Yesterday, the Treasury Department announced that US automakers are eligible for financial assistance under the TARP program. As the Washington Post reports:
“The law grants the secretary broad authority to purchase troubled assets that he deems important to improving financial stability,” said Treasury spokeswoman Jennifer Zuccarelli.
Ford and General Motors are eligible because they are both chartered as thrift holding companies, so they can establish banks to make car loans nationwide. Other businesses, such as General Electric, Nordstrom, John Deere and Macy’s, are chartered in the same way to issue credit cards or make loans to their customers. Chrysler would also be eligible, Treasury officials said.
It is unclear at this point exactly what form the financial help might take. According to the New York Times:
Another option under consideration is to tap a $25 billion loan program that Congress just created to help the auto companies modernize their plants. A third option would involve going back to Congress, immediately after the Nov. 4 election, for authority to spend funds aimed specifically at the auto industry. But officials have not yet decided how much assistance to provide or how to structure any aid program.
Under the TARP program, the funds would likely go to the automakers’ credit arms to financial new car purchases. Under the Congressional loan program, the money was supposed to go to production of new energy-efficient vehicles (see earlier posting). Those are two very different activities with two very separate outcomes.
Maybe we need to do both – given the vastly different targets. TARP was created to get credit flowing again – so maybe helping make auto loans is an acceptable use of the money. But the loan program was targeted at the future of the industry. Unless US automakers start producing the products we need, no amount of credit will stave off their decline.
The loan program came with strings attached. When we were giving such aid to other countries (either directly or through the IMF and World Bank), we used to call that “conditionality.” People would complain – but we would insist. Now it is time for US recipients of government aid to get a taste of some of the same medicine.
Give the auto companies the aid. But force them to live up to their side of the bargain. And by the way, let me repeat my other condition: the US taxpayers get a part of the intellectual property. If the taxpayers are going to assume the risk, the taxpayers should reap some of the benefits — both financially and in the introduction of new technologies.
Allan Sloan’s column in today’s Washington Post – Don’t Blame Mark-to-Market Accounting:
Mark-to-market is a business rarity — an accounting term that draws reactions from people who don’t know spreadsheets from bedsheets. Mark-to-market, which we’ll call MTM, evokes images of Enron’s made-up profits and the other corporate scandals that marred the first years of this decade. Not pretty.
Now MTM — which means valuing marketable securities at market prices — is a hot item again, but for the opposite reason. This time financial companies and their allies are claiming it’s too strict. They argue that marking the value of complex, illiquid securities to artificially low market prices has unnecessarily crippled the U.S. and world financial systems by creating billions of illusory losses on perfectly fine (albeit illiquid) securities, such as collateralized debt obligations linked to mortgages. Markets for these things, the argument goes, are depressed way below true economic value.
. . .
Credit markets have been frozen much of the past 15 months largely because banks haven’t trusted the balance sheets of other banks and have thus been afraid to lend to them. I can’t imagine that confidence problem being resolved by changing MTM.
There are problems with MTM: It’s relatively new, and parts of it seem arbitrary. But its problems have been exaggerated. It’s easier to blame accountants for your problems than to admit you made your institution vulnerable by overleveraging its balance sheet and buying securities you didn’t understand. Ironically, many of today’s whiners adopted MTM a year before they had to, partly because of an arcane provision that let them count as profit the decline in the market value of their publicly traded debt.
The bottom line: Despite MTM’s flaws, blaming it for the world’s financial problems isn’t the answer. Neither is shooting the messenger — or, in this case, the accountant.
Amen. The way to deal with thinly traded markets (including intangibles) is to work out acceptable methodologies which mimic the market. The folks who are pressing for a repeal/suspension of mark-to-market don’t want to mimic the market; they want to ignore it all together. Why? Because, as Sloan notes, the market is telling them that their assets are actually worth a lot less than what they paid for them. So rather than face up to that fact, they want to hide behind an accounting change.
Now, tell me again how “cooking the books” is going to make things better?
