A tow truck backed into my Honda Civic three weeks ago, leaving an ugly gash in the hood and sending it to the body shop.
At the rental agency, the counter agent grinned when I pointed hopefully to another Civic sitting out in the lot.
"That's my car," he said. "How about a Chevy Cobalt? They're about the same."
Talk about timing. While the American auto industry has been seeking a bailout, I've been forced out of my Honda, and instead have been driving around in its American equivalent — or what my six-year old calls "this junky car."
He's right. Yesterday's Wall Street Journal notes that a Civic, which costs about $3,400 more than a Cobalt new, retains 55 percent of its value over five years. The Cobalt retains just 32 percent. Subtract their resale values from the original list price, and it's actually more expensive to buy a Cobalt. That's fair value accounting that even the average consumer can understand.
Moreover, aside from its one accidental encounter with a tow truck, my five-year-old Civic has never been to the shop for anything other than an oil change. The Cobalt I rented already had a broken window crank. Which is to say two things: it had a crank (I had to explain that to my six-year old), and it was broken.
Still, a car-buying decision has always seemed to me one in which nationalism should counterbalance pure capitalism. However symbolic, the fact that my Honda was built in Alabama helped sell me on the car. The failure of the big three would have a devastating impact on 239,000 American workers. Moreover, the U.S. auto industry is huge piece of the economy. For years, CFO has excluded the industry from our annual working capital survey because it can swing the averages so wildly.
And yet. . . the day before automakers were pleading for a bailout on Capitol Hill, Japan officially slipped into a recession. Which somehow made any effort by the CEOs of GM, Ford and Chrysler to pin their woes on the economy ring hollow. Honda and Toyota may be hurting, but I don't hear them complaining. Compare that with woes in the bailed-out financial industry, which are certainly self-inflicted, but also ubiquitous and global.
It's simply impossible to argue that the bulk of the U.S. auto industry's problems are anything but internal. If the credit bubble that caused this financial crisis hadn't made auto loans and leases cheap, they probably would have gone bankrupt five years ago.
The bottom line: if I wouldn't spend my own money on one of their cars, why should the government spend my money on them?
Over the past year, accounting standard setters have alluded to horses and races on several occasions to illustrate their points. Monday was no different when at FEI's annual conference on financial reporting FASB chairman Robert Herz compared the concurrent tasks of improving U.S. GAAP and converging American and international standards to straddling two running horses at the same time.
On the same stage, IASB chairman David Tweedie described the elimination of fair value accounting for financial instruments — especially during the credit crisis — as "a race to the bottom."
Later in the day, I saw an opportunity to use my own horse race imagery, this time having to do with the Treasury Department's $250 billion Capital Purchase Program. The CPP is the government's bailout scheme in which Treasury injects liquidity into financial institutions by buying non-voting preferred shares from qualified banks.
The deadline for signing up for the CPP program was Friday, so on Monday, the Treasury Department released what seems to be the final list of banks that will participate. (Restrictions apply, as we pointed out in this article, so hopefully the proper controls are in place to protect taxpayer funds.)
Not all the participants are large institutions, which leads me to believe that the smaller banks that applied for the government handout will restart their lending activities — once the stock purchase is settled — and in turn infuse small and mid-size business with much needed capital.
Which leads me to my observation about horse races. One of the community banks participating in the CPP is Wayne, N.J.-based Valley National Bancorp, which will sell $300 million worth of stock to the Treasury Department. Valley National has six ATM machines at the Meadowlands Racetrack — a prescient move considering horse racing's track record during times of economic stress.
According to history books, horse racing thrived during the Great Depression, as 15 states legalized the sport during that period bringing the total to 21 states. What's more, some say the nation's spirits were lifted during the Depression by watching the unlikely rise of a champion named Seabiscuit. So the odds are in Valley National's favor that it will see an increase in ATM fees — and hopefully lending fees as well.
While it's hard to get anything like a unanimous answer to any question on fair-value accounting these days, the point that mark-to-market financial reporting applies best to marketable securities does get widespread agreement. What's less clear is how well fair value applies to products and services outside of the very limited sphere of securitization.
At yesterday's New York Society of Certified Public Accountants briefing on mark-to-market accounting, Stephen Penman, an eminent professor of accounting and valuation at Columbia—the "home of accounting fundamentalism," he noted, where the solons urge severe caution in the use of market pricing in the financials—made the point that fair value isn't very fair to manufacturers, retailers, or even the providers of basic mortgages.
To what extent, indeed, "is a market price fair value?" the professor asked.
Penman offered the example of the warranty liability for a dishwasher maker like Maytag. Under current standards, fair value is defined as the price Maytag could sell its warranty liabilities to someone else for. But Maytag, he argued, is in that business because it has a competitive advantage over other companies in servicing its warranties.
Maytag, in short, makes money by servicing washing-machine warranties at a lot cheaper rate than others can. "It's not really a question of what other people would do to service that business," Penman said, observing that the fair value of the service isn't the same thing as the market price. "It's what you can do in terms of serving customers as part of your whole business of developing customer goodwill and servicing."
