Because poor people just don’t eat lobster

Image courtesy of Tom Curtis/FreeDigitalPhotos.net

Henry Blodget, a once-disgraced securities analyst, is now a successful and widely read blogger at Business Insider, a company he founded to provide news and insight about business, politics, the economy, technology, pop culture and other trends.

Whether he ever subscribed to the Cult of Capitalism, we don’t know. But if he did, he’s no longer drinking that KoolAid. In a recent post in which he bestows the Scrooge Award on Corporate America, Blodget provides data showing that American companies are now achieving the largest profit margins in history, while paying the lowest wages in history as a percent of the U.S. economy.

He writes:

“If you happen to be an owner of a big American corporation, these charts could be construed as good news: You’re coining it! If you happen to be a rank-and-file employee, however, – or someone hoping to be such an employee – this is bad news: You’re sharing less than ever before in the success of American industry.”

He points out the problem with this – one that’s been addressed many times before: If the working class that accounts for more than two-thirds of consumer spending is slowly being choked by stagnant incomes and lack of spending money, the economy itself is going to suffer a low, slow and painful suffocation as well.

He emphasizes the point by noting how some of our most successful corporations like Walmart, Starbucks and McDonald’s, have policies specifically designed to keep their employees living at or near poverty in order to maximize profits.

Just yesterday (Dec. 4 2012), for example, the Washington Post reported that the CEO of Darden Restaurants Inc., owner of Red Lobster, Olive Garden and LongHorn Steakhouse, complained in an earnings advisory that profits were down because of … drum roll … Obamacare. Actually, he admitted, it wasn’t the federal Affordable Health Care Act directly. It was all the bad publicity the restaurant chain received after trying to avoid providing health care to its employees by cutting their hours down to part-time.

The company isn’t scheduled to release earnings for another 10 days (Dec. 14, 2012) so it didn’t provide actual earnings numbers. But it is expecting earnings of about 25 cents a share on continuing operations –  a fraction of what it earned in 2010, when profits exceeded $400 million, according to Fortune and CNN Money.

The irony is that if Darden had simply put the money into its employees’ hands in the form of the required health coverage, its customers might not be staying away and, perhaps, even its employees might be able to afford to eat the company’s own dog food (that’s a Silicon Valley expression; not a judgment on the company’s food – which does, in our opinion, pretty much suck). Sure, under Obamacare the company’s profits might be down, but its business might be up. Go figure.

Blodget’s crowning point might be this:

“This is a private-sector issue, not a government issue. This is about persuading American companies to share more of their wealth with their employees, so the government doesn’t have to get involved. As many conservatives are fond of observing, the government cannot solve all the problems in this country. The private sector has to do it. So, it’s time the private sector started doing it.”

 

How Bank of America Execs Hid Losses—In Their Own Words

June 7: This post has been updated and corrected.

When Bank of America announced it was buying Merrill Lynch in September 2008, bank execs told their shareholders that the merger might hurt earnings a touch. It didn’t turn out that way. Losses at Merrill piled up over the next two months, before the deal even closed. Yet the execs kept painting a prettier picture to shareholders — even though it turns out they knew better.

As the New York Times detailed this morning, a brief in a new lawsuit filed in federal court in Manhattan recounts sworn testimony and internal emails in which execs admitted to giving bad information to shareholders and that they had worried about the legal ramifications of doing so.

According to the filing, Bank of America’s then-CEO Kenneth Lewis admitted in a deposition that what he told shareholders about the financials of the merger was no longer accurate on the day they approved it.

We’ve pulled out the most revealing parts of the suit, which tell the story of how the deal went down.

On Sept. 15, 2008, Bank of America announced its agreement to buy Merrill Lynch. In the press release announcing the deal and other presentations, Bank of America said it would cause a 3 percent decrease in earnings in 2009, and that by 2010 the deal would break even or do better.

In October, concerns started to emerge about Merrill’s financials. As it became clear the company was going to lose $7.5 billion that month, one exec emailed another the numbers with the message “read and weep.”

Merrill kept losing money in November. Late that month, Bank of America ordered Merrill to sell off assets to try to stabilize its finances:

After current Bank of America CEO Brian Moynihan admitted in a deposition that this sale meant the deal was less valuable to shareholders:

On Dec. 1, Bank of America issued a $9 billion debt offering. Publicly, they said this was “for general corporate purposes.” But private communications showed that they were trying to raise money to cover Merrill’s losses:

Bank of America’s then-treasurer, Jeffrey Brown, wrote in emails just before the shareholder meeting that they needed to disclose that the Merrill losses were behind the debt offering. He also testified that he told other execs they could be committing a criminal offense by not disclosing the losses:

On Dec. 5, Bank of America shareholders met to decide whether to approve the merger. They questioned Lewis about the financial impact of the deal, and he reassured them:

That day, shareholders voted to approve the merger.

