Archive for March, 2009

Sun Setting on Sun-Times?

Tuesday, March 31st, 2009

The Sun-Times Media Group, publisher of the Chicago Sun-Times and several regional newspapers, today announced that it’s the latest newspaper publisher to file for bankruptcy. The Tribune Co., publisher of the Los Angeles Times and Chicago Tribune, and Philadelphia Newspapers LLC, publisher of the Philadelphia Inquirer, also recently filed for bankruptcy. In addition, two major newspapers in Denver and Seattle were recently shuttered by their publishers.

In the latest edition of his e-newsletter Early Indications, Smeal’s John Jordan explains how the digitization of news has led to the downfall of the newspaper industry. He says that many facets of the newspaper have been “separated out by standalone Web businesses, each taking some segment of the readership and unbalancing the [newspaper's] former cross-subsidies.”

More from Jordan:

Sports readers can go to the league sites (with heavy video footage), television spinouts from Fox/ESPN/CNN+Sports Illustrated, fan-driven blogs and/or message board efforts, or to any number of sites updating them on favorite cricket, soccer, or other international sports the metro dailies can barely cover, if at all.  News is still primarily gathered by the usual suspects, but commented on, linked to, and re-aggregated by everyone from Google News to bloggers to ideology-driven destination sites.  Daily A-Z stock charts aren’t a particularly helpful way to watch the financial world, opening the door to broad distribution of previously professional-grade charting, archiving, and analytics; less professional message boards, blogs, and other mechanisms spread the wisdom (or lack thereof) of crowds.

The papers’ extremely profitable classified ads were hit hard by multiple competitors. eBay then later Craigslist took over the realm of random objects, Monster and others (including the hiring firms directly) redefined the help-wanted field, and Edmunds and Cars.com along with eBay Motors improved on the car-buying experience by improving information availability and transparency.  Match.com and eHarmony improved on the user experience and inventory levels of the personal ads, while real estate agents alone and in their trade association aggregated and augmented millions of property ads with photos, maps, and video walk-throughs.

In the end, most any page of a 1990s-era newspaper was challenged by an online outlet.  With the readership in decline, both ad and subscription revenue spiraled downward, and the splintered nature of the competition made coordinated response impossible.

Tags: Jordan
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GM CEO O-U-T

Monday, March 30th, 2009

In exchange for further assistance from taxpayer-funded federal loans, the White House is forcing Rick Wagoner to resign from his post as chairman and CEO of General Motors. The Wall Street Journal calls the move “one of the most dramatic government interventions in private industry since the economic crisis began,” and Smeal’s Terrence Guay agrees. But, Guay says, “It is perfectly acceptable.”

More from Guay:

Financiers—be they commercial banks, the IMF, or private equity groups—always attach strings, or more accurately “conditions,” to their loans. It should be no different for the U.S. government. If taxpayer money is being loaned to a private company, the government should have every right to attach conditions to it, including changing GM’s management team. 

Wagoner’s almost nine-year tenure as CEO has done little to improve the fortunes of the company, and has arguably made them worse. Unfortunately, this transition comes too late in the game to have much of an effect in creating a successful restructuring plan for the company. 

The Obama administration has learned a lesson from the government initiatives over the past year to support the ailing financial sector. Public opinion simply will not support bailouts without conditions.  In effect, while banks received incentives or “carrots” to change their ways, the government is trying the “stick” approach with the auto industry. What the government may find out is that, regardless of the tactic, it is very difficult to discipline companies as the U.S. political economy is currently structured. 

Tags: Auto Industry, Economic Crisis, Economy, Guay, Politics
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The Secretary’s New Rules

Thursday, March 26th, 2009

On Capitol Hill today, Treasury Secretary Timothy Geithner outlined changes he’s proposing that would grant the federal government greater oversight and regulatory power over the country’s financial system. The Treasury proposal would extend federal trading regulations to derivatives and would bring hedge funds under the regulatory oversight of the Securities and Exchange Commission.

