Learning from Dogs

Wartime issues – assuming we are at war!

The debate about the Christmas Day Bomber continues.   The pundits continue to define “success” in this case as finding him guilty in a court of law.  They go on and on, repeating over and over again, how the evidence is so strong, how the civilian court system is so reliable, how the shoe bomber was tried in civilian court, and how a guilty verdict is virtually certain.  

This is so wrong.  The definition of success is not whether we find the Christmas Day Bomber guilty in a civilian court.  This man intended to blow himself up on Christmas Day, and take hundreds of innocent Americans with him.  The fact that he is alive today, facing a jury or a judge and possible jail time or, at the worst, the death penalty, is a mere footnote to him.

Has it occurred to anyone that if the military had interrogated the shoe bomber as the failed terrorist that he was, that the odds of the Christmas Day Bomber getting on that plane with those explosives would have been diminished?  And interrogating the Christmas Day terrorist instead of shipping him off to the local prosecutor — for reasons Eric Holder, the U.S. Attorney General, has yet to articulate– diminishes the odds of some future terrorist act?

Eric Holder

We are at war!

These people attacked us as part of the ongoing war with terrorists.   No one should “rest easy” because some lawyer is going to sleepwalk through a trial that may or may not successfully reach the painfully obvious conclusion that the Christmas Day Bomber is guilty! On the contrary, it makes me very uneasy that he is in the civilian court system at this point in time at all, because every moment spent reading this man his rights is a moment that could have been spent gathering intelligence from a terrorist.  His punishment will come in due time.  In the meanwhile, we have to extract as much information from his as we can in order to defend ourselves.

We are at war.

By Sherry Jarrell

When is a freeze not a freeze?

President Obama’s proposal to freeze parts of federal government spending over the next three years is a lot like a smoker buying a truckload of cigarettes one year before promising to “freeze spending” on cigarettes the next.  He can keep smoking for years to come without spending another dime.

Federal government spending has increased so much over the last year — by some estimates at a rate of 34% — that in December of 2009 the debt limit had to be raised to $12.4 trillion to help absorb a record-shattering $1.4 trillion deficit.

The promise to freeze spending is actually a guarantee that spending will remain at record high levels for the next three years.  It effectively prevents a reduction in federal spending.

How disingenuous of our President.

By Sherry Jarrell

Foxes and hen-house?

I’m not quite sure how I feel about this yet.  The Fed recently announced that it has appointed a long-time staffer with the New York Fed to head a newly created branch to oversee the the parts of its balance sheet acquired in efforts to bail out firms like AIG.

These massive asset purchases, orchestrated by Timothy Geithner, the current Treasury Secretary and former New York Fed official, ballooned the Fed’s balance sheet from $800 billion in primarily government bonds to $2.3 trillion in toxic assets.

Now the New York Fed is overseeing the assets brought into the Fed by the Treasury Secretary as he moved from the New York Fed to the Treasury.  All while the Treasury functions are supposed to be isolated from the Federal Reserve’s role in its implementation of monetary policy.

Smacks of the fox watching the hen house….

By Sherry Jarrell

Unemployment statistics and the real world.

Keep in mind, even as the number of first-time claims for unemployment insurance rose again recently, that the 10% U.S. unemployment figure understates the actual number of unemployed. Even the 17% underemployment figure, which includes those who are either unemployed or who are working part-time but would like to work full-time, fails to include many of those who have lost their jobs but, because they fail to qualify for unemployment, are not being tracked.  I know several such people personally; one has been unemployed for over a year.

My point? Structural unemployment is a serious economic issue. But the solution is not to funnel more unemployment benefits to the unemployed.  The best thing the government can do is to reduce the barriers it has erected to a vibrant economy, including oppressive taxes, fees, paperwork, bureaucracy, and regulations that repress business productivity and raise prices.  By reducing these explicit and implicit costs, there is absolutely no doubt that the private economy will be able to employ more workers as it produces more output at lower prices.

The best thing we can do as private citizens and neighbors is to treat each other right.  Keep the economy moving.  Put in a good day’s work.  Volunteer or learn a new skill if you can’t find a job.  Fill a need.  Buy smart.  And, finally, elect business-friendly local and national politicians.  It matters.

By Sherry Jarrell

In a new departure for Learning from Dogs, Sherry Jarrell publishes a three-part article on the Daimler-Chrysler merger.  Learning from Dogs is indebted to Professor Jarrell for both giving so freely of her time to the Blog and for sharing such erudite material.

