Archive for May, 2009
Friday, May 29th, 2009
From The Huffington Post:
Look for another rosy round of profits when banks turn in their numbers for the second quarter ending in June when it will be legal for them to improve their balance sheets by shifting losses into the future, thanks to new accounting rules passed by a one-vote margin by the Financial Accounting Standards Board (FASB).
It’s just one in a series of changes made to accounting rules that allow banks to shift or ignore losses or pretend that liabilities aren’t liabilities. The struggle for control of the financial recovery—where the money goes, how it’s counted and who survives—is nothing short of war. Truth has been the first casualty. The latest rule change allows banks to split losses into ones that they recognize immediately and others that are pushed down the road and may pop up on the books later. It passed in April with barely any notice from the press.
The press may not have noticed the rule change, but Smeal’s Edward Ketz did. Ketz penned a column in April that calls for the resignation of FASB chair Robert Herz, who cast the deciding vote in favor of suspending the mark-to-market accounting rules.
April 2, 2009 is a day of accounting infamy. It is a day in which the Financial Accounting Standards Board (FASB) bowed to the pressures of the banking community and Congress to allow distortions, massagings, and manipulations of the U.S. financial reports. Because of these cowardly acts, I think it time for Robert Herz to resign from the FASB.
… The FASB got pushed into this decision and Robert Herz caved in. This isn’t the first time either. Herz became chairman after Enron’s special purpose entities exploded on Wall Street and has yet to do anything about them. These special purpose entities have also played a part in the current banking crisis. Herz also presided over the new rules on business combinations. While I applaud the elimination of the pooling option, which enabled many corporate frauds, I remain skeptical of the treatment of goodwill, which is another loophole. And Robert Herz keeps preaching against complexity and for simplicity and principles-based accounting, which are keywords to allow corporate executives the power to do as they wish with the recognition and measurement of revenues and other elements. (Bob, if these FSPs are based on any legitimate principles, pray tell us which ones.)
Writing about these items when originally proposed, Jonathan Weil referred to the FASB as the Fraudulent Accounting Standards Board. I am sympathetic with his f-word, but I think it may be too harsh. After all, the board is “merely” allowing managers to commit fraud without facing any disincentives. But I think there are other f-words that we could employ, such as fearful, feckless, and futile.
Wednesday, May 27th, 2009
Readers of Business Casual are now able to post comments on each blog entry. Visitors are encouraged to respond to blog posts and engage Smeal’s scholars and each other in a dialogue on the issues covered in this blog.
No registration is necessary. To leave a comment, click on the entry’s title and scroll to the bottom of the page.
Tuesday, May 26th, 2009
“Concerned a brain drain could hurt its long-term ability to compete, Google Inc. is tackling the problem with its typical tool: an algorithm,” according to The Wall Street Journal. “The Internet search giant recently began crunching data from employee reviews and promotion and pay histories in a mathematical formula Google says can identify which of its 20,000 employees are most likely to quit.”
According to Smeal’s Maria Taylor, director for learning solutions for Penn State Executive Programs and co-author of Human Resource Transformation: Demonstrating Strategic Leadership in the Face of Future Trends, “Google may revolutionize talent management the same way it revolutionized how we find and use information.”
More from Taylor:
Google’s recent announcement that it is testing a mathematical formula to predict employee departures is a marvelous example of an organization drawing on its core competency to solve new problems. In this case, Google is synthesizing seemingly disparate sources of data into relevant information to help to solve its talent retention challenges.
This mathematical approach is clearly consistent with Google’s data driven culture. The question is: How well will Google combine this tool to build a viable system of talent management that is consistent with its culture?
Google’s identity is built upon user and employee focus. A visit to the Google Web site shows the emphasis on innovation, individual contribution, and the team in links such as the “Ten Things Google has found to be true” and “The Google Culture.” The new tool will be successful if it facilitates the organization to keep true to this culture and uses the information provided to raise the engagement levels of those who are identified as at risk. High tech plus high touch equals high impact.
Organizations that are successful in developing and retaining great talent share several characteristics: genuine focus on the mission and success of the organization as a whole, unique opportunities for employees to feel like they can make a difference, the belief that one’s contributions will be appreciated and recognized, and real involvement of leadership at all levels in developing talent. Talent and leadership development programs are successful when executed as an integral part of the greater whole of organizational growth and success.
To the degree that organizations can identify the important factors in retention and success, mathematical modeling and data-driven decision tools may become important components. However, their true success will be determined by implementing an integrated program that considers organizational as well as individual success and growth.
Friday, May 22nd, 2009
More details are available here.
Thursday, May 21st, 2009
A patent lawsuit filed this month by the ACLU and the Public Patent Foundation at Benjamin N. Cardozo School of Law (PUBPAT) on behalf of scientific organizations, researchers, and individuals has garnered a great deal of attention due to its unusual approach and controversial subject matter. According to an ACLU news release, the lawsuit charges that “patents on two human genes associated with breast and ovarian cancer stifle research that could lead to cures and limit women’s options regarding their medical care.”
