Random Thoughts – Randosity!

How not to run a business — Case Study: Sears Holdings

Posted in bailout, bankruptcy, best practices, business by commorancy on February 10, 2017

Back in late 2004 when Kmart and Sears merged to create Sears Holdings, I had to wonder what one failing retail chain could do to help another failing chain. However since 2004, the one thing this new company has proven is that these brands die hard. In 2017, however, I think the answer has come back to conclusively nothing has been gained. Let’s explore.

Back in 2004, I didn’t really dig deep into the $11B dollar merger deal to get the nitty gritty details mostly because I had no interest in two failing retail chains (where I personally never shopped). Though, I already knew the handwriting was on the wall for both of these chains. It was just a matter of time before both chains closed their doors. That they’ve managed to hang on another nearly 17 years is a testament to the cash infusions from a billionaire. I digress.

After deciding to finally dig into this merger deal, however, I have come to find that this deal was instrumented by a former Wall Street darling Eddie Lampert. A wiz bang former Goldman Sachs employee who started his own hedge fund and apparently made mad cash. Though, I’d have questioned why a Wall Street darling would have any interest in the failing retail space. It’s clear, though, Lampert still has no knowledge of retail even after 17 years of floundering with Sears Holdings. Lampert pretends he wants to be the next Jeff Bezos with this investment, but is failing at this for two really big reasons: 1) Lack of innovation and 2) Lack of involvement.

According to his executive staff, Eddie spends most of his time at his home on a private island community in Florida. A community of apparently 86 residents and a staff of private police to ‘protect’ the island. Based on his executive meetings, he literally phones in his CEO job day in and out. He rarely, if ever, makes an appearance in the office.

Running a company by remote control

It’s one thing to be an individual contributor who works remote. Typically, these are task oriented jobs which can be easily monitored for task completion. However, as CEO, there is no possible way you can run a company from behind Skype. However, if Lampert had had substantial previous retail management experience, he might be able to get away with this. Because Lampert has no knowledge of retail after merging Kmart and Sears, he’s effectively flying blind. Even nearly 17 years later doesn’t automatically impart knowledge of retail. It’s clear, Lampert has no business operating this company. Unfortunately, whatever is left of the Sears Holding company is entirely dependent on Lampert for his continual cash infusions (up to $1B) which have kept this listing barge from sinking. However, some boats are best left to sink.

It’s crystal clear, when you buy into a business you know nothing about, you have two choices. One, sit on your arse and assume you’ll figure it out eventually (which usually doesn’t work). Two, dive in head first and learn everything you can about running a retail business. I think it’s a relatively safe bet that Lampert is in the former camp rather than the latter. Instead of being available and actively engaging in the day to day affairs of the business, he sits comfortably at his private island home and dictates policy from a Skype conference call. It’s no wonder this business is being slowly driven into the ground.

For any would-be business owner

As an owner / CEO, you need to be actively engaged in and have passion to drive your business forward, whatever that business is. You can’t sit behind a computer screen at home literally phoning in your CEO day job. That may work for a short period of time, but it won’t work forever. It’s clear, Kmart and Sears are both on the brink of collapse. Why? Because the merger of two ailing turned failing companies was a foregone conclusion without an engaged leader. A CEO / owner is there to drive and guide the business forward. To make the tough choices and ensure the business remains viable and becomes / remains profitable. Your underlings won’t do this on your behalf. They’ll do whatever it is to take their paycheck home, but they won’t go out of their way to run your business. That’s your job.

The takeaway from this case study is that you cannot sit on your arse and expect others to do your work for you. You need to be available in the office often to drive your business. If you don’t take your business seriously, no one around you will either. You need to understand your sales numbers, what’s selling and what isn’t. You need to make strategic partnerships to bring exclusive merchandise (as in the case of a retailer) onto your shelves at a low price as a way to drive customers into your store. You also need to be shrewd to get costs down and profits up. You need to hire a kick-ass marketing team who can bring the demographics into your store. In short, learn your business, understand it, live it, breath it and make it your passion. Own your business’s problems and own its solutions. Also, you need to think outside the box to continue driving all demographics into your establishment(s).

Yes, it would be nice to sit on the beach sipping margaritas all day or behind a gated community in a big mansion and also be a successful CEO of a profitable corporation. That’s a pipe dream that doesn’t happen. You only get that beach time after you’ve done your in-office time and made your money. Retail doesn’t just automatically make money for you. It requires active involvement. You need to actively drive new business into your business. It’s not like your hedge fund where you crunch numbers at a desk and move out bad performers. You need to be in the office driving your staff. You will need to reinvent your business, brand and ideas every so often to remain ‘the place to go for cool new stuff’. Once your retail business is thought of as a mom and dad store, your store is considered antiquated. The mom and dad demographic does make some money, but it isn’t the only demographic spending money and that single demographic will not convert your company from a million dollar company into a multi-billion dollar company.

Why phoning in as CEO doesn’t work

If you aren’t showing up to the office day in and out, you are missing critical verbal queues, having meaningful conversation with your staff and learning the problems that face your business. Keep in mind that some problems are outside problems. Like, for example, the threat to Kmart and Sears has been the internet retailers like Amazon. This means you need to spend quality in office time hammering through new plans to counter growing trends, like Amazon’s quick ship, quick deliver model… like Amazon’s Kindle services. If you don’t keep-up-with-the-joneses, your business is lost. Sometimes the problems are internal problems, like horribly outdated decor and fixtures. Sometimes they are supply chain related.

