Tag Archives: Corporations

With All These Savings, We Will Soon Be Broke

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Unlike the private sector, government accounting is unaccountable. Governments are free to toss out ridiculous figures without an audit or criticism – Pres. Obama’s stimuli have saved 3 million jobs, please. One way governments claim to save money is through creative financing that would be illegal in the private sector. One recent example is the Denver bus system’s claim that it has saved $1.9 bln on a future train to the local airport. This savings is huge, considering the project’s budget is $2.3 bln. Nobody in the press questioned the improbability of such amazing savings or how the simple math could add up so favorably. In reality, RTD, Denver’s transit system, pulled a fast one by effectively taking out an illegal loan and raising taxes to pay for its airport train.

A little background on RTD’s train lust: RTD has always wanted to build a local train system for metro Denver, and voters rejected a series of tax measures to do so. In 2004, RTD finally succeeded in doubling the transit sales tax to fund an ambitious train system, including a link to the airport. Considering the fact that RTD had tried this several times in the past, one might assume that the budget was in place and that the tax increase would be sufficient. Oh naive ones, no. There was no budget or schedule, only empty promises. RTD eventually disclosed that they needed about twice as much money as they had initially told the voters. RTD wrestled with asking for a further 50% tax increase, but due to the recession and voter sentiment, they backed down. The solution, it turned out is a popular financing trick called the Public Private Partnership, or P3, which allows for off balance sheet financing of large construction projects.

While financiers like to parse deals to attract investors and sometimes hide risk, there is always a simple underlying truth. The reality of the airport train is that it will cost billions of dollars up front and passenger revenues cannot be collected until the work is done. Voters authorized a sales tax increase, along with eventual ticket sales, to pay for this project. No financial engineering can change the fact that this project needs about twice as much money as it has. The only solutions are to either delay construction or issue debt.

Enter the P3 concept. RTD partnered with a team of private contractors and train operators to reduce its upfront costs. This partnership will get the operating and tax revenues for most of the life of the train in exchange for building and operating it. Since the train is a money loser, RTD will pay the partnership $2.3 bln for taking on the liability. RTD will also allow the partnership to issue tax advantaged bonds to pay for the construction of the train. So, everyone is happy?

Everyone shouldn’t be happy because there are unanswered questions. Why didn’t RTD just issue its own bonds and save the middle man cost of a P3? Such muni bonds require the vote of the people, and public sentiment is generally against more government debt, so RTD went around the law and likely will of the people with the P3 concept. RTD has effectively entered into off balance sheet financing that, due to its lengthy term, violates the accounting rules a private company would have to follow. While the debt goes on the balance sheet of the private partners, the ultimate risk is still carried by the taxpayers, a financial sleight of hand that is often illegal under the Sarbanes Oxley law. Further, tax advantaged bonds like the one for the airport train siphon capital from the private sector because only the government can give investors a pass on income taxes. Further still, RTD has not stated who will set the train fares to and from the airport. Currently the bus to the airport is five times more expensive than a regular bus ride, and the P3′s train certainly won’t lower the fare.

Because RTD is the government, it makes its own rules. RTD engages in lease financing that would be illegal in the private sector. RTD skirts the law by issuing bonds without a vote of the people. RTD uses the power of the government to pay a lower coupon on its debt at the expense of regular bond issuers. Many of these sleights of hand that the Denver press lauded were tried ten years ago, by Enron. Former Enron CEO Jeff Skilling must be frustrated that had he done such things for the government, he would be a hero today instead of a federal prisoner.

Apology For Toyota?

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In what is little surprise to anyone who is not a tort lawyer or megalomaniac Senator, government researchers determined that runaway Toyotas were caused by driver errors. While Toyota was quick to say that the matter is not yet settled, Shout Bits is now prepared to state that when an accelerator is pushed to the floor and the brakes are not applied at all, an accident may ensue. That’s right, when the US Government did an independent study of crashed Toyotas, they found that in every instance the gas pedal was to the floor and brake was unapplied. Naturally, all the Senators and trial lawyers who lined up to bash Toyota have apologized and admitted that Toyota actually sells high quality US made cars. Not yet, anyway.

From hearings on satanic rock music to steroids in baseball, Senators have never shied away from sensationalizing irrelevancies to distract from their many failings. The Senate does not have hearings on their own graft, pork, or special interest handouts. No, the Senate has hearings on whether teenagers should attempt to break aviation records, or whether cigarettes are unhealthy, or why Toyota is to blame for auto accidents.

Nobody can blame Congress for wanting to deflect attention from its massive, nation destroying failures, and its red herrings are usually harmless. After all, harping on lead paint on toys only ruined a handful of small business owners’ lives. In the case of Toyota, however, tens of thousands of jobs are at stake. Toyota has invested billions of dollars in US manufacturing along with decades of innovation that have driven up the quality of all cars worldwide. Congress’s whipping boy was a model of capitalism, prosperity, and the power of a free market to make everyone’s life better. Better still, Toyota never took bailouts from Washington (only union shops qualified for such aid).