In his deposition for the lawsuit, Lewis said that what he told them was not accurate. Bank of America had already revised their numbers to reflect Merrill’s losses:

Just days after the deal was approved, on Dec. 12, a law firm for Bank of America prepared documents making the case that they could back out of the merger, based on Merrill’s new financial woes:

On the 17th, Lewis took that argument to then Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, who, according to the lawsuit, were stunned by Merrill’s losses:

According to the suit, Lewis raised the possibility of a bailout then:

But it wasn’t until January that shareholders — and the public — learned how bad things were. Bank of America stock dropped precipitously, and taxpayers ultimately padded the bank’s bailout funds with an extra $20 billion to cover the losses. The SEC has actually already settled its own charges against Bank of America over misleading shareholders on the deal. The bank paid $150 million — and didn’t admit any wrongdoing.

Bank of America didn’t comment to the Times on the new lawsuit, and didn’t immediately respond to a request for comment from us.

Update (6/7): Kenneth Lewis and Bank of America have also filed motions in the suit. Lewis’ motion states that he relied on Bank of America’s law firm’s recommendation that disclosure of Merrill’s losses was not required. Bank of America’s motion asserts that the plaintiffs cannot tie the losses they claim to the non-disclosure.

Correction: This post has been corrected to show that Kenneth Lewis did not say the words “no longer accurate;” instead, it was attorneys paraphrasing his position.

 

FB FU: Facebook’s unfriendly IPO

Photo credit: Freedigitalphotos.net

Big money has done it again. Since 2008, Wall Street banks have been trying to convince the public that the financial collapse was just an aberration, and that less government oversight of banking practices will be better for everyone.

Just as the public, with its notoriously short memory and forgiving attitude, was beginning to let bygones be bygones, Fac

ebook and investment bank Morgan Stanley have reminded us that allowing big money to regulate itself is a lot like … well, er … putting your money into the hands of an irresponsible, greedy stranger.

The story is that Facebook’s highly publicized initial public offering released stock at the price of $38 a share; the initial flurry quickly raised that price to as high as $45. While large, institutional investors reportedly kept their money in their pockets, individuals bought up a good percentage of the available stock. And within two days, the price had dropped almost 20%.

Only then was it disclosed certain large investors may have received verbal guidance that Facebook was about to deliver a big disappointment in its quarterly earnings. No wonder they sat out – satisfied to watch as the suckers who didn’t have access to the relevant financial information tossed their cash into a stock that was now seen as overpriced and certain to be a bad

short-term investment.

Eventually the large investors will buy up Facebook stock. Experts are speculating that will likely happen when small investors get scared and disgusted and start dumping their $38-a-share purchases at prices as low as $22.

The comeuppance is that Facebook and its lead underwriter, investment bank Morgan Stanley, now face a series of lawsuits – filed less than a week after the yawn-inspiring IPO – for allegedly failing to share material information equally with all investors.

There is plenty of irony in this episode. Facebook has been perceived as among the most egalitarian of media, where individuals were assumed to be in charge. Facebook users who bought stock hoped to leverage their own passion for social media into a solid financial gain. Instead they’ve been exploited, just as they are every time Facebook users their data to throw unproductive advertising at them.

It’s also ironic because Wall Street’s big money machine has spent the last four years trying to convince the public that government-imposed constraints were a primary cause of the financial meltdown and sluggish recovery. But like the mortgage crisis and the more recent explosion in banking fees, this most visible IPO in history demonstrates another dynamic – that Wall Street’s true concern is to take care of its own, even at the expense of its customers.

For its part, Morgan Stanley claims it did nothing wrong, and that it followed the same procedures it follows for all IPOs. If that’s the case – and it certainly may be – then it may be time for the Securities Exchange Commission to take another look at the regulations. And it’s certainly reasonable for small investors to question whether they can ever get a fair shake with Wall Street.

For everybody else, it’s simply a fair reminder that you don’t leave the fox in charge of the henhouse.

 

Why Parliament is wrong: Murdoch is perfectly fit

The United Kingdom’s Parliament had it exactly wrong when its report on the News Corp. phone hacking scandal declared media mogul Rupert Murdoch unfit “to exercise the stewardship of a major international company.

Murdoch, 81, has built one of the world’s largest and most powerful media companies, with unmatched global influence. Its holdings include such U.S. powerhouses as The Wall Street Journal, Harper Collins Publishing, Fox Broadcasting and 20th Century Fox. Worldwide, it earned just shy of $3 billion last year on revenue of $33.4 billion.