In this weekend’s edition, the Financial Times published a short bit on “America’s best assets”:
At the end of last year, there were $1,580bn of assets on the government’s balance sheet. The fact that printing presses can be switched on at any time makes the number pretty arbitrary. Still, the near-trillion dollars of inventories, property, plant and equipment is real enough, of which almost 70 per cent is defence-related. Obviously, the US is not about to sell its uranium stockpiles but, according to the Government Accountability Office, the government – including the Pentagon – has “many assets it doesn’t need”.
That is only the half of it. Not even included on the balance sheet are the properties, land and heritage assets held in stewardship. How to value the Constitution is anyone’s guess. But neither is a monetary value placed on the 28 per cent of the US landmass owned by the government. Selling national parks (or Alaska) for mineral resources would be controversial but many environmental studies conclude wilderness areas are no better managed under state ownership than they are privately.
I would disagree that we should think about privatizing these assets; what part of the word “stewardship” does the FT not understand.
However, the piece indirectly raises a different point when it asks about how to place a monetary value on the Constitution. The US government has a large collection of intangible assets that do not show up on the books. Like any organization, the Federal government needs to manage those assets well.
A first step would be to know what we have. In the past, I have called for a review of how much the government spends on developing intangible assets. An intangible asset budget would help tell us how we are doing in fostering the development of intangibles within the larger economy. We need an inventory of government-owned intangibles as well. That inventory would give us the baseline for better internal management. Both reviews would help bring the government into the I-Cubed Economy.
I was at an event this morning where the subject of so-called “patent trolls” came up (see also an earlier posting). Trolls are creatures who live under bridges and demand payment from travelers who wish to cross the bridge. Patent trolls are companies and/or individuals who buy patents for the purpose of making money off of infringement claims (rather than for the purpose of marketing/developing the invention). As such, trolls are a subcategory of (and take the organizational form of) the patent holding company. A good example of a patent holding company is Royalty Pharma, which makes its money off of the royalty stream. However, defining a troll, and differentiating it from a holding company, is sometimes tricky.
At the conference this morning someone made the analogy of patent holding companies and rental car companies. The rental car companies don’t operate those cars — just like patent holding companies. The cars, in fact, sit around, not being utilized, for periods of time — just like the patents being held by those companies.
Interesting analogy, but incomplete. I have no problem with holding companies serving an important market-making function of essentially renting out patents – just like an airport rental car company. I agree with the argument that patent holding company provides a valuable service (see IEEE Spectrum: Hooray for the Patent Troll! – which unfortunately equates trolls and patent holding companies).
But the analogy quickly breaks down. I don’t have a problem with rental car companies, of course. But I would have a problem if that rental car company parked their cars in such a way as to block all of the entrances to the airport and said that the only way into the airport was to rent one of their cars, at whatever price they wanted to charge you — and by the way, if you got out of your car and walked, you would be trespassing and they would shoot you dead.
That is the business model of the patent troll.
Here are a couple of references to new ideas in education. The first is a policy paper from the Brookings Institution on
Changing the Game: The Federal Role in Supporting 21st Century Educational Innovation:
To resolve dramatic disparities in educational achievement and ensure future American workers are globally competitive, the federal government needs, as it has in the past, to change the game in public education.
A robust new federal Office of Educational Entrepreneurship and Innovation within the Department of Education would expand the boundaries of public education by scaling up successful educational entrepreneurs, seeding transformative educational innovations, and building a stronger culture to support these activities throughout the public sector.
The second is a slide show in Business Week on Disruptive Education Technology: Helping Kids Learn:
A growing number of education technologies, many of them distributed over the Web, are upending traditional approaches to education.
New approaches should certainly be welcome in the I-Cubed Economy.
It looks like Larry Summers will be the new Assistant to the President for Economic Affairs and head of the White House National Economic Council (NEC). The NEC is the President’s economic coordinating body. As the head of the NEC (the President is the actual Chair, but Assistant to the President chairs the meetings in his absence), Summers will be a major voice on economic policy. Given this role, I though we should go back to what he wrote a month ago in the Financial Times:
Economists do not understand what drives productivity growth very well. However, we know these facts: productivity grew rapidly after the second world war and then sometime between the late 1960s and mid-1970s it slowed dramatically only to re-accelerate to record levels in the mid-1990s. Unfortunately, even before the downturn, underlying productivity growth appeared to be slowing.
