"Now, it's time for the happy recap." - Bob Murphy
September 08, 2004
POLITICS/BUSINESS: Not That Simple
Mark Cuban, trying his hand at politics, makes a serious error regarding drug company profitability:
They donít run their companies to make a profit. They run their companies to make Wall Street happy, to push their stock prices up, and if they are lucky, to hit the jackpot personally.
They know that in order for their stock prices to go up, they have to sell the future. If all they have to sell is the cash flow from their existing base of drug patents, they have a problem. Could you imagine the CEO of a major drug company saying, ďWell, we canít come up with any new products, and our R&D isnít really working, so we will just play out the patents on our drugs and pay out the cash to shareholders.Ē Yeah Right.
They will do just what they are doing now ó keep on investing in their own R&D hoping they can hit a home run with new drugs, and when that doesnít work, they will use their stock and cash to buy other companies that have better prospects. In all cases, they hope the results will propel their stock and their own net worth.
They arenít going to change how they do business at all. Wonít happen. CEOs are a competitive bunch. You donít get to run a major corporation by not being motivated to succeed. A measure of that success is personal wealth.
As long as CEOs and those around them want to be rich, we can change the laws regarding drug pricing and nothing at all will changeÖNothing.
This is a perfect example of how a smart businessman can believe a stupid idea when it comes to politics. Cuban is right, of course, about the kind of motivations that make executives tick - like any other worker, they work to make their companies profitable because they are given incentives to do so, not out of some abstract love for their shareholders. And he's right that, if drug companies realized tomorrow that they could no longer expect future profits from large R&D layouts, executives would be loath to become doomsaying pessimists about their own companies.
But what would really happen is right under Cuban's nose, and he misses it: what does a company do when it realizes that its current business is throwing off profits that can't sustain in the future? Well, the most common response is what Cuban himself suggests: "use their stock and cash to buy other companies that have better prospects." In other words, diversify.
Which is precisely the point: if R&D in new drugs starts looking like a bad gamble, sooner or later drug company CEOs will devote more of their available resources to acquiring companies who do other things than invest in drug R&D, and less to that R&D. And, in the long run, we'll have fewer drugs produced. Not none; that goose won't stop laying golden eggs entirely. But the natural response of CEOs who want to stay successful will be to migrate their companies' capital investments away from a low-margin business. And we'll all suffer.
June 21, 2004
POLITICS/BUSINESS: Paying Dividends
A DC-based lobbying outfit called the American Shareholders Association has produced a study showing a sharp increase in payment of dividends following the dividend tax cut:
The group's head argues that this is good corporate governance, given that unlike reported earnings, cash dividends can't be faked:
June 05, 2004
BUSINESS/POLITICS: It Can't Be The Economy, Stupid!
It seems almost beside the point at this stage to talk about domestic politics - the political terrain is 100% Iraq at the moment - but if the economy winds up becoming an issue in the election, the recent job growth reports may send the Democrats looking to take this helpful advice from the Politburo.
April 20, 2004
BUSINESS: Stock Answer
Mark Cuban has some revealing if unduly cynical thoughts about the stock market, from someone who was on the inside in the 1990s. (Yet again, Cuban writes with the touching naivete of a guy who thinks you can speak freely about the stock market in this country without getting sued at the drop of a hat). While I can't agree with Cuban's wholesale cynicism about the market, it's amazing how often investors, like sports fans and sports teams, forget that something that is a good buy at one price can be a terrible investment at a different price. His story about a company called Gandalf is a great example of the phenomenon.
April 02, 2004
BUSINESS: New Dow
Via Dustbury, we see that the Dow Jones Industrial Average has dropped AT&T, International Paper and Eastman Kodak and added AIG, Pfizer and Verizon. The passing of AT&T, in particular, from the Dow seems like a real sign of changing times.
April 01, 2004
BUSINESS: Accounting For Options
Kevin Drum links to this Gregg Easterbrook item arguing for treating stock options as an expense . . . granted, I'm a lawyer not an accountant, but as I explained in one of my earliest entries on this blog (one that drew a response from the author of a WSJ op-ed) I still don't understand why options should be an expense rather than a contingent liability that's expensed when exercised. Easterbrook's example of a company giving away land is entirely bogus, since granting an option gives away (duh!) an option to buy stock, not the stock itself. You can estimate the potential cost, but the real cost to the company isn't realized until when-and-if the option is exercised (and not all options are exercised, especially given that stock prices sometimes go down, not up).