Although its financials took a tumble in 2009 – like every other major media company during the recession – News Corp. has shown nothing but solid growth over the years. If a global corporation’s primary mission is to deliver growth and profit for its owners/investors, then you can’t argue Murdoch has been anything but successful.

What Parliament really seems to mean – and what they should have said – is that Murdoch’s success was achieved in a manner incompatible with the interests of society. Specifically, it believes News Corp. has violated laws and widely accepted  rules of behavior by building power through the hacking of private phone and e-mail messages, the buying and bullying of public officials and other behaviors that – legal or not – are widely consider anti-social and unethical.

These accusations are not only pointed at his now-shuttered News of the World operation, but also other global holdings. They are intended to paint his entire empire with broad strokes of conspiracy, influence peddling, and amoral greed.

Is anybody surprised by this? Murdoch is commonly described as a ruthless competitor (def.: having no pity, merciless, cruel). He sees himself as being on a mission to upend individuals and institutions with whom he disagrees, according to a 2010 profile in New York magazine. And since the 1980s, he has built his empire by toppling adversaries like so many dominoes.

Guess what? This is not unique in the corporate world.

The real point is that this is precisely why the Cult of Capitalism has it wrong.

The main theme of the Cult of Capitalism – of which Murdoch is both a respected symbol and a hands-on activist – is that the world would be more efficient and much improved if markets were unshackled from burdensome regulation.

What this episode reveals yet again is the questionable outcome when that assumption is put in practice.

If you’re OK with the Parliamentary conclusion that the social power of Murdoch’s media empire has been built on anti-social behavior, then congratulations: You’re qualified for membership in the cult.

Otherwise, the logical conclusion is that the game of capitalism – like all other games – requires some rules (and referees to enforce them) that assure corporations achieve success within a range of behaviors that are generally seen to be compatible with society.

In a message to employees, Murdoch  – the embodiment of unfettered capitalism – agrees to be bounded by these rules. But don’t expect any real change from him.

If News Corp. and others choose to play safely within societal boundaries, it’s only because those boundaries are well defined and enforced by regulators. Within the Cult of Capitalism, that practice is still referred to as wasteful and job-killing government spending.

Show us your backbone Wal-Mart; yeah that’s what we thought

In 2005, according to a New York Times report, top officials at Wal-Mart were alerted to the possibility that its Mexico subsidiary had made widespread use of bribery in efforts to gain marketshare. Wal-Mart de Mexico is the company’s largest foreign subsidiary.

Such activities, they were told, could be in violation of both U.S. and Mexican laws.

Wal-Mart looked into the matter; here, according to The New York Times, is what investigators learned:

They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark.

At that point, Wal-Mart leaders might have chosen to disclose the problem. It may have lead to prosecution in Mexico and financial consequences in the United States. It might have generated embarrassing headlines for awhile.

But Wal-Mart is a big company. It employs more than 2 million people; it would be easy to make the case that employees sometimes do things that are against the rules and top executives can’t be expected to know everything that’s going on all the time.

The disclosure wouldn’t likely have brought much economic hardship to the company or its stakeholders; Wal-Mart’s worldwide operations that year generated $10.2 billion in earnings. (Just 6 years later, according to its current annual report, earnings have grown more than 50% to $15.8 billion.) Its credit is pretty good.

So the disclosure would have been an unpleasant short-term blip. It might have even done some good, such as demonstrating the sincerity of the company’s sweeping  Global Ethics promise:

The Global Ethics Office is responsible for sustaining Walmart’s culture of integrity. This includes developing and upholding our policies for ethical behavior for all of our stakeholders everywhere we operate.

This would be meaningful because Wal-Mart makes a lot of pledges – about things like diversity, sustainability, treatment of employees, etc. – that are sometimes viewed with skepticism by outsiders. For instance, its Women’s Economic Empowerment Initiative was announced in late 2011, just a few months after the U.S. Supreme Court neutered the arguments of a high-profile, decade-long effort to bring a class action suit against Wal-Mart for discrimination against women.

Let’s be realistic: A company that has spent 50 years becoming the world’s largest retailer is going to have accumulated a lot of enemies. It’s going to be a target for sour grapes and discontent.

So at this moment of moral fiber, when Wal-Mart leadership had one of those defining opportunities to choose the right thing over the expedient thing, which way did they go?

You already know the answer to that; if they did the right thing the story would have been long-forgotten by now. Instead, according to The New York Times, they essentially allowed the Mexican subsidiary to investigate and exonerate itself.

