How to turn around a corporation

Lessons from Starbucks' renaissance:

1. Hire the old CEO who originally built up the brand
2. Close poorly performing outlets
3. Squeeze $500M efficiencies out of the production process
4. "Freshen" the brand with social awareness and "fair trade" coffee
5. Get rid of the cookie-cutter retail outlets, and customize shop designs to fit into local markets
6. Close for a day to teach the baristas how to make better espresso
   

These changes have lead to a 100% abnormal return (above what the market did) in the last year.

How to "loot" a corporation

In 1994, George Akerlof and Paul Romer showed us how to loot a corporation by borrowing with other people's money:

firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Ben Bernanke has apparently read their paper:

On Tuesday morning in Washington, Ben Bernanke, the Federal Reserve chairman, gave a speech that read like a sad coda to the “Looting” paper. Because the government is unwilling to let big, interconnected financial firms fail — and because people at those firms knew it — they engaged in what Mr. Bernanke called “excessive risk-taking.”

I like the NY Time's characterization of the current crisis as an example of looting 

Think about the so-called liars’ loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains. As Gretchen Morgenson has reported, Merrill Lynch’s losses from the last two years wiped out its profits from the previous decade.

What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it “management fees” or “performance bonuses.” Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.

There are two ways to address this problem. Get rid of the "too big to fail" guarantees that allow banks to gamble with other people's money (heads I win, tails the government loses) or impose more regulation on the banks to prevent them from taking risk. You can probably guess which path they will take.

The Economist on B-School Reform

After citing some sketchy statistics about MBAs' responsibility for the recent global "catastrophe" (e.g., "Most of the people at the heart of the crisis . . . had MBAs after their name"), the Economist offers some advice for how B-Schools should reform themselves. Ideas include teaching more business history, fostering more scepticism and cynicism in students, and hiring more professors who aren't afraid to "bite the hand that feeds them" (which I believe refers to business in general).

Moral Hazard at NSF

Oh my!

For instance, one senior executive spent at least 331 days looking at pornography on his government computer and chatting online with nude or partially clad women without being detected, the records show.

and

Investigators put the cost to taxpayers of the senior official's porn surfing at between $13,800 and about $58,000.

Evidently, he was not alone

The problems at the National Science Foundation (NSF) were so pervasive they swamped the agency's inspector general and forced the internal watchdog to cut back on its primary mission of investigating grant fraud and recovering misspent tax dollars.

Unfair, but well done

Will this merger succeed?

Wells Fargo's acquisition of Wachovia looks as if it will create synergies:

On the positive side, the merger has doubled the number of Wells branches to more than 6,600, giving it a footprint that only Bank of America comes close to matching. Wells and Wachovia were “mirror images” of each other, says Mr Stumpf, with Wells strong west of the Mississippi and Wachovia powerful to the east.

This gives Wells huge deposit-gathering power, as well as an opportunity to pump more products to Wachovia customers, who typically have four to five products with the bank, compared with almost six for Wells clients. Mr Buffett sees echoes of Wal-Mart in Wells’s retailing ethic. The merger gives Wells a formidable position in areas such as mortgages. In the first half of the year it handled a staggering 23.5% of all new home loans, according to Inside Mortgage Finance, a newsletter.

But by buying an undercapitalized bank, Wells Fargo reduced its own capitalization:

Among big banks, Wells scores poorly on Tier-1 common equity, the core-capital measure favoured by regulators (see chart). It is well below the 6% level that is likely to be the minimum required in future. And at some point it will have to repay the $25 billion of government capital it got last year.

What do longer skirts, shorter hair, lipstick, hair coloring and hot waitresses have in common

All are counter-cyclical indicators (inferior goods). On the last item:

“They slowly let the boys go, then the less attractive girls, and then these hot girls appeared out of nowhere. All in the hope of bringing in more business. The managers even admitted it. These hot girls that once thrived on the generosity of their friends in the scene for hookups—hosting events, marketing brands, modeling—are now hunting for work.” A Soho restaurateur I know recently received applications from “a couple of classic Eastern European fembots. Once upon a time, these ladies must’ve made $1,500 a night lap dancing. At my place, they’re not going to make that in a week.”

"Strategic" Mortgage Defaulters

A new study of mortgage defaults using a sample of 24 million individual credit files has found much higher rates of "strategic" default than previously assumed by the industry. A strategic defaulter is someone who goes directly from a good payment history to no mortgage payments at all (in contrast to many financially troubled customers who continue to try to make payments after they have fallen behind on their mortgage and other accounts). Interestingly, those with high credit scores are 50% more likely to be strategic defaulters compared to those with low credit scores.

Consumer Reports Goes after Wireless "Exclusivity deals"

Received via email today:

If you own a cell phone, the giant telecom companies are likely holding you hostage right now.

They know they can charge you what they want, give you spotty service, and even prevent you from getting the latest technology, because almost all the most popular wireless handsets on the market today are shackled by "exclusivity deals" — meaning if you buy a particular phone, you can only get service from one company.

Want an iPhone? You're stuck with AT&T. Own a Blackberry Storm? You have to deal with Verizon. These exclusive contracts mean your pricey phone is virtually worthless if you try to change companies. And forget about shopping around for a better deal.

...In Asia, 80 percent of wireless phones are sold outside of a wireless carrier contract. But in the United States, you're either stuck with one company, or your phone is effectively worthless. That's not a free market, that's just un-American.

Apparently, Consumer Reports doesn't think much of the ex-ante competition among manufacturers to design popular products in order to obtain lucrative exclusivity contracts.

Free market environmentalism