End Corporate Taxation

Steven Rattner's editorial makes the case for dropping Corporate taxation for the distortions it causes.  The best reason for eliminating corporate taxes is the cost of collection.  When companies dedicate their best and most expensive resources to lower their taxes the economy suffers.  It would be much better if those resources were used to create better products and services.

Not Enough has been Done to Prevent a Blowout at another Offshore Oil Rig

Elizabeth Birnbaum, ex Director of the Minerals Management Service at the time of the Deepwater Horizon blowout, co-wrote "The Deepwater Horizon Threat" editorial in today's New York Times.  Naturally it is a call for caution and more regulation, but  nowhere in the piece was there a mention of repealing the $75 Million liability cap that Congress allows offshore drillers.  It was very lucky for the Administration that BP is too big an entity with too many assets in the U.S. that they could not just walk away from from their liability for environmental carelessness. But a small LLC with unknown backers could have just as easily ignored the MMS as BP did but leave the Gulf Coast spoiled with an unpaid  $20 Billion of clean up costs.

North Carolina Regulators Join Duke Energy's Appeal of Judges ruling Ordering Clean Up

That Governor McCrory is a former employee of Duke Energy and that he has ordered his state regulators to fight on the side of not requiring Duke to clean up it's ash spill stinks to high heaven.  This receives The Crony Capitalism at its Most Brazen Award for 2014.

Bloomberg Should Stand Strong in China

Warren Buffett famously declares in his Berkshire Hathaway annual reports that he is a lucky man to have grown up in a country that uniquely appreciates his talent for asset allocation. In what other country could a man with a voracious appetite for business news passively invest in self discovered opportunities to grow from nothing to one of the world’s great fortunes? While Warren is our best practitioner it can be said that as a country the United States does a better job of asset allocation than any other and one reason for this great result is our First Amendment right to a free press.

Public corporations issue annual reports to their stockholders the world over. These reports are to the business owners where management discusses the company’s position, direction and finances. Berkshire Hathaway’s annual report is an excellent model because Buffett covers issues in a manner that he, as a great asset allocator, finds important to know and understand when examining other companies. Never the less, without a free press Buffett’s letter and report would be just his word; the equivalent of Bernie Madoff asking you to trust his financial prowess. Our tradition of a free press tests these stockholder reports. We trust Warren because a free press has verified his character and results over a long period of time.
It was reported “The chairman of Bloomberg L.P. said in a speech here on Thursday that the company should have reconsidered articles that deviated from its core of coverage of business news, because they jeopardized the huge sales potential for its products in the Chinese market.” This is a rather clueless as to what you are about statement coming from the head of a publishing empire whose business is to report on business. Those screens on their ubiquitous terminals are an amalgamation of business reports! What business would Bloomberg have if it got out that they were a house organ of the Chinese government? It appears as if Bloomberg’s Chairman, Peter T Grauer, is speaking as if he were the publisher of a local paper who didn’t want to offend advertisers. But he isn’t. Business is global and good business information is more valuable to his customers than appeasing easily offended crony capitalists.

Apparently the offense that caused the drop in the placement of Bloomberg terminals in government offices was an article regarding China’s current leader, Xi Jinping, and his millionaire family members. Sure it’s an embarrassment that any Authoritarian would try to quash but, and unfortunately for Chairman Grauer’s effort to appease, it is difficult to consider the article as anything other than business news! An allocator of assets, such as Warren Buffett, would like to understand the crony environment of a country where he is considering making an investment. On the other hand, if China’s government was insulted enough to have Bloomberg thrown out of the country then their massive portfolio of foreign funds would presumably suffer from poor investment decisions made by those working from second rate data on terminals toeing the party line.

Businesses and governments can delude than themselves that they are doing a public good and a free press can correct those that have jumped the track. Bloomberg by holding firm in reporting all the business news makes it more valuable to it’s consumers. The fact that Xi Jinping is ticked off is irrelevant, he isn’t the customer. On the hand Bloomberg does China a favor by factual and investigative reporting. Now that the low hanging fruit of economic progress has been consumed, China needs a free press more than ever if it is to keep fraudsters and swindlers from misallocating resources into schemes that slow and even kill future prospects. Bloomberg’s Chairman on the other hand has to fight from reducing their information to the lowest common denominator. Common is cheap; something not usually associated with Bloomberg.

Bloomberg Tempering its Reporting in China

Bloomberg has to decide to report on business in China accurately and with real insight, otherwise what are they and their terminals good for? Efficient allocation of capital requires good information that only a free press can generate. If Bloomberg let's itself become a house organ of the Chinese government then their information is suspect. Imagine the result if China could manipulate the Bloomberg screens to appease their crony capitalism tastes?  This isn't like a local paper not wanting to offend its advertisers.  