Only in late 2011, when Wal-Mart reportedly learned that The Times was onto a story about corruption in Mexico, did it reveal to the U.S. Justice Department that it was conducting an internal investigation, The Times reports.

Better late than never? Not everybody would agree.

 

 

Yahoo’s new idea: No new ideas

 

Photo courtesy of Stuart Miles, Freedigitalphotos.net

Yahoo, out of original ideas to end its losing streak, is now turning to shakedowns of online competitors. So says Business Insider, in its commentary on reports that Yahoo is preparing to sue Facebook for infringement of up to 20 Yahoo patents on technologies involving “advertising, the personalization of Web sites, social networking and messaging.”

It’s been a long time since anybody had much good to say about Yahoo’s direction and long-term prospects. Google has been shedding its “Don’t Be Evil” philosophy in a flurry of impressive – if not always beloved – moves that make it ever-more valuable to marketers.

And Facebook has been figuring out more and more ways to make money by increasing its presence in the everyday lives of internet users. Even frumpy old AOL has dug in hard in an effort to corner the hyperlocal market – though its Patch.com unit is said to be losing as much as $130 million a year and few observers give it much chance of success.

Meanwhile, what has Yahoo done? While it’s market share in online ad sales continues to decline, executives seem to have spent the last 3 years trying to sell the company and not much more. yippee.

RIM reintroduces PlayBook tablet; still irrelevant

Reasearch In Motion (RIM) – inventor of the Blackberry and our favorite company to kick around for an astounding record of failing to meet its commitments – has done it again.

It has released the next version of the long-awaited PlayBook tablet to an industry-wide uncomfortable silence.

According to BusinessInsider’s tech department, the would-be competitor to iPad and increasingly popular Android-based tablets, has addressed the single biggest complaint that the original version had when it was released a year ago. It now has a native e-mail application, allowing users to pull down e-mail without a convoluted set of workarounds.

And that’s the last nice thing BusinessInsider has to say:

It’s nice that the Messages app pulls in stuff from email, Twitter, LinkedIn and Facebook, but it’s barely usable. For example, you can’t send a message over your social networks to someone who isn’t already stored in your contacts.

As far as apps go, RIM says it added thousands of new apps to the BlackBerry App World today, many of them Android apps. Yes, there are some nice apps … but the store is still riddled with junk. It’s clear developers aren’t taking the PlayBook seriously.

Other reviews are less biting, but at best tepid:

RIM released its first version of Playbook last year to dismal reviews. The product was quickly pulled for a revamp, which was promised by last fall and then extended to sometime this year. In the meantime, the old CEO stepped down after co-founding the company, leading it into the stratosphere and then nearly crashing it. Let’s also not forgot the serial delays in other new RIM products, such as the operating system that now runs the Playbook; and the global shutdown of RIM services that affected millions of users for several days last autumn.

More recently, RIM board member Roger Martin (a business school dean, nonetheless) defended the company leadership, saying that while the company outlook and stock was tanking there is no question it was being run by the right people all along.

Today, though the company has a new CEO, the Playbook 2.0 release doesn’t seem to burnish near-term prospects. The base price for the device, which was originally designed to compete with the $500 iPad, has been dropped to $200. Best Buy, which got caught holding the bag on millions of the first-generation PlayBook, is selling refurbished models for as low as $169.99.

The PlayBook may yet succeed and pull RIM out of what appears to be a death spiral.

Or not.

 

 

Grand theft shale; Is Ohio a doormat for the gas industry?

The gold rush is on in Ohio as gas companies snap up land atop the carbon-rich Marcellus shale formation. Their goal is to begin fracking operations as soon as possible – hydraulic fracturing, in which water and chemicals are injected down a well to loosen and replace natural gas, which is pushed to the surface for collection.

In this brief report by veteran political reporter Tom Beres on Cleveland’s WKYC-TV, the main issues are spelled out:

  • Balancing the economic opportunity with health and environmental concerns;
  • Making sure Ohio gets its fair share of the money to be invested.

Beres raises serious questions about both. His report includes a soundbite from business-friendly Ohio Gov. John Kasich, who says: “… billions of dollars worth of investment in this state; we cannot let our fears outweigh the potential.”

Why doesn’t anybody question Kasich on that statement? Wherever they are in the world, the value of energy deposits has only increased over time. So what’s the harm if the state does choose to be deliberate in setting policies and regulations to manage the dangers that fracking may present? The gas has been there for millions of years; it’s not like it’s going to disappear now.

The investments by oil companies may accrue quickly to individual landholders where drilling is to take place. But Beres points out in his report that the job-creation benefit of this gold rush may be dubious. Ohioans, who don’t have experience in this kind of gas production, are less likely to land drilling jobs that need to be filled fast.

