Sunday, July 28, 2013

Bank Repos Wrong House, Destroys Contents, Then Refuses To Pay Owner's Losses

Bank Repos Wrong House, Destroys Contents, Then Refuses To Pay Owner's Losses

Rick Unger  -Forbes

Katie Barnett, a 36 year old nurse from McArthur, Ohio, made the mistake of taking her family on a two week trip last month, never realizing when they left home that they would return to find the family residence ransacked, emptied and, for good measure, the locks to the doors changed.
A burglary? Or maybe, as the local police theorized, the work of squatters who had taken advantage of the open domicile to have a two-week vacation of their own?

It turns out, the home invasion was far more insidious than either the Barnett family or the local crime sleuths could imagine.
You see, the Barnett family had fallen victim to one of the most dangerous, dreaded and ethically challenged genres of home invaders in the nation—bankerus moronicus piggius.
Apparently, The First National Bank in Wellston, Ohio had set their sights on repossessing a home whose owner had fallen behind on the  mortgage payments. That home was located on the Barnett’s street at number 509—a number clearly marked on the mailbox that sits out front of the house.  However, when the bank sent Moe, Curley and Larry to take possession and empty out the contents of the foreclosed home, they somehow ended up at a property situated across-the-street and two houses up from the target; a home where the mailbox out in front is clearly marked 514.
That, of course, is the home that belongs to the Barnett clan.
How did this happen?
According to bank president, Tony Thorne, the error was a result of the bank’s representatives (that would be Moe, Curly and Larry) using a faulty GPS to locate the home that was to be repossessed.
Well, that explains it. After all, why would anyone bother to look at the mailbox in front of a home to confirm an address before breaking and entering and then emptying the contents of the residence when you’ve got a GPS?
Of course, had someone with minimally functioning brain cells bothered to actually look at the address, there might be a chance that they would have been tipped off to a potential error by noticing that the Barnett mailbox revealed an even number address—which means that the home must necessarily be on the opposite side of the street of the actual target residence whose address sports an odd number.
But, hey, mistakes will happen—or so says Bank President Thorne in a statement released yesterday.
“Nothing like this has ever happened before,” he wrote. “The situation was a mistake on the part of our bank.”
Certainly, one would expect that Ms. Barnett has been holed up ever since discussing the invasion of her home with the many attorneys in the area who would love to get their hooks into a juicy case like this, yes?
Nope. It turns out, all Ms. Barnett wanted was $18,000—a sum that included $9,000 worth of car engines and parts along with the loss of furniture, clothing, etc. — which Barnett estimated to be the amount required to replace what the bank had taken or destroyed.

You have to admit that she makes more than a few good points.

Still, Mr. Thorne saw it very differently, writing—
“However, the written list of items that she provided to us – and the value she assigned to those items – is inconsistent with the list and descriptions of items removed that was prepared by the employees who did the work, and with the list and values of missing items provided by the homeowner herself as recorded in an earlier telephone conversation with one of our representatives.” In a meeting with me in my office, I indicated to the homeowner that we wanted to compensate her but would have to look further into the differences in the lists. We heard nothing more from her or otherwise about this situation until being contacted by a local television station, which subsequently broadcast a story that, from our perspective, did not accurately reflect the facts or the good faith actions of the First National Bank to resolve the situation.”
So, apparently, Mr. Thorne believed that the inventory prepared by Moe, Larry and Curly—they being the geniuses who couldn’t figure out that they had broken into the wrong house because they supposedly had use of a faulty GPS which interfered with the precise part of their brains that would think to look at the mailbox to confirm the address—could be trusted to prepare an accurate inventory of what they destroyed or took, despite being incapable of locating a clearly marked address.
Mr. Thorne—who presumably has a fair amount of money under his control given that he is the president of a bank—also appears to have skipped class in bank president’s school the day they were discussing the concept of replacement value as he does not appear to believe that Barnett should be entitled to the same.
But then, Mr. Thorne has arguably also never heard of the potential damages, both compensatory and punitive, his bank could face for negligently breaking and entering into private property and destroying the contents therein— just as he has never heard of what happens to a bank, or any other business, when you allow your present and future customers to know how they will be treated by your business should you, once again, put on so remarkable a display of incompetence. I think it particularly reasonable to point this out when the negligent and incompetent business is one where they are asking customers to park all of their money!
What astounds is that any board of directors would allow this bank president to keep his job after turning down an opportunity to settle out a case involving breaking and entering, and then trashing the contents of the home—and all the result of what can only be described as grossly negligent behavior—for a mere $18,000.00. Were this bank run by someone using some semblance of judgment, he or she would have taken Ms. Barnett’s eighteen thousand dollar request, written her a check for twice that amount and put up a plaque of gratitude on the bank’s wall proclaiming her citizen of the year.
Instead, Thorne is complaining that, since his last interaction with Ms. Burnett, he has not heard from her and would like to resolve the matter fairly.
Too late, Mr. Thorne.
Katie Barnett confirms that she has now hired at attorney. “We are definitely going to bring a lawsuit,” she said. “I gave them a chance and they are not willing to work with me.”
Let’s hope that when this lawsuit is all over, Katie Barnett is the new owner of the First National Bank in Wellston. Maybe she’ll give Tony Thorne the job of being the ‘bank representative’ in charge of locating the banks foreclosed properties and emptying them out.  She might even buy him a new GPS.
Then again, given the remarkably poor judgment displayed by Thorne in dealing with Ms. Barnett, he probably would only blow any such assignment even if the GPS was in proper working order.
Beside, if history has taught us anything it is that tone deaf business operators, seemingly without a shred of good judgment, are only cut out for one kind of work—running banks. How else do you explain how bank presidents throughout the world nearly succeeded in completely destroy the world’s economy through their stunningly bad judgement and greed?
Maybe the directors of the First National Bank in Wellston have exactly who they want in the position of running their bank after all.

