didn't wear green, a tradition tolerated, and even encouraged by our teachers who normally wouldn't tolerate such mischief. Immediate minor pain for the minor sin of failing to follow the rules of the holiday was a way to recognize the St. Patrick's Day holiday far more in tune with Lutheran and Midwestern sensibilities.

24 February 2009

Comic Books Profitable

I had always thought that the publishing side of the comic book business was a more or less break even operation whose main value was the opportunity that they provided to cheaply test market ideas that could be easily transformed into movies and merchandise.

Apparently, I was wrong. The publishing side of Marvel Comics, for example, turns out to have a remarkably high 38% operating profit margin.

Marvel’s publishing division finished 2008 with sales of $125.4 million, virtually flat with 2007 when revenue was $125.7 million. Operating profit slipped to $47.3 million from $53.5 million, which the company said was primarily due to ongoing investments in digital initiatives.


As these numbers show, comic book sales have proven themselves to be virtually recession proof (which makes sense given that comics books first took off as a media form in the Great Depression). Even in the economically catastrophic fourth quarter of 2008, Marvel's sales were actually up.

In contrast, big time publishing company McGraw-Hill has a roughly 15% margin, earning about $1.0 billion of net income on $6.8 billion of sales in 2007. The comparison isn't precisely apples to apples, but comic books appear to be quite a bit more lucrative than traditional books.

I wonder if the profitability of comic book companies has anything to do with the relative disorganization of comic book writers compared to, for example, screen writers and playwrights, who are almost universally members of unions. So far as I know, there isn't a mangaka's union in the United States, and comic book writers don't command the huge royalties that their Japanese counterparts and best selling American authors in traditional formats do. The dominance of a smaller number of comic publishers in the industry, with Marvel and D.C. Comics overwhelming all other publishers in the comic book industry, could also be a factor. The fairly thin distribution network, since there are far fewer comic book stores than there are book stores, could also be relevant.

Product Placement and Power

Maybe this is obvious to some people, but it just occurred to me today.

When a television program doesn't have product placements in it, the television network is the one that sells advertisements during that program, and thus, the producers and creative people with an interest in that television show are beholden to some network for the money necessary to pay for the show. These shows are like new associates applying for jobs in law firms who have no special business development connections. Moreover, ultimately, the amount a network is willing to pay for a show is dependent upon what the marketing department thinks it can raise selling ads during the show. Their talents are needed, but the market is based upon bids made by the buyers.

A television program with product placements (the NBC series Heroes is among the most blatant in doing so), interferes with this system. The producers and creative people are dealing directly with the advertisers in a way that they can take with them regardless of the network that the show is aired upon. And, by bringing in revenue as well as costs as part of the package, they have more money available to produce the show and hence provide a superior package and get better pay for stakeholders in creating the show, without reducing the available advertising revenue from the show at all. Indeed, product placements line up easy prospective clients for regular ads for the marketing department, making their job of selling TV ads less valuable. These shows are like lawyers with an established book of business looking to affiliate with a law firm, who can receive compensation for both their talents and their business development contributions.

Creative people have always resisted more than nominal involvement from advertisers in their shows, in a parallel to the newsroom v. business side divide in the newspaper industry. But, somebody's products have to be used in any production with a contemporary setting, and not all of those choices are material to the story. Like Eddie Murphy playing a con man elected to Congress in one of his movies, who suddenly discovers that he can take any position he wants on any issues, and that either way, somebody will want to contribute to his campaign as a result, a television show can get some product placement money for almost any consistent choice of product and doesn't have to go with the highest bidder if it fouls the show.

For the creative people, product placement is much less threatening, when they are the ones in control of the process, rather than networks with whom they have an arms length relationship who see their shows as mere commodities to be bought and sold like different grades of diamonds, and no need to produce a good product day after day or strong incentive improve the quality of the shows that they already have in stock.

Will the next natural step in this process come to pass? Will we reach a point where producers simply buy air time on networks like an infomercial (the ultimately in product placement, of course) does, while generating their own revenues from commercials sold as a package deal with the show itself, cutting out the middle man of the network advertising sales departments? Will the networks themselves devolve into mere auction houses for airtime?

While cable television networks add value by putting together a coherent package of programing in a single place, broadcast television stations, the variety shows of the television industry, have never been coherent packages beyond an occasional evening with a few well paired programs. For the most part, the fact that a television show is on ABC, NBC, CBS, or Fox is simply a matter of business negotiations unrelated to the content, just as the fact that a product ends up getting distributed through CostCo rather than Sam's Club has little to do with the product or the identity of the stores themselves.

It isn't obvious that the business model of offering a mismash of programming on one channel makes sense anymore. Behind the drama of the transition from analog to digital television, the big story that had hidden behind that little story that has attracted media attention is that the switch is irrelevant to most television viewers, who either get cable or satellite television. Faced with a disrupted status quo, some percentage of late adopters of subscription based television won't bother to get converter boxes or new televisions and will simply sign up for cable or satellite TV. Only about 5% of television viewers will be impacted by the switch when it finally happens. Most have cable or satellite TV already. The rest either have newer televisions or have bought converter boxes. In a specialized subscription based television market where consumers have hundreds of channels to choose from, niche channels make more sense than one size fits all channels with no focus.

Wither Local TV News Programming?

Of course, networks do produce a little programming, mostly news, and especially local news. The quality is mostly abysmal, but that is still the primary news source for more people than any other source. And, television news informs (or misinforms) people who are less likely to receive additional information through newspapers, magazines, the Internet and public radio than other news sources, i.e. it has far more people who rely upon their broadcasts as their exclusive news source. This is a source of political influence that greatly exceeds the economic clout networks hold from their ordinary entertainment programming. It isn't obvious whether the local television news business will survive the general decline of broadcast television (a business model which collectively loses market share year after year), and if it does, where it will migrate.

Local news departments on commercial television stations already struggle to produce enough content to fill the time allotted to them (as do local news shows on public television and radio). Fluff, overhyped stories that are little more than headlines, and the never ending police blotters, fire department calls, and court room reports, all remarkably analysis and significance free, fill the modest number of minutes these news crews fill between copious advertising. The only parts of the operation brave enough to have opinions or consider issues at length are the sports reporters and the meteorologists. Much of it is repeated several times a day.

Were local news stations to cut the bloat they insert to fill their allotted show times, and a podcast format might be a good fit, while eliminating the need to pile the opportunity costs of expensive air time on top of the production costs that go into making the show in the first place. Broadcast TV creates an incentive to bloat news coverage to leave more time available for ads. Podcasting creates an incentive to deliver succinct messages and either internally placed or short advertisements, in order to capture surfers limited attention spans. Notably, some of the most popular bloggers, like Atrios, are also exceedingly terse. (Don't worry, I won't be following that trend any time soon.)

It simply must be a lot cheaper to produce only the few minutes of content that you actually have to report upon, and distribute it via the Internet, than it is to produce much longer shows that air in several versions a day, and distribute it via scarce broadcast television signals. Indeed, most broadcast TV stations already podcast their shows, one segment at a time, anyway. The dramatically declining cost of good quality digital video equipment should also make this less product, less money model more viable, because there is less of a need to scale up the size of the news department enterprise in order to cover the equipment costs involved.

