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My latest on Slate, on blogs as businesses.
Posted by dan at 05:43 PM
Even if we reduce demand for oil to the point where we don't need to import oil directly from the U.S., we may still have to import refined petroleum products from the Middle East. Carola Hoyos reports in the Financial Times:
Europe and the US will become increasingly dependent on the Middle East as an exporter of refined petroleum products over the next 10 years, according to data published on Tuesday. The figures compiled by the Organisation of the Petroleum Exporting Countries and Wood Mackenzie, the oil analysts, show ambitious refinery building plans in the Middle East are expected to propel its refining capacity above that of Russia and the former Soviet republics, where underinvestment has plagued the energy sector.Aggressive investment in expanding and building new refineries is forecast to boost capacity in the Middle East by 60 per cent, according to the study published by Wood Mackenzie. This would make the region, chiefly the Gulf, the main exporter of finished petroleum products such as petrol, diesel, heating oil and jet fuel.
Opec, already the biggest supplier of crude oil, has itself detailed plans to increase its refining capacity by almost 6m barrels a day – or 50 per cent – in the next seven years. Its members, which include the biggest oil producers in the Middle East as well as Venezuela, Nigeria and Indonesia, hold three quarters of the world’s oil reserves. Middle Eastern Opec members, in particular Saudi Arabia, plan to build new refineries both domestically and nearer their markets, particularly in Asia.
Leaders of oil-consuming countries have stressed the need to improve the security of their oil supplies amid high oil prices and rampant demand for energy from China and India.
George W. Bush, US president, said in his State of the Union address two weeks agothat he wanted to reduce US dependence on Middle East oil by 75 per cent.
But analysts said the US was likely to become more dependent on the Middle East.
Aileen Jamieson, managing consultant at Wood Mackenzie said: “In the US, they have the biggest problem with ‘not in my backyard’ even though they will be most desperate for more capacity.” Strict environmental regulations, local opposition and unreliable profit margins have stopped refineries from being built in the US over the past three decades. Instead, US refiners have added capacity to existing plants and relied on imports from Latin America and the Caribbean to make up the difference.
Opec countries have emphasised this shortage of refining capacity, rather than production constraints, as being behind recent high oil prices.
Posted by dan at 04:50 PM
Steven Greenhouse reports in the New York Times on an anti-union campaign started by lobbyist Richard Berman. He's put up a website, Unionfacts.com, which imputes miraculous power to shrinking private sector unions. Did you know they "helped bankrupt steel, auto and airlines companies."? Gee, I didn't know union officials wrote the business plan for United Airlines and held a gun to the head of GM's management and forced them to make bad investments in Fiat.
Would it surprise you to learn that Richard Berman was himself a former executive at a bankrupt steel company? (Here's some background on him.)
Posted by dan at 04:43 PM
My latest in Slate, on the wave of third world acquisitions of first-world assets.
Posted by dan at 04:42 PM
The folks at the Wall Street Journal editorial page frequently rail against the anti-corruption crusades of Eliot Spitzer by noting that he always settled cases, and never took them to trial, where judges and juries would likely have the common sense to throw out his trumped-up charges.
And so it's no surprise that the page ignored Spitzer's latest court victory. Grethcn Morgenson reports in the New York Times:
Another telecom titan has tumbled.In one of the last of the major conflict-of-interest cases that rocked Wall Street nearly four years ago, a New York State judge has found that the former chief executive of McLeodUSA, a once highflying telecommunications company that has filed for bankruptcy twice since 2002, is liable for improper trading of hot new stock offerings during the technology stock boom.
Eliot Spitzer, the New York attorney general, sued the executive, Clark E. McLeod, and four other high-profile telecommunications executives in 2002, contending that they had steered investment banking business to Salomon Smith Barney in exchange for inflated ratings on their companies' stocks and hot new shares of other companies.
Mr. McLeod netted $9.96 million in profits on 34 stock allocations from 1997 to 2000, the court filings said. Salomon Smith Barney received more than $77 million in underwriting fees from McLeodUSA.
In a decision issued Thursday, Justice Richard B. Lowe III of New York State Supreme Court in Manhattan wrote that Mr. McLeod's acceptance of initial public offering shares from the same brokerage firm that his company used as an investment banker, a practice known as spinning, was "a sophisticated form of bribery."
He also found that because Mr. McLeod did not disclose his hot-stock grants and the profits generated by them, he misled both the investing public and his own company's board.
"We are gratified that New York courts have recognized that undisclosed stock spinning is illegal and deceives the public," Mr. Spitzer said in a statement. "This decision sends a message that executives who put their own interests ahead of their shareholders' will be held accountable."