The most plausible explanation is that an array of transforming investments and technologies – the interstate highway system, widespread air travel and the expansion of electronics – were spurs to growth during the postwar period. Eventually their impact dissipated and, as energy costs rose, growth slowed until the information technology revolution kicked in during the 1990s. Unfortunately, the IT supply shock that powered the economy in the 1990s and early part of this decade appears to be diminishing.
So there is a need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact. We need to identify those investments that stimulate demand in the short run and have a positive impact on productivity. These include renewable energy technologies and the infrastructure to support them, the broader application of biotechnologies and expanding broadband connectivity, an area where the US has fallen behind.
I had a chance a couple of weeks ago to ask Summers about this. In his answer it became very clear that he understood the need to action on the microeconomic level to boost innovation and productivity. Of course, it may have helped that this occurred at the National Academy of Sciences – where he was taking over as the Chair of the Board on Science, Technology and Economic Policy (a position he will now have to give up).
So I am optimistic about the innovation and productivity agenda. President Obama’s economic team will have to confront our immediate economic crisis. But if Summer’s earlier words are any indication, the short term action should help feed long term solution.
The Financial Times alerts us to the next crisis in its review of a new book, The Brand Bubble:
It is conventional wisdom now that because brands deliver superior market share, margins and “loyalty” (repeat purchase), they represent a secure source of superior future cash flows that is naturally reflected in the owners’ share prices. Brands should, therefore, be a haven for investors in today’s crisis-ridden markets. But they may not be, warn the authors of The Brand Bubble .
Over the past few decades financial markets have consistently pushed up the stock prices of brand-owning companies, say John Gerzema and Ed Lebar, both senior executives at the WPP-owned advertising agency Young & Rubicam. But, they warn, over the same period consumers have been “falling out of love” with brands.
The authors have tracked consumer perceptions of 2,500 US brands since 1993 as part of their “brand asset valuator” (BAV) research programme. Back then, consumers said they trusted 52 per cent of the brands researchers asked them about. In the latest round of research the trust level had fallen to 25 per cent. This “precipitous” decline in brand trust is mirrored by other metrics. Product quality ratings have declined by 24 per cent over the same period and brand “esteem” – whether the brand is seen as reliable and is highly regarded by the respondent – has fallen by 12 per cent. Brand awareness has dropped by 20 per cent.
“While Wall Street has been bidding brand values ever higher, consumer perceptions towards brands are substantially eroding . . . Financial markets think brands are worth more than the consumers who buy them,” say the authors, who, writing before the latest crash, estimated the size of the “brand bubble” to be $4,000bn, much bigger than the size of the subprime mortgage market.
Interesting. But a bit overblown, I think. I have always had a problem with what I consider hyped values of intangibles. (See my paper Measuring Intangibles for an overview of the various metrics.) So I’m not sure I buy the $4 trillion figure. And (as the reviewer points out) this bubble may have burst already in that the stock value of these brands probably has already dropped with the overall market.
A year ago, the International Standards Organization (ISO) formed Technical Committee 231 to begin a project on brand valuation standards. I don’t know whether this project is still on going. I believe that the US is not participating in the project. As I said when the project got started, the development of valuation standards is an important undertaking but I’m not sure that ISO is the right venue for this exercise. We will see whether this new book – and the continuing bubble mania – pushes us closer to a set of understandable and widely accepted valuation methodologies for intangibles – including brands.
By the way, the FT reviewer had this to say about the entire book:
The Brand Bubble is worth reading just for the salutary first few chapters that outline this argument. The rest of the book is disappointing. The authors have access to one of the richest longitudinal marketing databases in the world. They could have used these data to add many extra levels of chapter and verse, throwing a detailed spotlight on different “stellar” brands and underperformers.
Instead, they use the second half as an extended advertisement for their agency’s proprietary research and brand-building methodologies …
I would be interested in hearing what others have to say about the book and the issue of brand valuation.