Additionally, Geithner calls for tougher standards for judging whether financial institutions are too big to fail, and he proposes a new federal agency that would monitor risk.

Smeal’s John Liechty suggested similar changes to the country’s financial system in an article in yesterday’s American Banker. Liechty and co-author Allan Mendelowitz of the Federal Housing Finance Board argue for the establishment of a National Institute of Finance (NIF) that “would serve as a national data archive and think tank for the financial regulatory community.”

“A centerpiece of the NIF would be a Federal Finance Data Center,” they write. “The center would let regulators assess system-wide contagion and concentration risks, perform stress tests, including the impact of the failure of a large institution, and hence make better-informed decisions in times of crisis.”

Liechty and Mendelowitz conclude: “Without detailed data and validated decision tools, crisis decisions will continue to be based on guesswork and intuition.”

View an early version of their op-ed on Liechty’s Web site.

Tags: Economic Crisis, Finance, Liechty, Politics
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Treasury Detox

Thursday, March 26th, 2009

Treasury Secretary Timothy Geithner this week unveiled the Obama Administration’s plan to “liberate the nation’s banks from a toxic stew of bad home loans,” as The New York Times puts it. Smeal’s Jean Helwege says the plan may be what the financial system needs, but cautions that banks may not automatically play along.

More from Helwege:

The Treasury plan to auction banks’ toxic assets to private investors may be just the catalyst the financial system needs. In the past, when banks have been overburdened with bad loans—for example, in the Latin American debt crisis of the early 1980s, the savings and loan crisis of the late 1980s, or the so-called Lost Decade experienced by Japan in the 1990s—allowing banks to operate under the cloud of bad assets has been destructive to the economy.
 
While it may seem like a shell game to move assets from one part of the financial system to another, removing bad assets from bank balance sheets seems to help. In the Latin American crisis, toxic assets were removed via the Brady Plan, which packaged bad loans as bonds and sold them to investors such as insurance companies and mutual funds. Because these investors had no exposure to the emerging markets and were able to buy the bonds cheaply, they did not suffer any stigma by acquiring the assets and the banks were able to clean up their images. Likewise, the S&Ls’ bad assets were moved into the Resolution Trust Corporation (RTC) and auctioned off to private equity investors. In contrast, the Lost Decade went on as long as it did because Japan did not remove the bad assets from their banks, with the result being that they operated as “zombie” banks for years. 

A critical part of the Treasury plan to remove the toxic assets is participation by the banks.  One has to wonder why these assets, which have been weighing them down for well over a year, have not yet been sold. One potential problem is a lack of liquidity: Few financial institutions have the funds available to buy them. Thus the Treasury has moved to provide financing in its auction. However, another possibility is that banks are reluctant to sell the assets. Bank regulations provide perverse incentives to troubled banks: Even when the banks and the market know the true value of a bad loan, banks resist writing down their assets to avoid having to raise more capital to secure deposits.

As long as few toxic assets are trading, bank regulators cannot easily prove that banks are operating with faulty balance sheets. Suppose a bank makes a $100 loan that subsequently goes bad. If the bank reappraises the loan at $60, it must find an additional $40 in capital to maintain its regulatory net worth. As bad as that sounds, a Treasury-sponsored auction that reveals a value of only $30 would be even worse, as it might indicate insolvency and thus lead regulators to take over the bank. Some banks would rather not participate in any plan to clean up toxic assets if the asset values they record in their books are still far from the true market values.  Instead, they will prefer to wait for recovery, no matter how slow. 

Whether the plan works or not depends crucially on banks’ incentives to participate, and this in turn depends crucially on how well bank regulators have succeeded in pressuring banks to write down assets to reflect the true losses. Treasury efforts to entice buyers with subsidies and loan guarantees will help bring them to the auctions, but their profits from buying cheap toxic loans will not materialize if the banks stay away. As infuriating as these subsidies are to American taxpayers, things could be worse if banks refused to cough up the assets on which Wall Street vultures hope to profit.