Mr. McLeod, who lives in Cedar Rapids, Iowa, challenged Mr. Spitzer's assertions that his receipt of undisclosed hot stock offerings was illegal. His lawyer continued that challenge yesterday, calling the case against Mr. McLeod another example of overreaching by Mr. Spitzer.
"Clark McLeod is not Bernie Ebbers or anybody else of that ilk," said Harold K. Gordon, a partner at Jones Day in New York. "There is no evidence that there was any connection between Mr. McLeod's receipt of these I.P.O. shares and Salomon Smith Barney acting as the company's investment banker."
Stating that Justice Lowe erred in his decision, Mr. Gordon said Mr. McLeod would probably appeal.
The civil case against Mr. McLeod recalls the heady days of 1999 and 2000, when telecommunications companies like WorldCom and Qwest were stock market darlings and the men who ran them rock stars. A central figure in the case was Jack B. Grubman, the powerful Salomon Smith Barney telecommunications analyst who recommended McLeod- USA stock repeatedly to the public, even as it plummeted.
Indeed, Mr. Spitzer contended that Mr. McLeod sold 2.2 million shares of his company's stock after Mr. Grubman began recommending it, realizing a profit of almost $100 million from the sales. Mr. Grubman was barred from the securities industry in 2002.
Mr. McLeod appears to have pursued the initial public offering shares aggressively. For example, Mr. McLeod testified that he personally asked for initial offering allocations from chief executives of several companies McLeodUSA did business with and that Salomon Smith Barney was going to offer to the public.
The court must schedule a hearing to set the amount of damages and restitution to be paid by Mr. McLeod.
The other executives sued by Mr. Spitzer for their initial public offering profits were Philip F. Anschutz, former chairman of Qwest Communications; Bernard J. Ebbers, former WorldCom chief executive; Joseph P. Nacchio, former chief executive of Qwest who will be tried this year on insider trading charges in Denver; and Stephen Garofalo, chief executive of Metromedia Fiber Networks.
All four have settled with the attorney general. Mr. Anschutz paid $4.4 million to settle; Mr. Nacchio paid $400,000; and Mr. Garofalo paid $1.5 million. The settlement with Mr. Ebbers, which has not yet been completed, will be a part of his global resolution involving the holders of stock and bonds who lost money when WorldCom collapsed.
Posted by dan at 01:35 PM
Richard S. Dunham and Eamon Javers write in Business Week on the horrific plight of lobbyists, hard-working businessman and businesswoman who are forced, against their will, to make political donations.
The conventional wisdom: Crass corporate lobbyists lavish millions of dollars on lawmakers in a transparent attempt to buy influence on Capitol Hill. But in the carpeted corridors of K Street, the 11,500 people who earn their living in the influence-peddling profession know a different reality. More often than not, they understand that money is vacuumed up to Capitol Hill by demands from members of Congress. "Everybody thinks it's the interest groups buying the members," says John J. Pitney Jr., a political scientist at Claremont McKenna College in Claremont, Calif. "A lot of the time it's the members shaking down the interest groups."Despite the guilty plea of fallen superlobbyist Jack Abramoff, Capitol Hill doesn't hesitate to turn to K Street for campaign cash. One prominent business lobbyist was so aggravated by attacks on his brethren by money-raising members of Congress that he collected every fund-raising invitation letter he received for a month. The total for January: more than 60. He dutifully sent checks for most even though he says that he has never asked half of those lawmakers for anything. "I'm doing it because it's expected," he laments. "If you want to be in the game, you've got to pay."
That game can be expensive. One Washington lobbyist who asked not to be identified says he gave money to the unsuccessful Democratic candidate for a House seat. After the election, the Republican winner called to demand a check -- bigger than the original gift. Why? "The late train is a hell of a lot more expensive than the early train," the lobbyist says he was told.
Lawmaker solicitations are legion and often quite creative. Take the case of House Financial Services Chairman Michael G. Oxley (R-Ohio) and his book club. Each month a junior member of Oxley's committee picks a book and distributes copies to financial lobbyists to read and discuss. The price of admission is a contribution to the featured member. The lobbyists get face time with Oxley, who largely controls the Washington agenda for their industries. Oxley, who is retiring after 2006, wins the loyalty of his low-ranking colleagues by helping them score contributions. But the sessions are hardly educational: Panel members' tastes run more to motivational screeds than to tomes on finance, attendees say. "I've never read one of the books," says a regular. "Are you kidding me? Read? I went to law school." . . .