Alternately, local news could become a niche of its own, and a single channel could, for example, offer what would historically been local news programming and not considered national stories, to larger audiences, such as the entire Rocky Mountain West, rather than simply a part of Colorado, thereby securing enough content to support an entire channel, or even half of dozen or so regional channels focused on local news.

23 February 2009

Pundit Accuracy A Question Of Style

At first, [Stanford University research psychologist Philip] Tetlock's ongoing study of 82,361 predictions by 284 pundits (most but not all of them American) came up empty. He initially looked at whether accuracy was related to having a Ph.D., being an economist or political scientist rather than a blowhard journalist, having policy experience or access to classified information, or being a realist or neocon, liberal or conservative. The answers were no on all counts. The best predictor, in a backward sort of way, was fame: the more feted by the media, the worse a pundit's accuracy. . . . The media's preferred pundits are forceful, confident and decisive, not tentative and balanced. They are, in short, hedgehogs, not foxes.

[P]olitical philosopher Isaiah Berlin . . . in 1953 argued that hedgehogs "know one big thing." They apply that one thing (for instance, that ethnicity and language are primal; ergo, any country that contains many ethnic groups will break up) everywhere, express supreme confidence in their forecasts, dismiss opposing views and are drawn to top-down arguments deduced from that Big Idea.

Foxes, in contrast, "know many things," as Berlin put it. They consider competing views, make bottom-up inductive arguments from an array of facts and doubt the power of Big Ideas. "The hedgehog-fox dimension did what none of the other traits did," says Tetlock, who described the study in his 2005 book "Expert Political Judgment": "distinguish more accurate forecasters from less accurate ones" in both politics (will Iraq break up?) and economics (whither unemployment?).


From here, via Newsweek.

Even though "foxes" are more accurate than "hedgehogs," random chance "produces a forecast more accurate than most pundits'. Simply extrapolating from recent data on, say, economic output does even better."

The deeper question is why this should be the case. Readers surely don't try to be deceived by pundits, yet it is popularity with readers that drives a pundit's poularity of pundits with publishers, and hence a pundit's fame. Why should people consistently prefer a cognitive style in people making predictions that is consistently less accurate?

Here's one plausible guess.

Perhaps, in our evolutionary history, the predecessor to the modern pundit was the courtier, i.e. the senior advisor to a group's leader. While leaders may have learned the hard way that hedgehogs make better predictors of the future, in the pre-journalistic era, average people had a lot more communication with leaders themselves than people giving advice to leaders.

Democracy is a young form of government. Other than a few ancient Greek city-states, a part of Rome's history, second millenium Iceland, and the gradual democratication of the British state (not really complete until the mid-1800s), there were no democracies until the French and American Revolutions, respectively, in the late 1700s. Urban living, in contrast, is at least twenty times as old.

In a non-democratic state, citizens don't participate in daily decision making that it is the business of pundits to second guess. Citizens stay where they were born, or go into exile with a more attractive leader. They submit to a conqueror, or rebel out of loyalty to their previous leader. (This may also help explain why terrorism and civil war almost always has its roots in questions of the legitimacy of a regime, rather than its policy choices; humans may be hardwired not to violently rebel against decisions they have no opportunity to participate in making.)

In a leader, who makes his own fate to a great extent, it is a virtue to be publicly forceful, confident and decisive, rather than tentative and balanced. The goal of a leader is to motivate people, not to accurately predict the outcome of events they will not play a part in themselves. Leaders with a clear vision may have more success in changing outcomes. There is no evolutionary percentage in knowing that you are going to fail before you do if you can do nothing about it.

Wise leaders, in turn, can formulate their plans, from the tenantive and balanced counsel that they receive in private. Indeed, confidentiality is a central element of the ethics of all professions who make it their business to give advice: lawyers, doctors, psychologists, accountants, and clergy. Even more notable in the ancient convention in parliamentary regimes of cabinet members in a government showing a united public face to the public on policy issues, regardless of the views that members personally expressed in private cabinet deliberations.

The average newspaper reader hasn't caught up with his or her psychological legacy. Most of us hunger for decisive leadership, rather than thinking like kings ourselves.

Bush Appointees Out Of Work

"Only 25 to 30 percent of 3,000 political appointees who served President George W. Bush have found work."

From here.

Federal Judge From Texas Guilty

A federal judge pleaded guilty Monday to lying to investigators by denying he sexually abused his secretary in exchange for prosecutors dropping five sex-crime charges alleging he groped the secretary and another female court employee.

U.S. District Judge Samuel Kent, the first federal judge charged with a sex crime, also retired, effective immediately, avoiding possible impeachment by Congress.

Kent's guilty plea to obstruction of justice came as jury selection for his trial was to begin.

The jurist, who once shouted in court that he would bring "hordes of witnesses" in his defense, spoke barely above a whisper as he pleaded guilty to lying to a judicial committee investigating the sex-related charges. . . . Kent, 59, had been facing six charges - five related to federal sex crimes and the obstruction charge. Under the plea agreement, prosecutors will seek no more than three years in prison when Kent is sentenced on May 11. Obstruction, a felony, carries a maximum sentence of 20 years in prison and a $250,000 fine.

Kent had vigorously maintained his innocence. DeGuerin had said the judge's conduct with the two women was consensual. . . . Authorities first investigated Kent after McBroom filed a complaint against him in May 2007 and the Judicial Council of the 5th U.S. Circuit Court of Appeals began a probe. . . . The judicial council suspended Kent in September 2007 for four months with pay but didn't detail the allegations against him. It also transferred him to Houston, 50 miles northwest of Galveston, where he had worked since being appointed in 1990. . . .

If he had been convicted of the most serious federal sex crimes charges, Kent could have received a sentence of up to life in prison.


From here.

The judicial branch investigation led to the criminal charges. He admits to lying in the course of the investigation. Sentencing is set for May 11, 2009. Kent was appointed by George H.W. Bush.

Russian Ship Fires On Chinese Merchant Ship

Allegedly, on February 15, 2009, the Russian Coast Guard fired upon a Chinese merchant ship, the New Star, trying to leave a Russian port where a business dispute had been left unresolved. The merchant ship started to sink and eight crew were killed in rough waters abandoning ship, while the eight remaining crew were picked up by the Russian Coast Guard. Video available here.

Somehow, this incident escaped notice in the media accounts I've read and heard since then, despite its seeming significance. Warships don't fire on merchant ships in anger every day.

The whole deal has a Hans Solo fleeing authorities with the Millenium Falcon feel to it, complete with allegations of smuggling on the side. Legally, these kinds of issues are squarely within the world of admiralty, a legal specialty that I've dealt with only once or twice in my career (because the Colorado River is arguably one of the "navigable waters" of the United States and hence subject to admiralty law jurisdiction in connection with business taking place upon it), and then only in tort contexts.