Friday, July 26, 2013

Zimmerman Juror B29 : 'He got away with murder'

Zimmerman Juror B29 to ABC News: 'He got away with murder'

By Benjamin Mueller
The only minority member of the six-woman jury that acquitted George Zimmerman said Thursday that Zimmerman “got away with murder” and that she aches for Trayvon Martin’s grieving parents,ABC News reports.
"You can't put the man in jail even though in our hearts we felt he was guilty," said the woman, who called herself only Maddy and was earlier identified as Juror B29 during the trial. "But we had to grab our hearts and put it aside and look at the evidence."
Juror B29, who became the first juror to show her face in the interview with “Good Morning America” anchor Robin Roberts, said there wasn’t enough proof under Florida law to convict Zimmerman.

"George Zimmerman got away with murder, but you can't get away from God. And at the end of the day, he's going to have a lot of questions and answers he has to deal with," the juror said. "[But] the law couldn't prove it.”
Zimmerman was accused of second-degree murder for fatally shooting Martin once in the chest. The defense said Zimmerman feared for his life when the two got into an altercation in a gated community in Sanford, Fla. Critics said Zimmerman profiled Martin and that his unfounded suspicion of the 17-year-old   led to the confrontation. Martin was black, and Zimmerman is of Latino ancestry.
A 36-year-old nursing assistant and mother of eight, Juror 29B was the only minority on the all-female jury. She is Puerto Rican.
Like Juror B37, who spoke last week on Anderson Cooper's CNN show, Juror B29 maintained that race wasn’t a factor in her deliberations.
She said she pushed for Zimmerman to be convicted of second-degree murder until she decided on the second day of deliberations that there wasn't enough definitive proof.
Zimmerman's defense team argued that he killed Martin in self-defense. The jury was also allowed to consider a lesser charge of manslaughter.
"I was the juror that was going to give them the hung jury. I fought to the end," she said.
She said she doubted that the case should have been brought to trial, calling it a “publicity stunt.” But once it was, she said, the lack of evidence and Florida law left the jury no choice but to acquit.
"The truth is that there was nothing that we could do about it," she said. “I feel the verdict was already told."
She said she owes an apology to Martin’s parents because she feels “like I let them down.”
Now, in the trial’s aftermath, she said she struggles to sleep and sympathizes with the grief Martin’s parents have endured. She said she’s not sure she made the right decision.
“It's hard for me to eat because I feel I was forcefully included in Trayvon Martin's death. And as I carry him on my back, I'm hurting as much [as] Trayvon's Martin's mother because there's no way that any mother should feel that pain," she said.
Since Juror B37’s interview with Cooper last week, a group of four other jurors released a request for privacy and said B37’s opinions were “not in any way representative” of their own. Juror B29 was not among those four jurors.
She had kept her silence but now has become the first to express doubts about her decision.

