David Koch: An American Hero

Recently, an article came out about David Koch in the Palm Beach Post about Koch attending a fundraiser to raise money for M.D. Anderson Cancer Center in Houston. Even though the title of the article was “David Koch intends to cure cancer in his lifetime and remake American politics” people seem to be picking up on his comments about the politics. The comment that seems to have gotten the most attention was when Koch claimed “If unions win the recall, there will be no stopping union power”. He is absolutely right. Unions have been in decline since the 1950’s and have done little to protect the worker. I have often said that unions exist to protect the incompetent workers at the expense of highly skilled workers who could go elsewhere.

Koch has donated more than $750 million to good causes like cancer research, culture causes, and the arts. Despite this the media and other people claiming how much the Koch brothers give to conservative causes when David Koch has given far more to charity. For every dollar that he gives to political causes he gives $4 to charity. However, you could easily argue that the media coverage over his political donations gets four times more coverage than his charitable donations. In addition to this, he holds many seats on charitable boards.

One reason why David Koch might be interested is cancer research is because he himself suffers from prostate cancer. He was diagnosed in 1992 with prostate cancer. Since then he has been treated by Dr. Christopher Logothetis of M.D. Anderson Cancer Center in Houston. As a side note M.D. Anderson has been consistently ranked number one for treating cancer and attracts people from all over the world. What is amazing is today is that even though David Koch has prostate cancer he is still able to be executive vice president of the second largest private company in America. A couple of decades ago this probably would have not been possible but with breakthroughs in medicine David Koch is able to live a healthy life. He has an incentive to fund prostate cancer research since he is suffering from it. However, the money Koch gives to prostate cancer benefits millions of men who are not only now affected by prostate cancer but also the future men who are diagnosed with prostate cancer. Self-interest can work wonders even when it is trying to save your own life.

David Koch should be seen as an American hero. He is a man who worked hard for many years help building a successful company with his brother into the second largest private company in America. As a result each of the Koch brothers together are worth $25 billion. Many people point out that the brothers inherited the business from their father. However, it was Charles Koch and David Koch who turned around the company and I would argue made it more valuable then perhaps their father ever could. People also forget that just because you inherit something means you will be wealthy forever. Many people who inherit property or money can blow it quickly. I really hope the Koch brothers publish their autobiographies. This would be the only way both of them could set the record straight on the truth instead of having future journalists and historians rewrite history. Plus, wouldn’t you like to hear a tale of how two brothers amassed billions in personal wealth?

Whitney Houston: Death, Drugs, and Money

A couple hours ago it was reported that Whitney Houston died. Houston was known as a great singer and had a great voice. It is reported she sold 170 million albums (yes we use to have albums in the old days). It is reported she signed a record deal in 2001 for $100 million in which she would have to produce six albums. There will be no doubt there will be surge in the albums she sells. Whitney Houston knew how to earn money. Below is a list of tours and how much they grossed.

Greatest Love Tour (1986) $4.8 million
Moment of Truth Tour (1987-1988) $24 million
Bodyguard World Tour (1993-1994) $33 million
Nothing But Love Tour (2009-2010) $36 million

This is of course is what the tours earned not what Whitney personally earned. Plus, this is a gross amount which doesn’t take into account costs as well. Whitney herself in 1988 earned $30 million according to Forbes. It is rumored that she was broke and was asking for money within the past couple of months. It is also known that she had a problem with drugs and alcohol. She admits that during the 1990’s she was doing drugs every day. Drugs and musicians seem to go together although they really shouldn’t. One reason why I think musicians and performers look to drugs is because if you think about their schedule of giving it there all and going night in and out dancing and singing they probably won’t get by without some time of stimulant. If you include the traveling, interviewing, and promotional things musicians have to endure they have crazy schedules. I am in no way defending their behavior although I understand why they do it because of the incentives they are faced with. This makes me think of a similar analogy to baseball and the use of steroids.

Now that Whitney Houston has passed it will be interesting to see whether or not she died with a will (dying intestate). If she did die without a will then the public will become aware about her finances. Personally I am curious to see how much she had left over after earning many millions of dollars.