20 February 2009

Texas Judge Faces Ethics Charges

Formal judicial conduct proceedings have been commenced by the state's judicial conduct commission against Sharon Keller, the Presiding Judge of the Texas Court of Criminal Appeals (the highest court of appeals in criminal cases in Texas) for deliberately denying a death row inmate due process through administrative maneuvers on the night he was executed, contrary to the ethical rules that apply to judges.

Keller's actions almost certainly hastened the execution of the inmate who was executed based upon the legal circumstances of the case, and Presiding Judge Keller knew that this was what would happen.

Keller faces sanctions up to removal from office for her actions. She has fifteen days to respond to the charges against her. She has so far resisted public demands that she resign, but those demands have never involved official misconduct charges brought through the proper channels. Her term would otherwise under 2012, although she could probably run again. She very likely has absolute immunity from prosecution or civil liability under Texas and federal law. She deserves a far worse sanction than mere removal from office.

Keller isn't the only Texas judge recently in trouble. About thirteen months ago, I linked to a post summing up the highest profile issues:

This week, lawyers in Texas are closely following the on-going scandal over the indictment of Texas Supreme Court justice David Medina and his wife for arson and other crimes — indictments later quashed by the prosecutors. Click here

Then there is the expanding criminal investigation of U.S. District Judge Samuel Kent for sexual assault and corruption. Click here

Texas Court of Criminal Appeals Presiding Judge Sharon Keller has been nationally criticized for closing the doors of the clerk’s office to prevent a final death row appeal in violation of court practices. Click here Many are still calling for her removal.

Now, three justices on the Texas Supreme Court are facing serious ethics charges. Click here

The Texas system only recently got over scandals of alleged favoritism, including the state supreme court. Over a decade ago, there was great controversy over how Texas trial lawyers financed the campaigns of Democratic justices and how those justice appeared to favor the same lawyers. A feature on ‘60 Minutes’ in 1989 called “Justice for Sale” helped expose the allegations.In the meantime, Dallas has continued to be hit with criticism for its record number of innocent people cleared by DNA in death row cases[.]


Texas justice, as usual in criminal cases, is far below international standards of due process. This case is just another example of this fact. Of course, this has a lot to do with the fact that so many of the people of Texas are bloodthirsty cretins (see e.g., here, in the comments, and also here).

Comment Moderation

I've deleted quite a few comments recently. A legitimate commenter has nothing to fear. This simply reflect a rise in comment spam with comments not pertinent to the posts in question. I am quite lenient about keeping pertinent comments even if they have arguably spam links buried in a commenter's ID. But, I will not tolerate wholly unrelated or vacuous generic comments (e.g. "great post") whose whole point is exclusively to send you to another commercial site.

Juvenile Justice and Mental Health

The prevalence of mental health disorders among adolescents in the justice system is alarming: federal studies estimate that 50-75% of incarcerated kids have diagnosable mental health disorders and nearly half have substance abuse problems. . . . One study revealed that only 4% of adjudicated adolescents receive a mental health placement.


From here.

19 February 2009

Colorado Amendment 54 Litigation Continues

The Colorado Independent has a lengthy update on the progress of litigation in invalidate Colorado Amendment 54, a "pay to play" measure passed by Colorado voters last November.

Colorado Amendment 54 amends the state constitution in a way that largely precludes not only public contractor businesses, but relatives of public contractors, public sector unions and people affiliated with non-profits that receive state grant money from financial involvement in electoral politics. It also bans public contractors from making campaign contributions in areas broader than simply ballot issues for projects upon which they intend to make bids.

The primary issue in the case is whether these campaign finance restrictions, which must be narrowly tailored to legitimate governmental issues to be valid despite First Amendment protections for free speech, are constitutional. The nexus between many of Amendment 54's requirements and pay-to-play conduct is very weak. Multiple commentators, including yours truly, suggested before voters even approved Amendment 54 that on the merits, Colorado Amendment 54 appears to go beyond what is permitted by the First Amendment.

Multiple collateral issues are also relevant to the case.

The Plaintiffs, like those in all public law cases, must first show that they have sufficient individualized harm from Amendment 54 to give them standing to bring suit, must establish that the issue is ripe for court resolution in the absence of any enforcement action, and must navigate the question of taking on the statute "on its face" which entitles it to more deferential review, or "as applied" which leads to more searching review of the statute's constitutionality but requires a showing that the Amendment has indeed been applied in a particular way. Many suits challenging the constitutionality of statutes and state constitutional provisions, end up delayed, as the litigation concerning Colorado Amendment 41 gift ban did, or dismissed, over these kinds of general public law issues.

Another issue is the Plaintiffs manage to clear these hurdles at the trial court level, is whether any preliminary injunction preventing the law from being implemented, will be issued during the pendency of the litigation.

Then, there is the issue of a remedy on the merits of the suit, if there is some win for the Plaintiffs.

There is little doubt that the core provision of the Amendment, which prohibits public contractors from making contributions in connection with ballot issues funding projects upon which the will bid would be constitutionally valid, standing alone. A similar statute was upheld in Connecticut.

But, a key question is what the remedy should be if the Plaintiffs prevail in having some or all of the rest of the statute declared unconstitutional. A court could invalidate the entire Amendment, could "blue pencil" Amendment 54 by invalidating only "severable" unconstitutional parts of Amendment 54, could interpret the Amendment in a judicially binding way that while not necessary the plain reading of the law gives it a meaning that would be constitutional, or could provide some combination of these remedies.

In sum, absent a consent decree, and the Colorado Attorney General, who is defending the case, has signaled an unwillingness to go that route, the Amendment 54 litigation will probably be with us in Colorado for a long time.

California Real Estate Prices Back To Earth

The percentage of households that could afford to buy an entry-level home in California stood at 59 percent in the fourth quarter of 2008, compared with 33 percent for the same period a year ago, according to a report released Wednesday [February 18, 2009] by the California Association of Realtors.

The minimum household income needed to purchase an entry-level home at $248,030 in California in the fourth quarter of 2008 was $48,900, based on an adjustable interest rate of 6.02 percent and assuming a 10 percent down payment. The monthly payment including taxes and insurance was $1,630 for the fourth quarter of 2008.

At $48,900, the minimum qualifying income was 42 percent lower than a year earlier when households needed $83,700 to qualify for a loan on an entry-level home. Recent decreases in home prices and mortgage rates have brought affordability into better alignment with income levels of the typical California households, where the median household income is $59,160.

At 76 percent, the high desert region was the most affordable area in the state. The San Luis Obispo County region was the least affordable in the state at 44 percent, followed by the Los Angeles County region at 46 percent.


From here (emphasis added).

Nationally, about two-thirds of Americans are homeowners.

Not all of the fallout from the financial crisis has been bad news. California real estate prices had put home ownership out of reach for tens of millions of people in California and other markets experience housing bubble prices.

When entry level housing costs more than affluent home buyers can afford on terms that are themselves less than conventional, housing prices are higher than the market can bear and a disruptive collapse is inevitable sooner or later. Excessively high housing prices have been an important factor driving migration out of California and impairing its economic growth.