Tuesday, July 23, 2013

How Adding Iodine To Salt Resulted In A Decade's Worth Of IQ Gains For The United States

How Adding Iodine To Salt Resulted In A Decade's Worth Of IQ Gains For The United States

Iodized salt is so ubiquitous that we barely notice it. Few people know why it even exists. Iodine deficiency remains the world's leading cause of preventable mental retardation. According to a new study, its introduction in America in 1924 had an effect so profound that it raised the country's IQ.
new NBER working paper from James Feyrer, Dimitra Politi, and David N. Weil finds that the population in iodine-deficient areas saw IQs rise by a full standard deviation, which is 15 points, after iodized salt was introduced.
Since one quarter of the population lived in those areas, that corresponds to a 3.5 point increase nationwide. We've seen IQs go up by about 3 points every decade, something called the Flynn effect, so iodization of salt may be responsible for a full decade's worth of increasing IQ in the U.S. 
If a mother is iodine deficient while she's pregnant, the cognitive development of the fetus is impeded, and the effects are irreversible. To this day, the World Health Organization estimates that nearly 50 million people suffer some kind of mental impairment related to iodine deficiency. 
Before iodized salt, people were deficient based almost entirely on geography, whether the water and soil in their area had enough of the micronutrient. Diseases resulting from the deficiency, most commonly goiter, or swelling of the thyroid, were extremely common. 
The differences by geography were vast, making the effects easy to isolate. Seawater, for example, is rich in iodine, but glaciers depleted iodine rich soil in places like Michigan:
The mental impacts were unknown, the program was started to fight goiter, so these effects were an extremely fortunate unintended side effect.  
To figure out the effects, the researchers used the data from the Army General Classi cation Test (AGCT) given to people who enlisted during World War 2. That covers a wide group of men born precisely at the time iodized salt was introduced (1920-1927), which allowed comparison of low and high iodine areas.
The Air Force received enlistees who scored significantly higher on the AGCT, and the number of men who scored well and went to the Air Force from low iodine areas dramatically increased after iodized salt was introduced. The estimates of intelligence increases are based on that data.
Here's the author's chart that shows the boost in Air Force enlistment rates:
Despite these positive effects, there were some negative side effects as well. People who suffer long-term iodine deficiency can actually end up with from hyperthyroidism when it's introduced to their diet, so deaths spiked for a few years. However, the aggregate effect has been extremely positive. 

Read more:

Sunday, July 21, 2013

Price Fixing by Banks: A Shuffle of Aluminum, but to Banks, Pure Gold


A Shuffle of Aluminum, but to Banks, Pure Gold

Published: July 20, 2013  New York Times

MOUNT CLEMENS, Mich. — Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars.
The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.
This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.
Tyler Clay, a forklift driver who worked at the Goldman warehouses until early this year, called the process “a merry-go-round of metal.”
Only a tenth of a cent or so of an aluminum can’s purchase price can be traced back to the strategy. But multiply that amount by the 90 billion aluminum cans consumed in the United States each year — and add the tons of aluminum used in things like cars, electronics and house siding — and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years, say former industry executives, analysts and consultants.
The inflated aluminum pricing is just one way that Wall Street is flexing its financial muscle and capitalizing on loosened federal regulations to sway a variety of commodities markets, according to financial records, regulatory documents and interviews with people involved in the activities.
The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone. In the last year, federal authorities have accused three banks, including JPMorgan, of rigging electricity prices, and last week JPMorgan was trying to reach a settlement that could cost it $500 million.
Using special exemptions granted by the Federal Reserve Bank and relaxed regulations approved by Congress, the banks have bought huge swaths of infrastructure used to store commodities and deliver them to consumers — from pipelines and refineries in Oklahoma, Louisiana and Texas; to fleets of more than 100 double-hulled oil tankers at sea around the globe; to companies that control operations at major ports like Oakland, Calif., and Seattle.
In the case of aluminum, Goldman bought Metro International Trade Services, one of the country’s biggest storers of the metal. More than a quarter of the supply of aluminum available on the market is  kept in the company’s Detroit-area warehouses.
Before Goldman bought Metro International three years ago, warehouse customers used to wait an average of six weeks for their purchases to be located, retrieved by forklift and delivered to factories. But now that Goldman owns the company, the wait has grown more than 20-fold — to more than 16 months, according to industry records.
Longer waits might be written off as an aggravation, but they also make aluminum more expensive nearly everywhere in the country because of the arcane formula used to determine the cost of the metal on the spot market. The delays are so acute that Coca-Cola and many other manufacturers avoid buying aluminum stored here. Nonetheless, they still pay the higher price.
Goldman Sachs says it complies with all industry standards, which are set by the London Metal Exchange, and there is no suggestion that these activities violate any laws or regulations. Metro International, which declined to comment for this article, in the past has attributed the delays to logistical problems, including a shortage of trucks and forklift drivers, and the administrative complications of tracking so much metal. But interviews with several current and former Metro employees, as well as someone with direct knowledge of the company’s business plan, suggest the longer waiting times are part of the company’s strategy and help Goldman increase its profits from the warehouses.
Metro International holds nearly 1.5 million tons of aluminum in its Detroit facilities, but industry rules require that all that metal cannot simply sit in a warehouse forever. At least 3,000 tons of that metal must be moved out each day. But nearly all of the metal that Metro moves is not delivered to customers, according to the interviews. Instead, it is shuttled from one warehouse to another.
Because Metro International charges rent each day for the stored metal, the long queues caused by shifting aluminum among its facilities means larger profits for Goldman. And because storage cost is a major component of the “premium” added to the price of all aluminum sold on the spot market, the delays mean higher prices for nearly everyone, even though most of the metal never passes through one of Goldman’s warehouses.
Aluminum industry analysts say that the lengthy delays at Metro International since Goldman took over are a major reason the premium on all aluminum sold in the spot market has doubled since 2010. The result is an additional cost of about $2 for the 35 pounds of aluminum used to manufacture 1,000 beverage cans, investment analysts say, and about $12 for the 200 pounds of aluminum in the average American-made car.
“It’s a totally artificial cost,” said one of them, Jorge Vazquez, managing director at Harbor Aluminum Intelligence, a commodities consulting firm. “It’s a drag on the economy. Everyone pays for it.”
Metro officials have said they are simply reacting to market forces, and on the company Web site describe their role as “bringing together metal producers, traders and end users,” and helping the exchange “create and maintain stability.”
But the London Metal Exchange, which oversees 719 warehouses around the globe, has not always been an impartial arbiter — it receives 1 percent of the rent collected by its warehouses worldwide. Until last year, it was owned by members, including Goldman, Barclays and Citigroup. Many of its regulations were drawn up by the exchange’s warehouse committee, which is made up of executives of various banks, trading companies and storage companies — including the president of Goldman’s Metro International — as well as representatives of powerful trading firms in Europe. The exchange was sold last year to a group of Hong Kong investors and this month it proposed regulations that would take effect in April 2014 intended to reduce the bottlenecks at Metro.
All of this could come to an end if the Federal Reserve Board declines to extend the exemptions that allowed Goldman and Morgan Stanley to make major investments in nonfinancial businesses — although there are indications in Washington that the Fed will let the arrangement stand. Wall Street banks, meanwhile, have focused their attention on another commodity. After a sustained lobbying effort, the Securities and Exchange Commission late last year approved a plan that will allow JPMorgan Chase, Goldman and BlackRock to buy up to 80 percent of the copper available on the market.
In filings with the S.E.C., Goldman has said it plans by early next year to store copper in the same Detroit-area warehouses where it now stockpiles aluminum. On Saturday, however, Michael DuVally, a Goldman spokesman, said the company had decided not to participate in the copper venture, though it had not disclosed that publicly. He declined to elaborate.