Since the merger in 2004, Kmart and Sears have both failed to change anything substantial with their store merchandising or, indeed, updating their store look and feel to accommodate new growing trends. Instead, they left their stores looking like something out of the 80s. Who wants to shop in a place with horribly dirty floors, drab coffee stain colored walls and fixtures with chipped paint and rust? Not to mention, that horrid glaring 80s fluorescent lighting job. You want to make your stores inviting and modern, not be a turn off. This is where it takes regularly entering and visiting stores to see how they look, how they feel to a shopper and how the merchandise is being faced. Then draw up plans to remodel your stores.

Being a Billionaire

Not everyone has this luxury. As with Lampert, he’s apparently got lots of money to spend. But, that doesn’t make it spending money smart. The saying, “throwing good money after bad” actually applies here. Why would you want to continue to invest more and more money into a chain not producing returns on your investment? That’s not a good investment strategy. For a Wall Street darling, it really makes no sense at all. Use your gift of understanding good investments and then apply that knowledge to Sears and Kmart. You’ll quickly see your error. It just takes an outside party looking in from the outside to see what someone so close to the matter can’t.

Can Kmart and Sears be turned around? While anything is possible, I’d personally say, “not at this point”. If Lampert had started the turn around back in 2004, he might have been able to pull this listing ship up right. However, because he has become a complacent mostly home bound recluse for many of the last 17 years, a turnaround for this venture is likely impossible with this leadership team. It’s too bad, too. Sometimes we just need to say goodbye to some beloved old brands to let newer brands take us to the next level.

Using time (and lighting) wisely

As a business owner, don’t let your business become a victim of complacency. Expect to reinvent your business every few years to not only keep your business fresh, but also to keep people coming in to see what’s new. Customers value companies that invest in making their stores better. Having a refreshed store means you care about your business. It also means you care about how your merchandise looks on the shelves. If your stores look old and trashy, so will your merchandise. If your store looks new, fresh and well lit, so will the merchandise. It’s literally all about creating the proper mood and perspective in your stores. Lighting has a huge amount to do with this. So, expect to replace old outdated fluorescent lighting with updated LED lighting concepts.

It just comes down to investing money in the right things for your business. It’s clear, Eddie has no clue where to have Sears and Kmart use the money he’s investing. Instead of just throwing good money after bad, ensure that that money is being used to remodel stores, being used to draw consumers in and being used to buy merchandise that fits with the store’s branding.

Unfortunately, both Kmart and Sears haven’t been ‘goto’ places in a very long time. That’s primarily because these chains have not focused on any one area to be proficient at any. For example, Target has revamped its 80s retail-only stance into becoming a neighborhood grocery as well. So, not only can you go to Target to get the latest blu-ray movie, you can also pick up some hamburger and fixings to go with it. It’s a well rounded shopping experience. However, heading into Kmart, for example, yields many deficiencies. For example, the electronics area doesn’t even carry video games any longer. How can you possibly operate a general merchandise store and not carry any video games?

Takeaway

Drive your business smart. Invest money into your business wisely. Remain focused on your goals. Most of all, remain engaged and passionate in everything you do. If you don’t do all of the things that continue to make your business a success, you may end up with a failure. Unlike Eddie Lampert with seemingly endless funds, you may find your doors shut. Though, I believe at some point soon, even Eddie’s pet project of Sears Holding will close. However, if you find yourself as wealthy as Eddie, spend your money however you feel. It’s your money. For the rest of us, driving your business smart is the obvious answer to eventual success. Though, I will say that even as passionate as you may be about your business and as much work as you may put in, there’s still the possibility that your business may fail. Predicting success or failure in any new business venture is tricky as there are so many unpredictable market forces outside of your control. For the things that you can control, you most can certainly guide your business success in the right direction and reduce your chances for failure.

Film Review: The Warning – PBS / Frontline Documentary

Posted in bailout, banking, bankruptcy, botch, corruption, economy, insurance, scam, scams, tanking by commorancy on November 26, 2010

Rated: 4/5 stars.

PBS’ The Warning Documentary

The Warning is a PBS documentary discussing a warning from Brooksley Born, an attorney and a former Commodity Futures Trading Commission (CFTC) chairperson.  She explained that derivatives were extremely risky insurance vehicles and sent a warning that these vehicles needed regulation during her tenure as CFTC chairperson, but her warnings went unheeded.  She resigned in 1999 from the CFTC position after legislation was passed preventing her agency from regulating derivatives.

Vision of this Documentary

While I would like to rate The Warning higher, its take is pretty much tunnel vision on the derivatives markets.  While the derivatives markets did melt down and did, to a large degree, spur the meltdown onward, the meltdown was not started because of derivatives. The derivative meltdown was a casualty of and was exacerbated by the sub-prime mortgage meltdown.  Had the mortgage industry bubble not burst, the derivatives market might have gone unchecked for many more years. The warning was and should have been about placing regulations onto mortgage lending practices. The mortgage lending industry is the industry that failed and sent the economy into a tailspin, let’s make that perfectly clear.  The derivatives (insurance) market, which speculated on the mortgage industry, single-handedly sent Wall Street into a tailspin (along with several large insurance companies like AIG).