Cronies Destroying Wealth

Companies in industries such as utilities or extracting natural resources serve two masters, customers and regulators. It is a relationship where crony favors are sure to develop. Duke Energy's February coal ash spill into North Carolina's Dan river highlighted the worst in crony capitalism. That Governor Pat McCrory is a former employee who made it his business to defang the EPA to reduce the regulatory burden to the utility at the expense of the State's natural resources and it's citizens safety will be politically damaging to the G.O.P.'s current control there. While the the political ramifications of this accident are left to the good people of North Carolina, the investment community currently is voting with their wallets by selling and thereby distancing themselves from Duke Energy, a utility incompetent enough to put at risk billions of dollars of stockholder wealth through complacency brought on by political influence.

Cronyism is as addictive and unhealthy to a corporation's long term well being as alcohol is to certain individuals. Corporate self delusion takes hold when insiders deny their malfeasance by repeating the mantra that they serve the public. Soon the unthinking mantra blinds the company to it's operational risks. Illusory profits are declared and bonuses paid to management because of efficiencies garnered from reduced maintenance expenditures. Good investors see the sclerosis hardening and sell the stock. As stock values goes down so does the price earnings ratio in comparison to others in the industry. With a low PE raising money from the bond market is dearer and dividend payments to stockholders go at higher rates to maintain the stock price at a level the bond market requires. To my knowledge Duke Energy was not considered crony addicted beforehand and therefore many investors were surprised by this wealth destroying accident and it's apparent crony addled stupidity. Suddenly Duke Energy's reputation among it's peers as a good steward of stockholder assets is lost. This loss will be just as onerous a burden as the losses from private liability suits which are sure to come.

The biggest destroyer of stockholder wealth, Tokyo Electric Power better known as Tepco, put nuclear power plants lined up on the shore against the delusions that the1930's tsunami that devastated Fukushima would not repeat, that four plants next to each other were as safe as one and that the emergency generator's required for the almost certain disaster could be placed below water level. This absurd decision sequence could only have come from a captive regulatory apparatus that was countered, bargained and bullied on every detail by a company promising the regulators revolving door jobs. And the greatest delusion among all of those involved was that this was done for the betterment of stockholder value and Japan's economy. Unfortunately for Japan, TEPCO's wipeout leaves nothing to compensate the victims and the country for the company's malfeasance and it's regulators complacency.

The second biggest destroyer of stockholder wealth due to cozy relations with an inept government regulator and slackening operational standards is BP Oil. Fortunately for this country and the people living on the Gulf Coast the company had assets to cover the losses from the oil rig explosion and months long oil spill. If Congress has a lesson to learn here it is to rescind the crony deal whereby there is a 75 million dollar liability limit on LLC offshore oil rig operators. Otherwise the people of the Gulf Coast may be left with a future situation similar to the sloppy Charleston, West Virginia chemical tank operators who after letting thousands of gallons of toxic chemicals leak into the Elk river cut and ran from their liabilities leaving the mess to the tax payers.

While many would believe that another law with bigger fines and more regulators is required to resolve the problem of industrial accidents, the greatest deterrent is skin in the game. Thankfully BP had the assets to fix the problem and compensate the victims, actually more than compensate according to their recent ad's bemoaning payment's to Louisiana strip clubs and the like. Duke Energy has assets to fix and compensate as well. If the West Virginia Chemical Tank company had liability coverage sufficient to cover the hundreds of thousands of people affected by their sloppy operations then possibly insurance carriers would have made it their business to make sure the company ran a tight ship. Reliance on government agencies subject to politics and ignored by those being regulated is no compensation to the victims and taxpayers. Assets and Insurance are.  

Duke Energy & North Carolina - Cronies Destroying Wealth

As an investor I had a good opinion of Duke Energy and as a graduate of UNC at Chapel Hill held a high regard for the state as well.  But today's Ash Spill Shows How Watchdog Was Defanged in the New York Times has changed that.  That the Governor, a former employee, facilitated the fouling of the state's waters and endangered it's citizens is a an example of the wealth destruction of crony capitalism.  Duke Energy is going to pay.  Management did not do the stockholders any favor by using political influence to slacken their operations.  BP is a much diminished company today because of a series of accidents from shoddy procedural ethic that culminated in the Gulf oil spill.  Tepco, Japan's nuclear utility, is completely bankrupt and bankrupting the country of Japan as well because of lax control and cozy relations with their crony government regulators.