Banks as Traders
For much of the last century, Congress tried to keep a wall between banking and commerce. Banks were forbidden from owning nonfinancial businesses (and vice versa) to minimize the risks they take and, ultimately, to protect depositors. Congress strengthened those regulations in the 1950s, but by the 1980s, a wave of deregulation began to build and banks have in some cases been transformed into merchants, according to Saule T. Omarova, a law professor at the University of North Carolina and expert in regulation of financial institutions. Goldman and other firms won regulatory approval to buy companies that traded in oil and other commodities. Other restrictions were weakened or eliminated during the 1990s, when some banks were allowed to expand into storing and transporting commodities.
Over the past decade, a handful of bank holding companies have sought and received approval from the Federal Reserve to buy physical commodity trading assets.
According to public documents in an application filed by JPMorgan Chase, the Fed said such arrangements would be approved only if they posed no risk to the banking system and could “reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices.”
By controlling warehouses, pipelines and ports, banks gain valuable market intelligence, investment analysts say. That, in turn, can give them an edge when trading commodities. In the stock market, such an arrangement might be seen as a conflict of interest — or even insider trading. But in the commodities market, it is perfectly legal.
“Information is worth money in the trading world and in commodities, the only way you get it is by being in the physical market,” said Jason Schenker, president and chief economist at Prestige Economics in Austin, Tex. “So financial institutions that engage in commodities trading have a huge advantage because their ownership of physical assets gives them insight in physical flows of commodities.”
Some investors and analysts say that the banks have helped consumers by spurring investment and making markets more efficient. But even banks have, at times, acknowledged that Wall Street’s activities in the commodities market during the last decade have contributed to some price increases.
In 2011, for instance, an internal Goldman memo suggested that speculation by investors accounted for about a third of the price of a barrel of oil. A commissioner at the Commodity Futures Trading Commission, the federal regulator, subsequently used that estimate to calculate that speculation added about $10 per fill-up for the average American driver. Other experts have put the total, combined cost at $200 billion a year.
High Premiums
The entrance to one of Metro International’s main aluminum warehouses here in suburban Detroit is unmarked except for one toppling sign that displays two words: Mount Clemens, the town’s name.
Most days, there are just a handful of cars in the parking lot during the day shift, and by 5 p.m., both the parking lot and guard station often appear empty, neighbors say. Yet inside the two cavernous blue warehouses are rows and rows of huge metal bars, weighing more than half a ton each, stacked 15 feet high.
After Goldman bought the company in 2010, Metro International began to attract a stockpile. It actually began paying a hefty incentive to traders who stored their aluminum in the warehouses. As the hoard of aluminum grew — from 50,000 tons in 2008 to 850,000 in 2010 to nearly 1.5 million currently — so did the wait times to retrieve metal and the premium added to the base price. By the summer of 2011, the price spikes prompted Coca-Cola to complain to the industry overseer, the London Metal Exchange, that Metro’s delays were to blame.
Martin Abbott, the head of the exchange, said at the time that he did not believe that the warehouse delays were causing the problem. But the group tried to quiet the furor by imposing new regulations that doubled the amount of metal that the warehouses are required to ship each day — from 1,500 tons to 3,000 tons. But few metal traders or manufacturers believed that the move would settle the issue.
“The move is too little and too late to have a material effect in the near-term on an already very tight physical market, particularly in the U.S.,” Morgan Stanley analysts said in a note to investors that summer.
Still, the wait times at Metro have grown, causing the premium to rise further. Current and former employees at Metro say those delays are by design.
Industry analysts and company insiders say that the vast majority of the aluminum being moved around Metro’s warehouses is owned not by manufacturers or wholesalers, but by banks, hedge funds and traders. They buy caches of aluminum in financing deals. Once those deals end and their metal makes it through the queue, the owners can choose to renew them, a process known as rewarranting.
To encourage aluminum speculators to renew their leases, Metro offers some clients incentives of up to $230 a ton, and usually moves their metal from one warehouse to another, according to industry analysts and current and former company employees.
To metal owners, the incentives mean cash upfront and the chance to make more profit if the premiums increase. To Metro, it keeps the delays long, allowing the company to continue charging a daily rent of 48 cents a ton. Goldman bought the company for $550 million in 2010 and at current rates could collect about a quarter-billion dollars a year in rent.
Metro officials declined to discuss specifics about its lease renewals or incentive policies.
But metal analysts, like Mr. Vazquez at Harbor Aluminum Intelligence, estimate that 90 percent or more of the metal moved at Metro each day goes to another warehouse to play the same game. That figure was confirmed by current and former employees familiar with Metro’s books, who spoke on condition of anonymity because of company policy.
Goldman Sachs declined to discuss details of its operations. Mr. DuVally, the Goldman spokesman, pointed out that the London Metal Exchange prohibits warehouse companies from owning metal, so all of the aluminum being loaded and unloaded by Metro was being stored and shipped for other owners.
“In fact,” he said, “L.M.E. warehouses are actually prohibited from trading all L.M.E. products.”
As the delays have grown, many manufacturers have turned elsewhere to buy their aluminum, often buying it directly from mining or refining companies and bypassing the warehouses completely. Even then, though, the warehouse delays add to manufacturers’ costs, because they increase the premium that is added to the price of all aluminum sold on the open market.
The Warehouse Dance
On the warehouse floor, the arrangement makes for a peculiar workday, employees say.
