The Business Law Spot

New Website

2012-01-25T18:50:00.001-07:00

Woo-hoo, new website up and running. Click here, or use the link above my profile to the right.

Big Boys of BK

2012-01-19T12:41:00.000-07:00

Lots of Chapter 11 news today.

Kodak finally filed last night. It had been in trouble for a long time (I think I'm one of the few fossils remaining who uses film.), but it was trying to reshape itself as a printer company. To do so, it was relying on a revenue stream from its patent portfolio (At one time that portfolio rivaled the likes of Bell Labs and IBM.). Unfortunately, Kodak didn't account for aggressive (i.e. predatory) behavior by some major license users, including Apple and Research in Motion (I have to say I don't use much of anything from Apple. I hate black boxes, so I didn't care much for the products, and I didn't care for the culture, either. Seemed too much like a religious cult. I see people walking around festooned with 500 i-Crap products, and I wonder why anyone needs to be so simultaneously plugged-in and cocooned from the world. They remind me of Neo in The Matrix before he's released from his pod. RIM, though, hurts. I've rocked the Crackberry for over a half-dozen years now.). The big users decided to stop paying for the licenses, forcing Kodak to litigate. They wouldn't buy the patents outright, either, at least not for more than a dime on the dollar. So Kodak is in Chapter 11, where it might be able to force a few things.

American Airlines, on the other hand, might be getting forced. It's nearly two months since it filed, and American has barely gotten off square one. As I blogged the day it filed, American's big motivation was to take down the labor contracts and pensions. It hasn't, and everyone (including Your Truly) is confused about the delay. Confused about it, but still willing to take advantage of it. Delta and US Airways are making noises about rival bids, and others are getting into the game. If American doesn't have a reorganization plan in front of creditors in two months, it's looking at getting parted out.

And of course we can't let the day go by without some more mess from MF Global, this time with a heapin' helpin' of JPMorgan Chase. It seems that back in October, right before it filed, MF Global was selling piles of assets to raise cash. Problem was, it was selling them through JPMorgan, which decided to do a by-the-book slowdown of the transactions. Consequently, MF Global had neither the assets nor the cash and couldn't meet the inevitable margin calls. Welcome to bankruptcy. Now the creditors and trustee are finally getting around to asking JPMorgan where the money went, because it certainly hasn't been turned over.

JPMorgan's involvement in "where did it go" scenarios is getting to be a habit, and it's long past time someone pulled the curtain back and took a look. Somebody needs to look at where Washington Mutual's assets went, because they were there until JPMorgan stepped in. And unless something drastic has happened this week, JPMorgan is still sitting on piles of cash involved in investment schemes from five and six years ago (I have to be careful here. I've had two, executive-VP-level in-house counsel lie to me about the creation and handling of those accounts, so it's hard to say what the "official" records look like any more. And I've had outside counsel threaten me with bar discipline for daring to represent anyone opposing JPMorgan. But then that's SOP for Utah. The Bar doesn't care if an attorney makes a groundless threat like that so long as he is representing a 1% client and he makes it against an attorney with a 99% client.). Any wonder I refer to the place as "JPMorgoth"? We'll see if anybody decides to use the big microscope this time or if JPMorgan skates again.

If You Don't Promote, Your Business Won't Float

2012-01-15T11:41:00.000-07:00

No apologies at all to Johnnie Cochran.

Yesterday, while waiting for a kid to finish a rehearsal, I swung by Trolley Square just to see what was going on there these days. It was about 0915, and I was surprised to find the parking lots and new garage already pretty full. I walked inside and discovered that Trolley had leased a space to the Sundance Film Festival for ticket sales and that there were several hundred people in line waiting for the ticket office to open at 1000. I thought, "This is a great idea by Trolley. Sundance audience, relatively hip, some discretionary income. Exactly the target market for Trolley-style shops. And a captive audience to boot, with nothing to do but stand around until the ticket office opens."

And then I noticed that I wasn't seeing any shops open. I walked through the whole place. Not a single shop was open. No one was working the lines, handing out fliers or coupons or samples, offering to hold a place in line while someone shopped, taking food orders and bringing them back. Nothing. All those customers, and no one approaching them.

First, to Trolley Square management: Kudos, you did your job. You brought in a mass of potential customers the likes of which has rarely been seen around that tomb. And you'll be bringing those crowds in all week. It isn't your fault if your tenants aren't taking advantage. When they come whining to you for concessions because they aren't getting enough traffic, you should rub their noses in the photos and videos you're taking of this event. Why should you give concessions to businesses that act like they're hobbies?

Second, to Trolley Square tenants: You blew it, and you'll probably blow it all week. Yes, you opened at 1000, but so what? Those customers had already been there for an hour with nothing to do but wait. They didn't even have a moving line to keep up with. They were just standing there. And you were nowhere. You weren't visiting with potential customers, you weren't telling them about your inventory and specials, you weren't learning about their shopping habits and needs, you weren't getting their contacts for your email list, you weren't having them like your Facebook page. You were a no-show. I know you'll whine about lack of traffic all Summer, but it's really your own fault.

Third, to everybody: I've seen grundles of small businesses that acted either like they were hobbies or they had a divine right to customers. Both attitudes are fast tracks for the Fail Train. Hobbies are not designed to make money; they need to stay in your garage. And the last folks who claimed a divine right to something got their heads lopped off. The only people who don't have to work for money are the ones who were born with it. Your business is there to make money, and that requires work, your work. If you don't bring it, don't expect success.

Merry Red Ink Christmas

2012-01-10T11:37:00.002-07:00

Throughout the holidays, I saw people buying like mad. I kept thinking, "Wait a minute. The job picture stinks, about every asset and investment class is dropping, and everyone below the top 10% is getting absolutely rocked. How is everyone buying?"

The old-fashioned way, apparently: debt. The Fed's figures for November are out (December won't be out for another month, but I can't imagine it won't look worse.). Consumer debt rose at an annual rate of 9.9%. Revolving debt (credit cards, lines of credit, etc.) rose at an annual rate of 8.5%, and nonrevolving debt (mostly secured purchase money loans and student loans) rose at 10.7%.
This is a mess in the making. We have learned nothing from four years ago. People are once again buying by spending money they don't have by taking out loans they can't afford from people who don't care if they (or, more accurately, their clients/customers) get repaid or get stuck with collateral they can't unload so long as they get their origination fees. And when this new house of cards collapses, where does the bail-out come from this time?

I see bankruptcies trending back up soon, but that isn't the real concern. With the President, the House, and one-third of the Senate up for election this Fall, D.C. will pull any smoke-and-mirrors to kick the economic can past November. But what kind of hangover will we get in 2013? If what we've seen is any kind of prologue, you may want to find yourself a place to hide in the high grass.

Money Tree Not Down

2011-12-30T14:03:00.000-07:00

For any of you who may be wondering, the recent announcement of a Chapter 11 filing by Money Tree has nothing to do with the local company. Completely separate entities. The bankrupt one operates solely in the Southeast (Aside: How do you go broke as a payday lender? Katrina was six years ago, and did it really blow that many paychecks out to see? Were you lending to the entire Ninth Ward?). So if you need a loan shark out here in the wild, wild West, the local Tree is still standing.

It Wasn't Illegal?

2011-12-28T19:31:00.000-07:00

On 11 December, President Obama was interviewed on 60 Minutes. The transcript is here. The interview is pretty much what you'd expect. Then, about three-fourths of the way through, comes this:

I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn't illegal.

Excuse me?

First, it must be nice to deal with US news media, which consist almost entirely of ignorant tyros who do what they're told. Steve Kroft swallowed that comment and just kept pitching softballs. A BBC interviewer would have gone straight at that comment and pointedly asked the President just what in Hell he was talking about.

Second, loan fraud is illegal, and we've had well over 31 flavors of it in this mess, with new ones cooked up by B of A, Chase, and RBS every day. Securities fraud is illegal, including stuffing investment instruments with cherry-picked, bogus "assets" and then betting against them (I'm looking at you, GoldSacks.).

Mr. President, as a former prosecutor I can tell you that, just because your boys aren't pressing charges, all this garbage has suddenly been washed clean. And yes, Mr. President, the DOJ folks are your boys, however much you may want to hide behind prosecutorial independence. You picked Holder, you picked the US Attorneys. Their decisions are your decisions. Own them.

Just Because You Bought It...