This isn’t news. Previous reports have indicated that job creation estimates for energy projects – and specifically Ohio’s shale-related drilling – are grossly exaggerated. Even the value of the shale itself is being questioned; the federal government downgraded its estimate by two-thirds of the amount of extractable gas contained in the Marcellus formation. It went from a 20-year supply to 7 years based on production history of similar wells in Pennsylvania.

There is also legitimate question about the environmental safety of fracking. In the Youngstown area, a series of earthquakes have been linked – though not conclusively connected – to fracking. In other areas, groundwater contamination is suspected.

While all that is going on, Ohio’s bureaucrats are rushing to allow drilling – even while Ohio’s 3-cent tax on every thousand cubic feet of gas harvested is one of the lowest in the nation. What is the sense of that? It’s not as if gas companies can access this energy from anywhere else. Shouldn’t the state assure that it derives a reasonable benefit from the growth of this industry?

Worse still, Ohio doesn’t even insist on accurate metering of the gas being withdrawn; it allows the energy producers to self-report what they’ve extracted – in essence, deciding for themselves what they’ll pay in taxes. In what other industry does that happen? The state could easily require meters and give a tax credit on the cost of metering equipment; it would still come out well ahead.

It’s one thing to be business-friendly; it’s another to be a doormat. Even the payoffs to pols are disappointing. According to Common Cause, the industry has spent three-quarters of a billion dollars on lobbying in the past decade – and spent just $3 million in Ohio. Gov. Kasich has received more of that money in political donations than anybody else: $213,000, according to a report by The Plain Dealer’s John Funk. An unimpressive take for the man who is holding the front door open.

Energy extraction industries are dirty and dangerous industries; they can’t avoid having impact on the people and places around them. They are necessary industries too. So we have to find ways to let them do their work. But we also have to find ways to manage their impact. Kasich – a former Lehman Brothers rain-maker prides himself on being a manager. So when is he going to start managing the issues?

With the cost of energy rising everywhere in the world, and Ohio obviously ill-prepared to handle a burgeoning gas industry,  it’s understandable why drillers are so anxious to begin production. Everbody else would benefit by going just a little bit slower.

Outbound RIM CEO says he’s wanted to step down for years. It shows

Mike Lazaridis, who is giving up his job as co-CEO of RIM said in an interview recently that he has been planning to step down from the CEO job for years.

Based on earnings and RIM’s recent record of following through on commitments to customers and investors, we think he did.

12 months of futility reflected in RIM's stock price

 

News Corp. settles hacking claims, almost admits wrongdoing

Honest news veterans everywhere are just shaking their heads. For every time a journalist writes an important or mildly sensational story, someone hurls this accusation: You’re just trying to sell papers.

In truth, most of us are just providing a journal of what happened.

But at News Corp., we now know: Executives were just trying to sell papers. Contrary to what they’ve been saying, they knew employees were hacking into private phone messages of celebrities and non-celebrities alike in order to get stories.

That is the implication, anyway, in a settlement that stops about an inch short of a full admission. News Corp. doesn’t admit its executives actually knew, according to Inside Business, but that is settling on the basis that they knew – a fine point designed to limit exposure to the roughly 764 other people who have claimed to be victims in the affair.

In a settlement with 36 or 37 (reports vary) of the victims, News Corp.’s British publishing unit has now admitted that executives and directors were lying when they denied knowing about the phone hacking, and that they actively tried to cover up their involvement by destroying documents that could have connected them with the case.

Fortunately, their subterfuge was about as good as their ethical leadership; plenty of incriminating documents survived.

The New York Times writes:

The High Court hearing on Thursday at which the settlements were detailed was a humiliating occasion for Mr. Murdoch’s News Group Newspapers, which published the now-defunct tabloid at the heart of the hacking scandal, The News of the World. In a courtroom so jammed with lawyers, victims and members of the news media that some people had to sit on the floor, News Group’s lawyer, Michael Silverleaf, repeatedly expressed the company’s “sincere apologies” for “the damage, as well as the distress” caused to victim after victim.

James Murdoch, son of News Corp. Chairman Rupert, who was at the helm during the scandal and failed to get his story straight during the follow-investigation, is still well employed as chairman and CEO of News Corp.’s non-U.S. operations.

Terms of the full settlement aren’t available, as some of the awards haven’t been disclosed. But the 15 that are known total about $1 million, with the largest being actor Jude Law: $201,000.

According to one estimate, if the average cost so far is applied to all claimants, the total price could exceed $49 million – about as much as News Corp. brings in each week – through lunch on Tuesday.