Here is Part Three, the concluding part.  If you missed Part One then it is here and Part Two is here.

Where is DCX today?

The Daimler-Chrysler merger was troubled from the beginning.

Investors sued over whether the transaction was a ‘merger of equals’ or a Daimler-Benz takeover of Chrysler. A class action lawsuit was settled in August 2003 for $300 million. A lawsuit by activist investor Kirk Kerkorian was dismissed

Jürgen E. Schrempp

in April 2005, but claimed the job of the merger’s architect, Chairman Jürgen E. Schrempp, who resigned in response to the fall of the merged company’s share price. The merger was also the subject of a book Taken for a Ride: How Daimler-Benz Drove Off With Chrysler, (2000) by Bill Vlasic and Bradley A. Stertz.

It is questionable whether the merger ever delivered promised synergies or ever successfully integrated the two businesses. As late as 2002, Daimler-Chrysler appeared to run as two still-independent companies.  In 2006, Chrysler reported losses of $1.5 billion.  In 2007, it announced plans to lay off 13,000 employees, close a major assembly plant, and reduce production at other plants in order to try to restore profitability.

It was all for naught.  In May of 2007 Daimler-Chrysler announced that it would sell 80.1% of Chrysler to Cerberus Capital Management of New York, a private equity firm specializing in troubled companies. Daimler continued to hold a 19.9% stake. Daimler paid Cerberus $650 million to take Chrysler and associated liabilities off its hands, an amazing development given the $36 billion Daimler paid to acquire Chrysler in 1998. Of the $7.4 billion purchase price, Cerberus Capital Management invested $5 billion in Chrysler Holdings and $1.05 billion in Chrysler’s financial unit. The de-merged Daimler AG received $1.35 billion directly from Cerberus but invested $2 billion in Chrysler LLC itself.

On April 27, 2009, Daimler AG agreed to give up its remaining 19.9% stake in Chrysler LLC to Cerberus and pay as much as $600 million into the auto-maker’s pension fund.  On April 30, 2009, Chrysler LLC filed for Chapter 11 bankruptcy protection and announced a plan for a partnership with Italian automaker Fiat. On June 1, Chrysler LLC stated they were selling some assets and operations to the newly formed company Chrysler Group LLC, with Fiat retaining a 20% stake in the new company.

On June 10, 2009, the sale of most of Chrysler assets to “New Chrysler”, formally known as Chrysler Group LLC, was completed. The federal government financed the deal with $6.6 billion in financing, paid to the “Old Chrysler.” The transfer does not include eight manufacturing locations, nor many parcels of real estate, nor equipment leases. Contracts with the 789 U.S. auto dealerships who are being dropped were not transferred.

By Sherry Jarrell

In a new departure for Learning from Dogs, Sherry Jarrell publishes a three-part article on the Daimler-Chrysler merger.  Learning from Dogs is indebted to Professor Jarrell for both giving so freely of her time to the Blog and for sharing such erudite material.

Here is Part Two.  If you missed Part One then it is here.

What does the Daimler-Chrysler merger demonstrate in broader terms?

The 1998 Daimler-Chrysler  “merger of equals” was widely expected to realize both operating efficiencies and better access to international capital markets. Instead, when DCX incorporated it adopted German corporate governance standards.  U.S. institutional ownership in Chrysler was largely replaced by European banks that not only directly monitor the working capital financing of DCX but also may sit on its Management and Supervisory Boards.

Such superior access and corporate control created distinct advantages for large German institutional owners relative to minority owners; foreign shareholders in the U.S. found themselves among this minority group.  These advantages included the ability to: expropriate the private benefits of control from minority shareholders; share these benefits with management, effectively creating a collusion, and; profit from trading DCX shares with superior information.  As a result, minority owners priced their shares less aggressively – i.e., the bid-ask spread widened — to minimize their losses from transacting with controlling shareholders.  As their spread increased, U.S. minority shareholders’ trading costs rose and U.S. trading volume fell as it migrated to Germany, the relatively cheaper trading venue.

The merger between Chrysler and Daimler and consequent changes in corporate governance create an ideal clinical study for isolating our hypothesis about the failure of the enhanced disclosure requirements to effectively compensate for lax corporate governance standards in protecting minority shareholders.