Smeal’s Dan Cahoy, a patent lawyer and associate professor of business law, says the case appears to be a long shot, legally speaking, but that it could accelerate reform in intellectual property law.
Below, Cahoy explains the case and the legal arguments in greater detail:
If successful, this lawsuit would alter the balance between intellectual property ownership and public access. At the very least, it serves to highlight aspects of our innovation system that many believe should be reformed.
The case involves patents owned or exclusively licensed by Myriad Genetics related to the gene fragments known as BRCA1 and BRCA2. Screening tests for mutations in these genes can identify an increased risk of breast and ovarian cancer. Because it is not possible to conduct the screening tests without infringing the patents, they have generated controversy since issuing. Adding fuel to the fire is the fact that Myriad does not license the technology, but rather offers its own screening test for what some consider a premium price. The ACLU/PUBPAT suit is merely the latest attempt to tame this limited monopoly.
One reason this dispute has evoked a strong emotional response outside of the intellectual property legal community is certainly the fact that some of the patent claims at issue cover fragments of human DNA. Casual observers wonder, “How can you patent existing human genes?” The legal explanation is that that DNA patents actually cover only the isolated, purified genetic material, which does not exist in nature. This is the same rationale for granting a patent on a chemical compound or enzyme isolated from a plant. But even with this explanation in mind, people are still skeptical; this case seeks to channel some of that discontent to foster a change in the rules permitting such patents. (more…)
Wednesday, May 20th, 2009
President Obama yesterday unveiled new fuel economy standards for the auto industry calling for the nationwide vehicle fleet to average 35.5 miles per gallon by 2016. The new standard complicates the business model for the country’s struggling auto industry as it will add about $1,300 to the cost of each new vehicle. And, at the moment, with gas prices much lower than last summer, there just isn’t much demand for these smaller, fuel-efficient vehicles. To raise demand for these types of cars, many economists are calling for a gas tax.
Smeal’s Anthony Warren agrees, arguing that the Obama administration should institute a tax that fixes the price of gasoline at around $4.00 per gallon for the next four years:
The $4.00 price will include the wholesale market price of the gasoline, the retail markup, and a variable tax levy of the difference, which is captured at every purchase. State taxes will be added on to the $4.00 base price and clearly indicated at the pump and on the receipt. Retailers can continue to compete with each other by trimming their own per-gallon markup by a few cents per gallon while maintaining per-gallon tax levels. The final result will be gas prices hovering around $4.00 depending on the retail markup and state taxes.
Under this plan, when market prices are less than $4.00, the federal government has an immediate source of new revenue. And if market prices go above $4.00, which is improbable as demand will likely decline, the government will subsidize the price.
The federal government will immediately raise revenues that can be directed to infrastructure rebuilding and job creation. At the same time, consumers will know the price that they will have to pay for fuel now and for the next four years. We saw last summer that at $4.00 per gallon, consumers learned to deal with the increased price, and indeed reduced consumption, which in turn brought the price per barrel down. Under this new gas-pricing plan, the more demand is reduced, the greater the tax revenue. This provides the federal government with more flexibility to adjust income taxes as the gas tax levy plays out. Under the current gas tax structure, the government’s only incentive is to encourage gasoline sales to raise tax revenues without any regard to long-term national harm in the form of carbon emissions, energy dependence, and myriad other issues that come with the overuse of oil.
This new scheme will encourage consumers to make more rational decisions regarding gasoline usage, including which models of cars to buy, sending clear messages to Detroit about auto demand. The automotive companies will finally have market incentives to make rational development plans for new vehicles based on the long-term cost of energy. The burgeoning alternative energy sector will now have a stable benchmark against which to be judged. And young entrepreneurial companies in this field and others, which are so important for our future, will be able to attract the venture capital they so desperately need.
At the same time, with demand leveling out as a result of the steady price at the pump, oil companies will be able to plan their production schedules based on stable market demand.
If the new administration is serious in its promise of change, boldness, independence from lobbyists, and a willingness to look at truly innovative solutions, then $4.00-per-gallon gasoline presents the president with a chance to solve many immediate and long-term problems in one bold move.
Tuesday, May 19th, 2009
The Fed’s bank stress test results, released earlier this month, found 10 of the country’s largest banks need about $75 billion more in capital to survive another serious economic downturn. The results were met with positive spin from the Obama administration and ”sparked a new round of confidence in the sector.” However, according to Smeal’s Edward Ketz, the results point out the opposite: “The banking sector remains in serious trouble.”
More from Ketz and his recent column:
That the financial industry was and remains in trouble is not revelatory to those who pay attention to fair value measurements. Take Citigroup for instance. This firm, once a giant among banks, now gasps for its existence.
Citi’s reported net income was $(27,684) for 2008 (all accounting numbers in millions of dollars). While this is a smelly number, the odor grows worse when one adjusts it for various items that bypass the income statement. If one adjusts this reported number for unrealized losses on available-for-sale securities, losses on the foreign currency translation adjustment, losses on cash flow hedges, losses for additional pension liability adjustments, actual returns on pension assets, and losses on hold-to-maturity securities, the actual loss becomes $(53,671). It reveals that Citi lost twice as much as it reported.