Derivatives and the Mortgage Meltdown

Anyone with half a brain in their head could see that using questionable lending vehicles like interest only loans for the first two years or adjustable rate mortgages were ticking time bombs.  When the actual monthly payments came due years later after rates went up to where they should have been, people couldn’t afford pay.  This was especially true when lenders were handing these loans to people who could barely afford the ‘introductory period’ payments.  So, loans came due, people defaulted and the rest is history.  The derivatives (insurance policies) that were issued also came due because of the en masse foreclosures. Insurance companies that issued derivative policies speculating people wouldn’t default en masse began to fail because their speculation was wrong.  So then, these insurance companies couldn’t pay off on the insurance claims. So, when consumers defaulted, so did the insurance companies offering derivatives.

It wasn’t as if warnings weren’t being issued regarding the inevitable mortgage meltdown, it’s just that Brooksley Born (the focus of this film) was not one of the people issuing the mortgage warning.  Her warning was strictly about the highly risky derivatives.  More specifically, the black box non-transparent nature of them. The danger, of course, is that derivatives can be placed on any speculative and risky investment as insurance.  The reason derivatives need to be regulated is to prevent companies the size of AIG from making stupid decisions about such risky vehicles.  However, from a consumer perspective, banks should never have gotten into the position of issuing such risky mortgages like water to people who couldn’t afford them. This was the single mistake that led to where we are today and that mistake has nothing to do with derivatives and everything to do with Government and the Federal Reserve making stupid decisions.

Overall, the movie is worth watching, but also understand its information’s place in the larger meltdown at work in our economy.

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Is Obama hostile towards big business?

To answer this question, we need to delve a little deeper. Note, I am neither condoning nor praising Obama’s handling of his regulatory efforts. However, I would like to point out certain corrections that do need to be made.

“The truth is that not even the Franklin Roosevelt administration was as hostile to and ignorant about free enterprise as this [Obama’s] administration is.”
–Steve Forbes.

But, is Obama really hostile towards business? Or, is he making needed corrections? There is a fine line here. This issue also points out a serious problem in politics today. That problem is, you guessed it, money. Without money, the world doesn’t work. Without money, candidates don’t get elected. Without money, businesses don’t sell things and make money. Back up the train.. Businesses make plenty of money without governmental help. The trouble is that businesses want to be able to make laws that enable their businesses to make more money and then have the government be lenient with them when issues arise.

The reality, though, is that like the separation of church and state, the government now needs separation of business and state. The two are oil and water, they don’t mix. Government needs to be able to make law without interference from any party. But, businesses have deep pockets and hefty lawyers. These two elements help elect officials and help sway these same officials into making good on promises they made towards these businesses during the election.

Obama’s corrections

While I don’t agree with every single thing Obama has done, I do agree that change is necessary. The change that he is making is intended to correct the issues that led to the economic downturn. The trouble comes with statements from people like Steve Forbes. Mr. Forbes believes that he is the end-all-be-all-know-it-all when it comes to all-things-business. The trouble is, he doesn’t. Yes, he runs a successful magazine, but that doesn’t make him an authority. That makes him a successful business owner.

Obama is walking that fine line. A fine line that shouldn’t even be necessary. But, there it is. The line that’s there to help Obama help the economy, help spur business and growth and reduce the chances of a repeated failure. At the same time, the line is there to show that government values business, but isn’t there to socialize it. The trouble is, this economic downturn was of our own making. By our, I mean Wall Street. The housing bubble was just that, a bubble. Bubbles eventually burst and this bubble was no exception. It’s not as if analysts and intelligent minded people couldn’t see the handwriting on the wall. When the mortgage interest rates got down to 1% and all of those ARM and specialty loans were being issued like water flowing down the Mississippi, trouble was inevitable. We just didn’t know that banks and insurance companies were tying their financial soundness to these extremely risky loans using credit default swaps.

Until the bubble burst, no one really knew just how deep the rabbit hole went. Then, everything came crashing down and all of the nasty subprime mortgage and credit default swap issues came into view in their all fugly detailed glory. The first evidence of that was Bear Stearns followed by AIG (and the subsequent governmental bailout). I still think they should have let AIG fold, I digress.

Government and Business

It’s high time that government distanced itself from corporate businesses. It’s high time congress made laws to separate government from business (including political support). It’s high time that government stopped being a pawn for corporate businesses. Forbes clearly seems to think that Free Enterprise requires socialism to function. Free Enterprise is not part of and does not need socialism. Free Enterprise means that businesses can do whatever they need to do (within the limits of the laws) to make their business succeed. Clearly, there have not been laws enabled that have dramatically impacted Free Enterprise. The laws that have been enacted have been placed there to prevent corporations from producing risky investment vehicles with a high likelyhood of crashing down again. If businesses are now floundering, it’s not because of laws. It’s because corporations have lost their way and are still expecting handouts. Well, you can keep your hand out, but don’t expect the government to be dropping any coin in it.

Corporations have relied, no… depended on the US Government for handouts. That time needs to end. Subsidies for business need to go away. Businesses need to fend for themselves just like Free Enterprise mandates. If a business can’t make it on its own, then let it fail. I’ll repeat, LET IT FAIL. Failure is also part of Free Enterprise. Businesses that will succeed, will succeed because they produce a good product or service. Businesses that fail, will fail because they don’t produce good products or services.

