Management

In Oregon, Paul Fahey, who was convicted of murdering his wife by setting her house on fire four years ago, is suing the county claiming he received inadequate medical care for the injuries he received in the fire he set.

Most likely the state is paying for the attorney to sue the county, with the enormous legal costs of the silly suit being absorbed by the taxpayers.  Perhaps Paul should have been shipped off to a prison much further away than Oregon where he could have recuperated better from his unfortunate injuries.  Maybe somewhere more tropical….. hmmmmm, maybe Cuba?

During these crazy market gyrations people are naturally concerned about the safety of their cash – be it in bank accounts or money markets.  In an earlier post I wrote about steps you should take to protect your cash and investment assets.  Since then the federal goverment has stepped up to assure more protection to investors.  FDIC limits have been raised from $100,000 to $250,000, and they recently began offering protection to many money market accounts.  On September 29, the U.S. Department of the Treasury opened its Temporary Guarantee Program for Money Market Funds a plan to protect certain shareholders of money market mutual funds from losses if their funds are unable to maintain a $1.00 net asset value.  The Treasury Department has posted a few “FAQs” on the program that I have listed below -

What funds were eligible to participate?
According to Treasury, all money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, maintain a stable share price of $1 or more, and are publicly offered and registered with the SEC were eligible to participate in the Program. Tax-exempt and taxable money market funds were eligible to participate.

Why is the Program limited to accounts and assets as of Friday, September 19?
The decision to limit the Program to the value of accounts at the close of business on September 19 arose from grave concerns that ICI raised with the Treasury over the Program’s potential effects on flows among funds. Recently, large institutional shareholders, who hold almost two-thirds of assets in money market funds, have been moving money from general-purpose money market funds into funds that invest primarily in Treasury securities. The Program raised fears that this flow of funds would suddenly reverse if general-purpose funds joined the Program. By limiting the protection to account balances as of September 19, Treasury’s amendments should alleviate that problem.

Money market funds have $3.4 trillion in assets. The Program is funded with $50 billion. Is that enough?
We believe that the program is large enough to help restore investor confidence, for three reasons:

• In the 25-year history of money market funds, only one fund ever failed to maintain the $1.00 NAV prior to the unprecedented market conditions of recent weeks. Money market funds are strictly regulated by the SEC and operate under tight requirements for the liquidity, creditworthiness, and diversification of their assets.
• When a fund cannot maintain the $1.00 NAV, the shortfall is likely to be just pennies on the dollar. The fund that broke the buck in 1994 ultimately paid investors 96 cents on the dollar. If the guarantee plan were used, it would probably be called upon to pay only a small percentage of the assets of a covered fund.
• Recent large redemptions and other strains in money market funds have been caused primarily by lack of active trading in the money markets, principally in commercial paper. The Federal Reserve has taken and continues to take additional steps to improve liquidity in those and other markets. If those steps succeed in unlocking these markets, we have every hope and expectation that this Progam will never pay a claim.

I had an account in a money market fund on September 19, but I’ve withdrawn or added money since. How much am I covered for?
If your fund enrolled in the Program and then cannot maintain the $1.00 NAV (or, depending on the fund, a NAV greater than $1.00), you will be covered for the amount you had in the fund on September 19, or the amount you have when the Program is invoked-whichever is less-so long as you did not actually close your account. Treasury’s investor FAQs offer examples.

Is there a cap on the amount per account that’s covered?
No, there is no per-account cap on the coverage.

Why should I invest now in a money market fund if I’ve missed out on the guarantee plan?
Money market funds have long provided investors with capital preservation along with competitive rates of return. Money market funds are strictly regulated by the SEC and operate under tight requirements for the liquidity, creditworthiness, and diversification of their assets. In 25 years, $325 trillion in assets have flowed in and out of money market funds. Those same regulations are in place for all investors, whether they are covered by the guarantee plan or not.

Are retail and institutional shareholders all covered? What about foreign shareholders?
The plan covers all shareholders, retail and institutional, domestic and foreign, who had accounts on September 19 in the eligible funds that enrolled.