Despite the persistent backlogs, many Metro warehouses operate only one shift and usually sit idle 12 or more hours a day. In a town like Detroit, where factories routinely operate round the clock when necessary, warehouse workers say that low-key pace is uncommon.
When they do work, forklift drivers say, there is much more urgency moving aluminum into, and among, the warehouses than shipping it out. Mr. Clay, the forklift driver, who worked at the Mount Clemens warehouse until February, said that while aluminum was delivered in huge loads by rail car, it left in a relative trickle by truck.
“They’d keep loading up the warehouses and every now and then, when one was totally full they’d shut it down and send the drivers over here to try and fill another one up,” said Mr. Clay, 23.
Because much of the aluminum is simply moved from one Metro facility to another, warehouse workers said they routinely saw the same truck drivers making three or more round trips each day. Anthony Stuart, a forklift team leader at the Mount Clemens warehouse until 2012, said he and his nephew — who worked at a Metro warehouse about six miles away in Chesterfield Township — occasionally asked drivers to pass messages back and forth between them.
“Sometimes I’d talk to my nephew on the weekend, and we’d joke about it,” Mr. Stuart said. “I’d ask him ‘Did you get all that metal we sent you?’ And he’d tell; me ‘Yep. Did you get all that stuff we sent you?’ ”
Mr. Stuart said he also scoffed at Metro’s contention that a major cause for the monthslong delays is the difficulty in locating each customer’s store of metal and moving the other huge bars of aluminum to get at it. When he arrived at work each day, Mr. Stuart’s job was to locate and retrieve specific batches of aluminum from the vast stores in the warehouse and set them out to be loaded onto trucks.
“It’s all in rows,” he said. “You can find and get anything in a day if you want. And if you’re in a hurry, a couple of hours at the very most.”
When the London Metal Exchange was sold to a Hong Kong company for $2.2 billion last year, its chief executive promised to take “a bazooka” to the problem of long wait times.
But the new owner of the exchange has balked at adopting a remedy raised by a consultant hired to study the problem in 2010: limit the rent warehouses can collect during the backlogs. The exchange receives 1 percent of the rent collected by the warehouses, so such a step would cost it millions in revenue.
Other aluminum users have pressed the exchange to prohibit warehouses from providing incentives to those that are simply stockpiling the metal, but the exchange has not done so.
Last month, however, after complaints by a consortium of beer brewers, the exchange proposed new rules that would require warehouses to ship more metal than they take in. But some financial firms have raised objections to those new regulations, which they contend may hurt traders and aluminum producers. The exchange board will vote on the proposal in October and, if approved, it would not take effect until April 2014.
Nick Madden, chief procurement officer for one of the nation’s largest aluminum purchasers, Novelis, said the situation illustrated the perils of allowing industries to regulate themselves. Mr. Madden said that the exchange had for years tolerated delays and high premiums, so its new proposals, while encouraging, were still a long way from solving the problem. “We’re relieved that the L.M.E. is finally taking an action that ultimately will help the market and normalize,” he said. “However, we’re going to take another year of inflated premiums and supply chain risk.”
In the meantime, the Federal Reserve, which regulates Goldman Sachs, Morgan Stanley and other banks, is reviewing the exemptions that have let banks make major investments in commodities. Some of those exemptions are set to expire, but the Fed appears to have no plans to require the banks to sell their storage facilities and other commodity infrastructure assets, according to people briefed on the issue.
A Fed spokeswoman, Barbara Hagenbaugh, provided the following statement: “The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.”
Senator Sherrod Brown, who is sponsoring Congressional hearings on Tuesday on Wall Street’s ownership of warehouses, pipelines and other commodity-related assets, says he hopes the Fed reins in the banks.
“Banks should be banks, not oil companies,” said Mr. Brown, Democrat of Ohio. “They should make loans, not manipulate the markets to drive up prices for manufacturers and expose our entire financial system to undue risk.”
Next Up: Copper
As Goldman has benefited from its wildly lucrative foray into the aluminum market, JPMorgan has been moving ahead with plans to establish its own profit center involving an even more crucial metal: copper, an industrial commodity that is so widely used in homes, electronics, cars and other products that many economists track it as a barometer for the global economy.
In 2010, JPMorgan quietly embarked on a huge buying spree in the copper market. Within weeks — by the time it had been identified as the mystery buyer — the bank had amassed $1.5 billion in copper, more than half of the available amount held in all of the warehouses on the exchange. Copper prices spiked in response.
At the same time, JPMorgan, which also controls metal warehouses, began seeking approval of a plan that would ultimately allow it, Goldman Sachs and BlackRock, a large money management firm, to buy 80 percent of the copper available on the market on behalf of investors and hold it in warehouses. The firms have told regulators that these stockpiles, which would be used to back new copper exchange-traded funds, would not affect copper prices. But manufacturers and copper wholesalers warned that the arrangement would squeeze the market and send prices soaring. They asked the S.E.C. to reject the proposal.
After an intensive lobbying campaign by the banks, Mary L. Schapiro, the S.E.C.'s chairwoman, approved the new copper funds last December, during her final days in office. S.E.C. officials said they believed the funds would track the price of copper, not propel it, and concurred with the firms’ contention — disputed by some economists — that reducing the amount of copper on the market would not drive up prices.
Others now fear that Wall Street banks will repeat or revise the tactics that have run up prices in the aluminum market. Such an outcome, they caution, would ripple through the economy. Consumers would end up paying more for goods as varied as home plumbing equipment, autos, cellphones and flat-screen televisions.
Robert Bernstein, a lawyer at Eaton & Van Winkle, who represents companies that use copper, said that his clients were fearful of “an investor-financed squeeze” of the copper market. “We think the S.E.C. missed the evidence,” he said.
Gretchen Morgenson contributed reporting from New York. Alain Delaquérière contributed research from New York.

