November 18, 2008

Scoundrels

Lots of trash being talked about the BIG 3, and I don't disagree with most of it. A few caveats:

  1. We talk about the Japanese companies like they never put out crap. Seriously, you ever see a circa 70's Datsun? Closest analogue would be a Yugo. Not that they haven't got their acts together, mind you.
  2. And now we're talking about "making the car companies take their medicine" without a bailout? Whatever the argument there pro or con, if the Japanese government had done that to the Japanese auto giants back in the day, then they wouldn't be in the position they are in now.
  3. Japanese do small cars the best. Period. But, on every other level, American cars are in the same class. J D Power has Cadillac and Mercury right up there with Toyota. The last Consumer Reports I saw has American cars being more reliable than much-revered Germans BMW & Mercedes. The product the Americans are putting out now is competitive. Not better, but competitive. And sure, they put out some crap in the 70's & 80's, but nobody's perfect (see #1. above). I think that we may even look at this time as a golden era of design for Chrysler. It's time to get over the "American cars suck" thing.
  4. The Big 3 are addicted to the energy pigs, but if you don't think the Japanese were moving there, you've never seen a Honda Ridgeline (beastly as a damn Hummer!) or a Toyota Tundra.
  5. And speaking of the gas hogs, these were the biggest part of the market in the US. Do you want to be the CEO trying to tell the board of directors why you were trying to foist small cars on an unreceptive public? Maybe you could get away with it, if you had the government backing development of efficient but unpopular cars . . . once again, there are reasons the Japanese could develop their markets: first, the domestic market (for obvious reasons) fostered the development of small cars. Second, there was support from the government, and implicit understanding from the boards all the way down that the future was in these initially unpopular small cars. The Japanese did not have the same kind of pushback that Americans get from their instant gratification "free market", where minute-to-minute results matter, and every tick down the stock price takes endangers someone's job.
That said, if one penny of public money goes into the BIG 3, then it better be with the understanding that it is time to turn the page. It's going to hurt (Ford has Explorer and F-150 lines here in Lousville), but it has to be done. Now seems to be the best time: all auto sales are going to hell, so they may as well put all that dead capital outlay into projects which may pay off in the future, instead of clinging desperately to the past.

* * * * *

Oh, those bastards! I hate insider trading. All those white-collar Capones need to be locked up. And now, Mark Cuban is accused? Well, string him up, I say!

Not so fast. This is an odd little case. Cuban isn't exactly innocent, but this isn't the case of another rich guy scamming the public. There are pretty good accounts about exactly what is going on (mostly on the True Hoop blog at ESPN), but it seems to go something like this:

Cuban invested in a search engine start up called Momma.com, in spite of being suspicious of some of the people associated with the IPO. Not long after he bought in, he owned approximately a 6 % stake in the company. At a certain point, the company decided it was going to offer more stock to further capitalize their venture, and thought it wise to call Cuban to ask him if he wanted to buy more stock. Cuban was understandably pissed off, since a new stock issue would devalue his holdings (and the holdings of everyone else that bought in before the second stock offer). The company CFO informed Cuban that he was receiving confidential information, to which Cuban reportedly replied "Well, now I'm screwed. I can't sell." He then promptly did sell his entire stake in the company BEFORE THE INFORMATION ABOUT THE NEW STOCK OFFERING WAS MADE PUBLIC. That, friends, is a no-no (in most people's opinions).

Now, that's theoretically a bad thing, since the person buying the stock from Cuban had no access to the information Cuban knew (though there are those who argue that Cuban did not assume a "fiduciary obligation of confidentiality", which means he wasn't bound by insider trading laws). But it's also clear that Cuban made the move out of anger rather than a desire to rip someone off or even cover his own ass. Most reports say that he made about $750,000 by dumping his stock early. That sum is nothing to Mark Cuban. He dumped that stock out of spite, not for any kind of financial gain.

On top of everything else, there is a lot of evidence that Cuban was getting extra attention for backing the movie Loose Change, a documentary critical of George W. Bush. At very least, there were some improper threats from people associated with the investigation based on Cuban's political affiliations (perceived affiliations: actually, Cuban usually votes Republican).

Right now, this is a civil case. Chances are it won't go any further (remember, the Martha Stewart criminal case came up not because she did insider trading, but because she lied about it to prosecutors). Cuban could (and probably should) just write a check and make it go away. But he won't. He'll probably spend down to his last dime to fight back against the SEC. That's just the kind of guy he is. More power to him, I say.

Meanwhile, given what has been going on all this time, this has the appearance of Barney Fife cracking down on speeders while every bank in Mayberry is being looted.

6 comments:

josh said...

I don't care why the Big 3 need my money. I shouldn't be forced to give it to them.