What about foreign-domiciled funds?
Only U.S.-registered funds that operate under Rule 2a-7 and are publicly offered were eligible for the plan.

How will I know if my fund is participating in the Program?
Ask your fund sponsor.

How long does the Program last?
The Program is intended to address temporary dislocations in credit markets. The initial Program will operate for three months, after which the Secretary of the Treasury will review it. The Secretary has the option to renew the Program until September 18, 2009. If the Secretary renews the Program after the three-month review, funds must re-enroll to extend their participation.

What were the Program costs? Who will bear the fees?
Funds paid a fee of 0.01 percent (1 basis point) or 0.015 percent (1.5 basis points) of their assets as of September 19, based on their NAV that day, for the initial three months. The fee may be paid from shareholder assets.

How will the coverage work?
If a participating fund cannot maintain its NAV (typically $1.00, but sometimes more), and the fund sponsor chooses not to provide credit support, the fund board would notify the Treasury that it has determined to liquidate the fund. The fund would then close and liquidate. The Program would pay the fund the difference between a $1.00 NAV (or an NAV of greater than $1.00) and its shareholder payout; the fund would distribute that payment to shareholders.

Does the Program cover a fund that broke the buck before September 19?
No.

What should I do if I’m concerned about my money market fund?
Contact the fund company for its latest available information.

So, the bottom line seems to be the following:

1. Check to see if your fund is participating.
2. Note you are only covered by this program if you invested in the money market fund prior to September 19th.
3. Also note the covereage ends on December 19th.

The brilliant investor Warren Buffett now seems to have taken center stage in America as the one financial expert people trust.  In fact, in many ways I suspect Buffett will be one of the saviours of our current economic crisis, either as investor, advisor, or perhaps as a part of the Obama cabinet (he is supporting Obama for President).  Accordingly, people are curious about how the notoriously conservative investor is approaching the current economic situation.  Perhaps not suprisingly, Buffett sees opportunity in the stock market crash.  Of course, unlike most of us he had the foresight not to get caught in the downturn (he was invested in treasuries), so he is picking up bargains with his money intact and a lot of upside.  And I doubt Warren has an adjustable rate mortgage on his mansion.  Still, he is a smart man to follow.  Buffett publicly expressed his opinions this week in an op-ed in The New York Times.  His approach is interesting -  http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&scp=2&sq=warren%20buffet&st=cse&oref=slogin

If you are a Warrior in the workplace, you care more about getting things done than your popularity level in the company.  But unfortunately, there are seldom enough Warriors in the workplace, and a high percentage of non-Warrior managers prefer to “run a community” as opposed to “run a business”. 

Of course, there are exceptions –  ”community companies” that operate efficiently, but they are almost always small, frequently family-run organizations that have made the choice for a variety of different reasons.  A high performance company must operate like a company.

In a community, everyone has their say.  Decisions are made by consensus, and the community leaders are dependent on the community members to maintain their status, so they are careful to be inclusive and not offend anyone.  Community members are typically only ejected from the community for really heinous behaviour.  Community leaders will often choose not to make the tough choices for fear of alienating the community. 

A successful business almost never operates this way.  Decisions in a business are made by Warriors or teams of Warriors and trusted advisors, and are based on what is best for the business, not what would make them the most popular with the employees.  Managing by consensus or by popularity contest does not work in a business.  Certainly a successful business should have an industry-appropriate culture that fosters talent, and encourages success and innovation, but maintaining that kind of culture also requires tough standards. Good managers understand that they can’t be friends with everyone in their department, and holding people to standards (and firing those that can’t perform) is their duty as the manager.  Otherwise they foster mediocrity, which threatens the entire company.

Communities are great places to live, but I would not want to work there.

The average Americans’ head is now spinning with incomprehensibly big numbers!  Numbers for bailouts, bankruptcies, wars, deficits, CEO salaries, and various government interventions.  Not to add to the confusion – but here are a few of the more interesting big numbers.  Lets start with the really big one….

