Mish's Global Economic Trend Analysis |
- Vallejo Bankruptcy Plan Offers Unsecured Creditors 5-20%; JPMorgan CEO Forecasts More Municipal Bankruptcies; Bernanke Will Not Rescue Cities
- LA Mayor Says "No Question You’ll See Some Cities Default"; Mayor Daley Says "I wouldn’t doubt it"; NY Mayor Goes After Public Pensions
- Nicole "Stoneleigh" Foss of the Automatic Earth, in Chicago Tonight
- ECB Backs Off Rate Hikes; The Art of Buying Time
- Groupon's Marketing Disaster in Japan
Posted: 19 Jan 2011 09:49 PM PST Vallejo is using federal bankruptcy laws to stick it to unsecured creditors. Please consider Vallejo Plan Would Give Unsecured Creditors 5 to 20 Cents on the Dollar Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court.Vallejo's Regrets Bloomberg has additional details in Vallejo Bankruptcy Plan Would Pay Creditors as Little as 5% No city or county has used federal bankruptcy laws to force creditors to take less than they are owed, according to Bruce Bennett, the lead lawyer for Orange County, California, when it filed the biggest municipal bankruptcy in the U.S. in 1994.Busting Unions With Bankruptcy Bloomberg writer Joe Mysak says Busting Unions With Bankruptcy Isn't Chapter 9 Way January 6, 2011The "Adult State" Hello Joe, what is it do you fail to understand about these simple arguments?
Judge Rules Vallejo Can Void Union Contracts Flashback March 17, 2009: In a groundbreaking ruling as well as a rare victory for common sense and the overall good of taxpayers, Bankruptcy Judge Rules Calif. City Can Void Union Contracts. In the first ruling of its kind, a bankruptcy judge held the city of Vallejo, Calif. has the authority to void its existing union contracts in its effort to reorganize, holding public workers do not enjoy the same protections Congress gave union workers at private companies.I commented on the ruling at the time in Judge Rules Vallejo Can Void Union Contracts. I am hoping this gets settled in court rather than out of court. In that regard, it's good news that the sides are not talking.Vallejo Blew It My big problem with Vallejo's announcement today is the city had the opportunity to rewrite union contracts and failed to do so. Thus Vallejo failed to fix its structural problem. However, the key ruling is Vallejo had the right to do so. The next city to file, and I expect we will see new laws in Michigan to allow just that, will not be as lenient on unions as Vallejo was. The fact of the matter is that more cities would do take this action if their mayors were not 100% owned and beholden to public unions. The simple fact of the matter is numerous cities in this country are bankrupt. Union contracts and pension obligations are the reason. CPAs Declare "Houston Is Bankrupt" The city of Houston is Bankrupt. Houston, we have a problem. We are bankrupt.That is from October 2009. Obviously Houston has managed to kick the can down the road. In the end it does not matter. Rule number 1: You cannot pay, what you do not have. Rule number 2: taxpayers have had it. Cities cannot pay up unless they slash services or raise taxes. If unions refuse to negotiate, and so far they haven't, then cities are going to have no choice. So they kick the can down the road just as Illinois did. Illinois Pension Plans are $208 Billion in the Hole Flash forward to fiscal year 2010 and take a look at Illinois pension liabilities as shown in Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State? Illinois pensions alone are $208 billion underfunded using realistic measures. The overall level of funding is 29%, the worst in the nation. Click on the above link to see how your state fares. The only problem here is states cannot go bankrupt. Fortunately, Congress is working on that now. However, states can default. And unless we get some "union adults" in the room, that is exactly what Illinois should do. "No Question You'll See Cities Default" Earlier today, before I saw the Vallejo plan, I noted a number of Mayors discussing bankruptcy. Please consider LA Mayor Says "No Question You'll See Some Cities Default"; Mayor Daley Says "I wouldn't doubt it"; NY Mayor Goes After Public Pensions The gist of the story is Chicago Mayor Daley and Los Angeles Mayor Antonio Villaraigosa both warn of defaults. However, Mayor Villaraigosa downplays LA's default risk. He is mistaken. Police and firefighters have bankrupted the city. What cannot be paid, won't be paid and it is time for adults to realize that. For more on LA, please see L.A. to Shut Down City Departments in Budget Crisis; IBEW Local 18 Head: "How Taxpayers Feel Is