Tags: Banking, Economic Crisis, Finance, Helwege
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Business Travel Good for the Economy

Wednesday, March 25th, 2009

As public outrage grows over bailed-out banks hosting what many perceive to be lavish retreats and business meetings, politicians from the president on down have been condemning such events. In fact, the Senate recently  passed a bill limiting spending on luxury travel for firms receiving bailout money.

“There is no arguing with the premise that accountability regarding the use of bailout funds is essential to restoring public confidence,” says Smeal’s Fred Hurvitz. But, he says, the criticism seems to be causing a ripple effect through the entire meeting and event-planning industry. According to Hurvitz, a lot of healthy companies that haven’t received any bailout funds are cutting back on travel out of a fear of being labeled as lavish spenders.

More from Hurvitz:

The business travel industry supports nearly 2.5 million jobs in the United States. It is estimated that approximately 1 million of these jobs are tied directly to meetings and events. The travel industry is already suffering due to the current economic situation. The added focus on, and criticism of, business travel by our politicians is causing additional strain on this economically important industry.

What our politicians fail to realize is that when they make their very public assertions condemning “lavish” business travel, they are also stifling some of the economic spending needed to help re-energize this economy. It has been estimated that business travel accounts for approximately $240 billion in sales revenue, and meetings-related travel generates approximately $16 billion in state and local tax revenue. So, while it may be politically fashionable at moment, condemning business travel as an example of corporate extravagance is not in the best interest of our economy.

Perhaps the most disturbing part of all of this is that the people who our elected officials are harming the most are the service workers—including housekeepers, maintenance workers, reservation agents, wait staff, and other hourly employees—who depend on this form of travel for their modest livelihood. These are the very people who politicians purport to be looking out for when they run for election.

The recovery that we are all hoping to see depends on restoring confidence and stimulating customer spending. Politicians who are adopting populist rhetoric to garner support from an enraged public are working in direct contrast to these goals, and they need to be careful what they wish for. Condemning the travel industry, which accounts for about one out of every eight jobs in the United States, is not a good way to stem our rising unemployment levels. And fueling public anger against an entire industry—one that is a vital element to our nation’s overall economic recovery—can have unintended consequences.

Tags: Economic Crisis, Economy, Hurvitz, Politics
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Smeal on the Radio

Tuesday, March 24th, 2009

Smeal’s Jean Helwege is scheduled to be on WRTA-AM in Altoona, Pa., around 3 p.m. EDT on Wednesday. She will be discussing the financial crisis and the Obama Administration’s plan to buy up toxic mortgage assets.

Listen live online here.

Tags: Helwege, Media
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Accounting Stimulus

Monday, March 23rd, 2009

Smeal’s Edward Ketz was published on TheStreet.com Thursday, facetiously arguing that the most effective economic stimulus is actually accounting stimulus:

To stimulate the economy, one needs to stimulate the accounting. Bankers have often broadcast this mantra in an effort to end fair-value accounting, but these bankers are thinking too small. Let’s really stimulate the economy by really stimulating the accounting. And it won’t cost taxpayers one cent!

My proposal is very simple. As the economy lists in its doldrums, why not goose the accounting reports and get investors buying stocks again? Once stock prices rise gloriously and the Dow again sees 10,000, the economy will be fixed.

We can achieve this felicitous state by granting each company in the United States the ability to inject $5 billion into its own earnings. As the banks and auto manufacturers remain in serious trouble, we can empower them to add $50 billion into their earnings statements.

Read the rest of Ketz’s piece on TheStreet.com.

