The truth about GM repaying its TARP loan

Last week General Motors conducted a public relations blitz celebrating the repayment of its TARP loans. Treasury secretary Geithner also issued a press release saying GM has repaid its debt ahead of schedule.

Those with memories recall that GM received about $60 billion in government funds, but the TARP repayment amounted to a mere $6 billion. Also, GM is still not profitable. So where is the money coming from? GM CEO Ed Whitacre failed to note in his press release that GM drew upon another line of credit at the Treasury to pay off its TARP debt. Taxpayers continue to hold a sizable equity position in GM, but the odds that an IPO would make them whole are quite low. Today's NYT reports that the Congressional Budget Office expects taxpayers to take a $30 billion hit on GM.

My take: credibility is a precious asset, one that neither GM or the White House has in great supply right now. This phony message needlessly depreciates that asset further.

We have met the enemy and he is PowerPoint

This is the headline of an article in last Monday's NYT. Apparently Pentagon top brass spend a lot of time making and attending PowerPoint presentations and some are now realizing that the medium is getting in the way of the message. Money quotes:

• "PowerPoint makes us stupid," Marine Corps Gen. Mattis
• "Some problems in the world are not bullet-izable," Gen. McMaster (who actually banned PP in his command at one point)

As an aside, I used Apple's Keynote presentation software for the first time this week, impressive fonts and easy to learn. So it will be "death by Keynote" in my classes next year.

Rajan on sources of crisis

Chicago Booth finance prof Raghuram Rajan discusses his new book "Fault Lines" with WSJ columnist David Wessel. Rajan gained fame in 2005 when he rained on a career celebration of Alan Greenspan by saying big banks were leading the global economy into big trouble. "I felt like an early Christian who had wandered into a convention of half-starved lions."

Rajan sees three fault lines, all of which continue to pose serious threats to our economy: (1) the expansion of cheap credit in the US in the previous decade; (2) excess savings overseas in countries such as China that helped fuel low interest rates; and (3) continued expectations in the financial arena that the US government will bail them out in the case of another crisis. All of which makes the current debate over financial regulation all the more critical.

Moral hazard for credit raters

Paul Krugman's NYT column today delves into some emails at Goldman Sachs. Not the ones that have been cited in the SEC's charges, these emails come from credit rating agencies, the supposedly neutral arbiters of the safety of various securities issued by investment banks. But how neutral are these agencies, given their need to get a steady stream of business from the investment banks? Many finance experts (not to mention mere labor economists such as myself) have long feared that the credit raters have a-wink-and-a-nod routine going where they promise to give good ratings as long as the ratings business comes their way. Now we have incriminating emails showing this is exactly what is taking place.

So how can we get truly neutral ratings? Some have suggested that a government agency take over the role of Moody's and S&P, and since government agencies did such a good job of warning us about the financial crisis two years ago -- please note sarcasm. Krugman cites a proposal from two NYU finance professors suggesting random allocation of ratings agencies to banks, but why should existing agencies get a permanent lock-in? Maybe the ratings agencies should themselves be rated in terms of how well the securities they rate perform?

US News rankings

Good news from US News for NC State's Jenkins MBA. Our full-time program was ranked #66 in the US, tied with Alabama, Oklahoma and Utah. Among public universities we placed #33. To gain some perspective there are 433 accredited business schools in the US. The US News full-time rankings are based on the evaluations of b-school deans and recruiters as well as objective information on the quality of entering students and placement outcomes. As a relatively new program, NC State's Jenkins MBA has typically done best on the objective measures.

Part-time programs were ranked for the first time and ours was ranked #70 tied with 12 other schools. These rankings were based on a single metric: deans' evaluations on a 1 to 5 scale. My job will be to make sure other deans better understand how great our program is before the next survey.

Tech sector now hiring

Lead story in yesterday's WSJ reports that tech companies now have "surging earnings" and are starting to ramp up their hiring. This is one of the best signals we have yet about the recovery, indicating that companies now feel confident enough about the recovery to make significant investments in new technology. Now seeking resumes: Google, Intel, Cisco Systems, Twitter, and LinkedIn. The article claims that hiring is pretty slow outside of tech, although JP Morgan Chase and CSX are now also starting to look at resumes more carefully.

Rajan on financial regulation

Chicago finance b-school prof Raghuram Rajan has a stimulating piece in this week's Bloomberg Business Week about how to make financial regulation more effective. Rajan focuses on tail risks, in particular events such as a crash in housing prices that have low odds (at least in the minds of most risk modelers three years ago) but severe outcomes. Banks are not afraid to take on these risks because current regs skew the game -- heads they win and tails we lose.