Further, we have been hearing how Citi has turned things around and that the first quarter in 2009 returns Citi to the black column with a profit of $1,593. It isn’t true. If we make similar adjustments as described above and adjust for “nonperformance risk,” the quarterly results show a loss of $(10,284).
Citigroup suffered a cardiac arrest in 2008, and it remains in critical condition. Any other conclusion is propaganda or self deception. And forget the stress tests; they are so flawed that Lehman Brothers might pass them. The Fed says that Citi needs another $5,500 in capital to weather any additional economic crises it might face. It isn’t true. Citi needs a lot more capital than that just to weather current conditions.
If you want to protect your portfolio, don’t listen to the optimistic forecasts coming from Washington and don’t stop at the reported income number. Look at the fair value disclosures within SEC filings, adjust reported earnings for these fair value gains and losses, and then you will obtain the truth.
Friday, May 15th, 2009
The Obama Administration on Wednesday announced a proposal to regulate the credit derivatives market as part of an effort to avoid another financial crisis. According to Smeal’s Jean Helwege, “The lynchpin of the plan is the requirement that all credit default swaps (CDS) contracts trade on a regulated exchange so that they involve a reasonable amount of capital and to increase the transparency of the market.”
But, Helwege says, “The plan to require a CDS exchange misses the crux of the crisis, as it does almost nothing to reform the current setup.” She says the country would be better served by focusing reforms in the mortgage market, specifically targeting Fannie Mae and Freddie Mac.
More from Helwege:
The motivation for this reform is the failure of the giant insurance company, A.I.G., which became financially distressed as a result of writing hundreds of billions of CDS contracts (essentially offering insurance on bonds).
The plan to require a CDS exchange misses the crux of the crisis, as it does almost nothing to reform the current setup. If the requirement is extremely onerous to Wall Street, the CDS as we know it will cease to exist and the bankers will invent a new contract that evades the regulations but includes the essence of a CDS contract. If the regulation is not onerous, the CDS will start to trade on the exchange and two changes will occur that President Obama believes are very important.
First, the trades will be written down in a central place so that regulators can observe the depth of the market and understand the prices involved in these transactions. While this sounds like a major innovation, regulators can and do buy data on the CDS market from a vendor whose coverage is quite comprehensive.
Second, the CDS exchange will require that sellers maintain a margin account and put up more cash as the CDS premium increases. The market already requires that CDS sellers put up more cash as bond default probabilities increase. Indeed, this is the source of AIG’s cash crunch—their trading partners were requiring more and more collateral as the economy collapsed and corporate bond prices declined. Putting this requirement into writing as part of a CDS exchange would not have made AIG more or less vulnerable to losses surrounding CDS contracts.
Friday, May 15th, 2009
A research paper co-authored by three Smeal marketing professors has been named the best paper to appear in the Journal of Modeling in Management in the past year. “The Simultaneous Identification of Strategic/Performance Groups and Underlying Dimensions for Assessing an Industry’s Competitive Structure” was published in Vol. 3, No. 3, of the journal in 2008. Its authors are Wayne DeSarbo, Smeal Chair Distinguished Professor of Marketing, Rajdeep Grewal, professor of marketing, Qiong Wang, assistant professor of marketing, and Heungsun Hwang of McGill University.
The complete paper is available online here.
Thursday, May 14th, 2009
The European Union yesterday levied a record $1.45 billion fine against Intel for antitrust law violations. CNNMoney.com reports, “The European Commission said Intel, the world’s largest chipmaker, violated European antitrust laws by unfairly paying computer makers to delay or even cancel products that contained chips made by rival AMD.”
Smeal’s Terrence Guay, says the fine ”illustrates the fact that the EU has replaced the United States as the regulatory capital of the world.”
More from Guay:
If previous cases are any indication, the company’s appeal is unlikely to change the outcome, as General Electric and Microsoft learned to their dismay in recent years. The EU has major reservations about companies that hold a dominant position in their industry, such as Intel and Microsoft.
What is interesting is how U.S. competitors have used the EU as a forum to punish these three companies. Advanced Micro Devices (AMD), Intel’s primary competitor, brought the case to the EU and provided information used in the antitrust ruling. Authorities in Japan and South Korea previously had ruled that Intel had engaged in anti-competitive practices, although no fines were imposed. AMD realized that the EU would be tougher on Intel than would U.S. regulators, given the relaxing of antitrust policy under the Bush administration.
Similarly, Microsoft’s competitors went to the EU after losing their case in the United States in 2001, and won in Europe in 2004. Until this week, Microsoft held the ignominious record for the largest fine imposed by EU competition authorities. And General Electric’s 2001 attempt to acquire Honeywell was thwarted by the EU, despite winning approval from U.S. authorities.
The Obama administration signaled last week that it would get tougher on antitrust matters, which suggests a move toward the EU model of antitrust policy. Companies have to realize that the world’s largest market is no longer the United States, but the EU. And if they want to compete there, then they must abide by EU regulations, be they antitrust, environmental, product safety, or labor-related. Companies that dominate industries also need to be aware that their competitors will pursue them around the world as they “shop” for favorable regulatory environments.