PS - In the same item, Drum also argues that the Easterbrook item I cited yesterday on Richard Clarke and Iraq missed a few public statements Clarke did make at the time, although Easterbrook's larger point still stands about the gap between Clarke's present level of outrage and his willingness to speak out at the time.
February 28, 2004
BUSINESS: The Lou Dobbs Rogue Fund
Jim Glassman has some fun figuring out that if you invested your money in firms Lou Dobbs has blasted for 'offshoring' jobs, you would have made a 72% return on your investment last year.
November 19, 2003
BUSINESS: Delaware Indicator
I found this column a few weeks ago by economist Daniel Gross interesting: he argues that the rate of new business incorporations in Delaware (a state with nearly as many corporations as people, owing to its use as a legal home to many national companies) is a good indicator of the potential for near-term growth in the economy.
July 17, 2003
BUSINESS/SCIENCE: The Death of Moore's Law?
Former Intel CEO Gordon Moore thinks that we are only a few years from seeing the finite limits on how small things can be cause the death of "Moore's law," the maxim that "the number of transistors on a computer chip will double every two years."
July 13, 2003
BUSINESS: What Point?
>Key quote: ''PowerPoint allows speakers to pretend that they are
>Source: via The American Scene
July 11, 2003
BUSINESS/POLITICS: Social Conscience
Ricky West has some thoughts comparing Warren Buffett's anti-tax-cut social justice rhetoric to the reality of Berkshire Hathaway's treatment of its employees. Of course, Buffett has a duties to the other Berkshire Hathaway shareholders to maximize their profits rather than pay unnecessarily high salaries; he has to let the other shareholders decide for themselves how much money they want to devote to giving their fellow man a better deal than the market demands.
But then, shouldn't that also be true of George W. Bush?
June 17, 2003
Not good news, but probably not that harmful, either.
May 13, 2003
BUSINESS: Not For Thee
Mindles H. Dreck thinks it's funny that the New York Times, even after getting burned by Jayson Blair, is willing to call for onerous regulations of Wall Street while it couldn't live with even modest internal controls for its own business. Of course, Wall Street handles other people's money - but then, as I often see in my law practice, a single Times article can launch a huge and costly lawsuit that can take years to get rid of.
April 21, 2003
LAW/BUSINESS: AOLTimeWarner On The Hot Seat
February 20, 2003
BUSINESS: Ireland's Bane
Ireland's roaring economy has sputtered, and this New York Times profile blames the euro.
February 03, 2003
POLITICS/BUSINESS: Charles Schwab Steps Down
Charles Schwab stepped down as CEO of his firm Friday, while remaining on as chairman. This looks like just a sensible combination of corporate governance reform (Schwab's explanation) and the 65-year-old Schwab beginning the transition to the next generation of leadership for his company. But you do have to wonder, his denials to the contrary, if Schwab would be a candidate for public office. I assume from some of his public positions that he's a Republican, although whether a moderate or a conservative, I've no idea. But he's got huge name recognition and deep pockets.
In the end, probably the biggest hurdle is that he'll be 69 when Gray Davis' term ends. Guys like Schwab are generally better suited to be governors than senators. Still, in a California GOP desperate for winners, he'd be a guy worth talking to.
January 27, 2003
BUSINESS: Only The Vultures Got Fat
The incomparable Lileks on Monster.com's Super Bowl ad: "it reminds you of the year when every other ad was for an internet-bubble company. One has survived, and itís the site aimed at the unemployed. Thereís the latter nineties, in a nutshell."
December 19, 2002
BUSINESS: WSJ Corrupted By Clinton Crony!
The NY Post has an interesting critique of the corporate ethics of Dow Jones, parent company of The Wall Street Journal. Ironic that the Journal gets criticized for the ethical failing of having a Clinton crony (Vernon Jordan) on its board.
November 14, 2002
POLITICS/BUSINESS: The Treasury Job
More inside-the-Beltway stuff in Bob Novak's column on the impending doom of Treasury Secretary Paul O'Neill, which will leave the Bush Administration looking to fill the Treasury and SEC jobs as well as Larry Lindsey's economic-adviser job all at once.