Not Relevant" Please read those links. They show how and why LA is broke, how Villaraigosa is in bed with public unions, and why he is incapable of changing anything. Bear in mind, the links are about LA, but they are certainly representative of problems in many other cities. Miami's Solution Miami Mayor Carlos Alvarez is about to be kicked out on his ass, along with Commissioner Natacha Seijas. Both deserve it. Please consider Miami-Dade Commissioners set March 15 recall date for Alvarez and Seijas Thursday's county commission meeting offered plenty of political drama, as the county's leaders set a date for a recall election for the mayor and one of their colleagues.With an adult instead of a union sympathizer as Mayor of Miami, perhaps we will see an action Miami desperately needs: declaration of bankruptcy. JPMorgan CEO Forecasts More Municipal Bankruptcies Please consider JPMorgan's Dimon Forecasts More Municipal Bankruptcies JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects more U.S. municipalities to declare bankruptcy and urged caution when investing in the $2.9 trillion public-debt market.Bernanke Will Not Rescue Cities The first major city to declare bankruptcy will send a massive stir in the municipal bond market. Fortunately, Bernanke has already stated he cannot and will not come to defense of cities. I believe Bernanke for the simple reason he is beholden to banks and bailouts of banks not bailouts of cities. Moreover, I doubt a Republican Congress will bail out cities or state either. Legislation is even in the works to allow states to go bankrupt. Given that Illinois is indeed bankrupt, with an adult governor instead of someone in the unions' pocket, bankruptcy is a viable approach and one I recommend. That said, I do think Meredith Whitney has it wrong about the dollar amount of defaults. Most cities will probably pay off the bondholders and stiff the public unions. Vallejo blew it in that regard, by failing to fix its structural problem. However, if Oakland, Miami, Newark, and Detroit all file bankruptcy and all stiff the public unions and renegotiate public union contracts, maybe a few adults in the public unions will step up to the plate and negotiate some appropriate haircuts in pension contracts before cities file. Don't count on it. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To scroll Thru My Recent Post List |
Posted: 19 Jan 2011 06:13 PM PST In a long overdue move, New York Mayor Michael Bloomberg is calling for increased retirement ages of public union workers, changes in union seniority rules, and the ability to negotiate directly with unions instead of the state setting pensions. Chicago Mayor Daley and Los Angeles Mayor Antonio Villaraigosa both warn of defaults even though the LA Mayor downplays LA's default risk. In Washington state, Governor Christine Gregoire, a life-long bureaucrat and part of Washington's problem, at long last has her hands tied by voters refusing to accept more tax hikes. New York Mayor Michael Bloomberg Goes After Public Pensions The New York Post reports Bloomberg warns of deep budget cuts Mayor Bloomberg warned in his "State of the City" address Wednesday that New York still faces deep budget problems and promised he would seek to cut pensions for government workers that he said were more generous than those found in the private sector.Public Pension Ponzi Scheme City Comptroller John Liu has an impressive academic background, but is a fiscal illiterate. It would be nice if we could afford to have teachers retire at age 55 but we can't. The average taxpayer cannot retire at age 55. Quite frankly, Mayor Bloomberg was far too generous in his demands. Public pensions are nothing but a gigantic ponzi scheme. As boomers head to retirement, the effects are becoming widely known. I am sick of public unions and public employees awarding themselves benefits far beyond what anyone in the private sector sees. One might think that with Liu's background he should be able to understand the economic infeasibility of it. This is what happens when you put Mathematical Physicists (or bureaucrats in general) in positions that require a modicum of common sense. Comptroller Liu should teach math or physics, or go back to Pricewaterhouse Coopers, a job he had before joining NY City Council. Economic Insanity from the Patrolmen's Benevolent Association There's still more to the story in Bloomberg Seeks NYC Pension Changes, No Tax Boost New York Mayor Michael Bloomberg called for avoiding tax increases and raising some workers' retirement age as he laid out steps to plug a deficit that may be about 7 percent of a projected $67.5 billion budget.Paid For Benefits? No, Not Quite! Another thing I am tired of hearing is how the union "paid for benefits". The union did not pay for a damn thing. 