The powerful draw of the American Dream, which includes the notion that middle class families ought to be able to own their own homes, also helps explain the reckless financial arrangements that people entered into in order to cope with the bubble. People were willing to enter into adjustable rate loans that they knew they couldn't pay if the interest rates adjusted up from record low levels, skimp on down payments, and accept very long amortizations or even "interest only" loans, because without the lowest possible monthly payments they simply couldn't buy any home. Borrowers and lenders alike justified these risks, and stopped worrying about traditional underwriting tools like income documentation, because most of these loans were fundamentally "hard money" loans. In other words, the house that served as collateral seemed likely to increase in value so quickly, that foreclosure sales could easily cover the amount of the loan and the bank's foreclosure costs, as long as loan payments were kept current for even a year or two.

After the dramatic collapse in housing prices, would be California home buyers can buy the same home, with a similar or lower payment, with far more reasonable terms and down payment arrangements, from more traditional lenders like commercial banks, thrifts and credit unions, rather than mortgage companies financed with securitized loan sales.

Affordable housing is something that California hasn't had for a long time, and will once again make the state attractive for people wanting to start businesses and find work.

It would, of course, have been better if California hadn't seen a housing bubble in the first place. The collapse of a similar real estate bubble in Japan thrust that country into what was arguably the worst recession in the industrialized world since the Great Depression. Americans can't expect to be held harmless or nearly so from this real estate bubble collapse of comparable proportions.

The collapse of any real estate price bubble, particularly one with a drop of more than 20%, the cushion customarily provided to first mortgage lenders through some combination of a down payment, private mortgage insurance and a second mortgage at a higher rate, means that mortgage lenders lose some of the principal they lent, in addition to failing to earn the anticipated interest payments.

These losses, of course, hurt the financial institutions that are most leveraged, and made the least conservative loans, the worst. We've already seen the subprime and Alt-A lending industries virtually eliminated, banks with weak lending standards like Washington Mutual wiped out, and highly leveraged independent investment banks, which financed the nation's mortgage company based lending, cease to exist.

In the banking industry, the survivors seem to be commercial banks, thrifts and credit unions, particularly those with a local orientation disentangled from national financial markets more than major money center banks, that were conservative in their mortgage underwriting practices during the housing bubble.

Real estate construction is based upon assumptions about real estate prices in the year or two it takes from the time it takes to buy land, get zoning approvals and build new structures, until the time properties are sold, typically with third party financing. When real estate prices are unreasonably high, construction companies build too many buildings. So, the construction industry will probably remain anemic until all of the excess building inventory errected based upon unreasonably high prices is absorbed by economic and population growth. The temporary near demise of this industry, of course, will produce lots of job losses in the construction trades and related industries, and will in turn, weaking spending demand in the economy. It will also put pressure on wages in all industries that people who used to work in the construction trades are able to do, fields that have mostly seen declines in inflation adjusted wages since the 1970s already.

I expect that construction wages will plummet (ironically just as the proportion of the construction workforce that is composed as undocumented immigrations declines greatly as immigrant workers return to their countries of origin, discouraged by poor job prospects), as demand for construction work falls, and that in the face of a dearth of new construction work, that firms offering rennovation work at very competitive prices will spring up. Bids for government construction jobs, which may be the only game left in the industry in many cases, should also become more competitive, easing strained government capital budgets.

Who gets hurt, besides bankers, builders and merchants hurt by a generalized decline in economic demand? The people who bought property at real estate bubble prices and are now upside down on their real estate investments, and the parallel group of people who felt comfortable running up consumer debt based upon high real estate and financial investment values.

In California, which is one of the few places in the country where mortgages on owner-occupied homes are generally non-recourse (i.e. the owners can't be sued for the bank's losses net of the collateral after a foreclosure), homeowners who were swept up into the trend of taking out loans bigger than they could afford, may end up with battered credit records, but will typically lose only their down payments, which were often five percent or less of the purchase price. Some of these homeowners may even secure mortgage modifications in or out of bankrutpcy, and get to keep their homes with reduced loan amounts, lower interest, or more slowly amortized mortgage debts. Others may be able to buy different homes at the current more affordable prices.

For them, who on avearge and as a class were less thrifty than they probably should have been with debt financed consumer spending, a weakened credit rating may not even be a bad thing. Poor credit may discourage or prevent them from making purchases that they can't actually afford.

Real estate owners who made larger down payments who bought at bubble prices have been hurt more. Their large real estate investments will be gone, and neither the lenders nor the government will cushion their pain. They will be making the same big monthly mortgage payments that new buyers with almost no down payments make on their properties. And, falling real estate prices almost likely will lead to falling rental prices, so financial projections for investment properties may fall apart.

Investment real estate owners also aren't going to receive the mortgage modification benefits that were made available to owner occupied home owners, and typically don't have non-resource mortgage loans, so their other assets may have to be sold when their properties go upside down. Many will probably be forced into bankrutcy.

This whole class of once wealthy and influential investors will now be virtually wiped out, and will have to start over from scratch, something not easy for a group of investors who tend to be older and hence not as malliable when it comes to learning to start over in new endeavors, despite the fact that these investors tend to be smart, well educated individuals.

Real estate investors also make up a disproportionately large share of upper middle class black and Hispanic investors, so the black and Hispanic upper middle class may be particularly hard hit. Another area in which affluent black and middle class families have disproportionate investments is car dealerships, and General Motors has plans to cut a third of its dealerships, while other major car companies are also making some cuts to their dealership ranks. Members of the black and Hispanic middle classes were already asset poor compared to white family with comparable incomes. The crash leaves all people with substantial investments much less wealthy, but will probably widen rather than narrow this divide.

On the other hand, the financial crisis may bring to an end, for now, at least, the gross excessives of executive compensation in the financial sector, and for the first time in a very long time, will put a dent in the seemingly endless trend of the rich getting a larger and larger share of the nation's economic wealth. The link between productivity and wealth, which was very tight until a few decades ago, is beginning to be restored, over decades in which productivity growth was not shared with those who created it.

As previously noted, those who don't own businesses and vacation homes have seen their net worths fall by about 12%, while those who do have seen losses several times as large.

18 February 2009

Priorities For Securities Regulation

A paper by Tamar Frankel has some thoughtful ideas on setting priorities for regulatory examinations of companies.

(1) Examine more frequently when market prices rise (not when the have fallen);

(2) Examine entities that are too large to fail; those that are highly leveraged; those whose shares-prices rise steadily with little or no fluctuation; and entities that have obtained exemptions from regulation.

(3) Examiners should search for violations of the law (and the spirit of the law), but not economic or financial rationalizations.

(4) Examiners should be experts, highly paid and incentivized to remain in government employ. Expert information about the markets will hopefully reduce the impact of bubbles and inevitable crashes and the loss of investors trust that decimates the financial system.


The second point is particularly worthwhile.

Housing Initiative Explained

The President announced and Treasury published details of a new Homeowner Affordability and Stability Initiative today. . . .

To be eligible, a homeowner must have defaulted on his/her mortgage payments (due to economic distress or limited income) or otherwise hold a mortgage that is "underwater" (the equity left in the house is under 20% of the value of the house).

