Thursday, June 4, 2009

Potpourri...Follow Up From Some Prior Blog Posts

I have been sitting on some recent articles that are covering themes that I laid out in blog posts going all the way back to January. I thought that it might be interesting to annotate and review these recent articles, which are linked to in each section.

Crazy Executive Compensation

On January 24th and April 28th (and in other blogs), I railed about the insane compensation practices promulgated by Wall Street and the financial industry, as well as the mortgage origination business. My argument's gist is that (1) if you pay people on a current time scale for transactions that have the proverbial "long tail" then you are playing with a time bomb. Here's the scenario. Traders make their trades and at year-end (an artificial boundary) the trade looks profitable, so the traders get their bonuses. Six months after year-end, the trade tanks. Do the traders return their bonuses? (2) The system is stacked to promote reckless risk taking since those taking the risks, generally have no skin in the game.

In the article linked to below, Alan Blinder, a Princeton professor and a former Fed Reserve Vice Chairman makes the case better than I ever could. If you haven't read this one, it's certainly worth your time to do so.

As a footnote, incidentally Citigroup just reported that it unilaterally canceled severance package payouts for several of whom was slated to get more than $42 million of your taxpayer money. It seems like all the public outrage on this topic may be having the intended effect...we'll see what the situation looks like when Q1, 2010 rolls around.

Here is Blinder's editorial piece:

New Car Sales

On January 22, February 2 and February 19, I stated that new car sales worldwide are anemic, that the US car companies would go through bankruptcy and that the outlook for the industry as it is presently constituted is extremely poor.

Well both Chrysler and GM have now entered bankruptcy albeit a little later and many more billions flushed than I had imagined (and Ford is probably not far behind.) So now we have Obama Motors. I think that a government populated with officials from public service, academia and such has no clue about what it's like to run a business. They concentrate on "structural" items like cutting costs, providing financing and the like without taking head-on the major culprits, namely, market forces and corporate culture. So the "new" GM will be profitable if the industry sells 10 million new cars per year. What if that doesn't happen?

I strongly believe that a new car purchase is a luxury that unemployed people cannot afford; hence, I have been harping constantly about job creation, not only in America but throughout the world. And the existing new car inventory is staggering.

If our society "re-bases" their behavior, as I think we are doing, then we will see comparatively very few new car sales for years to come.

The following seminal article from the NY Times adeptly discusses exactly this issue.

Here's the link:

Harvard's (and others) Troubles

On February 9th, I described the mess that Harvard and other big-name, highly endowed institutions are facing given the dismal financial status of their endowments, coupled with years of new infrastructure construction and profligate spending that has caused tuition to skyrocket.

In any event, Boston Magazine produced an excellent, extensive piece that details the trouble that Harvard is in, and how unprepared the new president and administration are in dealing with all the forces that are work here.

You can check it out by following the link below:

Foreclosures, No End In Sight

On May 25th, in "Condition Yellow If Not Red," I worried that borrowers who had been prudent, not speculative, were starting to default on their mortgages. This is becoming a colossal problem for both lenders and borrowers, and the government's "mortgage intervention" program has been an utter fiasco.

The NY Times explores this theme comprehensively:

Pakistan And The Bomb

On May 4th, and in other posts, I have opined that the Nuke situation in Pakistan alarms me greatly. We'll it appears I am not alone. Several weeks later, the WSJ published an article that explores all the dangers that are being faced over there, despite the Pakistani army's putative successes.

Here's the link:

That's it for this segment. In my next post, I will write about some hopeful developments on the ethical front coming from, MBA graduates no less. I'll write that one soon, but I have to go eat dinner now.

Thanks for reading, if you like this stuff, please recommend it to your friends, and they can get automatic notification by signing up for Google Reader (preferable) or by opting for a similar service on Blogspot.

John A.

1 comment:

  1. Great post John. Meaty topics with your concise point of view and great articles to go alongside them. A worthy read.