100% of the salary that goes to public workers comes from taxpayers. Even if union members put a portion of their salary into pension plans, the source of that money is taxpayers. The contribution rate for employees varies but seems to be approximately 5% (not counting employer (taxpayer) contributions. The reality as I stated above is that 100% of the contributions come from taxpayers, but let's focus on that 5%. Assume an officer contributed 5% a year for 20 years on a salary of $100,000. That is a total contribution of $100,000. On that total contribution of $100,000 the officers expect to get $100,000 a year for life on retirement at age 58 or whatever. That is how outrageous police and firefighter sense of entitlement is. To be fair, I ignored compounding, but then again the stock market has been flat for 10 years. Moreover, Those officers were not making $100,000 twenty years ago when the the market was compounding at it greatest rate. Thus the idea, that the police paid for their benefits is totally absurd in more ways than one. The way to deal with this is via bankruptcy. Bloomberg should declare the city to be fiscally insolvent. Then the Patrolmen's Benevolent Association can see what it is entitled to in bankruptcy court. I suggest about 25% of what they think. Washington Govern Christine Gregoire Proposes $4.1 Billion in Cuts It's sickening to listen to Governor Gregoire whine, but march on we must. Please consider Governor Gregoire Dismantling the Washington She Helped Build Christine Gregoire began her career in 1969 as a prison-system typist. Last month, as Washington's governor, she proposed closing one of the state's 13 penitentiaries to save $17.6 million.Cuts? What Cuts? Hello Governor Gregoire, Remy Trupin. Get a grip. A 3 percent reduction in state employee pay is not even a down payment on what needs to happen. What about pension benefits? What about defined benefit plans that need to be eliminated? How many of those state agencies you are whining about merging should exist at all? Instead of closing a prison, how about privatizing the prison guards? Then again, why not do both (and free those in for minor drug problems in the process)? Why not outsource everything to the lowest cost bidder? Moreover, I see you bragging about education: "I created the Department of Early Learning. I put more money in K-12 than I think has been put in there in years, if not decades." That's fantastic Governor. Pray tell what results do we have to show for it other than robbing taxpayers to give money to the teachers' union? Where are the results? At what cost? I can easily see ways Washington can lower taxes, not raise them. Dedicated bureaucrats like Christine Gregoire are a huge part of the problem. They think government has solutions to every problem. That's an incredibly nasty situation, especially in conjunction with vote buying by public unions and politicians like Gregoire who are willing to tax citizens to death so the union workers can get benefits everyone else just dreams about. No Question You'll See Some Cities Default Chicago Mayor Daley and Los Angeles Mayor Antonio Villaraigosa say City Bond Defaults Likely Amid Strain The mayors of Los Angeles and Chicago said the financial strains still weighing on local governments in the wake of the recession may cause cities to default on their bonds.The fact of the matter is Los Angeles is bankrupt already. So is Houston, Oakland, Miami, Harrisburg, San Diego, Newark, Detroit, and numerous other cities. That is how deep in the hole city pension plans are. The only way out of this mess is to cram pension reform on public union workers whether they like it or not. Since they will resit, and since Villaraigosa is beholden to public unions, there is not much hope for anything other than bankruptcy. For more on LA, please see L.A. to Shut Down City Departments in Budget Crisis; IBEW Local 18 Head: "How Taxpayers Feel Is Not Relevant" Please read those links. They show how and why LA is broke, how Villaraigosa is in bed with public unions, and why he is incapable of changing anything. Bear in mind, the links are about LA, but they are certainly representative of problems in many other cities. Mayor Daley, 6 Alderman Will Not Seek Reelection Please consider Daley won't run for re-election: 'I have done my best' Mayor Richard Daley says he will not run for re-election in 2011, saying it's "time for me, it's time for Chicago to move on."Mayor Daley understands the fiscal mess Chicago is in, at least partially. He also knows Governor Quinn will make matters worse. He does not want to be mayor when the pension crisis blows sky high, when cramdowns are forced on the teachers', police, and firefighters' unions and when violence increases in the process. In short, Mayor Daley hopes to escape the blame for everything that is about to happen. Six aldermen are bailing ship with him. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To scroll Thru My Recent Post List |