While there are several candidates, all have their shortcomings:
Read More Ľ
Zell Miller, a decidedly Bentsenish choice, seems happy to serve out his term as a contrarian Democratic Senator, although joining the Administration seems likelier than switching sides in the Senate.
Rudy Giuliani's been mentioned for the SEC job, but he could have any job he wants; except for the vice presidency or Attorney General, neither of which is available, the only one I could maybe see him taking is the new Secretary of Homeland Security.
Phil Gramm would be great, but I assume if Gramm wanted to stay in government he'd have stayed a Senator.
Jack Kemp has the name recognition but probably too much of a reputation on issues like tax cuts and the gold standard.
Steve Forbes is absorbed with his magazine and easily caricatured as a rabid right-winger.
James Baker's been Treasury Secretary before, isn't a tax cutter (on a similar level, Dick Darman is probably even below Michael Moore on Bush's list of economic advisers) and probably doesn't need the headache of the SEC.
If Bill Simon had run well in California he might be an option for one of the jobs - his dad was Treasury secretary - but his disastrously tone-deaf campaign and the (unfair) ethical questions about him make him unattractive.
On a larger level, there are few Republicans out there who ran good campaigns and lost, the way Ashcroft and Spence Abraham did in 2000 (John Thune comes to mind, but he hasn't made a name on economic issues, or maybe Steve Largent).
I liked Christie Whitman as a Treasury choice two years ago, but the last thing Bush wants right now is to find a new EPA chief, when the environment is one of the Democrats' few enduring strengths (John Engler? again, a guy who has some tax-cutting experience but isn't the type to inspire confidence in financial markets).
A CEO looks like a bad pick these days, although some Wall Streeters have been bounced around for at least one of the jobs.
Other GOP veterans seem to be settled outside government, like Vin Weber and John Kasich and the recently-retired, although Kasich is a guy with real political experience, TV skills and conservative credentials.
In other words, Bush may wind up looking more to businessmen types with low political profiles, because the likely former officeholders are mostly unavailable or unlikely. And he has to do this while running the war . . . it's a tough job.
ę Close It
November 05, 2002
POLITICS/LAW/BUSINESS: Pitt Resigns
Slipping his resignation letter over the transom on a busy news day: people I work with know and respect Harvey Pitt, and everyone seems to agree that he deserved better than this.
Posted by Baseball Crank at 11:08 PM | Business | Law | Politics 2002-03 | Comments (0) | TrackBack (0)
September 26, 2002
BUSINESS/SCIENCE: Spam Spam Spam
A study tries to estimate the cost of spam to businesses, but I think it overestimates - I can spot and delete spam (which has started to spill over my law firm's firewall in droves lately; we used to get it from legal publishers and the like but now it's the really nasty stuff too) at a rate of probably one every 5-7 seconds, not 30 seconds as estimated in this article.
September 24, 2002
BLOG/BUSINESS: LOOK OUT NEXIS, STEP ASIDE YAHOO!
September 03, 2002
BUSINESS: Options as a Contingent Liability
Academics REUVEN BRENNER and DONALD LUSKIN argue in today's Wall Street Journal that when stock options are issued, they should be treated for accounting purposes, not as nothing (the traditional method) nor as an immediate but estimated expense (the current "reform" proposal), but as a contingent future liability that becomes an expense when exercised. (The article is available online only for subscribers). Their argument makes sense, and for another reason they don't mention: expensing options when exercised means that a company's income statement will take a hit (and be expected to take a hit) immediately after any big run-up in the stock that causes options to be exercised in large numbers. That should provide something of a check to excess enthusiasm, because big-time inside selling will trigger an instant dip. (The downsides: (1) until management absorbs this lesson, there would be more spike-and-drop patterns leading to more lawsuits, and (2) some execs could be legally trapped from selling by insider trading laws, because their decision to exercise options could, itself, be material nonpublic information about the future financial results of the company).
UPDATES: First of all, I mistakenly identified Donald Luskin as an academic, which he isn't. Second, Prof. Brenner was kind enough to email me to point out that he had considered the "hit to the income statement" point in his original draft of this article, which had to be shortened to fit the WSJ's space constraints.
August 23, 2002
BUSINESS: Is Not Good
You can tell things are really going badly in the markets when business journalists are leaping to their deaths.