Rajan recommends that banks' capital requirements be increased, that way equity holders have more to lose if tail risk raises its ugly head again (which it will). He also wants to put debt holders on the hook by having some debt automatically convert to equity if the bank suffers significant losses. Also, other financial institutions would not be allowed to hold each other's debt to avoid contagion issues (remember that's why AIG got bailed out). The overall idea is to make debt holders more fearful that the government will not bail them out 100 percent next time. Maybe the debt would then be priced to reflect the true amount of tail risk.

In effect Rajan trusts debt holders and equity markets to do a better job of managing risk than simply adding more federal regulators and regulations.

Reich on the jobs picture

And it is not pretty. The former Secretary of Labor and current professor of public policy at Cal-Berkeley wrote a stimulating (as usual) WSJ op-ed piece yesterday which made the following key points: (1) the March jobs report was not all that great because it was skewed upward by Census jobs; (2) it is hard to see where future jobs growth is coming from given households' heavy debt burdens, declining home values and tight credit conditions; (3) the Great Recession has accelerated outsourcing and substituting computer capital for labor; and (4) many job seekers will have to settle for much lower wages than they were expecting.

Video gaming in NC

No, not playing video games -- creating them. NC State's Michael Young has an op-ed in yesterday's N&O that highlights the increasing importance of gaming companies in the local economy -- over 40 firms with over 1000 employees making $79k per year. The Triangle Game Conference takes place April 7-8, featuring top speakers from leading companies and a career fair. There is even a Game Development University; might be worth checking out.

Caution on unpaid internships

Today's NYT reports that more employers are offering unpaid internships (old news) and some states are starting to prosecute these employers for violating labor laws (new news). Six conditions have to be met for an unpaid internship to pass muster: (1) training similar to a vocational or academic institution must be provided; (2) training is for the benefit of the intern; (3) trainees do not displace regular employees; (4) the employer obtains no immediate advantage from the trainees' activities; (5) trainees are not entitled to a job at the end of the training period; and (6) wages are not expected to be paid or received. The article reports some interns spending their time doing unskilled, menial tasks like making coffee or cleaning door handles. NC State's career services staff does its best to make sure that listed internships meet these standards.

The economic logic behind these internships: students should be willing to pay for training that enhances their marketability to a broad range of employers. No one has any problem with students paying tuition to vocational schools, community colleges, and universities to learn such skills. In an unpaid internship, the employer provides training and experience that is valued by the student in return for the option value of employing that student in some future period. Some unpaid internships would probably be paid if not for minimum wage laws that put a wage floor above the net productivity of the intern.

If federal and state attorneys start prosecuting employers who provide unpaid internships, do not be surprised when the employers respond by starting to charge interns to participate in a "summer academy." And this will make the students better off?

Are cities and states ready to take on unions?

Most state and local governments are facing a ticking time bomb: labor costs that are out of line with reality, often because of collective bargaining agreements. Yesterday's WSJ points out that employees of state and local governments make $39.60 per hour in wages and benefits versus $27.42 for the private sector. (Aside: My NC State colleague Lee Craig is quoted in the article.) Such raw figures need to be adjusted for differences in education, training, and experience. Most studies that make such adjustments find the wage difference to be fairly narrow but the benefit difference remains quite substantial. Cities are now facing hard choices: scale back medical care and pension promises or cut back employment and public services. Will public employee unions renegotiate their contracts so that they can avoid layoffs, or will they follow the model of their private sector counterparts (e.g., UAW, USW) and price themselves out of existence? Stay tuned.

Krugman on financial regulation

Worthwhile NYT column from Paul Krugman today on financial regulation. Krugman's main point is that regulators should worry more about the activities of banks (e.g., leverage) than their size. He points out that literally thousands of small banks were wiped out in the Great Depression because they had inadequate reserves and there was no deposit insurance to stop bank runs. Krugman also notes that Canada's big banks did ok in 2008, perhaps because they were more tightly regulated.

I still worry about the political economy of large financial institutions, in particular their ability to use campaign contributions and lobbyists to obtain regulatory outcomes to their own liking. Maybe Krugman will deal with this issue in a later column.

Argentina Chile study tour day seven

Saturday March 20 2010

Last day in Santiago for the group. Today we had the opportunity to visit Lodge Andino El Ingenio in the foothills of the Andes. Most of the group elected horseback riding; we had to stay in the valley because of fears that aftershocks could result in falling debris if we were further uphill.

After the outdoors activity we had a wonderful lunch, some poolside relaxation and then it was time for the bus ride to the airport. There was significant damage to the airport from the earthquake, but operations were getting closer to normal. There was a holding area under a tent where everyone had to stay until three hours before their flight. Then we picked up already printed out boarding passes outside the terminal. From there we proceeded to bag check, immigration and security -- all of which were set up in areas that had previously been allocated to other functions. Took only about 45 minutes for all of this, leaving the students time to say goodbye before hopping on return flights.