Nicole "Stoneleigh" Foss of the Automatic Earth, in Chicago Tonight Posted: 19 Jan 2011 01:10 PM PST I received an email yesterday from someone informing me that Nicole Foss of The Automatic Earth blog will be in Chicago this evening. Here is the time and place. January 19, 2011 at 7:00 PM United Church of Rogers Park 1545 W. Morse Ave., Chicago Free parking (SW corner of Morse and Ashland) Apologies for the late notice, but I just found out. She is a good speaker so if you live in Chicago, you might wish to show up. Requested donations are only $20, but no one will be turned away. I just got off the phone with her. We chatted for an hour easily. She drove from Canada to Chicago, and except for overseas, normally drives everywhere she speaks. In June, she is on a speaking tour of numerous cities on the west coast. She plans on driving from Ontario, Canada, the whole way. I invited her to spend a a night here. Perhaps we can setup a location nearby where the two of us can field questions on any topic. I won't charge for this, she can have 100% of donations to support her trip. I do not have dates for this yet, but if you are interested, send an Email to StoneleighTravels @ gmail . com. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To scroll Thru My Recent Post List |
ECB Backs Off Rate Hikes; The Art of Buying Time Posted: 19 Jan 2011 11:06 AM PST The Euro soared in conjunctions with a "successful" auction on Portugal (about 3.5% higher than German 10-Year Bonds) followed by comments from Trichet about rate hikes when the Euro was in a strenuously oversold condition. Crashes come from oversold conditions, not overbought ones, and central bankers are well aware of it. Trichet got the reaction he wanted, now he attempts to "fine tune" investor expectations. Please consider ECB Officials Retreat From Threat of Higher Rates "The Governing Council of the ECB sees present interest rates as adequate," council member Ewald Nowotny said at an event in Budapest yesterday. "We do not see a need for an interest rate change in the foreseeable future." Bundesbank President Axel Weber also said he expects inflation to remain below the ECB's 2 percent limit in the medium term, softening his language on the risks to price stability.Trichet Has No Credibility Trichet has violated everything he has ever stood for when he bought sovereign debt and allowed Ireland to print money backed by absolutely no collateral at all (see ECB Allows Irish Central Bank to Counterfeit 51 Billion Euros). So how can Trichet be believed? For that matter, why should anyone believe Citigroup's analysts either? Judging from the reaction and the recent comments by Trichet, it appears he wants an orderly decline in the Euro to help exports much the same the US wants an orderly decline in the dollar, Brazil wants an orderly decline in the Real, and every country on the planet wants an orderly decline in their currency as well, all so that everybody can increase exports. Mathematically it does not work, and never did. Trichet did manage to buy time, and that is always one immediate goal of every central banker. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To scroll Thru My Recent Post List |
Groupon's Marketing Disaster in Japan Posted: 19 Jan 2011 02:33 AM PST In a nice break from news about the Euro, China, or pensions, Mike "In Toyko" Rogers sent me an interesting email the other day regarding huge mistakes Groupon made in Japan. Take a look at the New Year's dinner Groupon advertised, vs. what was delivered. New Year's Dinner as Advertised New Year's Dinner as Delivered Those images are from Mike's article Groupon CEO Insults Japan With Simple Minded Apology Over the New Year's holidays, Groupon Japan sold traditional New Year's dishes to the Japanese. It didn't go well. In fact it went so badly that dozens upon dozens of people complained about fraud and then the Japanese government actually stepped in and is currently investigating the situation. So, I guess I should say it was a disaster.Learning the Ropes The Wall Street Journal commented on the marketing disaster in Groupon Learns Japan Ropes Doing business in Japan can be a, well, tricky business. Just ask Andrew Mason, CEO of exponentially expanding online discount specialist Groupon, who ended up posting a personal apology video to customers here on YouTube (in English, with Japanese subtitles) after a flub in orders for Japan's prized traditional new year's meal.Groupon's Apology Mike Rogers was more than upset, citing among other things