If mortgage owners on such mortgages reduce mortgage payments to 38% of income of the mortgage payee (with reductions on interest and/or principle) for five years, the government will match, dollar for dollar, further mortgage payment reductions to 31% of mortgage payee income. Treasury would also kick in a "partial guarantee" payment to the mortgage owner for a "reserve" in case the property further declines in value. The mortgage reductions are standardized under a program to be announced March 4th and the standardization will provide "legal cover" to mortgage "servicers" that act for investors in a mortgage pool and provide guidance to the many government agencies that hold or guarantee mortgages. All mortgage owners that take government payments under the Initiative must use the program conditions.

The cost of the Initiative is projected at $75 B.

The Initiative comes with a host of modest cash grant incentive payments to mortgage owners to modify mortgages and to mortgage payees to discourage defaults on the eve of modification requests and after modifications have been accepted.

The . . . government is also increasing by $200B, a program to purchase preferred stock issued by Fannie Mae and Freddie Mac.


From here.

Some of this, particularly the "underwater" standard and a reference to TALP as oppposed to TARP, doesn't quite ring true to my ears, so I am looking for confirmation of the details.

UPDATE: Here is the official executive summary:

1. Affordability: Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices

• Enabling Up to 4 to 5 Million Responsible Homeowners to Refinance: Mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 80 percent of the value of their homes have a difficult time refinancing. Yet millions of responsible homeowners who put money down and made their mortgage payments on time have – through no fault of their own – seen the value of their homes drop low enough to make them unable to access these lower rates. As a result, the Obama Administration is announcing a new program that will help as many as 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.

• Reducing Monthly Payments: For many families, a low-cost refinancing could reduce mortgage payments by thousands of dollars per year:

o Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.

2. Stability: Create A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

• Helping Hard-Pressed Homeowners Stay in their Homes: This initiative is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. Millions of hard-working families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income – particularly those who received subprime and exotic loans with exploding terms and hidden fees. The Homeowner Stability Initiative helps those who commit to make reasonable monthly mortgage payments to stay in their homes – providing families with security and neighborhoods with stability.

• No Aid for Speculators: This initiative will go solely to helping homeowners who commit to make payments to stay in their home – it will not aid speculators or house flippers....

• Providing Support for Responsible Homeowners: Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.

• Providing Loan Modifications to Bring Monthly Payments to Sustainable Levels: The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month to sustainable levels. Using money allocated under the Financial Stability Plan and the full strength of Fannie Mae and Freddie Mac, this program has several key components:
�� A Shared Effort to Reduce Monthly Payments: For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400. That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.
�� “Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years.
�� Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.
�� Reaching Borrowers Early: To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.
�� Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration -- together with the FDIC -- has developed an innovative partial guarantee initiative. The insurance fund – to be created by the Treasury Department at a size of up to $10 billion – will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.

• Institute Clear and Consistent Guidelines for Loan Modifications: Treasury will develop uniform guidance for loan modifications across the mortgage industry, working closely with the bank agencies and building on the FDIC’s pioneering work. The Guidelines will be used for the Administration’s new foreclosure prevention plan. Moreover, all financial institutions receiving Financial Stability Plan financial assistance going forward will be required to implement loan modification plans consistent with Treasury Guidance. Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee, and the Administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market. The agencies will seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by the federal government, including those owned or guaranteed by Ginnie Mae, the Federal Housing Administration, Treasury, the Federal Reserve, the FDIC, Veterans’ Affairs and the Department of Agriculture.

• Other Comprehensive Measures to Reduce Foreclosure and Strengthen Communities
�� Require Strong Oversight, Reporting and Quarterly Meetings with Treasury, the FDIC, the Federal Reserve and HUD to Monitor Performance
�� Allow Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options
�� Provide $1.5 Billion in Relocation and Other Forms of Assistance to Renters Displaced by Foreclosure and $2 Billion in Neighborhood Stabilization Funds
�� Improve the Flexibility of Hope for Homeowners and Other FHA Programs to Modify and Refinance At-Risk Borrowers

3. Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac:

•Ensuring Strength and Security of the Mortgage Market: Today, using funds already authorized in 2008 by Congress for this purpose, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability.
oProvide Forward-Looking Confidence: The increased funding will enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners, and provide forward-looking confidence in the mortgage market.
oTreasury is increasing its Preferred Stock Purchase Agreements to $200 billion each from their original level of $100 billion each.

•Promoting Stability and Liquidity: In addition, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.

•Increasing The Size of Mortgage Portfolios: To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.

•Support State Housing Finance Agencies: The Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving homebuyers.
•No EESA or Financial Stability Plan Money: The $200 billion in funding commitments are being made under the Housing and Economic Recovery Act and do not use any money from the Financial Stability Plan or Emergency Economic Stabilization Act/TARP.


SECOND UPDATE:

An administration fact sheet offers more detail on the proposed change in the bankruptcy law to allow cram downs of residential mortgages with certain procedural and dollar amount limitations (emphasis added):

D. Allowing Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options: The Obama administration will seek careful changes to personal bankruptcy provisions so that bankruptcy judges can modify mortgages written in the past few years when families run out of other options.

* How Judicial Modification Works: When an individual enters personal bankruptcy proceedings, his mortgage loans in excess of the current value of his property will now be treated as unsecured. This will allow a bankruptcy judge to develop an affordable plan for the homeowner to continue making payments. To receive judicial modifications in bankruptcy, homeowners must first ask their servicers/lenders for a modification and certify that they have complied with reasonable requests from the servicer to provide essential information. This provision will apply only to existing mortgages under Fannie Mae and Freddie Mac conforming loan limits, so that millionaire homes don't clog the bankruptcy courts.

* Bolster FHA and VA Authority to Protect Investors and Ensure Loan Modifications Occur: Legislation will provide the FHA and VA with the authority they need to provide partial claims in the event of bankruptcy or voluntary modification so that holders of loans guaranteed by the FHA and VA are not disadvantaged.

The Second Amendment Has Limits

The Constitution does not give anyone the right to be armed while committing a felony, or even to have guns in the next room for emergency use should suppliers, customers, or the police threaten a dealer's stash.


From an opinion in the 7th Circuit Court of Appeals.

17 February 2009

Stock Market Crash Rivaling Great Depression

The current stock market crash has slipped from mere serious recession levels to the deeper decline seen in the Great Depression and seems to be staying on this track. It has already fallen further than the 1973 oil crisis and the tech bust at their lowest points.

More News About Military Aircraft

While not a done deal, it looks like the Air Force will get another 60 F-22s, bringing the total to 243.

U.S. Special Operations are also purchasing some small transport planes from Poland:

U.S. SOCOM (Special Operations Command) has bought ten M-28 Skytruck aircraft from Polish manufacturer PZL. SOCOM needed a smaller transport, that could land on rough fields, to get small numbers of troops and supplies to the many scattered bases it has in places like Afghanistan. The U.S. Air Force Special Operations Command (a component of SOCOM) will operate the aircraft, which can carry up to 18 passengers or three tons of cargo. Currently, the air force usually has to send a larger C-130 on these missions.