Lost our way

America, and specifically corporate enterprises, have lost their way. For far too long have big corporations depended on favorable governmental conditions (sounds like a weather report) to help them stay in business. Well, that train has left (and must leave). It should be solely up to you and your business practices alone to make or break your company. It is the quality of your products, services and support that makes people want to buy your products or invest in your company. Nothing has changed about this aspect of Free Enterprise.

We need to go back to a time when quality was the key. When providing a superior product was the answer to getting people to buy things. If that also means deflation, then so be it. Businesses need to find their way by learning how to do more with less. How to manage their staff better and stop over-hiring. At the same time, many of them need to stop under-hiring and also value the employees that they have right now.

The key to keeping your business flowing is by keeping your employees active, productive and happy. Morale is a big problem in companies during any downturn. Once fear sets in over the next reduction in force (RIF), then morale falls to all-time-lows. No, taking the employees on an outing doesn’t boost morale. The way to boost morale is to stop RIFing the staff out the door. Yes, I know it gives a temporary boost to the stock price and makes the shareholders happy, but that’s a temporary fix with limited effects. Once the dust settles, the employees who are left become disgruntled, unhappy and produce less. This is completely backwards thinking. Which is why business has lost its way.

Shareholder value vs quality products

I know, someone’s going to say that it is all about ‘shareholder value’. That may be the way things seem now, but it is wrong. Currently accepted actions that lead to improved shareholder value tend to undercut production, stifle innovation, reduce profit margins and lower productivity. Why would you intentionally do this to your business? So, while these measures may seem to help the stock price, it does nothing to help the company improve its quality of products and services. In fact, in the long run, these actions almost always negatively impact the bottom line. So, the fundamental question is, are you in business to make the shareholders happy or are you in business to sell quality products and services? This fundamental question must be answered.

The true answer to this question also shows that Free Enterprise priorities today are all wrong. It used to be that the customer is #1. Now, shareholders are #1 and customers are #2. This is both wrong and stupid. Until businesses go back to the idea that the customer is #1, corporations will continue to fail and need governmental subsidies. While shareholders are considered #1, there is really no such thing as Free Enterprise when it comes to multi-million dollar corporations… which is why they always need a handout from the government.

Newest Scam: Law enforcement agencies target unsuspecting motorists with bogus citations

Posted in bankruptcy, corruption, ponzi schemes, scam, scams by commorancy on March 2, 2010

I’ve long suspected that this is happening, but now I’ve been a victim of this exact situation.  In the state of the economy, especially here in California, local law enforcement agencies are apparently under the budgetary microscope. As a result, it now appears that law enforcement agencies have now joined the ranks of the scam artists… with one exception, they are legally sanctioned entities.  In my case, my car was stated to have been located near an expired parking meter and cited for this parking infraction when it was no where near the location on that date.  I do drive near that parking structure.  Near yes, but almost never closer than 2-3 miles near it.  Close enough that a local cop could have written down my plate number, seen the make, model and color and then used that information to create the scam citation.  Yes, I could have contested the ticket, but the main issue is that the citation had nearly every bit of information about my vehicle correct except the body style (which was conveniently absent from the notice to pay).  On top of that, the citation was issued so late in the contest process, I basically didn’t have time to contest it.  However, the license plate number was correct, plate expiration year correct, make correct, color correct.  The only thing that wasn’t correct and, of course, wasn’t written on the notice to pay the citation was the body style… how convenient.  The other two things that were conveniently missing from their ‘system’.. the VIN and the month of the plate expiration.  Two bits of information that would have conclusively proven my vehicle wasn’t there, but this information was conveniently absent.

Worse, law enforcement agencies can dig through the state’s plate database and simply choose license plates at random, write a citation based on some random vehicle incident, throw the ticket away and collect the money. That is assuming you don’t contest.  The issue, though, is that if the officer is thorough enough about the make, color and license specifics, then they have you regardless of what the body style says to be or where you claim to have been at the time.  Of course, if you happen to have conclusive proof that your vehicle wasn’t where the officer claims it was on the citation.. like a date stamped photograph of your vehicle at that moment in time (and how likely is that to happen) or some other proof your vehicle was locked up, then you’re likely going to end up paying the scam citation.  Even contesting it, you may still end up paying. As long as the vehicle is in your name and the citation is tied to your plate, you’re liable period.

Honestly though, would you actually be able to successfully contest this?  I mean, you can, yes.  But, is it worth the effort?  Sure, you could retain a lawyer, but that would cost you much more than the $45-$90 just to pay the citation.  You could do it yourself and go to court.  Again, they know this is a hassle and they are apparently exploiting this fact.  They know you’ll pay because the amount is too small for all that hassle.

Incidents like these are exactly what government and law enforcement don’t need or want right now.  Setting up scams to bring in cash isn’t the answer.  But yet, it is happening.. likely every day.  Note that in my case and because my car actually wasn’t where the officer claimed it was, I never received an initial citation.  The only notice I received was from the collection agency.  One officer stated to me when I called about this issue. “It might have just blown away”.  Uh-huh.. riiiight.  Maybe I didn’t receive it because my vehicle wasn’t actually there.  But, that doesn’t matter.  As long as the officer is thorough enough to go through the license database or write down your vehicle as you drive around town, they can easily set up scam citations to collect between $45 and $90 for the city, county (or the University in this case).  And worse, as long as it’s in your name and the majority of the information is correct, even a judge may still find you liable for the fine.