2011-12-28T18:59:00.000-07:00

...doesn't mean it's yours. There's a big brouhaha in the MF Global bankruptcy. It seems the trustee's definition of the bankruptcy estate (and hence the assets available for him to liquidate) includes gold and silver bullion that traders and investors parked, or at least thought they were parking, with the firm and received warehouse receipts for. And they are WAY unamused they can't get their bling.

A little background. First, warehouse receipts. I'm Joe Farmer, and I just brought in my corn harvest. I decide to store it at the grain elevator for a couple of weeks. I take it to the elevator, physically deposit it there, and get a receipt for X amount of corn. When I want it back, I turn in the receipt, pay the handling charges, and get my corn back. Substitute any storable thing you care to name, it's the same, basic process.

Second, other people's property in a bankruptcy estate. If you lend your friend $100, and he declares bankruptcy, chances are you'll never see old Ben Franklin again. If you let your friend use your car, though, and he declares bankruptcy, the trustee can't just take your car. The bankruptcy estate doesn't include things the debtor possesses but someone else owns.

And that's what the warehouse receipt people are saying. They have receipts for specific bars of precious metals that they bought and that were supposed to be stored in the MF Global facility.

Problem the First: Unlike Joe Farmer, extremely few of these people actually lugged any gold bricks to MF Global for storage. Some put money directly into an MF Global account for purchase and storage, and took a "warehouse receipt" in return. Others were brokers themselves and were making purchases for customers. Either way, they weren't really following warehousing procedures (How often do you ask the warehouse to buy the stored item for you?), so off the bat we have a question of whether these "warehouse receipts" are warehouse receipts.

Problem the Second (and here's where it gets painfully apparent that a brokerage is not a warehouse): Back in 2005 the CFTC adopted Rule 1.25, which allows certain commodities investors to invest clients' deposit accounts (as opposed to investment accounts) so long as an asset of "equal value" is substituted in (As an aside, if I as an attorney were to do this with a client account, I'd be doing the perp walk in nothing flat. In Investment World, though, it's perfectly OK. For the investment house, that is.). This fact was undoubtedly disclosed somewhere in the "storage agreement," and unless I miss my bet, that condition wasn't entirely one-sided. If MF Global could invest the deposits, it could defray some of its costs instead of passing them on to the depositors (Remember those handling charges I mentioned? Running a grain elevator isn't free.). I certainly wouldn't be surprised if that was how MF Global pitched it.

So instead of the gold and silver sitting in the warehouse, MF Global pulled it and replaced it with "assets," namely paper instruments with all the value of papier de la toilette, or some such. Needless to say, a bunch of the gold and silver is nowhere to be found. Which means a bunch of those "warehouse receipts" don't stand for anything. Which is perfectly OK since, by the receipts' own terms, the bullion could be swapped out. Which leaves the "warehouse receipts" looking less like warehouse receipts and more like mislabeled investment contracts. Which is exactly how the bankruptcy trustee is treating them. If the depositors want it any different, they'll have to take the trustee to court and force it. Good luck with that.

Some Recovery

2011-12-15T11:30:00.003-07:00

Things have slowed down in bankruptcy world, and now I have an idea why: People are too broke to care. The latest census report shows that nearly half the population is either "in poverty" or "low income". In other words, half the country either can't afford to file or has so little worth that filing is pointless. When exactly was it the recession ended?

Of course the Heritage Foundation (The only "heritage" that foundation has is shilling for the 1%. Just saying.) trots out its "poverty expert" Robert Rector (Oh, it's such a strain not to do naughty puns on his name.) to say that they're not really poor (by Mumbai standards), that we do enough for them already (Look at all the taxes rich people have to pay.), and that we just need to teach them how to be "self-sufficient." Of course, this toady has been shoveling this line for decades. Don't believe me? Google him. Or look at this article from 11 years ago where he's claiming the gap between rich and poor isn't so bad because of all the poverty programs the rich have to pay for (First, note how he conflates "income gap", which is bad enough, with "wealth gap", which is more accurate and is absolutely obscene. Second, note that the gap has only gotten worse, due in large part to policies the Heritage Foundation promotes. Don't believe me? I'll let those Commies over at Forbes lay it out for you. And while I'm over at Forbes, took a look at this article on 1% wheels. Don't you love that remark by the Bugatti CEO, "The crisis cannot keep a Bugatti buyer away from buying a car for financial reasons”?). Or this article, in which he claims the poor don't need more food because so many are already overweight (conflating "underfed" and "undernourished"). Or how about his remarks to the New York Times saying all but a very few people are merely "constrained" in the type of food they buy, so there is no hunger problem. Just to show you you what level of dinkage this guy operates on, he's also the Heritage Foundation's "expert" on abstinence-only sex "education". News flash: That's the kind of sex education we had when I was a kid and on before that, and ignorance really wasn't a terribly effective contraceptive. The difference is that, back then, a 17-year-old could get a job that could support the girl and baby. Those jobs are gone, and the Heritage Foundation led the charge to destroy them.

OK, rant over. The bottom line is that things are not improving. If unemployment figures are going down, it's because people have dropped out of the work force or are holding jobs that barely qualify as jobs. People are hungry and cold and desperate, regardless what the paid shills say. And it's getting worse, not better.

Red Ink by the Barrel

2011-12-13T17:52:00.000-07:00

Lee Enterprises has filed a pre-pack Chapter 11, basically to force some dissenting creditors to go along with restructuring the company's massive debt load. For months now this hasn't been a matter of "whether" but "when". Lee, frankly, is a mess, and while it is pretending to be singing "Kum-Ba-Ya" with its largest creditors now, this looks like nothing more than a game of kick the can.

Full disclosure: I used to be in newspapers, and Lee publishes a lot of them. Locally, it publishes the Provo Herald. Back in my old, home territories, it publishes the Quad City Times and the Muscatine Journal (in Iowa) and the Lincoln Journal-Star (in Nebraska). I worked for the Des Moines Register, and the Times was our chief rival in Eastern Iowa. On the other hand, when I was in high school, the Star ran a feature article on me, complete with a picture of my not-so-smiling face, on the front page. I guess that makes me neutral.

In all seriousness, you have to wonder who is driving the bus at Lee. You can trace this train wreck to 2005, when the company acquired Pulitzer, Inc. (owner of the St. Louis Post-Dispatch) for a cool $1.5 billion. Newspapers folding left and right and the industry in a general state of free-fall, and Lee decides to drop a bill and a half on acquisition. Of course it was 2005, credit was cheap and loose, and the economy could only go up, just ask The Blessed St. Greenspan. You can imagine the dollar signs in Goldman Sachs's eyes when it heard Lee was looking for financing. You can imagine the pitchers glossing over the 1.5 billion things wrong with the deal, including the complete lack of supporting cash flow and acquisition value and the requirement for unanimous creditor approval for refinancing (which is what forced the Chapter 11). Anybody who greenlighted this checked both brain and spine at the boardroom door.

Now GoldSacks and its cronies are getting a 13% piece of the action, and you can bet they won't put up with any management shenanigans. And I expect the shenanigan attempts to commence soon. Lee's plan defers the due dates on all those bonds, but the bonds are still there, ticking away, and its revenue stream is so poor it must have been handing out Swisher Sweets to celebrate the deal. Lee certainly couldn't cover Montecristo A's. On top of that, a big chunk of the debt isn't really deferred. It's currently at 10.55% (Can Mary Junck say "Junk"?), and in a year the escalator clause kicks in. There is no way Lee can cover that. I figure that in perhaps two years, the creditors will pull the plug, part Lee out, and hold fire sales for the papers that are still standing. And there will go a big chunk of what's left of this country's news media straight down the drain.

Chapter 11 Airport

2011-11-29T10:45:00.000-07:00

Well, it was just a matter of time. Every other major, U.S. airline had taken a trip through bankruptcy court in the last 10 years, and now American Airlines, via its parent AMR Corp., has gone in. AMR cites two, big causes: fuel costs and labor costs. Ignore the former; it's all about the latter. AMR will use 1113 to reject the current collective bargaining agreements, 1114 to severely curtail retirement benefits, and 29 USC 1341 to do a distress termination of the pension plans and foist them on the Pension Benefit Guaranty Corporation (i.e. we taxpayers). No word about a pre-pack plan, but you can bet there has been a bunch of negotiating going on. Watch the first-day motions to see who is pulling the levers. You can be sure it isn't the unions, who haven't even been invited to a side table.