The M28 is a westernized version of the 1960s era An-28 transport. Although a Russian design, PZL became the sole producer of the An-28 in the 1980s, and produced about 200 of them. The 15 ton M-28 has two turboprop engines and a price about half that of a comparable Western aircraft. The M-28 can cruise at 270 kilometers an hour for about five hours per sortie. PZL got the SOCOM sales because of good performance by M-28s with five other export customers (including mountainous Nepal).


The M-28 has about half the capacity or less of the Army's new C-27J cargo aircraft, and is much less expensive. The MV-22 Osprey has a similar capacity, but is much more expensive because of its VTOL capacity.

Coyote Gulch Has A New Home

John Orr, proprietor of the Coyote Gulch blog, has announced his new address:

I've had to change blogging software for Coyote Gulch.

New URL: http://coyotegulch.wordpress.com/
New RSS: feed://coyotegulch.wordpress.com/feed/

The URL http://coyotegulch.net/ also works.


Go visit.

Auto Industry Bailout Opening Offers In Phase II

GM and Chrysler made another round of bailout requests today.

General Motors and Chrysler LLC . . . in documents submitted to the Treasury Department, also detailed plans to cut 50,000 jobs worldwide by the end of the year. . . . A newly-appointed auto panel will review both plans and determine by March 31 if GM and Chrysler can be viable in the long run. . . . The automakers' request for a $34 billion federal bailout in December fell short when Senate Republicans blocked passage of the request. The Democratic majorities in both houses of Congress have grown since then. . . . If the federal panel looking at the plans rules either company is not viable, it could recall the outstanding loans, a move that would likely force them into bankruptcy. . . . the companies also submitted an analysis of what would happen if it filed for bankruptcy. . . . . . . Separately, UAW president Ron Gettelfinger said in a statement Tuesday that the union had "reached tentative understandings with Chrysler, Ford and General Motors on modifications to the 2007 national agreements."


GM's plans:

GM said it plans to close five more plants in the next few years and confirmed it will drop some of its weaker brands. . . . . GM . . . said that by 2011 it could need a total of $30 billion, which includes the $13.4 billion in Treasury loans it has already received. In the near term, GM will most certainly need $9.1 billion in additional loans and could require another $7.5 billion in the next two years if auto sales don't improve. . . .

GM . . . accelerated its job cut plans, saying that it would eliminate 47,000 jobs over the course of 2009. The company said it would cut about 20,000 jobs in the United States, or about 22% of its remaining U.S. staff.

Previously, GM called for U.S. job cuts of between 20,000 to 30,000 workers, but it had stretched out those reductions through 2012. The company said it plans to close five additional U.S. plants by 2012 --in addition to the 12 planned closings announced in December. . . . GM added it plans to phase out the Saturn brand by the middle of 2011 if it is unable to sell or spin-off the brand. GM is also looking to sell its Saab brand, and will look for help from the Swedish government to support Saab until a buyer is found. . . .

GM is struggling under a $35 billion mountain of unsecured debt. It hopes to shed about two-thirds of that debt with a swap of debt for equity with its bond holders. But the company was not able to reach a deal with the bond holders by Tuesday's deadline, although it did include a letter from their committee's financial and legal advisers saying that they are "prepared to recommend that the committee approve and support the bond exchange" proposed by GM. . . .

In a reorganization scenario, GM said it might need up to $100 billion in additional federal loans to finance their operations during a two-year reorganization.


The Washington Post has more details:

Once-popular lines such as GM's Hummer and Saturn will be spun off, or failing that, eliminated. Saab is up for sale. . . . In addition to U.S. loans, GM is also requesting financial support from the governments of Canada, Germany, Britain, Sweden and Thailand.


Saab accounted for 1,772 U.S. sales in January 2008, out of a total GM sales number of 250,926.

More details are set forth at Marty Padgett's blog (citing a GM press release):

In the U.S., GM will focus on its core brands; Chevrolet, Cadillac, Buick and GMC. Pontiac will serve as a focused brand with fewer entries, within the Buick-Pontiac-GMC channel. GM will have a total of 36 nameplates in 2012, down 25 percent from 2008 levels. The plan also provides additional detail on the Hummer, Saturn and Saab brands.

GM expects to make a decision to sell or phase out the Hummer brand by Mar. 31, with a final resolution expected no later than 2010.

GM has conducted a strategic review of the global Saab business and has offered it for sale. Given the urgency of stemming sizeable cash demands associated with Saab operations, GM is requesting Swedish government support prior to any sale. The company has developed a specific proposal that would have the effect of capping GM's financial support, with Saab's operations effectively becoming an independent business entity Jan. 1, 2010. While GM hopes to reach agreement with the Swedish government, the Saab Automobile AB subsidiary could file for reorganization as early as this month.

Saturn will remain in operation for the next several years, through the end of the planned lifecycle for all Saturn products. In the interim, if Saturn retailers or other investors present a plan that would allow a spin-off or sale of Saturn Distribution Corporation, GM would be open to any such possibility. If a spin-off or sale does not occur, GM plans to phase out the Saturn brand at the end of the current product lifecycle.

GM's dealer count is also projected to be further reduced, from 6,246 in 2008 to 4,700 by 2012, and to 4,100 by 2014. Most of this reduction will take place in metro and suburban markets where dealership overcapacity is most prevalent. The result will be a smaller, but healthier GM dealer network. . . .

As indicated in the Dec. 2, 2008 plan, GM is moving ahead aggressively with plans to improve the fuel efficiency of its vehicles and develop a broad range of advanced propulsion technologies. The company is investing significantly in alternative fuel and advanced propulsion technologies in the 2009-2012 timeframe, supporting the expansion of GM's hybrid offerings and development of the Chevrolet Volt's extended-range electric vehicle technology.

For example, GM in January announced construction of a new U.S. manufacturing facility to build lithium-ion battery packs for the Volt. Lithium-ion batteries are an essential technology for advanced hybrids and electrically driven vehicles, and an important energy storage technology for other applications. GM has also committed to increasing its number of hybrid models to 14 by 2012, and to making more than 60 percent of its fleet alternative-fuel capable. . . .

In order to improve capacity utilization and cost competitiveness, GM has consolidated its manufacturing footprint considerably by closing 12 manufacturing facilities in the U.S. between 2000 and 2008. Given the current very difficult market conditions, GM will close an additional 14 facilities by 2012, five more than were included in the Dec. 2, 2008 plan.

Agreements with the UAW concerning several items have been completed and are now being implemented. First, a special attrition program has been negotiated to assist restructuring efforts by reducing excess employment costs through voluntary attrition of the current hourly workforce. Second, the UAW and GM's management have suspended the JOBS program. The program provided full income and benefit protection in lieu of layoff for an indefinite period of time. In addition, GM and the UAW have reached a tentative agreement relative to additional wage and benefit changes.


I can't imagine a successful spinoff or sale of Saturn. The brand is dead, and this is the biggest brand at any of the automakers scheduled for a change.