• $3,000,000,000,000.  That’s three trillion dollars – the final price many experts are estimating for the Iraq war.
• $60,000,000,000.  Sixty billion – the original estimate from the Bush administration for the Iraq war.
• $80,000,000,000.  That’s eighty billion dollars, the current budget surplus the Iraq government recently reported.  (Yes – I did mean surplus – as in “we have way too much money!”)
• $407,000,000,000. Four hundred and seven hundred billion. The upcoming estimate of the Federal Deficit.
• $700,000,000,000.  The Bush Administration is requesting seven hundred billion from congress to stabilize the economy.

So, what to make of all these big numbers?  Well, since I am not an economist I’m not qualified to comment on the government’s increasing role as regulator and “Uncle Moneybags” to Wall Street.  But, as a businessman who has some experience borrowing money and granting credit to customers, if they were borrowing money from me I would question the credit qualification of the current administration.

Imagine someone comes to you to borrow money – perhaps to build a new building.  They initially request sixty billion – but the budget ultimately comes in at three trillion.  (OK – it’s a really, really big building! Lots of glass and gold plated elevators!) And after all the cost overuns, you learn that one of the partners in the project has abscounded with eighty billion.

If that same borrower then wanted to borrow another $700 billion after running up another $407 billion in debt – would you give them the money?

Probably not.

Though we might want to consider letting the Iraqi government run this show.  They seem to be pretty good with money!

A few more unrelated but interesting numbers to consider:

• $91,000,000.  Ninety one million dollars – the 2006 compensation for Merrill Lynch CEO Stanley O’Neal.  O’Neal received more than $160 million in compensation despite the fact that stockholders lost 41% of their value during the same period. Three other Merrill executives will share a $200 million dollar payment for tanking the company and turning it over to Bank of America.  Makes you wonder how much they would have made if he had managed to take the value of the company to zero!
• $68,000,000. AIG’s former CEO Martin Sullivan’s contract entitled him to compensation of $68 million while the company reported losses for two quarters of $13 billion!

As the CEO of a mid-size company, the above numbers obviously indicate I am doing something wrong!  I receive bonuses based on achieving profit goals, not for running up huge losses and tanking my company.  I suspect it is much easier to lose money than make money, so I really need to renegotiate my contract!

These are frightening times when it comes to investing and and holding on to your money! As I write this the DOW seems hell-bent on going retro – retreating to ugly places we have not seen for years!  And we all just sit and wait with baited breath for the next bad news!

Of course, the optimistic investor with the proper long-term horizon might be saying “wow, I see a major buying opportunity right around the corner!”  There is definitely a big liquidation sale going on right now, and you can buy some really great quality companies at a fraction of their value!

But I’m not going to go out on a limb here and tender investment advice in this entry. I would encourage people to do a little basic safe house keeping -

1. Check your FDIC insurance limits.  Keep in mind that depending on your account, you are typically insured to $100k per institution (trusts and joint accounts carry bigger limits), yet many people are running balances in excess of this number.  Also, you might be invested in money market accounts that are not insured.  Double check the status of all your cash, and shift accordingly to maintain proper FDIC insurance!
2. How are your securities being held in your investment accounts? Here is a little-known fact I just discovered.  Some brokerage houses hold your assets in a street name as opposed to your name.  This could be dangerous if your brokerage house were to collapse, as your ownership might be questioned, and your assets could get thrown into a big bucket parceled out via bankruptcy.  It’s not a bad idea to verify with your broker that your assets are held in your name, so no matter what happens to the brokerage house you get to keep your assets.

Though my portfolio is pretty ugly compared to a couple months ago, I am taking some solace in the fact that I have been playing it pretty conservative lately.  I have been buying 30 day to Two Year FDIC insured CDs for the last few months, being careful to observe the FDIC limits per institution.  While there might be good rates floating around in your home town, I have found the easiest way to manage a lot of CD trades is through Charles Schwab.  They have a CD trading section that changes constantly, and makes it very easy to buy from many institutions to maintain your FDIC limits.  Schwab manages the process and the rates tend to be very good.

Good luck, remember the one sure thing about the market is that it eventually goes up, and avoid open windows!  It’s only money!