Government problems just beginning

These issues are the beginning of the end of the government as we know it.  When cops are now involved in state legalized racketeering, then there’s really no hope that this government can continue to exist.  We are about to head back to the old west of lawlessness.  If the police can no longer be trusted not to scam individuals out of their hard earned money, the no one can be trusted.  This is the era in which the US and local governments will collapse.  It will collapse under its own weight and ungainly methodologies.  By unscrupulously taking advantage of its own infrastructure for illicit monetary gain, the end of this government draws near.  It’s only a matter of time.

Government was initially designed to serve the people.  Unfortunately, now it’s just the opposite.  It now looks like people are now forced to serve the government.  As long as these scams continue unabated, there is no hope for law enforcement agencies to gain any respect or trust from the people, let alone the government.  And then they wonder why people no longer trust cops.  Hello?  Looks like the lights are on but no one’s home.

Our governments were designed to help us (the people).  Unfortunately, now government appears to be helping itself more than the people.  Of course, this issue is not the beginning.  In reality, we can consider sales tax, use taxes, income tax all forms of legalized monetary scams.  Ways to part you from your money.   Sure, it’s supposed to help us through programs, but the only thing it really does is help government remain in power.  If the American people stood up and finally said no to paying government fees, taxes and assessments in mass, it would be all over for government agencies.  They simply would not be able to function.  But, that’s not going to happen.  Too many Americans believe that government is still necessary.  But, do we need a government like this?  A government that is no better than your average street thug dealing dope?

I’m not saying that government deals in dope, but don’t they?  Just look at the FDA.  It’s supposed to help protect us.  But then, big pharma companies just use the FDA to put their expensive and hazardous drugs onto the market.  Some of these drugs make us highly addicted or, worse, the drugs become lethal.  Again, it’s another ‘legalized’ form of controlled chaos.  I guess it’s all really a point of view at this point.  It can only be called protection, though, if people don’t die.  When people begin to die because big pharma decides to push the latest pill, then that isn’t any better than the drugs being shipped in from outside the US.  So, how is the FDA really any better than a big drug cartel?

Government rethink

I think it’s time to rethink our governmental system.  It is now time to realize that what our forefathers put in place is now collapsing under its own weight.  Is there a governmental system that could work?  Good question. We already know that other governmental forms like socialism and communism don’t really work.   A democracy could work, but I think we’ve put so many laws into place that it’s now simply collapsing.  I think there’s a point at which there are too many laws and I think we’ve already reached and exceeded that number.  Worse, our governments have bastardized the bill of rights to fit the criteria of their point of view instead of what they actually mean.  So, for example, you can claim the right to bear arms as long as you’re in a state where it’s legal to do so.  Huh?  How is that possible?  The right to bear arms is a given right and cannot be revoked by any state.   Again, as for the fourth amendment, what’s actually considered an ‘unreasonable search and seizure’?   Because our forefathers weren’t more specific on this aspect, it is left open to interpretation.  Interpretation leads to modification.  Modification leads to the law only being valid under specific conditions.  These modifications were not sanctioned by the bill of rights.  Of course, so when it comes down to whether or not it violates the Bill of Rights, then it has to go in front of the Supreme Court.  And, oh yes, this court is appointed by the President.  If that is not conflict of interest, I don’t know what is.

Yes, it’s time to consider a new government.  One that goes back to our roots.  One that doesn’t try to save every business in the US.  One that focuses on the people as people, not as a business.  Free enterprise and entrepreneurship will survive no matter what.  Businesses can fend for themselves.  We no longer need businesses putting politicians in their back pockets simply to help keep the revenue flowing.  This isn’t a nanny state, yet I believe that’s where we are fast heading, if not already there.  Businesses don’t need any government officials ‘on their team’.  But, big business will always argue that it does.  That’s only because they want laws passed that benefit their ability to continue to make money.  Truth is, no one looks out for an individual.  Why should any third party look out for a company?

Government has sewn the seeds of its own destruction with situations such as all of the above.  It’s now time for us to find another fundamental way to continue our society (and the human species).  In the grand scheme of things, the government is probably the least important thing we have today.  What’s most important is Earth and ours, the human species.  Clearly, where we are today isn’t the answer.

73 AIG Execs get over $160 million in Bonus Payouts: Oversight?

Posted in bailout, bankruptcy, botch, corruption, economy, insurance, scam, scams by commorancy on March 18, 2009

Ok, so I know this story has been covered ad nauseaum in the press, but I also have some comments about this issue.  My question isn’t that they received these bonuses, it’s about the contracts they cling to that they MUST fulfill.

Contracts and Bonuses

As far as I know, unless AIG is just completely stupid at writing contracts, most bonuses written into contracts and, later, given to employees are issued based on performance.  That means, as long as you perform your duties properly, then the company will pay you at least part of the bonus.   And note that ‘properly’ could be intentionally left vague or it could be specifically defined through a set of criteria.    The criteria is the unknown factor in these employment contracts.  If it was intentionally left vague, though, even my argument still applies.  Further, to get paid the entire bonus, the employee and the company both have to perform in an outstanding way.  I don’t exactly consider bankruptcy outstanding.  Next in this debacle, why would you pay out 11 ex-employees?  Contracts usually terminate once employment ceases and this should include bonus clauses.  Again, stupidly written contract?  I don’t think so.  Clearly, there are flaws in AIG’s contract arguments.