As I noted before, there are technical problems facing the Fed as it undertakes its financial stability actions (I would call it a plan, but it seems to be a series of improvised actions — which may be for the best). One of those is that the Federal Reserve Act requires the Fed’s lending to be backed by collateral. They have been finding ways around the technical problems, such as with the new mechanism for lending to money-market funds.
But, what if they start looking further at things like intangible assets as collateral? Is the industry ready? Are the identification, valuation and structuring processes in place? Yes, there have been deals done in the past, but nothing like the volume that the Fed is playing with now. My fear is that a large volume of intangible-backed deals being done for the Fed could overwhelm the system. That opens the door for bad (meaning widely varying and uncertain) valuation estimates and poorly structured deal. Such a negative process could result in the tainting of intangibles as a new toxic asset class.
As the Financial Times notes (Practicalities the only limit on Fed action), operational problems are now becoming a concern:
The problem is that, as it lends money in ever more ways to an ever larger range of institutions against an ever broader range of assets – or in the case of the commercial paper programme, the underlying credit of the borrower – the complexity involved expands exponentially. At some point the Fed will have to stop because it will exhaust its capacity to make the basic credit judgments involved.
As we argue for increased monetization of intangible assets, we need to make sure we don’t overstrain those operational capacities.
Here is an update on my earlier posting on political campaigns and copyright, from Larry Lessig’s op-ed in today’s New York Times Copyright and Politics Don’t Mix. He argues that copyright has become a tool of political censorship:
A recent dispute in a race for New York State Assembly is a perfect example. A Democrat, Mark Blanchfield, is challenging the Republican incumbent, George Amedore, in the Assembly district that includes the upstate New York city of Schenectady. Last month, Mr. Blanchfield released television and radio advertisements that included a clip from a video interview with The Albany Business Review in which Assemblyman Amedore said, “I don’t look at the Assembly position as a job.”
Mr. Amedore complained that the ads took his remark out of context, and the newspaper’s lawyers sent Mr. Blanchfield letters calling the ads “an infringement of our client’s exclusive copyright rights” (redundancy in the original), and threatening Mr. Blanchfield if he didn’t cease using the material. Never mind that Mr. Blanchfield’s use couldn’t possibly have harmed the financial interest of The Albany Business Review. Whatever the newspaper’s motive, the result is the censorship of Mr. Blanchfield’s campaign.
This problem isn’t limited to New York Assembly races. It has directly affected the presidential campaigns. Last year, Fox News ordered John McCain to stop using a clip of himself at a Fox News-moderated debate. Last month, Warner Music Group demanded YouTube remove an amateur video attacking Barack Obama that included its music, while NBC asked the Obama campaign to pull an ad that included some NBC News video with Tom Brokaw and Keith Olbermann. No doubt, these corporations are simply trying to avoid controversy or embarrassment, but by claiming infringement, they are effectively censoring political speech.
I would note that that if today’s copyright laws had been in effect a hundred plus years ago, the Thomas Nast‘s heirs might have been able to force the US government to stop using the image of Uncle Sam on anything they politically disagreed with – along with barring the GOP from using the elephant and the Democrats from using the donkey (since Nast can lay claim to the copyright over all of those).
Clearly, something needs to be done to better balance copyright and the right of free speech. As Lessig says:
It would be far better if copyright law were narrowed to those contexts in which it serves its essential creative function — encouraging innovation and ensuring that artists get paid for their work — and left alone the battles of what criticisms candidates for office, and their supporters, are allowed to make.
From Washington Post editorial Blaming the Bean-Counters:
Markets not only need transparent financial reporting, they need consistent financial reporting. To suspend or abandon mark-to-market now, in the middle of a panic, would simply deepen the confusion and suspicion that are already crippling the financial system. No, today’s financial meltdown is not some accidental byproduct of misguided technical rules. It happened because too many firms made too many bad financial bets with borrowed money. Pretending otherwise won’t solve anything.
From the Corporate Reporting Users Forum in Europe – a group of investors and analysts (story and letter in the Financial Times):
We would oppose any steps by the European Commission to undermine this position and diminish investor confidence in corporate reporting by establishing further carve-outs from IAS 39 [which calls for mark-to-market] or adopting its own standards. Now especially, investors need comparability and transparency, not further uncertainty and inconsistency.