It's easy to feel sorry for retirees losing pensions, but these tended to be real Rolls Royce models, while the rest of us muddle along with Yugos (Actually, mine is more of a skateboard.), so it isn't hard to see how companies can't keep funding them. There are two things that gripe me, though. First, it's apparently OK for a multinational corporation to walk away from obligations like these, but morally reprehensible for poor schlubs to bail on economically absurd mortgages. Sorry, that's hypocritical horse hockey. Second, AMR entered into these contracts with its eyes wide open and led by the managerial geniuses who will be running the reorganization and who are unlikely to take any kind of meaningful haircut for putting the airline in this position. If you want to talk about rewarding failure, start right there.

Agribusiness Is The Problem, Not The Solution

2011-11-27T16:23:00.000-07:00

Winterbotham Parham Teeple, one of SoCal's main BK houses, recently noted on its blog that rising grocery bills are playing havoc with family budgets. I commented that the real culprit is the decades-long romance of government and the banks with industrial agriculture at the expense of small farms. Winterbotham is trying to soft-pedal the price increases as business as usual. I'm having none of it, and you can call me a conspiracy nut-case all you want, but U.S. ag policy for over 60 years has had the uniform effect of continuously shrinking the percentage of the population that can feed itself. What does that mean? Control. As Mark Twain put it, "Show me where a man gets his corn pone, and I'll show you where he gets his opinions."

Anyway, I posted my comment a week ago, and it has yet to be let out of moderation, even though I know more about ag commodities and policies than everyone at Winterbotham combined (Not a brag. Fact.). So here it is:

"Yes, we would all like to maximize profits, but Agribusiness has had singular forms of assistance. Since WWII it has had a federal agricultural policy designed to drive people off the land, and since 1970 it has had a matching financial industry policy. We now have 90% of the population divorced from the land and wholly dependent on industrial food delivery (We have also become a net food importer, perhaps the greatest absurdity produced by our economic system.). When people tried to become less dependent, Agribusiness acquired new allies. A pliant USPTO granted patents on every strain of seed presented to it, allowing Agribusiness to send cease and desist letters to anyone with the temerity to save seeds for planting. And all producers have to comply with all regulations (regulations that Agribusiness loves to wail about but that it in fact uses to drive small “competitors” out of business), and if they don’t, the USDA, FDA, and state agricultural agencies will sweep in, destroy their operations, and even jail them, as if they were cooking meth.

In other words, Agribusiness has used government and bank assistance to create a captive market and continues to do so. So yes, there is plenty of reason to object to unrestricted price increases."

The Latest On Harrisburg

2011-11-23T14:28:00.000-07:00

Bankruptcy Judge Mary France has dismissed Harrisburg's Chapter 9 petition, ruling the city did not have the authority to file under state law. See this post for my initial comments on the filing last month. Mayor Linda Thompson and a minority of the city council have fought the filing all along. I have not seen the ruling, but apparently it was based on two grounds: 1) Act 26 that the Pennsylvania legislature passed this year bars Harrisburg from filing, and 2) the authorizing resolution was invalid because it was not presented to the city solicitor first.

We'll see how this plays out. First, I question whether Act 26 is actually constitutional, regardless of Judge France's ruling that it is. Given that it targets Harrisburg alone among all the municipalities in Pennsylvania, it has to be vulnerable to an equal protection challenge. Second, if the council can get around Act 26 and wants to refile, it can streamroll the city solicitor. The law only requires that the resolution be presented to the city solicitor, not that he approve it. "Here's this resolution we're going to pass. Don't like it? Pound sand!" Believe me, I've been to that rodeo more than once.

If the decision stands, the mayor and the council minority are going to learn you should be careful what you wish for. Once a receiver takes over, their authority is going to be reduced to the name plaques on their doors. And maybe not even that.

No Giving Thanks In Orem

2011-11-21T23:25:00.000-07:00

Nordstrom's has pulled the plug at the University Mall in Orem. Come 24 February, the mall will be missing two out of three anchor tenants (Mervyn's spun in several years ago, and Nordstrom's closure will leave only Macy's, in the old ZCMI space it got in the buy-out.) as Nordstrom's heads north to open its new store in City Creek. Orem will seriously be hating that loss of sales tax revenue, and Woodbury (the mall owner) has to be ruing the improvement money it fronted to get Nordstrom to move into that space 10 years ago. It's only half-way through the 20 years of earmarked sales taxes it was promised as reimbursement, and that payment stream just went POOF.

So why is Nordie's doing this? Because it knows where the money is. Nordstrom's has always been well above median in the market, it wants to go farther up the scale, and it doesn't think enough of the good citizens of Utah County have sufficient discretionary income to make it fly. In other words, Nordstrom's has called the yeast-growth-curve-knee in the MLM Ponzi scheme that is the Utah County economy. Utah County is saturated. There isn't enough upline/downline/sideline left for the next magic hoochie juice to cover family expenses and still leave some extra for Waterford crystal or clothes imported from anywhere other than China.

But we're so business friendly here and have such a well educated population. News flash: That's the problem. Because of what Utah is, gazillions of highly trained people flock here for jobs that don't exist. You can't swing a cat without hitting a dozen people with graduate degrees pounding the streets peddling security systems door to door because there isn't anything else to do. Add to that a rabidly pro-business legal and social environment, and you're not just in a race to the bottom of the wage barrel, you're picking up the barrel and digging a hole under it. You end up with no one being able to shop at Nordstrom's, except for the top 1%, and let's face it, there are only so many stores 25,000 people can keep open.

Of course the Chamber of Commerce is putting a big smiley-face on this, assuring everyone that Woodbury will have a new anchor in there in no time. I don't know what Kool-Aid they're drinking, and I'm not sure I want to know. What anchor retailers are looking for space like this? The Mervyn's space has been dark for three years now. Who is going to look at the demographics and decide that moving into this space is a good play? The Dollar Store?

Another Muni BK

2011-11-10T11:24:00.000-07:00

So we have another municipal bankruptcy filing, this one in Alabama. And it's a biggun, with over $5 billion in debt, sure to send some shockwaves through the bond markets (The centerpiece of this solid waste is a series of sewer bonds.). The one bright spot is that this isn't the result of anything systemic but rather of outright corruption, and that people have actually gone to prison for it (Gee, how did that ever happen?).

What I can't believe in all this is the remark by the receiver, John Young Jr., that the filing is an "utterly irresponsible act". Excuse me, but allowing the public purse to continue to be eaten away by creditors who were ratcheting up the terms of the settlement would have been utterly irresponsible. Your job, though, was to keep the creditors in line, and you failed, so if we're talking about "irresponsible"....

The remark I can believe is the one by the JPMorgoth Chase spokescritter, just not in the way she intended. I bet JPMC wanted to avoid a BK filing; in Chapter 9 its backroom maneuvering and political clout are severely curtailed (Duplicity by JPMC? I'm shocked, shocked! Just because I've had two VP-level JPMC counsel lie to my face in multi-million dollar cases....). Sorry, people, you overplayed your hand and left Jefferson County with no choice.

Ice Cream Cools Off

2011-11-04T18:33:00.000-06:00

Dippin' Dots, which makes the ice cream equivalent of little chocolate doughnuts (You just keep popping them in until you 'splode.) has filed Chapter 11. According to its filing, it has a decent shot at reorganizing, but we'll see if the filing is reality. The bigger question is, if ice cream companies are going down (And they are. Goodbye Snelgroves!), just what sort of civilization are we creating here?

BTW, it's absurd that the spell checker here thinks "doughnut" is misspelled. But then again, it thinks "blog" is misspelled.

The Way We Live Now

2011-11-03T16:42:00.000-06:00

I love this book. It should be required reading.

Do you think federal jobs are a safe bet? You might want to check with the 9,000 civilian employees the Air Force is showing the door.

Maybe high tech? Guess again. AMD, the second-largest microprocessor manufacturer, is shedding 1,400, 12% of its workforce, and its stock is still falling.

George Papandreou made a brilliant move at the G20, threatening to hold a referendum on the Greek bail-out, which would undoubtedly scuttle the proposal (Mish and I actually agree on this, so take special note.). Papandreou is already back-stroking on this, but the opposition parties may hold him to it.

In spite of 30-year mortgages falling to 4.1%, housing prices continue to sag because no one is buying because no one can. How can you buy if your job prospects consist of being a part-time greeter at Walmart? Yet Bloomberg has the temerity to blame the malaise on new regulations.