Why would you pay out ANY performance bonuses to any executives in a company that came within millimeters of (and is still within) the brink of destruction?  Clearly, not one single executive performed properly.  Not one.  Based on the fact that the company is clearly bankrupt, that the government now owns an 80% stake in it and that it as been bailed out with Government (come Taxpayer) money, it is crystal clear that there is not one single executive in AIG who deserves a performance bonus.  Not one.

Check those contracts over

Since the government now owns an 80% stake in AIG, someone in the government needs to sequester their contracts and read them closely.  Seriously, why would checking the contracts over not have been the FIRST thing that was done when these bonuses were announced?  Someone needs to obtain a copy of each of these 73 employees’ contracts and read through the bonus section.  I cannot even fathom that AIG crafted the bonus contractual obligations as 100% payout no matter what happens.  If this is true, then AIG deserves to go out of business.  If they can’t even write employee contracts correctly, how can they POSSIBLY write insurance policies correctly?

AIG executives need to return the money

I am almost 98% sure that these bonuses were based on performance.   Someone would have to read their employment agreements to know for sure.. but, based on the assumption of a performance clause, these execs need to return this money.  AIG is clearly stepping beyond the bounds and this issue proves that the executives currently operating AIG need to be terminated.  Yes, every last one of them.  If nationalization is the key, then that’s what needs to happen.  Perhaps it needs temporary nationalization just long enough to clean house and then rehire the positions with executives who can actually run AIG properly.

If AIG did actually write employment contracts with mandatory bonus payouts, then this company is far beyond the help of a bailout.  This company has serious internal problems where the only resolution is termination of everyone involved.

Closing AIG and starting over…

 At this point, the only real hope is to force other solvent insurers to take exisiting insurance contracts away from AIG.   Move as many as possible.  For the ones that cannot be moved, force the closure of the contracts by a certain date.  For the credit default swaps, too bad.  These don’t need to be insured.  These are the things that cost AIG its livelyhood.  If another insurer is solvent enough and willing to take the risk to support the credit default swaps, those contracts can go there.

Once all of the insurance contracts have been moved, this company needs to be quietly wound down and closed so we can be done with AIG.  There have to be other insurance firms that can take the existing insurance contracts from AIG and honor them.  In fact, I’m quite sure there are plenty of other insurance groups that would be grateful to have the cash flow.  The American public needs to be done with AIG once and for all.

Bank executives still in power after meltdown

Posted in bailout, banking, bankruptcy, corruption, economy by commorancy on January 27, 2009

What’s wrong with corporate America?  This article discusses the exact reason why America’s corporations are and continue to be both problematic and emblematic of serious fundamental problems with free enterprise.

Free Enterprise

On the surface, this phrase embodies entrepreneur-ism, freedom to go into business and freedom to make money in the way you choose.   But, to each silver lining, there is also a dark cloud.  The dark cloud of free enterprise, then, is what’s rarely discussed but is always present in any business once it reaches a certain income level.  This black cloud tends to overreach any good that a company may do and, in many cases, stifles the business into oblivion through stupid decisions, inaction and through senior executive selfish actions.

Banks

We all know the story.  Banks doled out risky loans to individuals without checking credit histories and the whole banking industry nearly self-imploded.  But, what’s not widely known about this event is what happened to the bank’s senior executives.  The Associated Press did some research and found that the majority of the banks that doled out these risky loans, and nearly single-handedly killed the banking system, have the SAME senior exectives still in power today.  These are the same executives who presided over and actually ALLOWED their banks to issue (and continue to issue) risky loans until the meltdown.

As the banks continue to lay off thousands workers and, in some cases, shutter branches… incidentally, the layoffs likely include workers not responsible for the meltdown, the senior bank executives (CEO, CFO, CTO, etc) remain safely and comfortably employed (and likely making the same salary pre-meltdown). 

Car vs Bank Bailout

With the automotive industry bailout, very stringent conditions were placed on when and how these car companies could get and use the money.  Some of the conditions discussed even included ousting executives who couldn’t manage their businesses properly.  Not so with the banks.  There were no such executive conditions placed onto the bailout monies for the banks.  This leaves, in most cases, the same executives who presided over issuing of risky loans and the economic meltdown the task of trying to clean up this mess.  Can they?  Do we trust them?

Trust

Do we trust these executives to do the right thing?  That dark cloud I was speaking of, what is it? That dark cloud includes executive compensation, bonuses and other executive cash shuttling programs.  Once large companies get into the position of billions in revenue, the executives in power do not want to give up that cash cow no matter what.  Yet, here we are.  The banks (and their executives) have failed us and our economy and yet they remain in power?  Do we continue to trust that they know what they are doing?  Can they properly get not only their company, but our economy jump started?  Where is the accountability here?

Let’s hope that Congress wakes up to this issue and ultimately takes these bank executives to task for their inaction and inability to police their own companies during the meltdown times.  Surely, they can’t say, “We had no idea it would get that bad!”.  Sha-right.  The handwriting was on the wall when the risky loans began over 2 years ago.  Anyone in their right mind would know that handing out a loan to someone who hasn’t had their credit checked is a tremendous risk.  For executives to make that claim ensures they do not deserve to stay employed.