Friday, July 19, 2013

Ayn Rand Killed Sears

Ayn Rand Killed Sears

How the me-first corporate structure installed by hedge fund manager Eddie Lampert helped ruin the retail giant

Ayn Rand killed Sears

This article originally appeared on AlterNet.

Eddie Lampert, the legendary hedge fund manager, was once hailed as the “Steve Jobs of the investment world” and the second coming of Warren Buffett. These days, he claims the number 2 spot on Forbes’ list of America’s worst CEOs. He has destroyed Sears, the iconic retail giant founded in 1886, which used to be known as the place “Where America Shops.”
America now avoids Sears at all costs, thanks largely to Mr. Lampert and his love of twisted economic logic.
A bit of background: Lampert cut his teeth on Wall Street at the risk-arbitrage desk of Goldman Sachs under Robert Rubin, who later became U.S. Treasury Secretary and now serves as vice chairman at Citigroup. In 1988, Lampert founded ESL Investments and joined the billionaire’s club at age 41. He rose to fame in the early 2000s for seizing control of Kmart during bankruptcy and then using it to take over Sears. Along the way he was kidnapped and deposited on a motel toilet in handcuffs for nearly 40 hours, and lived to tell the tale. Lampert is known for his touchiness and odd habits, such as conducting meetings from a bare bones room to Sears executives forced to tune in by videoconference. He hates flying.
You might say that Lampert is the distillation of the fervent market worship and wrong-headed economic approaches that came to dominate the U.S. in the 1980s and have yet to run their fatal course. He adores Ayn Rand, and is reported to have given out copies of Atlas Shrugged during an ESL annual dinner. Lampert is also a fan of Friedrich von Hayek, the Austrian economist beloved by conservatives and libertarians. As a Robert Rubin protégé, he absorbed the lessons of a man whose discredited economic focus on budget deficits ended up starving the country’s infrastructure, education and alternative energy.
Looking at what Lampert has done to Sears, we can see what happens when the lessons of his mentors are actually applied in the real world. It isn’t pretty.

1. Myth: Bigger is better
William Lazonick, an expert on the American business corporation, has written about the rise of the conglomerate movement of the 1960s. At the time, shareholders were clamoring for rapid growth, so they pushed for big mergers and acquisitions. Once-successful firms were pressured to move away from their core businesses, often to terrible effects.  In an email to me, Lazonick noted that “the ideology was that a good manager could manage anything, and that all the central office needed was performance statistics so that it could ‘manage by the numbers’.” This foolishness “imploded,” as Lazonick put it, in the 1970s.Evidently Lampert didn’t get the memo. In the 1980s, as deregulation got the casino games rolling on Wall Street, mergers and acquisition fever once again took hold. This time around, mergers more often involved acquisitions in the same industry, like Bristol Meyers’ acquisition of Squibb. Two new terms entered the American vocabulary, the “hostile takeover” and the “corporate raider.” Oliver Stone made a movie about this episode called Wall Street.
Some refer to Lampert as a corporate raider. He prefers the term “active investor.” It must be admitted that Lampert wasn’t only interested in stripping the assets of his retail giant to make a fortune off it right away. He thought he could increase profits, too. After making a nice wad of cash from Kmart by selling off the valuable real estate sitting under dozens of stores, shutting down 600 stores and laying off tens of thousands of workers in the name of cost-cutting and thereby jacking up the stock price, he got bigger ideas. He would use Kmart to take over another ginormous retailer, Sears.
What background did Lampert have in retail? None at all. But never mind that. He was a Wall Street genius, and he would make this thing work by harnessing the power of data and numbers and letting the invisible hand of the market guide his Franken-company to glory. He even hired Paul DePodesta, the statistician of “Moneyball” fame, to advise him. When Kmart acquired Sears, the new company, Sears Holdings, became one of the largest retailers in the U.S., and Lampert became its CEO. He took on the Herculean task of integrating two vastly complex companies. And he brought on a guy that knew all about restaurants and nothing about retail to help him, Aylwin Lewis, former president of YUM! Brands.
Reactions ranged from surprise to predictions of doom. Mark Tatge atForbes called him “Crazy Eddie” and decided that he must be planning to liquidate the whole shebang, perhaps slowly, by dumping stores (Sears owns a ton of valuable real estate) and using the money to do stock buybacks (more on that later) that would further enrich him.
It turns out that contrary to Lampert’s notion, you actually do need to know something about a business in order to manage it well. There’s really no substitute for industry-specific experience. And bigger is not always better — a gigantic corporation can be too unwieldy and complex to thrive, especially when your management philosophy is derived from a writer of bad novels.
Sears and Kmart are now on well on their way to becoming vaporized as brands.