I’m pleased to welcome back our favorite guest blogger, Ray Link.  Since Ray is originally a “Florida Republican”,  I suspect we have disagreed about previous elections, the value of a golf tan, bass versus trout fishing, and other crucial issues.

But Ray is also a very good businessman experienced in assessing talent, and his approach towards this election makes a lot of sense.

Electing a President is like hiring a CEO

By Ray Link

What is the election of the President of the United States similar too?  To me it is simple: we are hiring the CEO of our country with a guaranteed four year package with lots of perks.  Since we cannot fire him for four years, we must do our best to make an informed choice.   If you look at it as hiring a CEO of a very large international corporation the process is easier to understand and judge.  It also eliminates a lot of the “political garbage” associated with the existing process and forces one to look at what really matters.

Years ago I was fortunate to have been a chief financial officer at different times under two very strong and very smart CEO’s.  Both hired me as their CFO yet I did not have the ideal experience to be the CFO of their company.  Both said that they valued talent and chemistry over experience and that many people who have 20 or more years of experience have in fact 1 year of experience replicated 20 times.  They both believed that if you hire smart, energetic people they will “figure it out” and do well over time.  These CEO’s looked at the total package which includes academic credentials, communication skills, decision making skills, ability to cope with change, demonstrated leadership and relevant experience.

Let’s take that view of the presidential election where we have John McCain, age 72,  with 21 years of Senate experience, a war veteran, and a graduate of the Naval academy versus Barack Obama, age 47, with 4 years Senate experience, no military experience and a graduate of Columbia University and Harvard Law School.  Which person would be hired to run a major international corporation?  [click to continue...]

One of the toughest things about managing a business is judging just how tough to be!  It’s easy to be “too easy” – avoid conflict, and ultimately build a mediocre operation because you fail to make the tough choices.  Often managers swing the opposite way, becoming tyrants in the workplace, and building a dissatisfied team that hates the workplace, and accordingly also underperforms.

Today I heard an interesting philosophy that I tend to agree with. “Be ruthless about your business, and gracious about your delivery”.

Entrepreneurs are typically micro-managers.  They believe nobody can do the job better than they can, and accordingly they often control every aspect of their organization to create their ideal vision for the company. And often that is when an entrepreneur is faced with a decision.  They can continue to micro-manage, which typically severely inhibits growth, but allows them control and sustains the vision.  Or, they can loosen the reins, hire really smart people that have diverse talents (hopefully talents the entrepreneur does not possess), give up some control, and try to guide the company to even bigger heights than they imagined.

There are pros and cons and risks to each approach.  But the one path that seldom works is straddling the two approaches.  You can’t bring in talented employees with the promise that they will be integral in growing the company, and then not allow them the freedom to do their jobs.

The entrepreneur that makes this jump successfully is self-confident enough to let talented individuals move the company to new heights, but also smart enough to recognize when they have made a bad hire that ultimately threatens the organization.

In a sign that karma does exist, a major business Weasel was sent to prison this week.  Steve Warshak, founder of Berkeley Premium Nutraceuticals (better known as Enzyte – the so-called hard penis people) was sentenced to 25 years in prison.  Warshak, his mother, and several others were accused of bilking customers out of millions of dollars via false advertising and bogus credit card transactions. In fact, they took so much money that they were also fined $500 million dollars in addition to the jail time! 

Viewers may remember the “Smilin Bob” Enzyte commercials that promised to turn every average Joe or Bob into a sexual powerhouse.  Warshak was indescriminate in his dishonesty.  In addition to stealing from customers, he would also refuse to pay his advertising agencies, claiming he was going bankrupt and tying them up for months in court in an attempt to delay and ultimately reduce payment.

It’s always good for the advertising business and consumers when these kind of scam artists get sent away, but although Warshak deserves it I was still a bit suprised at the severity of the sentence.  25 years!  He apparently underestimated how serious men are when it comes to their erections. ”Steve Warshak preyed on perceived sexual inadequacies of customers”, said the Judge when he handed down the sentence. 

One must wonder if there are any disgruntled customers where Steve is going. Perhaps the fact that Enzyte doesn’t work will make prison a less painful experience.