Shareholders: The other dark cloud

Once a company goes public, the shareholders become the ownership and power of the company… or so we are told.  So, whenever executives make decisions, it’s easy for them to claim it was ‘for the shareholders’.  That’s a catchall phrase to allow the executives to do things they ordinarily could not or should not do.  But, when is it good for the shareholders?  Who makes that decision?  Apparently, this decision is supposed to be the board of directors.  However, in many cases, the CEO is also the Board Chairman.  But, again, part of that same dark cloud.  The board of directors are supposed to steer the company into the right direction.  Again, when large sums of income become involved, people’s eyes get glazed over by $ signs.

When something is done for the good of the shareholders, you can pretty well guarantee they mean there is money involved (either obtaining, but usually spending it).  When and how that money is used is anyone’s guess.  The accounting books are supposed to tell the tale, but we know how that goes with all of the recent accounting scandals.

Corporate executives

Why is it then ok for these corporate executives to preside over and allow detrimental business practices, yet they continue to remain employed?  Why do they get reprieve from the unemployment line?  When are we supposed to hold executives accountable for their actions (or inactions) that lead to dire negative consequences?  These are questions that must be answered.

Does this imply more governmental regulation over corporations?  Perhaps.  It does imply that free enterprise is broken at a fundamental level.  It also implies that something must be done to fix it.  Whether that’s more regulation over businesses or more accountability, I don’t know.  Perhaps we just need stiffer laws that define corporate practices so that executives can be brought up on charges when these situations occur.  If there are legal statutes that prevent such problematic operations, then perhaps executives will think twice about their roles within large dollar companies.  After all, high dollar salaries shouldn’t come with little oversight and no strings attached.

It’s official, Obama is our 44th President

Posted in bailout, banking, bankruptcy, economy, presidential administration by commorancy on January 21, 2009

… and there’s definitely a lot of work to be done.  The state of the country is in severe economic disrepair, no thanks to our former president, George W. Bush.  President Obama definitely has his work cut out for him.

Bush era over

Bush’s errors have left a legacy of  his lack of doing ‘the right thing’ for the country by extreme spending on an unnecessary ‘war’  and economic packages which helped only the rich.  During Bush’s reign, we have seen favoritism towards big business at the expense of everything else.  Yes, I understand certain business lobby groups are very powerful (read give lots of money away) in order to get the things they want.  Under Bush’s watch, he ushered in one of the worst recessions in this nation in years!  This happened strictly because he was not focusing on the economy as a whole and instead focused on being overly friendly to his big business buddies.  But, what’s more important, making those greedy businesses happy or making the country prosper as a whole?   Clearly, catering to big business is both short sighted and part of why we are where we are today.  Instead of making these businesses more money, they have, in fact, lost more money as a result of our down economy.  Short sighted.

Bush also presided over the monetary system that encouraged bad lending practices without reigning these institutions in.  He simply turned the other way and ignored it as though it didn’t exist (again, helping his buddies make more money).  Instead, he would firmly focus on the middle east and he thought that everything would be fine.  Well, everything isn’t fine and we’re paying that price now.  Again, short sighted.

Doing what’s right

The hard choice is to do the right thing for the citizens, the economy and the country as a whole, not what’s right for big business.  Clearly, if anything, this downturn has taught us what shouldn’t be done.  I believe these are the ‘hard choices’ that will face the Obama administration.  Choices that we have yet to see in action.  Choices that I’m not even sure Obama will face without falling into the same old traps.  That’s not necessarily the fault of anyone, it’s just the way lobby groups and our political system works.  Politicians tend to cave into these demands when they don’t see any risk.  But, that risk is often masked behind rhetoric and double-talk.

Clearly, lowering the fed interest rate 2-3 years ago to a single point spurred the home lending crisis.  It’s now starting again with the interest rate at a quarter of a point.  We are now facing the same exact housing bubble possibility that faced our country the first time around.  Can we avoid this bubble again?  Perhaps, perhaps not.  Perhaps it isn’t smart to be lowering this rate this low a second time.  It’s all about cause and effect and this effect has already been felt in a major way.  We don’t need to experience it again.

Tough Choices

There are a lot of tough choices that need to be made, and those choices will affect us every day.  For each tough choice to aid our economy, another problem will result.  Is there a choice that can be made to turn the economy around swiftly?  Doubtful.  Recessions come in cycles.  This recession came a bit earlier than expected… it’s usually an 11 year cycle and our last cycle was after the dotcom bubble burst in early 2000.

Clearly, Obama’s words are tough talk on bringing this country back.  When it comes down to it, can he really make and live up to these tough choices?  Will he be able to say no to businesses over the economy?

Blame the consumer

Because of the mortgage crisis, blame is had from all over for its origins, but one finger is always clearly and firmly pointed at the consumer.  While the consumer may have been partly to blame for accepting their bad loan, it was entirely the lending instituions’ fault for granting the loan in the first place.  If you hand money to a consumer, they’re going to take it.  It is the lender’s responsibility to make the proper and correct decision to give money out and to whom.  Yes, that also means that the lenders must take responsibility for their actions when giving money to people who should never have been given that money.  It’s also the lender’s responsibility for shuttling people into specialty loans that practically ensured failure.

Fixing the lending practices is one of the first hard choices that must be made.  Trying to loosen up credit again isn’t necessarily something that we need to be doing as an economy.  This is a hard choice, but it has to be made.  It’s one of those choices that has clear ramifications.  It means that credit will be limited to those with the best credit scores.  But, people who don’t have the money to pay off loans shouldn’t be given loans.