Chrysler's plans:

Chrysler said it now needs a total of $9 billion, up from the $4 billion Treasury loan it received in December. Chrysler said it will need that money by March 31. . . . Chrysler said it plans to cut about 3,000 jobs, or 6% of its workforce, and reduce capacity by another 100,000 vehicles this year as it tries to adjust to reduced demand. It also said it has won the concessions from the United Auto Workers union and its creditors that were demanded under terms of the loan from the Treasury Department. . . . If it was forced to liquidate, Chrysler estimated there would be a loss of 2 million to 3 million jobs, resulting in a $150 billion reduction in federal tax revenue over three years. . . .

Chrysler . . . left most of its 12 North American assembly plants idled throughout January due to weak demand and excess inventory. In addition to the job and production cuts, the company pledged to further lower costs by eliminating a manufacturing shift and discontinuing three models. . . . Chrysler said it would need up to $20 billion to $25 billion [in a Chapter 11 bankruptcy].


According to the Washington Post: "Chrysler will stop production of the PT Cruiser, Aspen and Durango by the end of the year." The Dodge Viper model is up for sale.

Fiat has recently made a major investment in Chrysler.

Additional Chrysler details are as follows:

To help meet customer needs and increased federal fuel economy standards, Chrysler plans 24 vehicle launches in 48 months, and announced electric technology as a primary strategy for developing fuel-efficient, low emission vehicles, including an electric-drive vehicle in 2010. . . .

In 2010, the Company will launch four highly successful platforms: a new Jeep Grand Cherokee, a new Dodge Charger, a new Dodge Durango and a new Chrysler 300 (the most awarded car in automotive history since its launch in 2005). The Chrysler 300 launch will be followed by a new, bolder Dodge Charger and an all-new unibody Dodge Durango.

In 2008, Chrysler offered six vehicles with highway fuel economy of 28 miles per gallon or better. For 2009, 73 percent of Chrysler LLC’s vehicles show improved fuel economy compared with the prior year’s model. Fuel economy will continue to improve in 2010 with the introduction of the all-new Phoenix V-6 engine, which will provide fuel efficiency improvements of between 6 to 8 percent over the engines it replaces. A two-mode hybrid version of the Company’s best-selling vehicle, the Dodge Ram is scheduled for 2010. The first Chrysler electric-drive vehicle is also scheduled to reach the market in 2010. It will be followed by other electric-drive vehicles, including Range-extended Electric Vehicles, in the following years in order to further reduce fuel consumption.

The proposed Fiat alliance would further help the Company achieve these standards as Chrysler gains access to Fiat’s smaller, fuel-efficient platforms and powertrain technologies. The alliance would enable Chrysler to reduce its capital expenditures while supporting the company’s commitment to develop a portfolio of vehicles that support the country’s energy security and environmental objectives. . . .

Through year end 2008, Chrysler has:

Reduced fixed costs by $3.1 billion
Reduced its work force by 32,000 (a 37 percent reduction since January 2007)
Eliminated 12 production shifts
Eliminated 1.2 million units (more than 30 percent) of production capacity
Discontinued four vehicle models
Disposed of $700 million in non-earning assets
Improved manufacturing productivity to equal Toyota as the best in the industry as measured by assembly hours per vehicle according to the Harbour Report
Achieved lowest warranty claim rate in Chrysler’s history
Recorded the fewest product recalls among leading automakers in 2008

The following additional restructuring actions are planned in 2009:

Reduce fixed costs by $700 million
Reduce one shift of manufacturing
Reduce total manpower by 3,000 people
Discontinue three vehicle models
Take out 100,000 units of capacity
Sell $300 million additional non-earning assets . . .

Chrysler will fully comply with the restrictions established under section 111 of EESA relative to executive privileges and compensation. In addition, the Company has suspended the 401k match, incentive bonuses, merit increases and has eliminated retiree life insurance benefits. . . .

Chrysler will achieve cost savings . . . through . . . reduced dealer margins, elimination of fuel fill, reduction of service contract margins. . . .

The signed term sheets for the UAW Labor Modifications and VEBA modifications fundamentally comply with the requirements set forth in the U.S. Treasury Loan and once realized would provide Chrysler with a work force cost structure that is competitive with the transplant automotive manufacturers. This agreement is subject to ratification. . . .

The Company has initiated the dialogue with its suppliers and believes that it will be able to obtain substantial cost reductions from suppliers that will result in achieving targeted savings. Chrysler supports the supplier associations’ proposals, which would provide a government guarantee of OEM accounts payables. . . .

Chrysler anticipates that the holders of the 2nd Lien Debt will agree to convert 100 percent of their debt to equity.


Ford, meanwhile, is holding out:

Ford Motor . . . requested a credit line of $9 billion from Congress in December. But Ford said it would not to have to tap the line of credit unless conditions in the auto market and economy deteriorated more than expected.


Ford has considered selling the Volvo brand, and its investment in Mazda. Volvo accounted for 8,036 U.S. sales in January 2008, out of a total Ford sales number of 155,753.

The next step isn't obvious. But, the impact is potentially smaller than I had expected.

Is Dubai crashing? Will it rebound?

The tiny Persian Gulf kingdom of Dubai, part of the United Arab Emirates, has made a name for itself in recent years with its outrageously over the top skyscraper and development projects. It has tried to sell itself as a financial, intellectual and tourism destination of the Middle East. Apparently, it is now crashing, a la Las Vegas.

Perhaps. But, Las Vegas isn't necessarily the best comparison. Dubai isn't mostly selling glitz, although it does have that in spades. Before the boom its entertainment offerings were something like the Crimean Peninsula was for the Soviets. It was a family friendly small resort targeting the relatively modest Islamic world.

Hong Kong, Macao, Singapore, Switzerland, Luxembourg, Monaco, Delaware and various tax havens like the Cayman Islands are probably a better comparison, in economic model, if not in climate. Yes, it has opportunities for R&R, but that isn't the main draw. Essentially, what Dubai was selling had more to do with its business and financial environment than it did with its entertainment appeal.

Certainly there is pent up local demand for a relatively orderly business climate in the region historically known for its savvy merchants. Consider the some of the local Islamic world alternatives to Dubai.

* Saudi Arabia (with harsh and indifferent royal justice, gross influence from the huge royal family, hordes of idle radicalized scions, and imported labor),
* Iraq (home of the violent insurgency with a justice system that has only functioned for a few years and recently saw the exodus of the entire middle class),
* Iran (the original Islamic theocracy),
* the Palestinian territories (all the rocket attacks and refugee camps, with none of the effective self-government),
* Sudan (genocides R us),
* Yemen (we decided to be one country again if the insurgents don't change their minds),
* Somalia (a failed state with pirates),
* Ethiopia (we still have droughts and starvation),
* Eritrea (a new born nation where almost all men and women are military veterans who spent a generation fighting an insurgency),
* Afghanistan (home of the Taliban and a thriving heroin trade),
* Pakistan (where judges are removed by military dictators with nuclear weapons, religious violence thrives, al-Queda makes its home and governments are changed via street protests),
* Syria (where elections are won by the political party with the most missiles),
* Lebanon (where we used to be like Dubai until our buildings were blown to smithereens by religiously motivated terrorist, anti-Israeli militias took over the South, refugees flooded our brothels, and Syria took over)
* Qatar (home to large numbers of infidel American soldiers),
* Egypt (where bloggers go to prison and tourists are attacked by terrorists), and
* Kuwait (where slavery thrives because George W. Bush saved our butt in the First Gulf War, and Iraq is right next door and still wants our oil).