Kudos to the Austral Group for organizing and escorting the NC State team for a wonderful week in Chile. Based on the learning objectives for the course and the background and interests of the students, the Austral Group put together an itinerary that exposed us to a wide range of companies and industries. All of the presenters were engaging and polished presenters. The on-ground staff -- Ignacio and Shirly in BA and Claudia and Alejandra in Santiago -- were simultaneously professional and fun to be with. The cultural opportunities were all outstanding. I would certainly work with them again if I were to take a group to South America.

Argentina Chile study tour day six

Friday March 19 2010

Today we headed about 35 miles south of Santiago to visit Subsole (fruit exporter) and Vina De Martino (winemaker). Subsole takes grapes from local farmers (who are the main shareholders), packages and cools them and then exports them. Subsole also exports citrus, kiwi, cherries, and avocados so that their capacity and employees are fully utilized over the year. After a presentation from Jose Miguel Fernandez the general manager, we all enjoyed a plant tour. I was a bit surprised that this was the first factory tour for many students. At the end we all received a nice size basket of Ralle grapes, a scrumptious new variety.

Next stop was Vina De Marino, where we enjoyed a talk from export manager Guy Hooper (another expat). De Martino is currently the #46 wine producer in Chile and is looking to build market share overseas, especially in the US. De Martino charges slightly higher than average prices, with their key differentiators being 12 years of research to find the best terroir, the launch of carmenere as a distinctive varietal (as opposed to part of a blend), and fully organic production (hello, Whole Foods, have we got a wine for you!). De Martino's facilities also have just been certified 100% carbon neutral. Lots of questions from the students about the marketing challenges; the best advertising is still "get wine into people's mouths."

Hooper then hosted a fantastic lunch. We started with the choice of chardonnay or cabernet sauvignon, while trays of empanadas and razor clams circulated. Then it was time for a three course dinner (1-charcuterie, 2-squid ink risotto topped with fish and crab, 3-pick between fresh fruit, cake or creme brulee) accompanied by more wine (carmenere and/or sauvignon blanc). Then it was time for the winery tour. Each of us was provided with a glass so we could sample at various stages of fermentation, which was a nice twist. Finally, and much to my surprise, we had a chance to sample two more wines (syrah, carmenere) from De Martino's premium brand.

Last night in Santiago and the entire class went to Mestizo where more great seafood and wine were enjoyed. Hard to believe we only have one more day.

WSJ interview today with Gary Becker

Learn what Chicago's best known Nobel laureate has to say about health care legislation, the power of special interests, market and government failure during the financial crisis ("The SEC didn't see it at all"), and the power of markets to promote economic growth (China, India and Brazil vs. North Korea). Unlike many conservative, market-oriented economists, Becker says that "I remain basically an optimist."

Argentina Chile study tour day five

Thursday March 18 2010

Full day today with two morning and one afternoon meetings. Our Santiago guide Claudia told us that there had been two aftershocks in the early morning; no one seemed to have noticed.

First stop was the local chapter of the American Chamber of Commerce, where we had two speakers both of whom were US expats. John Welby gave us a great overview on the economy and current trade issues. Steven Buchanan provided a personal account on what an expat needs to do in Chile to become accepted and credible to the business community. His advice included the following: find a niche, learn the language, be careful selecting partners, understand your market, embrace a local accountant, and "always give more than you receive."

Back to the hotel for a presentation from microbrew entrepreneur Christoph Flaskamp, a German expat who has unleashed his Tubinger brand on Chile. Flaskamp talked about the challenges facing startups in general and brewing startups in particular. Pisco and wine are the two dominant alcoholic beverages in Chile; microbrews are just starting to get noticed. The students had many questions (including one who is starting his own microbrew enterprise in the Sandhills region soon) and enjoyed the opportunity to taste a small sample of Flaskamp's product.

After lunch we all hopped on a bus and went downtown to visit Andres Bello University for a talk from Prof. Marcelo Mena about energy and environmental challenges facing Chile. Chile does not produce much in the way of petroleum and natural gas, making it heavily dependent on imports. Hydropower and wind are being closely scrutinized as energy sources for the future.

Most of the students stayed downtown to shop and explore after Mena's talk. A brave few sampled the terremoto, a blend of white wine and pineapple sherbet. Terremoto is the Spanish word for earthquake.