But then what do you expect from Hizzoner Michael? He just blamed the mortgage mess entirely on Congress. Have to protect Wall Street at all costs, eh Mike? Even Forbes called BS on this.

So what do people consider to be the big answer to this mess? Gold. Yes you read that right. The big, yellow clunker. I love Paul La Monica's comment about gold having "tangible value". Really, Paul? How many fillings and ear studs do you need? Trust me, children, as I've commented before, if you wake up one day wondering where you're going and what you're doing in that handbasket, you won't need gold, you'll need dirt and lead, i.e. a place to grow your spuds and a loaded weapon to defend them. Smokes and booze are far more useful for barter than gold can hope to be.

And on top of that, a growing bloc of idiots thinks returning to the gold standard is the way to go. Yeah, that makes sense. Everybody is in hock to his highest hair follicles, and the threat of severe deflation grows daily, and we're going to fix it all by hardening the currency. Reality to geniuses: We tried exactly that in the 1870s and got a quarter-century of rolling recessions. For most people it was a depression. Except for the top 1%, who made out like bandits (Ever hear of The Gilded Age?). Now stop and think about who is really pushing for a gold standard now. Sheesh, I knew you people were born at night, but I didn't know it was last night.

Ye Olde Spelinge Bea

2011-11-03T13:47:00.000-06:00

I'm a good speller (You wouldn't know it from some of my entries, but that's because I'm not a good typist.). It runs in the family. My dad is a good speller. My son is a good speller. Dad and I both rocked in spelling bees when we were in school. Today was the boy's first spelling bee, and I was reminded why, even though I'm good at them, I loathe spelling bees.

When I was in seventh grade, I won the school contest and went on to the county. Then things got serious, and we received a little blue book of words to study. I remember looking through the lists and thinking, "Who last used these words, Chaucer?" I think I've actually found some of them in my Anglo-Saxon copy of Beowulf. Seriously, though, I think spelling bee organizers pull a solid 25% of their words from diaries of their great-great-great grandmothers who spent their lives in rural, isolated places. Well, I got tripped up by one of those "words that are no longer with us" (and that wasn't in the blue book either, hah!). Now, I have always loved reading Shakespeare and such and learning the words in the old literature, but you have to draw a line. Dad and I actually got into an argument about that line in the parking lot after the spelling bee. He threw an "if you'd just study more" routine at me, and I responded, "Who gives a damn about memorizing words that haven't been used since before Noah Webster was born?" He didn't appreciate that.

The rock the boy wrecked on was that commonly used word "chickabiddy". Look it up (I sure had to.) and ask yourself what dismal corner of 19th Century Mississippi they dragged it from. There isn't enough time to learn everything there is to learn in school, and that problem gets worse every year. Learning to spell words that fell into disuse so long ago they probably never had a standard spelling isn't learning, it's busy work.

The State of Chapter 13

2011-11-03T13:10:00.002-06:00

Earlier this week I posted an update over at my LinkedIn page about managing to shove two Chapter 13 plans through confirmation over the trustee's objections and without breaking the clients' nonexistent bank accounts. That page is for business PR, so I keep it civil. Not so much here.

First, you have to understand what bankruptcy "reform" in 2005 did (Look here for my unvarnished opinion on what BAPCPA was really about.). BAPCPA shifted the presumptive chapter for consumers from 7 to 13, from liquidation to a 3-5-year repayment plan (bka release-time debtors' prison). That means that, if you are an ordinary schmoo, and you can't jump through a bunch of special and frequently shifting hoops, you have to go for Chapter 13. Which means the Chapter 13 trustee effectively dictates who gets bankruptcy protection and who doesn't.

Second, understand that, according to my sources, Chapter 13 problems are not limited to Utah. Chapter 13 trustees all over the country are slamming the door in people's faces for no good reason other than they can (Example: Why do the trustees push, and why do the courts order, the inclusion of Social Security in projected income? Just because there's a line for it on Schedule I, in spite of the express definition of "disposable income" in 1325(b)(2)? And in spite of creditors not being able to reach Social Security if the debtor were liquidated? You decide to make it unfeasible for a substantial population of elderly and disabled citizens to obtain bankruptcy protection? Aside from being, IMNSHO, an error of law, there is a term for this: jerkitude.). Why on Earth are Chapter 13 trustees more intent on wrecking debtors than Chapter 7 trustees are?

But there are peculiarities to Utah. First, the trustee routinely throws three sets of objections at a debtor: one for the 341 meeting, one after that, and another just before the confirmation hearing. How many bites at the apple does it take? Second, has anyone in that office run a business? A frightening percentage of the "objections" to business financials are just tragic. Third, why is everything a last-minute sandbagging? I know you're busy, but so am I, and I don't like wasting my time at a hearing where you're raising new issues or resurrecting issues I thought we had resolved. Or raising things that aren't before the court, just to stir the pot (Example: In a recent confirmation hearing that ended up being continued, the trustee noted to the court that I had objected to several claims. True, I had, because those creditors had not bothered to document their claims, and I was entitled to object [The rules say so.], but the trustee insinuated I was being sneaky and obstructionist. The court then proceeded to unload on me and accuse me of a bad faith filing. Well, the creditors amended their claims, and I filed a withdrawal of my objection, but to cover myself, I laid out the legal basis for the objection. I wanted to make it clear to the court that there has been a change of law and to the trustee that I was not amused, but mostly (no, really) I wanted to fire a warning shot over the bows of any creditors who were thinking of taking me to task. But in the end, not one step of that trip was necessary.).

Finally (No, not really. See below.), why does the Chapter 13 trustee mess with exemptions? Utah is an opt-out state, so we use only the state exemptions, not the federal. Some of those exemptions are based on the item, not the value. For example, your refrigerator is exempt, regardless of how much it's worth. Nevertheless, the Chapter 13 trustee insists that each exemption have a specific value. Have you ever tried to value used carpet? On top of that, if the trustee doesn't fancy your value, you're facing an objection that will have to be resolved at the confirmation hearing. Why does this matter? Because the US Supreme Court recently ruled that a debtor can lose part of an exemption by claiming less than the full value of the exempt item. I'm not interested in setting a $10,000 value on the household appliances only to have their value ultimately pegged at $15,000 and having the trustee demand an additional $5,000 be paid into the plan. I have a work-around I've devised, but I'm waiting for the trustee to object to it. Because then the fight will start.

But the thing that really bugs me is something that has bugged me about the bankruptcy court since I first walked through its doors over a quarter-century ago: It's a sealed society. We have an extensive code and extensive general and local rules. We have standardized forms, best-practices manuals, and regular training sessions. But it's all for show. In reality the bankruptcy court is a Star Chamber that functions via secret handshakes and Captain Midnight decoder rings. Case in point: I've been trying to figure out a number of the requirements the Chapter 13 trustee imposes on plans. Not in the code, not in the rules, not in the handouts. Finally stumbled across a blog the trustee established over three years ago (and hasn't updated in over three years) laying out the office's interpretation of the new model plan. Not the authorities, just the conclusions. But there it was, all laid out (No, I'm not going to give you the URL. A guy has to have some trade secrets.), everything they've decided to require in a Chapter 13 plan. All I can say is "Wow, just wow." A model of transparency.

Which is a long-winded rant of a way of saying, forget what you read on the self-help sites on the Internet. If you're planning on filing bankruptcy, especially Chapter 13, seek help from somebody who does it for a living. Because what it says in black and white isn't the way things work in the real world.

Only So Long I Can Hold My Tongue

2011-10-19T12:02:00.003-06:00

Adam Levitin posted a great piece on Credit Slips ripping on proposed "solutions" for the financial crisis (And yes, kiddies, regardless of the pablum they're shoveling your way, we're still in a crisis.). Basically, he compares these proposals to prescribing an aspirin to someone with a knife in his chest and then giving the aspirin to the attacker. First comment out of the box blames the mess on those evil, nasty borrowers. To quote the Interweb meme, "Don't know if trolling or just stupid." Probably a shill, actually. Anyway, I and a few others declared a free-fire zone. Enjoy.

They Were the First

2011-10-12T10:41:00.002-06:00

We now have a state capitol in Chapter 9 bankruptcy. Harrisburg, PA has filed for protection. I guess wealth has become less common in the Commonwealth. The city fathers took one look at revenue projections and saw they would never cover bond payments. Translation: Local economic activity is not generating enough revenue to cover local infrastructure costs. This is a severe problem. And to divert ourselves from it, we can start speculating which municipalities will be next. Cities failing puts strains on counties; counties failing puts strains on states. And then of course there are schools, utilities, transportation districts, etc. And on top of that, what happens when the Chapter 9 plans start cutting masses of employees, and the ones still employed find their pay and benefits drastically cut? Suddenly those public sinecures aren't looking so secure.