American Airline Pension Problems

American Airlines is definitely hitting financial turbulence. In November of last year, American Airlines filed for Chapter 11 bankruptcy. As I mentioned in my previous post about Hostess, bankruptcy does not mean a company and their assets instantly vanish. In Chapter 11, the company meets with its creditors and purposes a plan in order to meet its obligations. Creditors get to vote on the plan the company creates. American Airlines is now trying to restructure some of their costs and increase their revenue in order to save them from going under. American Airlines has lost money for three straight years. In 2010, the company lost $481 million, and in the first nine months of 2011 lost $982 million. In the past decade, the company has lost more than $11 billion. Clearly, this company is not creating value. It seems a little ironic that a company with the name American in it is losing so much money a year.

As part of restructuring their costs American Airlines is trying to terminate their pension plans (they have 4 due to different unions) in order to save money. The company needs $18.5 billion to cover all their pension promises made to current and former employees. However, the company only has $8.3 billion or can only meet 45% of their obligations. When pensions get in trouble the Pension Benefit Guaranty Corporation (PBGC) steps in to take over. The PBGC is a government sponsored entity (GSE) that doesn’t get its money from the government but rather through premiums that companies pay in order to protect them in case a company goes belly up. However, what is even more interesting is that the PBGC itself has a shortfall of $26 billion. So in essence the organization that is going to bail out a company needs more of a bailout than the company it’s bailing out. If American Airlines employees agreed to take a 55% decrease in their pension benefits the problem would be solved, however I think there would be so many union strikes you wouldn’t see an American Airlines plane over the ground for a while.

American Airlines is trying to get back on track by cutting their costs and increasing their revenue. The company recently announced they were going to lay off 13,000 employees or 15% of their workforce. The company is reducing their labor costs by 20% or $1.25 billion. The company is going to try to increase revenue by $1 billion by buying new planes that are more fuel efficient and increasing flights to certain cities. American Airlines seems to be a little too optimistic in terms of how much the new planes will save them.

Time will tell whether or not American Airlines can get its act together. The company will try to move its pension plan from a defined benefit to a defined contribution. What this simply means is that employees will actually have to contribute part of their salary to a 401k plan if they want money for retirement. Usually the company will match whatever they put in. The old way use to be a defined benefit plan where the company told the employee they would get x amount of dollars per month for the rest of their life depending on their years of service and salary. Defined contribution plans are better because a 401k plan can be managed by the employee and not the company like defined benefit plans are. I have a feeling though that the government will ultimately have to bail out American Airlines since I don’t know if the PBGC could handle it. I would prefer the PBGC to just disappear and have companies just set up defined contribution plans (which is what the current trend is). It seems a little ironic that a company with the name American in it is losing so much money a year. Warren Buffett was spot on when he said. “Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down”.

Is President Obama Creating Jobs?

Many people were jumping for joy when they heard unemployment decreased to only 8.3%. However, how the unemployment number is calculated can sometimes be misleading. For instance, people serving in the military, people in nursing homes, or prisons are not considered in the unemployment numbers. People who are on unemployment benefits are also not counted. Data from the Department of Labor shows that 3.46 million people are on unemployment benefits. If we include the amount of people who have given up looking for work unemployment would be almost a full percentage point higher.

A better measure is to look at the civil participation ratio which looks at what percent of the population is working. The civilian participation ratio is now 58.5%. The civilian participation rate has only decreased since President Obama has been in office. Today, there 12.8 million unemployed people and 43% of these people have not had a job in more than six months. Jobs skills don’t regenerate over time. Usually if you not constantly doing something every the brain will eventually forget what you are doing.

One positive however is that number of government jobs has been decreasing even though government spending has been increasing. I suppose this gives more power per government worker. In the last year, 276,000 jobs were lost. Nearly all these losses came from local and state government and not the national government.

Having millions of people out of work is unproductive. Not only are people unemployed but they are losing job skills since they are not working which will put them further behind. Many firms are skittish to hire because of fear of upcoming regulations, legislation, and what the future for taxes holds. If the government started to slash the most costly regulation to companies, cut thousands of pages of worthless regulations, and lowered corporate tax rates (also assuming they eliminate all deductions, subsidies, and corporate welfare) the economy would get a much needed jolt.