Argentina Chile study tour day four

Wednesday March 17 2010

Today we visited the Standard Bank Foundation and learned all about trade issues from the perspective of Felix Pena, a lawyer who had headed the Argentine delegation in various trade negotiations. We reviewed a lot of facts and charts about imports and exports (Argentina exports a lot of beef -- it would export more if it did not tax beef exports) and then had a great discussion about trade policy. We learned that Argentina's priorities for the coming years are to promote the Doha Round of tariff reductions (especially regarding agricultural issues), build stronger ties through Mercosur (Southern Cone trading bloc that also includes Brazil, Paraguay and Uruguay) and initiate discussions between Mercosur and the EU.

In the afternoon we had to say goodbye to our wonderful Argentine guide Shirly Kalush (pictured here) and headed off to Santiago Chile. Chile's economy is heavily dependent on agriculture. To keep pests and diseases away, all incoming passenger luggage is screened. A few of us had close calls with those apples from the breakfast buffet that we had stowed away for a late afternoon snack.

As one might expect, everyone is Irish today and most students sought out Irish pubs in Santiago. It was my birthday, made extra special because of a card from the students and their gift of a Maradona soccer shirt.

The future of economics: more history, less math?

Interesting NYT column by David Brooks today about the economics discipline. In a nutshell, Brooks argues that economics has become increasingly abstract and mathematically complex at the cost of ignoring history and psychology. I agree with Brooks on the history side, but there has been a lot of progress in the last 20 years integrating psychological rigor into economic models. NC State's COM just hired Stacy Wood to the Langdon Distinguished Chair of Marketing; one of Stacy's main interests is neuroeconomics. Stacy will be teaching a new course in consumer behavior in the fall.

Argentina Chile study tour day three

Tuesday March 16 2010

This morning was the academic high point of our visit in Argentina when we visited the Metro-politan Design Center. The Center acts as an incubator for dozens of startups; it also houses the Buenos Aires Fashion Bureau and a research center on design and innovation (which makes it a natural partner for NC State given our university's focus in these areas, especially in the Colleges of Design, Management and Textiles). The Center is housed in what was a seafood distribution facility in a marginal neighborhood, a mere 10 blocks from the largest shantytown in BA. Buenos Aires is one of the first four urban areas labelled as a design center by UNESCO, so the strategy is to leverage this advantage into company and job creation. (Other cities now include Berlin, Montreal, Kobe Japan, Nagoya Japan, and Shenzhen China.)

The students learned first hand from one of the companies how hard it is to get a business started in Argentina and how much harder it is to gain access to export markets. Pictured here is the owner of a slipper design and manufacturing company who sells her product in the chic Palermo neighborhood in BA (and would like to sell abroad).

In the afternoon we learned about Neoris (a spinoff of Cemex from Mexico) which is essentially the Accenture of Latin America. Neoris differentiates itself by focusing on IT deployment (versus IT strategy) and by locating offices in medium size cities that are ignored by the IBMs and Deloittes. Neoris finds Argentina an attractive market place because of the availability of skilled labor at relatively low cost, but it has concerns about political and economic stability -- a recurring theme of our visit.

In the evening most of the group headed for Cabana Las Lilas in the Puerto Madero district for one last beef throwdown.

Argentina Chile study tour day two

Monday March 15 2010

The group walked to the American Club in BA and went to the top floor, overlooking the Teatro Colon, BA's jewel of an opera house modeled after La Scala in Milan. The day began with two talks. Fernando Furci, head of international trade for the American Chamber of Commerce (and GQ model?), gave an overview of economic conditions and summarized do's and don'ts for American firms thinking about entering the market. Juan Cruz Diaz, director of Cefeidas a consulting firm, talked about how Argentine politics affect the business climate. We learned that the current president Cristina Kirchner of the Peronist party ran on a unity ticket with the leader of the Radical party as VP, but the two had a falling out on export taxes on agricultural goods (Cristina wanted higher taxes but her veep cast the tie-breaking vote in the Senate against her). Kind of like an Obama/McCain ticket. The class asked questions about the debt repudiation in 2001 and the prospects for Argentina receiving international investment in the future. Diaz concluded his talk on an optimistic note, "We are convinced the next government in 2011 will be more conciliatory toward business." To quote the Who, "We won't be fooled again!!!" I hope so.

In the afternoon we visited Craveri Laboratories, a rapidly growing contract manufacturer of various pharmaceutical products and an Argentine pioneer in Tissue Engineering. We selected Craveri because of NC State's emphasis on technology and biosciences. CEO Juan Craveri generously spent an hour telling us about Craveri and answering student questions. Craveri is making great strides in developing new products to help victims of burns, skin ulcers, and other ailments.

Fun time in the evening: a visit to El Viejo Almacen for an hour-long tango lesson, a three course dinner and a great tango show.