Corporate Mismanagement

While surfing the internet, I came across an interesting website hosted by Carl Icahn. For those of you not familiar with him, he is listed at number 20 on Forbes’ list of richest Americans. He has a reputation, some of it not so great, as being greedy and arrogant. The Wall Street Journal (WSJ) today called him a Corporate Hell Raiser. I can’t speak to the past, but I believe Mr. Icahn now “gets it” (I’m sure he’ll sleep better knowing that I approve).

In the interview with the WSJ, he says that most company boards are dysfunctional and have been for some time. He is now calling for more corporate accountability in how companies are managed, and I think he may be on to something. Being who he is, he has a better chance of bringing about change than you or I do – at least at this point in time.

I hesitate to write this, because no one can tell the future. I also don’t want to be a doomsayer. However, I think things are going to be worse, much worse, for our country. I don’t think that Paulsen or Bernanke quite understand what has happened, mainly because they are too far removed from the financial situation of the average American.

What has happened?

1. Over the past 5 years, the average American saw their wealth, their financial self-worth, sky rocket… then plummet. As an example, a house worth $200,000 in 2000, was worth $600,000 in 2005. Now, it is probably worth about $200,000 again. People lost a LOT of money. If not in actual dollars, in their psyche – they became destitute.

2. People used their equity to live a lifestyle they couldn’t afford and went into debt based on home equity loans and credit cards. Now they have negative net financial worth.

3. The stock market crashed and people lost 30-50% of their retirement savings (It’s not over yet!). Yeah… I know, it’ll bounce back. BUT – with baby boomers losing that amount of money, and with a compressed retirement timescale to make it up, they are going to be very very very risk adverse. This money is not coming back into the stock market because of #1, #2 and this point #3.

4. Deathspiral – American consumers cut back on spending (Look at October’s numbers on consumer spending. It was the largest decrease EVER recorded) causing investors to hold back capital, causing corporations to close stores/factories/offices, causing loss of jobs which causes American consumers to stop spending. You get the idea.

5. Local and State governments will flounder financially. Lack of consumer spending and urban growth is causing shortfalls at the State and Local Government levels. We will be seeing some of these start to file bankrupcy next year. Then the bonds that people thought were safe, will no longer be safe and there will be another crisis. As an example, many cities and counties took out bonds 5 -10 years ago to accomodate the growth of suburban America, fueled by the housing boom. Now, those homes are either empty or not built. The revenue that they were expecting in property taxes and water, sewer, electrical fees is not coming in because of this, and many are going to have problems paying their bonds due to the lack of funds. This will cause further problems in that government will shrink, causing layoffs, causing more Americans to cut back on spending….. see #3.

6. Lack of Leadership in Congress at both the State and Federal levels. These guys and gals just don’t get it. In California, they are taking irresponsible, untenable positions. The hard lines of no new taxes (Republicans), and no cuts to benefits (Democrats) are anti productive. We need to do both. The quabbling by these supposedly smart men and women is going to delay any real action from happening. It is going to take TRUE bipartisan support to put something in place that will help to avoid financial melt down at all levels of government.

7. Wrong focus of the bailout package. I don’t understand this. Well, I do – and it makes me sick. I remember the package being sold to Congress with the cry of Chicken Little. Paulsen said in October.. if we don’t have this package by next week, the world will end. Banks will freeze, lending will stop. Well…. of the $700 billion, we’ve only spent a small portion of it AND – in ways that are completely different than originally intended. While Paulsen will tell us the crisis was avoided, how can that be when it took over a month to spend the money, and only a small portion of it? What did the Feds actually do that made a difference? Which tells me that they didn’t really understand what was going on at the time, and panicked. They wanted a slush fund of $700 billion (1/10th of our National Debt!!) to fix something they didn’t understand. Just this week, they gave some money to American Express (Are credit card companies the next victim to the cycle?) and are thinking about bailing out the auto industry.

8. Failing Healthcare system. I have a friend who is undergoing treatment for cancer. She told me, one… ONE… chemo treament costs $9,000! That is a lot of money. Even though she only pays a co-pay, someone is footing this bill. How is the average American going to afford healthcare… AND continue to spend on the luxuries that we used to in the past. There are some that suggest all Americans have to do, is spend more money to get us out of this financial mess. That may have worked in 2001, but it won’t this time. Times have changed.

8. Same bat channel, same bat time (for you Batman fans). Ok… when are we going to get serious about holding managers and leaders accountable for their actions. Which brings me back to my original point about Carl Icahn. Capitalism, our way of life, is at stake here. I certainly don’t have a problem of people making money. Lots of money. However, it is a crime.. really… for CEOs AND upper management to walk away with hundreds of millions of dollars EACH when their companies are going down the tubes. Think of it this way, my lone consulting busines… me… John… made more money than GM, Chrysler and Ford combined. I don’t think I’m taking home a $200 million bonus this year. We need to hold people accountable.

I can’t predict how all this will play out, but I do know that poor corporate and government leadership got us here. We need to do more to help insure that this doesn’t happen again. Check out Carl Icahn’s Website and join his United Shareholders of America.