October 2009

Apologies for the infrequent posts. It seems we are still in some tough times. I hope the "change" we get is not for the worse. I guess we will "hope" for the best. I am worried that the powers of government may be used to stifle dissent. I hope the people will remember who is in charge.

October 2008

What a crazy past few months we have had. The severity of the credit market failure and it causing a 40% drop in the stock market caught me by surprise. The central bankers can try to flood the markets with liquidity, but it seems that what is lacking is trust and confidence.

I just watched show tonight (October 17, 2008) on ABC's 20/20 where John Stossel had the nerve to suggest that in most cases free markets work better when government stays out of the way. He showed some examples and made a persuasive case for limiting government's well-intentioned interventions. I hope a lot of people get the message. I fear we are going to retry the failed policies of the FDR administration. At least we know to try to increase the money supply. Trade protectionism was a key reason the depression lasted so long and was so severe. One thing that Stossel noted in his show is that outdated government programs are seldom ended.

Complaint-Free Update

The purple bracelets have been useful in helping me and my wife to stop and think before complaining. We have not been wearing them at all times, and when we do there still may be plenty of complaining. At least they make us stop and consider our words. It has been much longer than the 21 days, but I am wearing my bracelet right now. I have not been wearing it to work because it could be difficult, but I try to remember to check unnecessary complaining.

The exercise makes one monitor their own speach from another person's viewpoint, in order to avoid what could be perceieved as a complaint. The shift away from a self-centered perspective is the real value here.

Tim

A Complaint Free World

Yesterday I began a 21 day process to stop complaining so much. It starts with wearing a purple rubber bracelet. Every time I catch myself being critical or complaining or gossiping, I switch the bracelet to the other wrist. This is said to train a person in three weeks, enabling a happier life. More details are at http://ccunitykc.org/Complaint_Free_Instructions.htm

Trust

A successful economy depends on many things.

The rule of law, protection from theft and fraud, enforcement of contracts, freedom from excessive taxes and regulation, control of unfair trade practices, regulation of financial reporting and securities markets, etc. are all required.

In spite of all the efforts of the government and legal system, business depends on trust. If one cannot trust the people one is dealing with, it becomes very difficult and expensive to complete transactions. Auditing and litigation costs do not add economic value, and are a drag on the system.

In the high-profile debacles in recent years, the perpetrators displayed a complete disregard for the trust that had been given them. They may have rationalized their misdeeds by saying that they were maximizing the value for their shareholders. Unfortunately, the frauds committed by the managements of Enron and WorldCom destroyed more shareholder value than any in history. These managements are responsible for terrible damage to the repudiation of American business. These people should spend the rest of their lives in prison and lose all of their assets.

Let’s look at WorldCom
Amount of fraud (overstated earnings): $11 Billion
WorldCom equity (market cap.) destroyed: $180 Billion

If we make the (generous) assumption that the average person’s lifetime earnings is about $2 Million, this means that the equivalent of 90,000 people’s lifetime earnings were destroyed. Yes, I know that the creditors still have some of the remaining value of the company now called MCI, but the stockholders lost $180 billion.

This is only the beginning. The lost trust in corporate governance hurts everyone. Congress felt the need to do something, so they passed the Sarbanes-Oxley act. The cost of the new requirements, especially section 404 internal controls, makes the U.S. capital markets less competitive. More IPO’s are being listed on the London and Hong Kong exchanges that would have listed on the NYSE in the past. We are seeing many public companies taken private to avoid the cost of compliance.

What We Should Do
The damage done has been huge. In order to help repair some of this damage, I think the following should happen.

1. Corporate boards need to take more responsibility. They need to be more than a rubber stamp for management.
   
2. Shareholders need to hold boards accountable. With so many shares held by pension funds and mutual funds, the owner’s are disconnected from the underlying shares.
   
3. Revise Sarbanes-Oxley. Many of the new regulations were needed, but the cost of some of the requirements greatly outweighs their benefits.
   
4. Inflict even harsher penalties on wrongdoers. The SEC needs to do its job and stop the practice of allowing fines with no admission of wrongdoing. Criminal penalties for multi-million dollar frauds should be greater than for robbing a gas station.
   
5. Consolidate the regulatory functions of the NYSE, NASD, and perhaps the SEC. The many regulatory bodies put the United States capital markets at a disadvantage versus foreign markets.

I have gone on at length on this, but feel I’ve only scratched the surface. I welcome your comments.

An interesting paper on how overvalued equity can destroy value:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=480421

Or the same on Archive.org:

http://web.archive.org/web/20060911101002/http://www.law.uiuc.edu/content/conferences/capitalmarkets/pdf/jensen_agency_costs.pdf

Wikipedia has some good information on Sarbanes-Oxley:
http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act

Tim Callison
www.tcallison.com

Welcome to my new blog!

I would like to use this a blog as a place to share opinions about these subjects:

Internet Business
What I see and predict regarding problems and opportunities. The huge problem of spam in all its forms threatens legitimate uses of the technology. Search engine optimization (SEO) techniques try to game the search engines to gain competitive advantage in the results pages, but may not add any value for the users. The internet’s low barriers to entry make for many risks and opportunities. Whole new ways of doing business are appearing before our eyes.

Business, Finance, Economics and Society
The changes we are experiencing in the U.S.A. affecting us all. Better communication and transportation have opened once secure industries to global competition. Our role in the global economy needs to adapt to changing times. Allocation of land, labor, and capital is always the concern of economists. Joseph Schumpeter’s creative destruction is a necessary but difficult process as our economy adapts to changes.
Excessive executive compensation at large public corporations reflects a failure of the board of directors to protect the owners (stockholders).
Ethical lapses like those that happened at World Com and Enron - why did they happen and what can we do?
The demographic changes in our population are no secret, yet our government leaders cannot make the hard choices.
Health care costs are out of control. Who should pay: government, employers, or consumers?
How should we deal with illegal immigration?

I will be addressing these issues in future installments. If you want to share your opinions on any of these or other related subjects, please feel free to submit your comments.

Tim Callison
www.tcallison.com