Even in the case of providing mortgages, the knowledge that mortgage originators have relative to others should be part of the fair-value calculation, according to Penman. "The originators are out there on the spot when a customer runs into problems. They can work through the mortgage, try and get [distressed homeowners] to hold to maturity," he said. "They may in fact get a better estimate of the value of that mortgage to that institution—because they're a bank in a town where customers around the corner have a drink with you on Friday night—than what you could actually trade it for."
In short, true fair value, at least when it comes to such things as washing-machine warranties and plain-vanilla mortgages, may have a whole lot more to do with "It's a Wonderful Life" than with what a securities investor might pay for an item.
After writing a blog post at work yesterday about the AIG junket that wasn't , I was fascinated, and horrified, to go home and watch all the actual TV coverage.
This total non-story made it onto just about every news outlet you can imagine, including segments throughout the day on CNN. The height of ridiculousness was that AIG CEO Ed Liddy was forced to go on Larry King Live — as the first guest — to defend this ordinary conference against charges of being an executive boondoggle. (CNN realized midway through the day what a joke this story was and began inserting some balance into its reports, but couldn't stop pumping it in advance of the Larry King show.)
The absolute nadir was the original, breathlessly reported exclusive undercover investigative report by the Phoenix ABC affiliate. If you thought it was impossible to make something as excruciatingly boring as a 3-day insurance conference sound like an orgy at the Playboy Mansion, well, just click the video.
(Way to go, ABC15 reporter Josh Bernstein. Stay tuned for his story six months from now on why the bottom suddenly fell out of the Phoenix conference business.)
Or simply click on the slideshow to see the AIG executives "sitting poolside, drinking coffee, while other people attending the conference were in meetings." Coffee? Good grief! What a debauched bunch these insurance executives are. And how odd that they don't attend training sessions describing products that they designed!
Despite the fact that these guys were meeting in suits and ties at a table, surrounded by briefcases overflowing with work folders, other media outlets quickly began reporting that they were "lounging by the pool." Speaking from personal experience, having a meeting in the pool area of a conference hotel with your work colleagues in a dark business suit and tie in the hot sun is closer to a waterboarding than a boondoggle on the spectrum of creature comforts. The only reason anyone does this at all is that they're desperate for fresh air after days of inside meetings.
As AIG has admitted, it has behaved abominably in the past. Issuing billions in credit default swaps? That's terrible risk management. AIG executives hunting quail in the English countryside? That's a boondoggle. Putting on conference for financial planners that sell your product? That's good marketing.
The inability of the media, the government, and the public to distinguish between corporate excess and ordinary business is the result of the very same financial illiteracy that got us into this mess in the first place.
Most media outlets took great glee in reporting that this supposed "executive day spa" took place at the same time AIG's original bailout was revised. But most failed to note why it was revised: the terms were so onerous that they put AIG at risk of failing anyway. That's hardly good for taxpayers.
And pouncing on this company every time it attempts to conduct normal business anywhere other than an IHOP (as one CNN anchor suggested) is also a great way to make sure the bailout fails and we taxpayers never see that money again.
An article in today's Arizona Republic reports that days ago, AIG hosted a $343,000 conference for 150 independent financial planners at the Pointe Hilton Squaw Peak resort in Phoenix.
Financial planners, of course, recommend insurance products to their clients, so this is a marketing event for AIG. Moreover, AIG managed to get 93 percent of the tab paid for by sponsors, and the financial planners paid a registration fee and their own travel. AIG paid the remaining cost — about $23,000 — out of pocket. That works out to about $153 per financial planner — an extraordinarily low cost.
But the gist of the article is that Congress is outraged by this extraordinarily cost-effective piece of marketing because it happened at a resort hotel.
That's simply not an accurate description. The financial planners hosted by AIG aren't company executives, they're independent distributors of its products.
Second, what's AIG supposed to do, stop marketing? The AIG bailout had to be revised once already because its terms were too onerous. Is it now a de facto term of the revised bailout that marketing is prohibited?
Apparently it is. According to AIG, the company has canceled more than 160 meetings or conferences in the past month.
Now clearly, every company should be watching appearances and avoiding executive junkets, and no doubt some of those conferences deserved to be canceled. But let's remember, too, that the business of America is business. Cummings represents Maryland's 7th District. Perhaps he should take a quick lunchtime drive from the Capitol up I-95 up to his hometown of Baltimore, and take a look at the Inner Harbor, one of the most storied urban renewal programs in history. He might notice that its prominent features (and employers) include a conference center and several up-market hotels.
It's one thing to be a careful steward of taxpayer money. But if Congress makes legitimate business marketing the target of this sort of asinine, knee-jerk populism, it's not going to save taxpayers money, it is going to put AIG out of business.
And, if Congress isn't careful, airlines, hotels, taxi companies, restaurants, meeting planners, caterers, and plenty of other businesses will go under too.
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