Another tough choice that must be made is to force lending institutions to go back to standard fixed rate loans.  We must prevent these poorly crafted specialty loans from ever being granted again, no matter how tempting they may appear or how much it may appear to help out the consumer.  Balloon, ARMS and introductory rate loans must become a thing of the past.

If there is one single thing to blame in this process, it’s these poorly crafted specialty loans.  These loans created the false impression that people could afford a loan that they couldn’t afford.  So, in 2 years, when the loan reset (which was clearly written into the terms), this reset ensured a loan failure.  Again, the consumer can be blamed here because it’s easy (and because they accepted the terms).  But, it’s really the lending instutition’s responsibility for lacking the foresight in seeing that these loan products were destined to fail.

Days ahead

From here, we will have to see where Obama and his administration takes us.  Obama speaks of tough choices, but I’m waiting until those words become action on his part.  It’s easy to speak them, it’s much tougher to follow through.  We defnitely need a ‘buck stops here’ President who is willing to lay down the hammer.   We no longer need, nor can our country afford, a president who caters to the rich.   We need a president who is willing to work to bring the country together as a whole rather than filling his own bank account.

Obama, we’re ready and waiting for you to put your tough talk into tough action.

$5 billion given to GMAC Financial

Posted in bailout, banking, bankruptcy by commorancy on January 2, 2009

GMAC Financing (GM’s financing arm) has been given $5 billion in addition to the already $17.5 billion given to GM in order for GM to sell vehicles.  It was stated that GMAC had gotten tangled up in bad mortgage debt.  Um, hello, what business did GMAC have in giving out HOME loans?  I thought this company originated for the purpose of auto financing?  If auto loan companies are sticking their hands into markets where they don’t belong, they deserve to get them slapped.

Again, here is another bailout that was unnecessary.  Yes, I do understand that GM can’t sell cars without its financing arm.  Again, who’s problem is this?  GM needs to work through its issues itself.  The citizens of the US do not need to be propping up these badly run organization through these bailouts.  What business did GMAC have even issuing home loans? Yes, I realize they are a financing arm, but GM should have been keeping careful watch over them to prevent GMAC from offering loans on items other than cars or vehicles.  Again, another company with no oversight that does not deserve a bailout, yet the government is handing them $5 billion.  I understand the reasoning behind the money, but it doesn’t make the pill any less bitter to swallow.

Oh, and the worst part of all of these auto bailouts is that there is no guarantee they won’t go belly-up anyway. Giving the auto makers  this money may all be completely pointless, but we the taxpayers will have to pay the price in the end no matter the outcome.

Car Maker Bailout

Posted in bailout, bankruptcy, economy, tanking by commorancy on December 11, 2008

Because I’ve already discussed my views on bailouts, I’ve debated about creating a post on this topic.   So, I will keep this one short and sweet.

No no no!  No bailout for car makers.  We do not need to be footing any more bills for badly run companies.  If the car makers cannot get their act together on their own, what makes anyone think they’ll be able to succeed with an infusion of cash from the government?  The answer, they won’t. 

Worse, without any government oversight (and there has been little oversight of the bank bailouts), they’ll take the cash and run without actually becoming accountable for it.

Again, no no no.  No more bailouts.  Let these companies go through Chapter 11 and rework their own company’s finances on their own.

Does CitiGroup deserve a government umbrella?

Posted in bailout, banking, bankruptcy, economy, tanking by commorancy on November 24, 2008

 

CitiGroup Logo

I guess the broader question, does any large commercial business deserve to be bailed out?  Well, clearly Mom and Pop businesses fail every day.  Yet, the government does nothing.  Why do large conglomerates deserve special treatment? 

The short answer is that there is some magical threshold where there are too many people who would lose their jobs as a result of the failure combined with possible economic ramifications.  But, still, does that warrant a bailout?  No.

If a business cannot run itself in a fiscally appropriate manner (large or small) it deserves to fail and go away.  If any of your family is employed by CitiGroup or any financial company caught up in the turmoil of the financial sector crisis, I feel for you.  But, that doesn’t mean that the company deserves to continue to exist if they cannot maintain profitability even in the toughest of times.  Fiscal responsibility starts at the top of the company and trickles down to even the most bottom level employee.

What does this mean?  It means, don’t request a new computer every year.  Don’t ask for Herman Miller chairs and the most expensive ergonomic keyboard simply because you can.  If the item is considered ergonomic, the company is almost obligated to make sure you get it.  Buying all of these expensive amenities for your desk makes you fiscally irresponsible to the company if you don’t really need it (and, in most cases, you don’t).  But, that’s not to say that this is responsible for CitiGroup’s problems.  

Who knows where the money hemmorage is going inside these companies.  But, clearly, it’s not going back into the business.  Again, I ask, why do these companies deserved to be bailed out?  What makes them special?  I have no sympathy for large companies that can’t properly manage themselves.  Neither should the government.  Spending all of this money to prop up these badly run organizations is clearly counter to free enterprise. 

In Free Enterprise you have to take the good with the bad.  That means, when business is good, you profit.  When it’s bad, you bankrupt and close.   There needs to be no governmental cushion here to soften the fall.

Does CitiGroup or any other badly run business deserve an umbrella?  What do you think?

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