To test this hypothesis, we explored changes in the bid-ask spread that are associated with the change in corporate governance and the control over the flow of information about the Chrysler assets.  We look “inside” the trading mechanism that creates the observed transacted stock price, namely the bid-ask spread, to generate evidence on shifts in the quality and quantity of information available to minority versus controlling shareholders.  The bid-ask spread should grow as minority shareholders learn that traders on the other side of the spread possess superior information about the company, information which is linked to their majority control of the firm and its senior management compensation, asset disposition, and financing and risk-taking strategies.

We find that the decision to merge and become a German stock corporation significantly weakened the protection of minority shareholders, particularly prior owners of Chrysler assets, and led to their expropriation by controlling shareholders and principal creditors of the consolidated firm.  How? We find that the answer lies in the lack of protection afforded minority shareholders by the corporate governance structure of the newly combined DCX entity.

By Sherry Jarrell – Part Three continues tomorrow.

In a new departure for Learning from Dogs, Sherry Jarrell publishes a three-part article on the Daimler-Chrysler merger.  Learning from Dogs is indebted to Professor Jarrell for both giving so freely of her time to the Blog and for sharing such erudite material.

Here is Part One

What does the Daimler-Chrysler merger demonstrate in broader terms?

In a paper co-authored with Rick Harris, Tom McInish and Bob Wood, we explored the Daimler-Chrysler merger of 1998 to examine the interplay between disclosure rules in the U.S. and corporate governance standards in Germany.  Here is an overview of what we found.

Large shareholders typically control European and Asian industrial giants, leaving minority shareholders less than well protected.  In several studies of the legal protection afforded minority shareholders across 27 countries, German shareholder protection ranked among the very worst. In the early 1990s, Daimler-Benz, one of the largest firms in Germany, was no exception.  In 1993, with Deutsche Bank owning 24% of the equity, Mercedes AG Holding 25%, and the Emirate of Kuwait 14%, its controlling shareholders decided to cross-list Daimler-Benz on the New York Stock Exchange (NYSE).

1997 Daimler Mercedes

All foreign firms that cross-list [list their shares for sale in more than one country] in the U.S. subject themselves to stricter disclosure standards.    In addition to listing on a major U.S. stock exchange, Daimler was required to file financial statements with the SEC and report any material non-financial information as well.   Cross-listed firms are also followed more closely by U.S. stock analysts and the business press.  These legal disclosure requirements and additional scrutiny by the investing community improved both the quantity and quality of information available to all shareholders about Daimler.

1997 Chrysler Town and Country Minivan

By early 1998, the cross-listed Daimler shares were widely held and actively traded worldwide, including significant volume originating in the United States. In September of 1998, Daimler and Chrysler shareholders, majority and minority owners alike, overwhelmingly approved a merger creating DaimlerChrysler AG (DCX) through an exchange of the cross-listed share for the first “global registered share” (GRS).  The so-called “merger of equals” was widely expected to realize both operating efficiencies and, via the informational transparency of the GRS, improved access to international capital markets.

By Sherry Jarrell – Part Two continues tomorrow.

US politics and health care

The latest political spin in the U.S. is that the Democrats lost the seat that was held by the late Senator Edward Kennedy in Massachusetts because the people “just don’t understand the health care legislation.”  It is not, so they say, that the legislation is bad or that it will raise taxes or result in rationing.  No, it is not the legislation at all. It is that the White House has failed to communicate the key elements of the health care legislation clearly.

I beg to disagree.  I think that we, the electorate, understand the legislation, but we do not like it, and do not want it.  We do not want it shoved down our throats; we do not want our tax dollars used to blatantly buy off votes for the legislation; we do not want our voices to be ignored.

And the White House knows that the public has turned against this legislation because it now knows more about the bill, not less.  Why else would they endorse the secretive, closed-door sessions to draft the language of the bill?  Why else would they want to hide the legislation from the light of day, from the scrutiny of the press and the public?  Because the less we know, the more likely it is that this shameful legislation will slither through and  become law.

So, spare us, White House.  The reason people do not like the health care legislation is not because you haven’t communicated it clearly enough. It’s because we understand it all too well.

By Sherry Jarrell

Here’s a surprise!

The engine of world economic growth is sputtering.  The most clear evidence of this is the lack of new business formation in developed nations across the globe.  Over the last year, the number of entrepreneurs starting new businesses in the wealthiest of nations dropped 10% from the 2006-07 level; in the U.S., that number fell by 24%.