Dubai still has to compete with Oman, which doesn't have nearly the infrastructure, Dijbouti, which is too close for comfort to Somalia, fellow UAE states, and Jordan, but who is to say that a little hustle couldn't make it an attractive place to do business for merchants not interested in jetting off to Istanbul, Paris or London to do deals.

When the real estate crash hits bottom, and Dubai's economy collapses, Dubai will still have nice real estate and everyone else will have receipts from oil money pissed away. It will be a bit like Grand Junction, Colorado after the oil bust; empty but ready to go when the boom returns. The Asian economic model has demonstrated that people and culture matter a lot more to economic prosperity than raw materials. The skyscrapers matter as much because the demonstrate an ability to organize large business ventures in a way that produces results as they are for the office space that they provide. Alas, a lack of transparency in the crash has cast doubt about whether Dubai can live up to the claims that it can be the fair and open economy that a financial center requires, upon which those skyscrapers were built.

The demise of Baghdad as an Islamic world business center full of middle class professionals has also opened up a gap in the Middle Eastern economic ecology.

Selected Military Affairs Quick Hits

About 8,000 people have been killed in the last two years in Mexico in drug cartel related violence. While not entirely off the radar, this orgy of paramilitary class violence has not made a big impact on the American consciousness, despite the fact that much of the violence has taken place close to the U.S. border.

Submarines remain extremely lethal to surface ships, even those with advanced anti-submarine warfare (ASW) systems. Modern air independent propulsion submarines that run on diesel fuel are even harder to track down than nuclear powered submarines which almost never have to surface. If naval warfare ever does break out (there have been just three instances of naval warfare between sovereign states since World War II (specifically the Falklands War in 1982, the last of the Indo-Pakistani Wars in 1971, and war between Iran and Iraq from 1980 to 1988) - "there have been just two submarine kills in the last 62 years. Submarines have damaged civilian ships since World War II, but only by accident.", one submarine kill was in 1982, the other in 1971), the U.S. could abruptly find many of its surface warships sunk in short order by hostile submarines. The flip side of the submarine threat, however, is that there are very few submarines in military service with potentially hostile nations outside of the general vicinity of China and North Korea, and even fewer of those submarines are modern, hard to detect submarines. Conventional weapons treaties might be a less expensive solution in most cases than advanced ASW technology.

Department of Defense weapons system cost bloat is an across the board phenomena. The F-35 is now coming in at $85 million a plane (or more, see below), the DDG-1000 Zumwalt destroyer at $6 billion per ship, and so on. While improved munitions have added a great deal of value in terms of range, lethality, and accuracy, it isn't obvious that the airplanes and ships and tanks that carry these munitions are improved in militarily useful ways that justify their much greater cost. The same source states in a different article that:

[A]ir [F]orce generals point out that the first 500 or so F-35s will cost $200 million each (without taking R&D into account), while F-22s only cost $145 million each (without taking R&D into account). The construction cost of the F-35 will eventually go to about $100 million each as more are produced.


The original budget for the F-35 was $30-$35 million per plane, and the F-35 was supposed to be much cheaper than the F-22. The Air Force has released performance data intended to favor extended F-22 production in lieu of F-35 production. Allegedly, Air Force simulations "indicate the an F-22 would destroy 30 Su-27/MiG-29 type aircraft [be]for[e] getting destroyed. But the F-35 would only have a 3:1 ratio, while the F-15 and F-16 would only have a 1:1 ratio[.]" Skepticism of the Air Force assessments abounds, particularly in light of the modest differences in operational capabilities between the F-22 and F-35 announced to date, somewhat more recent technology in the F-35, and the historical experience of U.S. fighter aircraft designs in the real world, which is vastly superior to what the simulations suggest.

Transport planes are also expensive but get more frequent use:

The U.S. Air Force has ordered another fifteen C-17 transports, paying $194 million for each of them. . . . the C-17 is more in demand during the war on terror than are air force combat aircraft. Only the two dozen AC-130 gunships, and a hundred or so A-10 ground attack aircraft and F-16 fighter-bombers are getting steady work these days. But their workload is nothing compared to the C-17s, which are in constant demand to deliver personnel and material to American troops in Iraq, Afghanistan, and many other places[.]


By implication, air to air combat optimized F-15 and F-22 aircraft, and the Navy's F-18s, are getting virtually no use in combat zones.

Large numbers of aircraft were used in Kosovo, in the early days of the first Gulf War, and in the early days of the Iraq War. But, these episodes, the later two involving multinational alliances, lasted just a few weeks or months, in a single theater of operations in the world at once. Kosovo and the Gulf War also pre-date the widespread use of guided bombs that reduce the number of sorties required. Air to air combat has been exceedingly rare, although not entirely non-existent, since Vietnam, and has mostly involved very small numbers of aircraft on both each side in the post-Vietnam era. Large bombers are used so infrequently and require so little training time, that ancient B-52s are still serviceable and have relatively few flight hours.

The U.S. is developing a new guided tank shell. One hopes this version will prove more militarily useful than the last one (or versions developed but little used by other countries) (bold for emphasis, italics for my editorial addition):

The earliest U.S. tank missile was the U.S. MGM-51 Shillelagh. This was a 60 pound, 152mm missile developed fifty years ago [i.e. 1958]. Guidance technology back then was crude, using infrared signals that required the gunner to keep his sights on the target until the subsonic missile hit. Range was 2,000 meters. The Shillelagh system used a short barrel and could fire a howitzer type round as well. The weapon was used on the Sheridan light tank and a few M60 tanks. Some 80,000 Shillelagh missiles were built, and only two were fired in combat (in 1991). The U.S. found high speed, 105mm and 120mm tank rounds were more effective, and dropped Shillelagh type weapons.


Given the availability of guided artillery rounds, armed drones, and anti-tank planes with "smart bombs," as well as mobility issues for the Army's existing main battle tank, the M1-A1, in mountainous terrain and crossing civilian bridges not built for its weight (as well as a shortage of C-5 and C-17 aircraft that can deploy the M1 overseas at a speed greater than allowed by sealift and rail), it isn't obvious that tanks need this long range guided munition technology as well, and there is no doubt that guided tank shells will be expensive.

Increasingly, the notion that tanks are primarily for use against other tanks is appearing outmoded. Most of the tanks destroyed in the Iraq War were destroyed with aircraft, which are faster and already have guided anti-tank weapons. Tanks, in turn, are increasingly being seen as a means of supplying superior force with impunity against unarmored vehicles, infantry groups, and soldiers using civilian buildings as shelter.