As If We Needed Any More Evidence

2011-07-12T15:39:00.002-06:00

OK, so I haven't blogged for awhile, and the following is a bit stale. Hey, I work for a living, and this isn't getting the attention it deserves.

To preface, for those of you who may think I was late to the bubble prediction bandwagon, I suggest you look here and see that I was predicting the train wreck in December 2005. Beat that, Nouriel Roubini.

We know that the overwhelming majority of opinion makers in the US are just sock puppets for the Financial Overlords. Ditto for our supposed intellectuals. They don't need to rub our noses in it. But along comes Roger Lowenstein in Bloomberg Businessweek to "explain" why there have been effectively no prosecutions resulting from the collapse. It's because, simpletons, there were no crimes committed. Demands to the contrary are just the result of our overheated, plebeian blood.

Well, Roger, here's the deal, and I'm speaking as a former prosecutor who's handled white-collar crimes, which is one more claim that you can make (Yes, I know Daddy was a Wall Street lawyer and Columbia law prof, but I have a shingle on the wall too, and my kids know that doesn't make them legal experts.): If this mess wasn't created by a tsunami of crime, we have glossed "criminal fraud" out of our legal system.

I'm no accountant, and if you want that kind of analysis, I recommend you go read Francine McKenna's column in Forbes, which is heavily linked. I'll stick with what we know of facts and law.

In 2002, the Dot Com Bomb and 9/11 had deflated the preceding bubble (Anybody remember how outraged we were over LTCM? Those were innocent times.), and investment houses and banks were sitting on cash with investors clamoring for it to go somewhere that produced a return. Fortunately, "help" was at hand: real estate.

First, create a demand pool for the money. This required bringing a pile of borrowers to the table who had no business being there. No problem. No-doc loans and "creative financing" (Read: Fake it 'til you break it.) bring everyone to the table.

Second, you need properties that "support" the loans. Again, no problem. You have everything from investment groups flipping properties internally to jack the prices to armies of in-house appraisers for whom "MAI" means "Made As Instructed."

Third, take that freshly inked paper, cut it up like paper dolls, and securitize it all over the place. Get the ratings agencies to help by declaring that poo no longer stinks.

Fourth, the piece de resistance. Cherry-pick the securitized pools and hedge. Then buy credit default swaps on both the bets and the hedges. And THEN sell the swaps upstream and downstream. AIG and the monolines will be more than happy to help.

Oh, don't forget to make sure the regulators remain lapdogs by reminding them that if they do their jobs, the house of cards will collapse, and then there will be no place for them when they leave government and want to earn some serious scratch.

And at every one of those steps, the commissions and fees run hot and heavy. And so do the fibs, the half-truths, the misrepresentations, the blind eyes, and the outright lies. Countrywide lied systemically to produce the greatest pile of toxic, residential mortgages in history. JP Morgan Chase wasn't any different on the commercial side. Chase propped itself up with a forced take-over of Washington Mutual (No, kiddies, it wasn't really WaMu that needed the propping.). Bank of America swallowed Countrywide with all the due diligence of a five-year-old dragging home a stray dog. And Goldman Sachs got caught buried shoulder-deep in the cookie jar, selling products it had created so it could bet against them. And on, and on, ad nauseam, ad absurdum.

And nothing. Few meaningful investigations, fewer prosecutions, and business goes on as usual. Except that it's right out in the open now; no one even bothers with back rooms. And it all gets ignored. So I guess you're right, Roger, in a sick way, because legally there is no crime without a conviction, and there can't be a conviction without a charge. But who are you going to blame, Roger, when Joe Main Street starts treating the rule of law with the same contempt his lords and masters demonstrate?

Koch Is Not It

2011-05-18T08:41:00.002-06:00

I'm brewing up a series of entries over the next few days, but I'll start with this:

Late last year, a group of merry pranksters issued a fake press release satirizing Koch Industries' environmental policies, using Koch's trademarks and name to make the release look like it was actually from Koch. FYI, Koch Industries is the Koch Bros., the billionaires who are funding the Tea Party and about every anti-Middle-Class piece of legislation in the country. Nobody was actually fooled into thinking the press release came from Koch, but Koch did have to spend some staff time responding to inquiries. Well, things like this aren't supposed to happen to People Who Matter, like the Koch Bros., so they decided to get to the bottom of it. They sued Bluehost and Fast Domain, the internet service providers (ISPs) the pranksters used for disseminating the release, here in Utah to get the names of the pranksters (Bluehost is based here.), alleging the pranksters had committed IP fraud and infringement.

Background: With any type of intellectual property, there are certain ways you can use it without paying for it. This is called "fair use". Go beyond fair use without paying, and you're infringing. One group of fair uses are informative uses. A reporter might use a company logo in a news story, a reviewer might quote from a book, and a researcher might cite to an earlier work, and none would be infringing the IP they are using. Another group of fair uses are political uses. For example, company names and logos are frequently used in strikes and boycotts, but the users are engaged in political speech and are Constitutionally protected.

An example, to give you an idea of how these things normally work. A couple of years ago, the outdoor clothing manufacturer North Face learned that it was being lampooned by a couple of people selling clothing under the name South Butt. South Butt was not only parodying North Face's name but also its logo and marketing slogan. And South Butt was making money selling recreational clothing, in direct competition with North Face. North Face sued, received a lot of bad publicity for picking on the little guy, and ultimately settled the case. The terms are secret, but South Butt's operations have apparently been limited in some way to minimize their impact on North Face. Commercial use, infringement, resolution. That's the norm.

Then there's the Koch lawsuit. The Koch Bros. targeted the ISPs so they could find out whom they really wanted to attack. Both ISPs caved the day after being served with subpoenas and turned over the names. One of the ISPs went so far as to justify its actions by saying it didn't want to harbor felons (Excuse me, but what happened to presumption of innocence? And has the U.S. become do corporate-owned that the Koch Bros. now have criminal charging authority? Memo to me: Never use these clown school ISPs for anything.).

The pranksters immediately ran into court to protect themselves by quashing the subpoenas. Koch's response, courtesy Parsons Behle & Latimer, would be laughable if it weren't so insidious and backed by so much money and political clout. It boils down to, "The pranksters' political speech isn't Constitutionally protected because it infringes on our IP." Which of course is exactly backward, because the Constitution trumps all other laws in spite of the recent efforts of Our Glorious SCOTUS (As an aside, during my first year in law school, Vic Filippini, the third-year in charge of my legal writing class, ripped me to pieces for making a backward argument like this, even though the brief he'd asked for was factually and legally impossible otherwise. If I'd known what I was doing, I'd have told him I was preparing for a career with a major, regional firm. Instead, I attempted to "correct" my deficiencies. Now he's a partner at Holland & Knight, and I get paid in muskrat pelts and sacks of feed. Go figure.).

Anyway, Judge Dale Kimball issued his ruling, and it's a smackdown of Koch. Basically says, "What part of 'protected political speech' don't you understand?" So what's the result? First, Koch Bros. can't use the info they got from the ISPs (Yeah, right.). Second, the ISPs had better lawyer up after rolling over and coughing up confidential information so readily. Third, Judge Kimball had better start watching out for a well-funded smear campaign, including Andrew Breitbart fake videos of him soliciting bribes. Finally, expect Koch Bros. to start a full court press on Congress to amend the IP laws and cut off all this "judicial activism." Because People Who Matter shouldn't have their business interfered with by the Constitutional rights of the rest of us.

Milestone

2011-04-14T17:33:00.001-06:00

My Subaru rolled over 300,000 miles today. Way to go, little car!

Space, the Final Frontier. Nevermind.

2011-04-12T18:24:00.001-06:00

In addition to this being the 50th anniversary of Yuri Gagarin being the first man in space, it's the 30th anniversary of the first Shuttle launch. Back then we could afford a space program and believed it should belong to all citizens. Now we're told we can't afford it and that it's all good if it's the private toy of the rich and of multinational corporations. How far we have fallen.