Such invitations are the rule, not the exception, in Washington, where campaign shops churn out fancy engraved invitations and spam e-mail targeting K Street. One GOP lobbyist says that in prime fund-raising season he receives five to six e-mails a day from the Bellwether Consulting Group, a GOP fund-raising firm in Washington. "I don't open 'em. Delete, delete, delete," he says.
Sometimes the squeeze isn't the least bit subtle. One lobbyist, who requested anonymity, returned from a meeting with a Democratic senator to find a message on the office voice mail saying where the check could be sent. . . .
Some lobbyists are having second thoughts about today's pay-to-play mind-set. "As a conservative, I've always opposed government involvement," says Stanton D. Anderson, a Washington business lobbyist. "But it seems to me that the real answer to this so-called lobbyist reform crisis is federal financing of congressional elections."
You see, Stanton Anderson is a conservative who has always opposed 'government' involvement. But he makes his living figuring out ways to get the government to favor certain businesses. Lobbyists operate under the grand delusion that they are somehow providing a service other than buying and selling legislative influence. The donations are simply part of their overhead, like the offices on K St. and the cell phones. And if the donations are really so onerous, and make it so hard for these guys to turn a profit, why don't they leave and do something else?
Posted by dan at 01:26 PM
Income volatility hits the farm belt. Scott Kilman reports in the Wall Street Journal:
The U.S. Agriculture Department said it expects net farm income to drop 23% this year, in another sign that the economic boom across the U.S. farm belt is rapidly cooling.After the most profitable two-year period on record, a combination of falling grain prices and rising costs of everything from fuel and fertilizer to credit is conspiring to return U.S. farmers' incomes to more normal levels. The slowdown also is sparking fears that a sharp run-up in land values could run out of steam.
"There is no financial crisis imminent," said Keith Collins, USDA chief economist. "But there will be more financial stress."
The USDA said it expects agricultural producers to generate net farm income of $56.2 billion this year compared with $72.6 billion in 2005, which was down 12% from the record of $82.5 billion in 2004.
Net farm income isn't what America's two million or so farmers have left after paying their taxes. Rather, it is a measure of the farm belt's contribution to the national economy, and so has served as a widely followed barometer of the sector's profitability for decades.
Posted by dan at 01:23 PM
Lee Hawkins Jr. and Neal E. Boudette report in the Wall Street Journal on a silly tiff between two money-losing car makers.
Detroit's two struggling auto makers, General Motors Corp. and Ford Motor Co., are engaged in a bragging-rights dispute over which boasts the top-selling brand in the U.S.Since January, GM's Chevrolet division has been running advertisements that include the claim that it is the No. 1 brand in America. GM cites 2005 auto sales data showing Chevrolet edged past the longtime leader, Ford's eponymous blue-oval brand.
But over the weekend, Ford said newly released data on 2005 auto registrations shows Ford was able to keep its lead, and it will confront its cross-town rival.
In January, GM said it sold 2,651,124 Chevrolet vehicles in 2005, while Ford said its main brand had sales of 2,634,041. Ward's Automotive Group, an auto industry market researcher, published similar figures showing Chevy was ahead.
A few days ago, R.L. Polk & Co. released data on new-vehicle registrations showing 2,630,000 Fords were registered last year and only 2,625,000 Chevrolets. Those figures came to light as auto makers and their dealers were meeting in Orlando, Fla., for the National Automobile Dealers Association convention.
Question: if your compay essentially loses money on every car it produces, does it really matter if you sell more cars than your biggest rival?
Maybe next year Ford and GM can judge their relative success by a newfangled metric that seems to be gaining popularity in certain business schools: profits.
Posted by dan at 01:18 PM
Michael Rapoport reports in the Wall Street Journal that Google earned a big chunk of earnings in the most recent quarter the old-fashioned way; by collecting interest.
Google Inc.'s fourth-quarter results may not have met Wall Street's expectations, but many investors drew comfort from the news of the company's 72% jump in earnings per share.They may be a little less comfortable if they realized how much of that increase came from a source other than Google's vaunted Internet search-engine business -- a source that's unlikely to continue to grow nearly as much in the years ahead.
At issue: skyrocketing payments Google received on the money it has parked in interest-bearing accounts and investments.
Fourth-quarter net interest income was $70.2 million, more than a ninefold increase from $7.4 million the year before. Figures in a recent report from research and data firm Thomson Financial suggest that gain may have accounted for more than one-fifth of Google's overall earnings growth in the quarter.
Google's net income for the quarter rose to $372.2 million, or $1.22 a share, from $204.1 million, or 71 cents a share, a year earlier. Excluding factors such as stock-based compensation, Google's profit reported Jan. 31 was $1.54 a share, below the $1.76 a share that Wall Street analysts polled by Thomson Financial forecast on the same basis.