Mike asked me what I thought about this, and I approached it from a different angle.... What's Groupon Worth? In December, Google offered Groupon $4 billion, then upped it to $6 billion when Groupon balked. Groupon walked away from $6 billion as well. I cannot conceive of rolling the dice on a $6 billion offer. Look at Groupon's Model. They tell clients that if they make money, their offer is priced too high. That's does wonders for Groupon's phenomenal margins, but how much repeat business will there be and for how long is the model sustainable? Let's sidetrack for a moment. Look at the offer Microsoft made for Yahoo, $32 a share. Yahoo turned it down. Yahoo's share price is now $16.50. Look at MySpace. It collapsed under the rising star of Facebook. Might not Groupon do the same? My point is 'Things Happen'. Marketing wars in this space will become immense. With competition comes decreased margins. I guarantee it. Look at the disaster in Japan. Those restaurants advertising the New Year's deal wanted to make a profit but couldn't, at least based on the images shown. So they offered something they could make a profit on, and look how it turned out. Customers are furious and Groupon did not even understand Japanese culture to know how to respond. On a basic level, ignoring the disaster in Japan, Groupon is not doing its clients any favors if it bankrupts them in the process. Deals need to be win-win or clients will eventually tell Groupon to go to hell. In the US, we see pictures of the classic sub sandwich or something like this. What businesses can afford to offer 90% off and survive? Is that what happened in Japan? As with all social trends, people (and businesses) will try the latest and greatest thing. However, struggling businesses won't be social butterflies forever. What happens after a majority of businesses lose money on it? What happens if competition offers better deals? How quickly might better offers catch on via Facebook or Twitter? Those are significant risks to Groupon. Bear in mind, I do like Groupon's model. However, those margins are not sustainable. Of course Groupon can lower its margins, but then what is it worth? The answer is nowhere near as much, yet far more than if it suffers more disasters like we saw in Japan. For that reason, I thought Google offered way too much. Yet Groupon turned it down. Why Groupon Said No To Google's $6 Billion The Business Insider discusses Why Groupon Said No To Google's $6 Billion Each and every Groupon board member stood to gain millions, hundreds of millions, or even more than a billion dollars by accepting Google's $6 billion offer to acquire the company.The Perfect Company?! I think Groupon is perfect in the same sense Yahoo was perfect before Google came along, MySpace was perfect before Facebook came along, Netscape was perfect before Microsoft embedded free browsers, and dare I say it ... Google directly attacks Groupon's model with a competing product. Had Groupon accepted the offer, I doubt Google would have let Groupon make rookie mistakes like it did in Japan, or if it did, there would have been a bigger, more sincere apology must faster. I also think Google would be smart enough not to run its clients into the ground. I cannot comment on the antitrust aspect except to say it seems to be a poor reason to turn down $6 billion. After all, if "Groupon is Perfect", it would no doubt still be perfect if the deal fell through. Time will tell just how perfect Groupon is. Addendum: I struck the word "Eve" from the above post in several places. Mike Rogers informs me that in Japan, the New Year is a three day religious celebration, quite different than the big night before New Year's Eve celebration in the US. For an update from Mike, please see Groupon CEO Insults Japanese People With His Callous Apology - Pt. 2 Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To scroll Thru My Recent Post List |
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