The contaminants in the fuel line are oppressive government policies that increase the cost of doing business, increase unemployment, and raise the risks to the current labor force of quitting their jobs to try to start new businesses.

At a time when government should be encouraging venture capitalists and the formation of new business, it is instead putting on the brakes to this source of economic growth in the form of cap and trade, compensation regulations, fees on banks, and myriad other explicit and implicit new taxes.  In 2009, nearly half of U.S. employment was generated by small businesses; U.S. companies started through venture capital employed more than 12 million people, or 11 percent of private sector employment, and generated $2.9 trillion in revenues, or 21 percent of U.S. GDP.

Fully 100% of economic growth is created in private industry.  Government simply redistributes that wealth, destroying some portion of it in the process.  Never have we needed non-interventionist government policies more.

By Sherry Jarrell

This is not the correct way to defend a great Nation in a fair and just manner.

In an earlier post, my colleague Paul Handover left us with an important question:  Does the public’s lack of clarity about the “underwear bomber’s” status as an enemy combatant or a criminal undermine the appearance of impartiality of the U.S. judicial system?

US Attorney General Eric Holder

Paul reviewed the legal development of the “enemy combatant” designation, ending with a March 2009 pronouncement from Eric Holder, the current U.S. Attorney General, that the U.S. had abandoned the Bush administration’s use of the term.  Mr. Holder continued, “As we work toward developing a new policy to govern detainees, it is essential that we operate in a manner that strengthens our national security, is consistent with our values, and is governed by law.”

A new policy that “strengthens national security?”  I think it is blatantly clear that an intense and timely interrogation of the bomber does more to protect our national security than lawyering him up and giving him the right to not speak.  As you read this, Michael Marinaccio, an attorney for Zarein Ahmedzay,  who is suspected of plotting a terror attack on NYC, is seeking to have all the information gathered by officials after his client was represented by counsel  thrown out as illegal, under the civil and criminal law of the U.S.    We can likely expect the same in the underwear bomber case.

A new policy that is “consistent with our values?”  Treating terrorists as terrorists is perfectly consistent with my values.  I am not sure what he is trying to say here.  Then again, maybe I do know what he is trying to say: that it is “wrong” to treat a terrorist as an enemy combatant, and “right” to give that person all the rights of a U.S. citizen, including the right to an attorney and the right to remain silent?  Those may be Mr. Holder’s values, but they aren’t mine and, as you’ll see below, they are not those of the former U.S. Attorney General either.

A new, as yet undetermined, policy that is “governed by law?”  This coming from the same legal mind that decided to try the five 9/11 terrorists  in New York City federal court?  A decision based on what legal precedent?  There is no legal precedence.  On what existing, well-formulated policy? There is no such policy.

Mukasey, US Attorney General 2007-2009

But on the legal subtleties surrounding this issue, I defer to Mr.  Michael Mukasey, a former federal judge who oversaw cases relating to the 1993 World Trade Center attacks.  Mr. Mukasey was the U.S. Attorney General from 2007 to 2009 before retiring and being replaced by Eric Holder.   His analysis is as follows:

Had Abdulmutallab [the alleged underwear bomber. Ed.] been turned over immediately to interrogators intent on gathering intelligence, valuable facts could have been gathered and perhaps acted upon. Indeed, a White House spokesman has confirmed that Abdulmutallab did disclose some actionable intelligence before he fell silent on advice of counsel. Nor is it any comfort to be told, as we were, by the senior intelligence adviser …that we can learn facts from Abdulmutallab as part of a plea bargaining process in connection with his prosecution…Holding Abdulmutallab for a time in military custody, regardless of where he is ultimately to be charged, would have been entirely lawful—even in the view of the current administration, which has taken the position that it needs no further legislative authority to hold dangerous detainees even for a lengthy period in the United States … What the gaffes, the almost comically strained avoidance of such direct terms as “war” and “Islamist terrorism,” and the failure to think of Abdulmutallab as a potential source of intelligence rather than simply as a criminal defendant seem to reflect is that some in the executive branch are focused more on not sounding like their predecessors than they are on finding and neutralizing people who believe it is their religious duty to kill us. That’s too bad, because the Constitution vests “the executive power”—not some of it, all of it—in the president. He, and those acting at his direction, are responsible for protecting us.

The full article from which I quoted is here.

By Sherry Jarrell