Tags: Accounting, Economic Crisis, Ketz
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Mexican Trucks, No Mas

Thursday, March 19th, 2009

When President Obama signed the omnibus spending bill last week, he also killed an 18-month-old pilot program that allowed Mexican trucks to drive on U.S. highways. In retaliation, the Mexican government announced yesterday that it is levying higher tariffs on $2.4 billion worth of U.S. goods, including beer, shampoo, and toilet paper.

Columnist Mary Anastasia O’Grady outlines the history of the Mexican truck debate in Monday’s Wall Street Journal and argues that allowing Mexican trucks on U.S. highways improves trade relations, supply chain efficiency, and border security.

Smeal’s Fariborz Ghadar agrees that the trucks should be permitted on U.S. roadways:

If we are going to take NAFTA seriously, Mexican trucks should be allowed to cross the border and continue unimpeded to their U.S. destinations. First, Washington says that they’re not allowed because they are too dirty. Then, once they were cleaned up, the argument became that they’re unsafe. We put up hoop after hoop, and they’ve jumped through all of them.

We finally installed this pilot program, which allowed the trucks on U.S. roads for a year and a half with no safety problems whatsoever, until another election put politics ahead of good policy. The fact that this fight has been going on for so long has everything to do with labor politics and nothing to do with the safety of Mexican trucks. No matter what NAFTA says, if the government continues to put up one obstacle after another in the way of cross-border commerce, they eventually end up blocking free trade.

Tags: Ghadar, Globalization, Politics, Trade
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Ambassador Rooney

Wednesday, March 18th, 2009

At a reception marking St. Patrick’s Day yesterday at the White House, President Obama nominated Pittsburgh Steelers owner Dan Rooney to be U.S. ambassador to Ireland. Rooney, who spoke at Smeal last year, has long been a supporter of Irish charities, including helping to found The Ireland Funds, an international organization that raises money around the world to support causes in Ireland.

“The strong ethnic heritage and fabric of Pittsburgh and his family are good backdrops for his nomination,” according to Smeal’s Andrew Bergstein, associate director of the Center for Sports Business & Research. “It also doesn’t hurt that the family business wins super bowls.”

More from Bergstein:

It’s hard to imagine Dan Rooney being anything other than a caring, thoughtful, and ethical representative of his country to his native land. Having owned the team for so many decades “Mr. Rooney,” as he is called, his family, and his legendary father have become icons not only to Irish Americans and the multi-ethnic Pittsburgh community. Their hard work, family values, and ethics have made the family and their team popular with people around the world. But the nomination of Dan Rooney might resonant all the more today as people react to the forces that led the United States and the world to their current economic situation. 

Mr. Rooney represents what many people feel is one of our nation’s greatest assets. The strength of the American experience would never have been possible without people and families coming to the United States seeking better lives. As the world turns its attention to the post-Bush Obama United States, it might see the successful ascent of immigrants as a reminder of an inherent goodness of the nation he represents.

Tags: Bergstein, Politics, Sports Business
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Small Business Stimulus

Tuesday, March 17th, 2009

President Obama yesterday laid out his plan to free up credit for American small businesses. Under his plan, the Small Business Administration will increase its payback guarantee for small business loans from 85 percent to 90 percent. The proposal will also lower the loan fees paid by borrowers.

Smeal’s Anthony Warren, Farrell Clinical Professor of Entrepreneurship, made the following comments in response to the president’s plan:

It’s better to spend money on stimulus for the future than on supporting the dinosaurs of the past. Obama’s plan is a welcome sign that the new administration recognizes the importance of small company survival for the long-term health of our economy. 

Certainly the SBA has been neglected for too long. But changing the guaranteed level by 5 percent will not in itself provide sufficient stimulus to this vital sector. Many companies do not avail themselves of these guarantees currently because of the onerous paperwork and bureaucracy that is associated with the applications. There must of course be a balance between ease of loan acquisition and oversight, but  the loan application and approval process needs to be streamlined along with the higher guarantee levels.

Tags: Economic Crisis, Entrepreneurship, Warren
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