Train Wreck Reform

2011-03-30T09:11:00.004-06:00

Once again couldn't get this to post at Credit Slips, so here it is:

BAPCPA was a deliberate shot, below the waterline, at consumers and small businesses, and it was a highly successful shot, exacerbated by the wildly moving targets that are the courts' and trustees' expectations. Pre-filing analysis for either a 7 or a 13 has become rocket science, except that with rocket science you're at least dealing with, you know, science, as opposed to the whimsy of the gods. No matter what you're dealing with (qualifying a consumer for 7, reformatting and producing the accounting for a business 7, or dealing with a 13 trustee who has no concept of business operations or irregular paychecks), it's a labor-intensive mess.

Then there is personal Chapter 11, a saddle on a sow necessitated by the horse-and-buggy jurisdictional limits in 13 and exacerbated by the brain-dead semi-incorporation of 13 standards into 11 (but what can you expect from The Mind of Grassley). In all honesty, everyone is just making this up as they go, and I shall be long dead before any semblance of order is imposed. Pile onto this that the disparity of treatment between big and little keeps getting worse. Big 11s get away with pre-petition roll-ups and "reorganized liquidations" (*cough* Blockbuster *cough*) that would get an individual or small business bounced for fraud.

Finally, creditors are increasingly using the "reform" to take a dog-in-the-manger approach. This list is long, but these are a few notable locals: Bank of America/Chase (Why is it that every other mortgage has these two worthies in an owner-servicer pas de deux in which they torpedo short sales, proceed with foreclosure at a lower price, and then proceed with a claim for the full deficiency?), RC Willey (I shall never darken its door again. Dear Mr. Buffett, if you made your pile buying into companies with these tactics, you aren't the Sage of Omaha, you're the Don Corleone of Omaha.), America First Credit Union (With its reaffirmation policies, it needs to rename itself "America Last".), Celtic Bank (Sorry, it isn't my clients' fault your troubled assets ratio is back up to 90, six times the national median. It's a you problem.).

We're creating a bankruptcy system people either can't get into or can't stay in, and the system outside bankruptcy is reverting to debtors' prisons. Is it just me, or is there something wrong with this picture?

Triangle Shirtwaist Fire

2011-03-25T14:51:00.003-06:00

Today is the Centennial of the Triangle Shirtwaist Fire. Right about now, 100 years ago, a fire broke out in the Triangle Shirtwaist Factory. Due to unsafe conditions typical in sweatshops of the time, in 18 minutes 146 people were dead. For more information, go here.

If anyone wonders why I have been sickened for years by the free trade mantra and its cheerleaders like Thomas Friedman, there it is. Because we had the basic decency to acknowledge that disasters like that should not happen, we implemented building, fire, and health codes and worker safety regulations. The free traders have put our businesses, our industry, our people, and our nation at the mercy of countries that have no such decency. We are competing with imports from countries that are willing to have any number and variety of disasters so long as they can produce cheap goods that undersell and undermine our domestic economy.

There is a technical, legal term for free trade arguments that produce such results: crap.

Boise County Files Chapter 9

2011-03-06T15:46:00.003-07:00

As reported by the Idaho Statesman, Boise County, northeast of Boise up Highway 21 through Idaho City and Lowman to the pass over to the Stanley Basin, has filed for Chapter 9, municipal bankruptcy. It seems they screwed up a land use decision, the developer sued them and won a multi-million dollar judgment, and the county come anywhere close to paying.

There are several lessons to be learned from this. First, there are a lot of stupid people on the Interweb Pipes. The Statesman story was apparently linked to a bunch of right-wing websites (Drudge, Free Republic, Town Hall, etc.), and the knee-jerk comments started pouring in from folks who apparently hadn't even bothered to read the article (See comments by Ron Reale, Mark Babb, Christopher K, Teddy Kennedy's SEARCH+RESCUE, Joe Astroturf, Jack White, and golden_elixir for the most egregious examples.), screaming about how liberal Boise deserves this (First, Boise is not liberal, except in Idaho. Second, this is Boise County, not Boise City. Get a map, people.) and how this county was bankrupted by public unions (The Koch Brothers really have their meme rolling, here. You might want to check just how unionized Boise County is. Then check whether any union members caused the loss of the lawsuit.). With "civil" discourse at such a level, it's no wonder nothing is getting accomplished in this country.

Second, municipal bankruptcy is a world of its own. One of the commenters (johnnydoughey) asks a decent question: He thought you couldn't get discharged for liability for an illegal act. Well, there are illegal acts (criminal) and illegal acts (civil penalty). Municipalities can't be convicted of the former and can be excused for more of the latter than private people can. The developer's attorneys have already promised a 921(c) motion for dismissal for a bad faith filing, but I doubt the court will grant this (I wonder if the commenters who are currently complaining about the federal court entering the judgment will also complain about the federal bankruptcy court providing protection from that judgment. They're both exercises of federal authority, after all.). It remains to be seen if the county will come up with a viable plan, though.

Third, if you're going to be in local government, please learn how to make land use decisions. At issue here was a teen treatment facility that the county put so many conditions on, it was economically unfeasible. The conditions themselves, frankly, weren't the problem. Most of the conditions had to do with assuring adequate infrastructure back there in the hills. The problem was that the county had already approved other, larger developments back in those hills that required most of the same infrastructure but had applied no such conditions. In other words, the county was trying to charge all the infrastructure costs of several developments to one development, a constitutional no-no, and that was also discrimination against a special needs facility, a Fair Housing Act no-no. On top of that, county staff and elected officials were apparently advising the opponents on how to build a record to block the development, also a constitutional and FHA no-no. The developer filed suit for damages and nailed the county good.

Folks, if the city slickers are coming to your corner of Hay Seed World to make a quick flip on your cheap land, lawyer up and do what your lawyers say. I guarantee the developer has and is mapping out every move you can make. The Boise County commissioners didn't listen when the Boise County attorney said they were screwing up. The Boise County commissioners didn't listen when the attorneys for the Idaho Counties Risk Management Program (the counties' insurance pool) said they were screwing up and (SURPRISE!) the Program has denied coverage. Locally, Draper didn't lawyer up when it was reviewing SunCrest, and it will be dealing with it forever. Bluffdale didn't lawyer up on the one-acre zoning lawsuit and ended up losing an FHA case (It should consider itself lucky the developer wanted the development and not damages, or else we would have had a Chapter 9 here in South Valley.). Whether you're in private business or public office, it's never a good idea to be your own legal counsel.

I Really Don't Care What Paul Jackson Says

2011-03-06T14:06:00.003-07:00

A new article over at Credit Slips comments on Paul Jackson's chest-thumpings over an Alabama trial court decision on a chain of title issue. I'll let you read about it over there. I'm posting here because I couldn't get my links to work over there. Here it is, with links:

Jackson is a long way from an objective observer. In law practice, he represented banks and servicing shops. He thinks that second mortgages are the chief problem with short sales, not the endless feedback loops within the first position lender and its servicers. He's a leading proponent of the theory that strategic defaulters are going off on shopping sprees (No comment on whether such opinions are why he remains ABD in the consumer behavior doctoral program at USC.). If you have Yves Smith and everybody else, including Janet Tavakoli on one side and Paul Jackson on the other, I'm backing Yves.

On the substantive side, I think you're exactly right. I practice in two non-judicial foreclosure states, and once that sale closes, you don't get it unwound. The debtor came to the game too late. In the cases where the debtor gets to court before the sale, the banks are losing.

Bankruptcy Exemptions

2011-03-02T06:48:00.003-07:00

OK, enough ranting and back to some nuts and bolts.

Last June the SCOTUS a decision in Schwab vs. Reilly concerning when a party could challenge a claimed exemption. Debtor had claimed an exemption in some personal property and set the value for it at exactly the exemption amount. It turned out the property was worth more than that, and the trustee wanted to liquidate the property and distribute the difference. Problem was that the trustee didn't object by Rule 4003's 30-day deadline. The majority ruled, "Sorry, Debtor, notice matters, you gave no notice there was anything to be objected to, so you only protected the property up to the value you listed, and the trustee can pursue the overage." The dissent wrote, "30 days means 30 days. Period. The property should be fully exempt."

This case arose because Debtor was in a state that had not opted out of the Federal exemptions and so had a "floating exemption" that she could split among different pieces of property. That's why she low-balled the value of the property at issue; she would have more of the exemption left over for other property. Some states have that floating exemption too. For those of us in opt-out states that don't provide a float, the opinion was not very exciting. Here in Utah, you get a $2,500 exemption for your car. You list its value as $2,000 but it turns out to be $3,000, you get the same exemption.