2. Myth: Self-interest is the greatest virtue
The neoclassical economic paradigm is built upon the idea a human being is little more than a globule of self-interest. It teaches that the market economy is populated by rational individuals whose selfishness is constrained only by expediency. Ayn Rand was an enthusiastic proponent of this idea in extreme form, and her celebration of it can be found in The Virtue of Selfishness: A New Concept of Egoism, published in 1964, which explains, among other things, the destructiveness of altruism and the virtue of acting solely in your own self-interest.
At Sears, Lampert set out to create the Ayn Rand model of a giant firm. The company got a radical restructuring. It was something that had been tried at giant industrial conglomerates like GE, but never with a retailer.
First, Lampert broke the company into over 30 individual units, each with its own management, and each measured separately for profit and loss. Acting in their individual self-interest, they would be forced to compete with each other and thereby generate higher profits.
What actually happened is that units began to behave something like the cutthroat city-states of Italy around the time Machiavelli was penning his guide to rule-by-selfishness. As Mina Kimes has reported in Bloomberg Businessweek, they went to war with each other.
It got crazy. Executives started undermining other units because they knew their bonuses were tied to individual unit performance. They began to focus solely on the economic performance of their unit at the expense of the overall Sears brand.  One unit, Kenmore, started selling the products of other companies and placed them more prominently that Sears’ own products. Units competed for ad space in Sears’ circulars, and since the unit with the most money got the most ad space, one Mother’s Day circular ended up being released featuring a mini bike for boys on its cover. Units were no longer incentivized to make sacrifices, like offering discounts, to get shoppers into the store.
Sears became a miserable place to work, rife with infighting and screaming matches. Employees focused solely on making money in their own unit ceased to have any loyalty the company or stake in its survival. Eddie Lampert taunted employees by posting under a fake name on the company’s internal social network.
What Lampert failed to see is that humans actually have a natural inclination to work for the mutual benefit of an organization. They like to cooperate and collaborate, and they often work more productively when they have shared goals.  Take all of that away and you create a company that will destroy itself.
In 2012, Lampert bought a $40 million home on Indian Creek Island, near Miami, just around the time he decided to sell 1,200 Sears stores and close an additional 173. That same year, Sears Holding was named the sixth worst place in America to work by AOL Jobs.

3. Myth: Greed always wins
In the 1980s, a noxious business philosophy developed that said that shareholders were the only true stakeholders in a company, because they made the investments and bore the risk. Forget about the investments and risks born by taxpayer and the people that work for a company. They didn’t matter. A company had no responsibility to anybody but the shareholder.
As a result, executives started using this justification for various kinds of hustles designed to line their pockets. They got very adept at the game of buying back their own stock in a way designed to inflate earnings per share and hide weaknesses.
In 1977, 95 percent of distributions to shareholders came in the form of dividend payments.  Today, more than half of the cash returned to shareholders of S&P 500 companies comes from buybacks instead of dividends.
Fortune magazine, in a story about what happens when Wall Street jumps into the retail business, reports that under Lampert, Sears has gone on a stock buyback spree. Between 2005 and 2011, he took what was once the company’s strong cash flow and spent $6.1 billion of it on stock buybacks. During the same time period, only $3.6 billion was spent at Sears on capital improvements. Lampert told investors that upgrades and new stores were not an “efficient” use of capital. Neither was paying workers decently. In fact, Sears workers are paid so badly that they have taken to the streets to protest.
So when you walk into a Sears store today, you find a sad, dingy scene with scuffed floors and chipped paint. Tense-looking workers hover over merchandise scattered onto ugly display tables. Hardly makes you want to buy a microwave.
A handy chart on Yahoo Finance show that buybacks reached a high just about the time that Sears’ sales went into the toilet. Stock buybacks are really just an effort to manipulate stock prices, and they don’t help a company’s long-term health. They divert money away from the things that a company needs to have to succeed, like decent salaries for workers and investments in new products and services. Wonder why Apple is no longer making anything interesting? Why its retail workers get paid squat? Check out what they’ve been doing with stock buybacks.
Lampert’s buyback scheme has raked in a pile of money for him and his early investors, but it’s also flushing the company down the drain. Hoovering cash out of any firm, especially a retailer that needs appealing stores and strong advertising, will eventually crush sales.
And so it has. Sears has lost half its value in five years.
Conclusion:  The lessons of Crazy Eddie seem so obvious that a bunch kids running a lemonade stand could understand them. You have to know something about the business you’re running, especially a big one. Success requires cooperation rather than constant competition. Greed is ultimately destructive.
The invisible hand of the market appears to have attempted to slap Lampert upside the head to teach him these things. But he remains committed to his nonsense, and the real losers are all the hard-working people who have lost their jobs, and the potential loss to the American economy of two revered brands.

It’s probably a good thing Ayn Rand never tried to run a business.