Insider trading laws should be abolished. Every reasonable person should understand that investing is a form of gambling. Every gambler knows the house always has the advantage. Insiders are the house. If insider trading is wrong we should ban investment.

Bill Zink said...

Yeah, no problem, Josh. We'll pull your last few federal tax returns, convert them back into cash, and rope off the stack in the corner of a room somewhere. Then we'll call it the New Federal Reserve, & we'll use it to guarantee government debt through the end of the millenium. But it will still be there whenever you want it back (insert winkyface emoticon here).

Seriously, though, this whole thing came about because some guy on the radio was ranting against "auto welfare", saying they should learn to be competitive like the Japanese. The thing about that is that one of the Japanese industry's big advantages is that the Japanese government has always had their backs when necessary . . . so, if you're against the bailout, don't bring up the Japanese auto companies, because that's actually an argument for a bailout, not against it.

That said, I don't want it to sound like I think the American companies aren't largely responsible for their predicament. I know the story of a GM exec who, upon being named general manager of a new GM division, was given most of a year to come up with a business plan. He spent that time flying back and forth between Japan, Korea, and Germany, talking to people in the business, trying to find out why they were successful. Being an unusually quiet person for such a high level position, he found them more than willing to share their ideas with him, even though he was soon to be a competitor. At the end of that time, he presented his business plan to the board of directors. What he learned, he said, is that long term investment is crucial to success. His plan required "X" for investment every year for ten years, which would be more than projected income "Y" in any given year. In the unlikely event that "Y" should be greater than "X", then the overage should not be looked at as profit, but rather as more opportunity to invest back into the business. If they operated in such a manner for ten years, then they would be so thoroughly entrenched in the market that they would be in the black for the next twenty years with minimal investment for upkeep.

The board loved his presentation. Several members sought him out to compliment him on it. A few days later, he met with his boss in Detroit. His boss raved about his presentation, then told him he had to show a profit in his third year if he expected to keep his job. This was 1986. He didn't last three years. By 1995, the division had been sold off to the Chinese. By 2001, the original plant was closed.

That is the Big 3 problem in a nutshell.

As far as the insider trading laws, I'm more or less with you . . . but, the problem is, most people (reasonable or otherwise) do not understand that the stock market is SPECULATION, therefore GAMBLING. My late grandpa Zink, pro-business right-winger that he was, understood that clearly: he always used to say "Bill, if you're gonna gamble, stick to sports, except for boxing. No boxing, and no stocks. Stocks are the dirtiest of all.

The industry has thus far been able to pull the wool over the general public's eyes. That's another reason I like Mark Cuban: he's big on debunking the myths of the stock market, especially when it comes to sharing his own mistakes with other people (unlike all those bullshit macho "never wrong" "financial geniuses").

No matter what you do about insider trading, the insiders still have the advantage (they are indeed, as you so accurately point out, the "house"). The only power you have as an investor is not to play the game by investing in index funds and suchlike. Leave the stock market to the gamblers.

josh said...

Cuban's one of the more likeable billionaires around. I loved when he suggested starting a hedge fund that would invest all its money in betting on NBA games. He proceeded to describe the stock market as a Ponzi scheme and was immediately muffled by David Stern.

I just saw a headline that said Congress wants to see the Big 3's business plans. Uhh...does that mean Congress is an authority on how to run a profitable business? If Congress knows best how to run a business, the next step is to just nationalize everything.

I hope Obama was kidding about working with Republicans. The good thing about partisan gridlock is it minimizes the amount of policy becoming reality.

Bill Zink said...

Ah, I should have figured you would be one of those who agreed with me that gridlock is not necessarily a bad thing . . .

Yeah, I remember that Cuban hedge fund idea. It's actually a great idea. David Stern is such a gangster tool.

Matt said...

This really doesn't have too much to do with this particular entry (though I found it a stimulating entry), but I've been meaning to highlight some outstanding writing from this blog for quite some time. Things that make me say "shit why can't I write like this". So without furhter adieu, my faves:

Meanwhile, given what has been going on all this time, this has the appearance of Barney Fife cracking down on speeders while every bank in Mayberry is being looted.

Surrounded by the gray of the landscape, weighed down by the great undifferentiated masses around me, a bereaved mourner at the funeral of meaning, Motorhead fuels the only emotion that keeps me going in the face of my claustrophobia: adrenalin rage.

We are told that sportswriting can be great writing, and then we are force fed Grantland Rice mythologizing bullshit, and modern bozos can't even approximate a shadow of that hackery . . . well, FJM, you will be missed, to say the least.

Meaning is dead & buried in an unmarked grave. Pity the fools who still believe it alive.

Leigh said...

On the theme of wall street gambling:

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom