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.

Thomas Sowell: A Closer Look At Discrimination from Firing Line

Charles Koch: William E. Simon Prize Acceptance Speech Video

Charles Koch is a true american hero...I am suprised MSNBC or the New York Times have not a hold of this video yet...

Mitt Romney: How Private Equity Works

Recently in the news Mitt Romney has been criticized for his tenure at Bain Capital. The common thing you hear is that Romney amassed great wealth by taking companies leveraging them with debt and selling them reaping millions in profits. People should understand how a company like Bain Capital works before making such statements.

Companies like Bain Capital are known as private equity firms. Usually, a company like Bain will look at companies that are under-valued, in trouble, or help companies go from being private to public traded. Identifying under-valued companies and improving them creates shareholder wealth. Texas governor Rick Perry claimed Mitt Romney was a “vulture capitalist”. I would regard vulture capitalist as a compliment personally. In essence, Warren Buffett is a vulture capitalist when he invested in companies he believes a company is undervalued. Private equities companies don’t get paid unless they meet certain benchmarks. Also private equity firms have their own money on the line so they can’t be too foolish with it. The idea of private equity companies is to come and improve the company. Sometimes, this means firing workers. Firing people is not a bad thing considering some of those people probably shouldn’t have even been hired in the first place. Critics of Romney talk about the job layoffs however don’t talk about the success stories like Dominos Pizza, Staples, and Sports Authority. Yes, Mitt Romney had to fire people but I would argue this is a good trait for the future President to have given the large size of government. Businesses can fire people in the short term. However, no company is successful in the long term by continuing to fire people. New employees increase productivity and profits which make the company more valuable.

Critics argue that companies still went bankrupt since Romney “likes to fire people”. There is no guarantee that when a private equity company helps out a troubled company there will be success. In fact, more often than not there are more failures given the fact that private equity companies take on companies with the most problems. It would like looking at two different doctors with different patients. If one doctor always takes on the sickest and most ill patients we would expect the mortality rate to be higher. However, if the other doctor took on average healthy patients the mortality rate should be comparatively lower. Bain did take on companies with major problems however they did create value. From 1984-1994 Bain was involved in 77 deals. During this time Bain made $2.5 billion while only investing $1.1 billion. So Bain was making an annual compounded annual growth rate of 8.55% per year.

In the process, Mitt Romney also made money for himself. Romney himself is estimated to be worth over $200 million. This is impressive given he spent $54 million to run to eventually become governor of Massachusetts. According to an article entitled “Two Mitt Romneys: Wealth Man, Thrifty Habits” Romney for most of his life has lived like a middle class American. He likes flying JetBlue, while at Bain Capital ate brown bag lunches at his desk, and couldn’t justify spending money on a private jet. Also Romney was required to do chores even on Saturdays. In high school he didn’t even have a car even though his father was an executive at American Motors.
Many people want to criticize Mitt Romney and his ties to Bain Capital. However, when you look closer at what he actually did the record it would show that Romney and Bain Capital in the long run created jobs, wealth, and progress. As economist Dr. Walter E. Williams would say “the rich didn’t get rich by being stupid”.

Hostess Bankruptcy: Was CEO a Ding Dong?

2012 seems to have started out with many bankruptcies. First, we had Kodak and now Hostess Brands is filing Chapter 11 for the second time. Hostess Brands is responsible for making Wonder Bread, Twinkies, Ding Dongs and other assorted goodies. It seems surprising that a snack company is going out of business given the rising obesity problem America faces. However, in business if your costs are more than your revenues you are out of business. Hostess filed for bankruptcy in 2009 and still owes $860 million to creditors. In their most recent fiscal year the company lost $340 million despite selling $2.5 billion worth of goodies. Rising input costs like sugar and flour have also been blamed for the bankruptcy. Of course government quotas artificially sweeten the price of sugar for a handful of American farmers.

One of the major problems with Hostess seems to be the number of union contracts that they have. Around 80% of all Hostess employees are unionized which would inevitably bring problems if a company wants to restructure anything. The company has 372 separate union labor contracts. Most companies don’t have a union. Employees come and go as they please. I never understood the argument of unions. Essentially, unions are created to protect the unproductive. Why do employees need an organization to negotiate for them? If employees had marketable skills and were good at their job the employee would have the bargaining power not the employer. In union jobs only certain people are allowed to perform certain tasks. For instance, for instance union contracts at GM in the old days only allowed certain employees to change light bulbs. Anyone with a brain will realize how unproductive this is. In the case of Hostess Brands only certain trucks had to deliver bread and cake products. The labor contracts also present another problem of numerous pension obligations. Since there are so many union contracts there are also many different pension plans. Hostess has 40 pension plans they have to work with. Managing pension funds is expensive and has burdensome paperwork. Considering most companies just have one (their own) pension plan it would make sense to consolidate this.

Whether or not Hostess Brands emerges from bankruptcy is a question only time will answer. The company brands however might not disappear. Various companies could come in and look at buying individual brands that the company owns and try to integrate them into their snack portfolio mix. This of course would happen if Hostess was unable to restructure their obligations and debts in bankruptcy court. So the question remains was whoever running Hostess a ding dong?

Apple Steve Cook Highest Executive in 2011?

Apparently, Tim Cook could be the highest paid person in 2011. The Associated Press is reporting that Tim Cook could stand to receive $378 million in compensation. It should be pointed out that $376 million of this is in the form of restricted stock. Companies give employees restricted stock in order to reward long term productivity from employees. The shares usually can’t be sold for a number of years. The earliest Mr. Cook can sell these shares is August 2016. Not only does he have to wait five years to sell these shares but he can only sell half of the shares receives at that time. He will be able to sell the other half in August 2021. In essence, the idea of restricted stock is to incentivize employees (usually executives) into creating shareholder wealth. If employees are highly productive and make decisions that create wealth for the company it will usually be reflected in the share price. I say usually only because in the short term the market can gyrate for various reasons but the long run is a good measure of a company’s true value. Profits are created by fixing problems.

People complained that executives were getting paid too much of a salary so then corporations began giving executives (and regular employees) options. Even to this day people complain when executives receive large amounts of compensation because of stock options. If you look at Tim Cook 99.4% of his compensation will be based on how well Apple stock does. True his options today are worth $376 million however if Apple takes an iTumble in the market Cook could stand to lose lots of money depending on the stock price in 2016. In 2016, when Cook has the right to buy the stock he will pay ordinary income of that money. Assuming he is in the highest tax bracket, tax laws don’t change, and Apple stock is around $500 per share cook would pay around $78 million in taxes when he has the right to exercise (buy the stock). Not only will Cook pay ordinary income but also pays capital gains when he ultimately sells the stock.

Executive compensation is a hot topic. Often people who have never paid or been a CEO seem to know how much a CEO is worth. What people seem to fail to realize is how much of net worth any executive has tied up in stock options. True the executives get a salary but often used to pay their taxes from exercising options. If anything these executives have much more to lose than the average employee so much of their net worth relies upon how well the company does.

Hopefully, Tim Cook will lead Apple to create insanely great products that satisfy millions of people. With Steve Jobs now gone we can now test to see how “innovative” Jobs really was. If Cook is successful the value of his stock options will rise. Of course he won’t be able to cash out his stock options until 2016.

1980-2010 Government Spending Receipts and Outlays

Spending data from 1981 to 2010 is now in. The data shows that the U.S. is now spending $3.45 trillion per year. To put this in perspective the United States government spends over $100,000 per second. The next logical question should be what is this money spent on? First spending is separated into mandatory and discretionary spending. This is language is mysterious since you could argue all spending is discretionary. The largest expense for 2010 was Social Security which cost $695 billion. The next largest expense was the Department of Defense which spent around $664 billion. Next on the list is unemployment/welfare/other spending coming in at $571 billion. Clearly, running a government isn’t cheap the question should be are we getting our what we pay for?

Despite what people say the government doesn’t have a revenue problem it has a spending problem. Looking at the data from 1981-2010 it is crystal clear that the annual increase in revenue was 4.52%, however the annual increase in spending was 5.89%. Spending has on an annual basis been 30% higher than revenue. People and politicians talk about taxing people their fair share, but isn’t the government already spending more than its fair share? There is absolutely no amount of money politicians cannot outspend. The annual deficit seems to have exploded in the past few years. In 2008 the annual deficit was only $454 billion. By 2010 it increased to $1.25 trillion.

One solution people have is to tax the rich. Let’s put this into perspective. Essentially what these people are saying is we should tax the most productive people because certain elected people spent too much money. This to me does not make any sense. Why should the rich be punished because politicians spent more than they had? We could tax everyone who made over $250,000 (the new millionaires and billionaires according to President Obama) at a 100% tax rate and this would only raise $1.97 trillion. This number is unrealistic because if the government taxed anyone 100% there would be no incentive to work. If the government wanted even more money they could take all the profit from Fortune 500 companies which would amount to $400 billion. Of course if Congress ever announced this you would see 500 companies and millions of people flee to other countries.

The solution is to just spend what we have. Individuals and families create budgets that they have to follow. If Congress were able to freeze spending for a few years (without any gimmick legislation to remove the freeze or else they would have to resign) we would slowly start to see surpluses. In addition to this, if we lowered the corporate tax rate, eliminate taxes on dividends and interest, got rid of many burdensome regulations we would start seeing money from all over the world flow into the United States. In addition to all this the government has 650 million acres (around 30% of all the land in the United States) Clearly, some of these assets along with other assets like buildings could be sold to raise money. Not only would selling land to the public raise money it would also increase revenue since people do have to pay property taxes every year. If someone tells you we don’t have enough revenue you should ask them well how much is enough?