But what about exemptions that don't have set limits? Suppose you valued the exempt property at X, but it turns out to be worth twice that. Can the trustee come in at any point and say, "You only exempted the claim amount, and I'm taking the rest"? I don't know. I do know that in Section III of its opinion, the SCOTUS reaffirmed Taylor, which held that listing an exemption value as "unknown" gives notice of a valuation issue and sets the 30-day clock running (Yes, Taylor concerned an exemption with a fixed limit, but to me, the issue is notice, and "unknown" is a red flag.). I've always used "unknown" in the schedules when we didn't know a value. Some people get bent out of shape by that, but until they amend the Code or the Rules, I'm going to keep on using it, and now I have an extra reason. Setting a value where I don't have one is nothing but a trap for the debtor.

On a side note, the alignment of justices in Schwab was perhaps more interesting than the opinion. The majority was written by Thomas (?) and joined by Scalia, Alito, Kennedy, Sotomayor (!), and Stevens (!!). The dissent was written by Ginsburg and joined by Breyer (!) and Roberts (!!!!!!!!!!!!!). Go figure.

Small Business Is In Great Shape

2011-02-20T11:15:00.005-07:00

Just ask the Wall Street Journal and the Chamber of Commerce. According to an article this week in the Journal, business bankruptcies are down, so things must be improving for small businesses. The Chamber of Commerce chimes in with this line, with the C of C VP for small business offering the usual pap about small businesses being better positioned to recover than the big boys because they are more nimble.

First, let me say that anyone who uses the word "nimble" in a business context should be punched in the face, preferably by someone wearing a chain mail glove. It is a noxious, marketing buzzword from Dot Com Daze, when investors deliberately checked their brains at the door so they could avoid noticing the hucksters were making their sales pitch with a shovel. I was there, I remember. There was a poster that consisted of a picture of a blow dryer, an arrow pointing at the ON switch, and the caption, "Press here for marketing presentation." Unless you're talking about cutting horses and herding dogs, there is no place for "nimble."

The Journal and the C of C can allege all they want that the bankruptcy drop shows a small business recovery. I would submit it shows something else: Small businesses are finding some financing. Oh, not enough to make a difference. Not enough to restructure, right the ship, and set a new course. No, money like that is reserved for the big boys. The C of C conveniently ignores that, if you own the game, you don't need "nimble." If a small business owner tries to raise meaningful capital, he inevitably violates a securities law, and the federal and state regulators swoop down, shut him down, take everything, and still make him do the perp walk. That's what they spend 99% of their time doing. Meanwhile, the big boys can raise billions through outright fraud, squander it through more outright fraud, and get no more than a slap on the wrist (I'll blog about the Friday night dismissal of all charges against Angelo Mozilo later.). So no, folks, I do not believe prosperity is just around the corner in small business world. Quite the contrary.

What I do see is small businesses getting just enough financing or payment deferrals to play kick-the-can. The business owners who are coming to me are no longer talking about recovering, turning things around, or riding out the downturn. They're talking about "surviving until." Until the last kid graduates next year so they can permanently downsize. Until they qualify for Medicare and Social Security in two or three years. Until the paperwork on their visas goes through and they can dump what's left of their lives and move away (Yes, it's gotten to that point.). They're at the ends of their tethers, and they're hoping to kick that can far enough down the road to salvage something, for their kids if not for themselves.

They know bankruptcy can't help them. Another inconvenient truth the C of C isn't letting on is that Lloyd Blankfein doesn't have to personally guarantee GoldSacks' loans; small business owners have to personally guarantee everything. It doesn't do any good to put the business in bankruptcy; the creditors will go after them personally. If they file personally, the business is cooked anyway, and it's over. It's hard to be "nimble" when the bank has sunk your feet in a tub of concrete.

So they try to stretch it out. Until. That's the state of the American Dream.

What Passes for Business Reporting in Utah

2011-01-23T09:30:00.000-07:00

If you want business news in Utah, don't look for anything that matters from any of the local, mainstream media. The bulk of the "business reporting" here is nothing more than company press releases with no editing or additions. An article on the City Creek Center in this morning's Trib is a prime example. Taubman Centers, Inc., is developing and managing City Creek, and it has issued a press release about bringing Linda Wardell to town as general manager. The article is nothing but PR gush, waxing rhapsodic about the big plans for City Creek and touting Wardell's experience as general manager of The Pier Shops at Caesar's in Atlantic City. And the Trib swallowed it and published it whole.

The Trib could not have done any research for this article. A basic Google search would have shown that, when Taubman launched The Pier in 2006 (a major overhaul of an existing mall on the site of the old Million Dollar Pier), it planned to install up-scale shops and restaurants anchored to a big, tourist draw (Caesar's at Atlantic City). In other words, the same plan it intends to use here (Granted, Caesar's and Temple Square are different draws, but they are still big, single-anchor draws.). A little research also would have shown that last year Taubman and Wardell failed at The Pier; Taubman strategically defaulted on a $135 million note and turned the keys over to Bank of America (See here and here.).

That's a real nice record of success coming to town. And the Trib missed every bit of it. Way to keep your readers informed, guys.

The National Football League

2010-12-19T12:03:00.003-07:00

OK, time for a big, NFL prognostication.
NFC East: Eagles and Giants are neck and neck, and guess who collide at New Meadowlands today. Even if the Giants win, they are by no means a lock because they have to go on the road against a desperate Green Bay and the Dead er Redskins. If the Eagles win, it's game over, because they are home for The Team Formerly Known as the Vikings but that now Wants Brett Favre's Corpse as its Starting QB before closing at home with Jerry Jones's Rolling Train Wreck.
NFC North: Da Bears have a one game lead on the Pack and are about to expand it. Da Bears are technically on the road against The Team Formerly Known as the Vikings but that now Wants Brett Favre's Corpse as its Starting QB, but they're playing it in Gopherville because apparently the engineers who designed the Deflate-O-Dome didn't get the memo that there's this thing called Winter in Minnesota, and that environment will feel about like Soldier Field. The Pack, on the other hand, will be the latest to be assimilated by the Foxborough Borg. That puts Da Bears up two games with two games left and could well push the Pack completely out of the playoffs (at which point the drainfield known as the NFC West should have to give up its slot).
NFC South: Looking for entertainment, here it is. I have to give the nod to the Falcons, though, even though they have the big showdown with the Saints next week. First, that game is at Atlanta. Second, the Falcons face Miss McGillicuddy's Girls' School, Seattle Campus, this week before closing with Miss McGillicuddy's Girls' School, Carolina Campus, whereas the Saints are facing that brutal Ravens defense this week.
NFC West: Does anyone actually care? The Shams and Seaturkeys are tied for first, and both have losing records. If you wanted to fix this division, you'd have to call Roto-Rooter. The Seaturkeys management's biggest move was bringing Sneaky Pete north out of El Lay one step ahead of the law. I think the NFL is trying to find a way to sell this division to the CFL for a used hockey puck.

AFC East: Patriots. Patriots. And just for a change, Patriots. The J-E-T-S get the leftovers.
AFC North: Who wrote this schedule? Steelers and Ravens are one game apart and don't face each other in the stretch. Steelers are likely to keep that one game lead, though.
AFC South: This may be decided today, as the Jags and the Colts are battling in Indy as I type. Advantage, Manning's Machine, although the Colts still have to go through Davis's Dystopia next week, while the Jags face no such challenges.
AFC West: Advantage, Super Chargers. The Chiefs have yet to show me they care enough to bring it when it matters. The Chargers will win out, which is more than I expect from the Chiefs, even though they get the Alcatraz Alumni at home.

That's Just Crazy Talk

2010-10-22T18:58:00.004-06:00

Another topic Mary, Marci, and I discussed at lunch was how loony the rhetoric is getting in the foreclosure mess, from all sides.

First, an example from the lender side. I realize that the Wall Street Journal is little more Rupert Murdoch's gift of an in-house organ for the banks and the brokerages, but even by that low standard, Robbie Whelan's column yesterday is a high in low. He basically blames the whole fiasco on lawyers who dare to defend homeowners and demand that banks actually produce evidence to support their claims before they take someone's house away. Even by Wall Street standards, such a claim takes a lot of chutzpah, since the claimant has to ignore all the lender fraud we're finding shot through the system. This claim might actually surpass the lie the banks originally spun to us (A lie that our wholly owned Treasury Department and regulatory agencies continue to treat as reality.) that the mess was the result of those nasty, greedy borrowers and that banks were just victims (sniff, sob, sad-puppy-dog-eyes). I think the new shovel-load surpasses the old simply because the banksters are now so desperate they're trying to blame the one, remaining profession capable of punching them square in the mouth: we eminently killable lawyers. That's desperation to the point of madness.