Toyota played the game well, unlike BP, by prostrating itself before the uninformed bombastic jackasses who have never done anything to make cars safer. Mr. Inaba, Toyota CEO, nearly wept tears of blood as he admitted failings that his engineers most certainly told him were false. Inaba surely recalled the bogus acceleration charges levied against Audi ten years ago. Rather than defend his product, Inaba knew he had to submit to Orwellian prosecution in order to put the sensation behind him. Never mind that sudden acceleration complaints are only filed when the news is hyping them, not regularly as a real problem would suggest. Never mind that a cash strapped California driver clearly faked his high speed Toyota incident a few months earlier. Never mind that the accelerator systems allegedly at fault were used by many auto manufacturers. Never mind that Congress runs GM, Toyota’s main competitor. In fact Inaba deserves a prize for his containment and focus on preserving Toyota, rather than the objective truth that nearly all accidents are caused by driver error.

Now that the government study has fully exonerated Toyota, where are the apologies? Perhaps Rep. Barton can give it another go. Toyota has wisely remained cautious, likely fearful that claiming victory would incite a backlash. Of course it is no surprise that the old time media’s interest in restoring Toyota’s reputation is tepid. Car crashes caused by driver error are dog-bites-man boredom right down the middle. Likewise for the Senators that preened as Inaba kowtowed. Building up industry, supporting capitalism, or acknowledging that most companies want to do right by their customers is not the Washington way. So, as usual, the prattling classes take more interest in salacious falsehoods than they do in humdrum truth. Toyota: there is nowhere to go to get your reputation back, but thanks for playing the Washington game so well.

Corporations Are Not Nice People

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This week five corporations, including BP and ConocoPhillips, dropped out of the US Climate Action Partnership (a.k.a. USCAP, with an emphasis on the ‘CAP’) an industry lobbyist group that sought to mollify the most aggressive instincts of ‘green’ and government organizations while at the same time advance the environmentalist agenda. USCAP’s membership is chock full of corporations that will not benefit from cap and trade laws, yet they lobbied for them. One might assume that five brave corporations saw that global warming is more political than science based, and they made a principled stand by dropping out of USCAP. The real reason is more pedestrian, and a little sad. Why these companies joined and subsequently left USCAP goes a long way to explain the psyche of corporations.

USCAP is based on the strategy of ‘being at the table so as not to be on the menu.’ Big corporations are easy targets for opportunistic politicians – consider Pres. Obama’s relentless bashing of Wall Street ‘fat cats,’ or the Senate’s grandstanding over cigarette companies’ unhealthy products, or Sen. Hatch’s obsession with punishing Microsoft. Obviously BP has no interest in fossil fuel taxes, and Phillip Morris doesn’t really favor punitive cigarette taxes, but they, and countless other corporations play USCAP’s game because it is better than the alternative – the complete routing and destruction of shareholder value that Microsoft suffered as punishment for standing up to the Government.

Big Corporations ‘sit at the table’ with their enemies for another reason: to stifle competition. The Byzantine red tape that Washington imposes on the free market is easily navigated by multi-billion dollar corporations, but not so by their smaller competitors. The costs of complying with regulations that clog every aspect of the business world disproportionately fall on the shoulders of small businesses and entrepreneurs. For example, Mattel lobbied for a new law that, while imposing some product testing expenses on themselves, effectively outlawed independent toy manufacturers. Mattel even managed to make selling used toys at garage sales practically impossible. The law created and entrenched an oligopoly of big toy manufacturers; not bad for a day’s work in Washington.

Similarly, back when a socialized health care bill seemed inevitable, Wal-Mart came out and supported Obamacare. Why would Wal-Mart, the nation’s largest employer, want the burden of insuring all of its employees? Wal-Mart knew that it had the economies of scale to pay the very least for its insurance, and it owns its own Pharmacies to boot. Of all the employers hit by Obamcare’s mandates, Wal-Mart is best equipped to cope. Wal-Mart didn’t care about people so much as it wanted to suppress its competitors.

Likewise, USCAP’s mission is not to benefit its members by reducing their costs, but to harm smaller competitors more by raising their relative costs. From the formation of AT&T over a century ago, , to blue laws, to the Chamber of Commerce’s statist tolerance of government, regulation always evolves into an incumbent protection racket. The only losers are entrepreneurs and consumers.

Why the USCAP defections? USCAP is falling apart because the Obama agenda is falling apart. Cap and trade is dead with little hope for revival. USCAP’s mission of mitigating cap and trade’s damage to its well-heeled members no longer matters, so its members are dropping off. There was no change of moral compass here, just political calculus.

Similarly, with the implosion of Obamacare, PhRMA recently dumped its CEO, Rep. Billy Tauzin. PhRMA had the same mission as USCAP, but with regard to Obamacare – craft a bill that harms its members less than their competitors. Why continue to pay a Washington big-wig when the issue is comatose and ready for the morgue? Tauzin’s connections and moral flexibility are no longer needed.

Why are companies, especially the larger ones, so spineless on issues that are critical to very existence of the US? Why are corporations so greedy, feckless, and sometimes even evil? Simply because it suits their short term interests. Leftists want to believe that corporations should be good corporate citizens, but it is not in their nature. Corporations will always pursue politics as a way to benefit shareholder value.

Despite the evil corporations sometimes do, there remains no better engine for the betterment of people. The NYSE’s $16.3 trillion market capitalization proves that the corporate structure is the best way to generate wealth and improve everyone’s quality of life. In other words, the corporation is a wonderful source of good, but corporations are sometimes evil. Political opportunists in Washington set up corporate excesses as a straw man to hobble the corporate system and dole out their expensive favors.

Nobody should count on Corporate America to consistently support the cause of capitalism and freedom. The Supreme Court rightly ruled that corporations have the right to political speech, but that does not mean that informed voters should always listen, because corporations are at best a weak ally in the cause of liberty.