Most people wouldn't be inclined to fault a company for having so much money that its interest income looks like a business unto itself, but the issue with Google is what this means for expectations: Its rising interest income stemmed from conditions that are unlikely to recur in 2006, such as a giant stock offering last year that boosted the company's cash hoard.
If those conditions don't recur, Google's interest income won't grow nearly as fast this year and in the future -- and so a key impetus that investors may be counting on may not be there, even if the company's operations perform as expected.
Posted by dan at 01:08 PM
Ben Stein has suddenly woken up and realized that something is wrong with the way American CEOs are compensated. He writes in the New York Times.
The question haunts me, not only because of UAL and Delphi, but also because there is something deeply broken about the corporate system in America. Long ago, my pop was pals with Harlow H. Curtice, the president of General Motors in its glory days in the 1950's. Mr. Curtice presided over a spectacularly powerful and profitable G.M.For that, in his peak year as I recall from my youth, he was paid about $400,000 plus a special superbonus of $400,000, which made him one of the highest-paid executives in America. At that time, a line worker with overtime might have made $10,000 a year. In those days, that differential was considered very large — very roughly 40 times the assembly line worker's pay, without bonus; very roughly 80 times with bonus. A differential of more like 10 to 20 times was more the norm.
Now C.E.O.'s routinely take home hundreds of times what the average worker is paid, whether or not the company is doing well. The graph for the pay of C.E.O.'s is a vertical line in the last five years. The graph for workers' pay is a flat line — in every sense.
Now, my fellow free-market fans may well say: "Hey, stop your whining. This is the free market at work." Only it isn't the free market at work. It's a kleptocracy at work. (I am indebted to another of my correspondents for the word.) What's happening here is that the governance system for many — by no means all — corporations has simply stopped working
For centuries, the idea has held that the stockholders own the company. They are the trustors. The trustors select directors who in turn hire a chief executive and other top officers and then keep an eye on them for the stockholders. They — the chief executive, other top officers and the directors — are all agents for the stockholders, many of whom are often the employees, as is the case at UAL.
But what has happened is that — as in a corrupt, failed third-world state — the trustees in too many cases are captives of the C.E.O. and his colleagues; they owe both their places on the board and their emoluments to the chief executive, and they exercise no meaningful restraint at all on managers. The directors are instead a sort of praetorian guard, protecting management from its real bosses, the stockholders, as management sucks the blood out of the company. . . .
Government, meanwhile, does nothing, or next to nothing. Courts, especially bankruptcy courts, do nothing. And the employees and stockholders and the whole society are looted. Maybe it's not looting in the legal sense, but something basic is removed from the society. In the capitalist society, the most basic foundation is trust. But in today's world, trust is abused, mocked, drained of meaning.
Again, I am not talking everywhere, by any means. I work with many, many businessmen and businesswomen, and a huge majority are honest and amazingly hard-working. I am sure that this is true nationally. But enough are not so honest and hard-working that it takes a toll on the rest of us. . . . .
Now, we are engaged in a war. More than 100,000 Americans are fighting far from home. Many don't come back. Many come home crippled. They are fighting for a vision of a just and decent society back home in glorious, shining, blessed America. And back home, meanwhile, the looters are running wild, taking the meaning out of that vision of America, taking some — by no means all — of the beauty out of America as a land of justice and fairness.
ONE of my correspondents wrote that she, a flight attendant at United Airlines, had played by the rules, believed what her bosses told her, trusted that the laws would protect her, believed that fairness would triumph in the end because it's America. "I guess that makes me a fool in today's world," she said, because now she is broke, with no job, barely any pension and no faith. While the soldiers are fighting to protect us from the terrorists with bombs, too few are at home protecting us from the terrorists with briefcases. There aren't a lot of such terrorists, but they do a lot of damage.
Surely this is not what Colonel Denman won his medals for. Surely this is not the America that our best are fighting and dying for in Iraq and Afghanistan. There is something desperately wrong here, and if President Bush is searching for an issue, I might suggest this: common decency for the workers and the savers and investors of this country, and an end to the hideous breaches of trust that build great mansions in the Hamptons and wreck a free society.
Posted by dan at 01:01 PM
It's so wonderful to see European firms standing up for pan-European values. From the Economist:
"Carrefour, a French retailer, has drawn scorn in Europe for voluntarily pulling Danish products from its shelves in the Middlea East--and boasting about it."
Posted by dan at 12:59 PM
My latest in Slate, on Oprah, Howard Stern and satellite radio.
Posted by dan at 12:57 PM