As an aside, the "blame it on the borrower" line has recently had another hole blown in it, hopefully below the water line. Professors Adam Levitin or Georgetown and Susan Wachter of Penn recently published a paper showing that the credit bubble was largely generated by excessive supply of capital, with the demand being ginned up by ruthless marketing to provide a place to dump the supply (and generate lots of commissions and fees).

The borrower side has its own dubious tales, but at least someone who's about to be thrown into the street has an excuse for desperation verging on madness. Nevertheless, I consider it better to plan from within reality, so here goes.

Perhaps the most popular Kool-Aid tale on the borrower side is that this mess is so big that mortgages will be canceled and people will keep their houses for free. There are a lot of scam artists, some of them lawyers, encouraging this belief. I'm here to discourage it. With extreme prejudice. The mere fact that your lender securitized your loan no more invalidates your note and mortgage than a commercial landlord's pledging a rent stream as collateral for a loan invalidates the lease. Sorry. The mere fact that those securitization parties hedged their positions with credit default swaps that were train wrecks from the start has no effect on the validity of your loan either. Sorry again. And the mere fact MERS can't produce your note doesn't mean there isn't somebody out there who actually holds it and who will one day come knocking on your door. Sorry a third time. And what I tell you three times....

To sum up, lenders can't blame borrowers for their own mistakes, and borrowers can't ignore payments and expect to keep collateral. There's a new Harry Potter movie coming out, but the magic wands don't work on this side of the screen.

Sex for Sale

2010-10-21T22:56:00.002-06:00

Well, I figured if that headline didn't get your attention....

Anyway, back in 2006 the owner of Match.com, Gary Kremen, held the rights to the domain "Sex.com" and decided to sell those rights. Some investors formed Escom, LLC ("S" com, too clever) to buy those rights for a cool $12 million. Apparently the investors used all their creativity on the company name, because they then managed to go broke. In the sex business! Half the Internet is sex, and they can't monetize Sex.com. Wow. They defaulted for a not-so-cool $10 million, and creditors pushed them into Chapter 11 last year.

Now Escom is seeking court approval of the sale of the domain to some off-shore consortium by the name of Clover Holdings, Ltd. (Which means Escom is throwing in the towel and is opting for a "liquidation plan." Man I love how flexible Chapter 11 can be.). Clover is paying $13 million, a $1 million mark-up in a BK sale in spite of the teeny-tiny economic downturn we've had in the interim. Maybe Internet pr0n is the last bull market standing.

Teamwork is not Magic

2010-09-12T19:34:00.003-06:00

To paraphrase George Patton, "A business is a team."

Is your business a team? On a football team, for example, everyone knows the overall goals: score and keep the other team from scoring. Everybody knows his job description and and how it fits into each play: block that guy, run that pass route, cover that zone. And they practice so they know what their own jobs are, and how they fit with everyone else's, and how everyone else does his job.

Too often when I'm advising businesses, and I ask them where their job descriptions are, I either get a blank look or they snort and say, "We don't need no stinkin' job descriptions; we just tell people to do whatever needs to be done." Ahem. If you don't know what a job's supposed to do, how do you know what skill set to hire for it? How do you know you even need the job in your business? How can you tell if the employee is doing his job? How does the employee know he's doing a good job, or even what he's supposed to be doing beyond the file currently on his desk? This is an abdication of management responsibility. It's non-planning. It's ad hoc reaction and crisis hopping. It's a recipe for failure. If you think Bill Belichick runs the Patriots this way, you need to think again.

Let's suppose you have the job descriptions and you use them to get people people into place and let them know what they're supposed to do. Do you ever give teams projects so they can get used to working together, see how other employees operate? If you were running a Formula One team, would you just throw cars on the track without testing whether the parts worked together? I didn't think so.

Last Thursday, I saw that problem show up, and at a pretty high level. By the end of last season, the New Orleans Saints and the Minnesota Vikings were perhaps the two best teams in the NFL, certainly two of the top three. Even so, they had some weaknesses they needed to work on in the off-season. Thursday night showed the results of the off-season work. As anyone who follows the NFL knows, Brett Favre (starting quarterback for the Vikings) doesn't like pre-season practice. The last two years, he has shown up dramatically late and simply started playing. People say, "Well, Favre doesn't need the practice." Favre might not, but his teammates do. Pass routes and blocking assignments are all about timing. To work out the timing, you need the actual players there, not the substitutes. The Saints showed up last Thursday with new pass routes and blocking assignments that covered last season's weaknesses. They had had their quarterback, Drew Brees, available throughout the pre-season to help work out the timing on these new schemes. It showed. The Vikings had not had their quarterback available to work out new schemes. It showed. Guess who won?

When that big contract comes through the door, you can't expect your employees to magically come together like a well-oiled machine and deliver the order if they've never done it.

MLB BK

2010-05-25T11:53:00.002-06:00

The Texas Rangers have now become the fourth Major League Baseball team to file bankruptcy. The old Seattle Pilots filed back in 1969 before skipping out to Milwaukee and becoming the Brewers. The Orioles followed their owner into bankruptcy in 1993. Last October the Cubs followed the Tribune Company into Chapter 11 to facilitate a clean sale of the franchise. And now the Rangers have followed suit, to force a sale of the franchise past a recalcitrant creditor. Thomas Hicks, the main man in the Rangers ownership group, is reportedly also trying to sell his half interest in the Liverpool Football Club, perhaps the crown jewel of the English Premier League. In my not so humble opinion, if Hicks can't make money off the Liverpool club, it's probably best that he gets out of sports ownership.

Which is not to say that making money from sports ownership is an automatic. Far from it. Of the four major, professional leagues in the US, only the NFL has a business model that a reasonable likelihood of returns to owners (Although we'll see how much the recent Supreme Court decision bollockses this.). In the NBA, NHL, and MLB, unless you're one of the elite franchises, you have issues; non-elite franchises bleed cash and are nothing but rich men's hobbies.

Looking at this, I can't help but conclude that, unless MLB fixes its business model, we can expect more filings. There's only so long you can run your business as a hobby and keep the lights on.

Professional Civility?

2010-05-13T08:18:00.000-06:00

An article on the ABA website this morning left me shaking my head about my remaining years in this profession. Sarah Allen wanted to go to law school. Let's set aside the wisdom of that in the face of this economy; she wanted to go. As with most people, she didn't have the money to pay for it and was worried about the debt she'd end up with. She decided to solicit donations, not just for herself but to set up a general scholarship fund.

The response was predictable: The legal message boards lit up with the usual anonymous, infantile, Gen X vitriol that seems to make up half of Internet traffic. Nasty stuff. And so she's shut the whole thing down and is reconsidering going into law.

But the really disturbing thing has been the responses to her withdrawal. No comments about her soon-to-be "colleagues" calling her ugly and saying she should raise money by becoming a prostitute. No, everyone is saying she needs to have a thicker skin to be in law. Anyone else apprehensive about what these guardians of justice are going to be like in court or around the negotiation table when there is actually something on the line?

We've made a lot of noise for a number of years about improving civility in the profession. It isn't sinking in, and the shark tank is getting more savage by the day. And unfortunately, this is the behavior everyone notices. It should be small wonder that the public views us, not as guardians of justice, but as mercenaries who operate under the motto, "Lawyers: Bringin' the Hate Since the Dawn of Time."

Of Gold Sacks and Garbage

2010-04-22T06:09:00.004-06:00

So Goldman Sachs (Gold Sacks to those of us who have watched its operations with ever-increasing horror) is finally getting spanked by the SEC. GS created and marketed a junk-stuffed synthetic CDO at the request of and with the advice of hedge funder John Paulson. No legal problem there. GS disclosed to the CDO buyers that Paulson was investing in the CDO. No legal problem there. Except that GS left out these teeny-tiny details: Paulson was betting against the CDO, he had picked the CDO content so he could bet against it, and GS sold him his bet. Oops. Hence the SEC action.

What happens now? That depends to a great extent on GS. Remember that GS is a publicly traded company, so it is required to make certain disclosures, and its disclosures (required or not) are heavily regulated. And for the last week, GS has been digging itself deeper with every disclosure. GS apparently received a Wells notice (the tap on the shoulder the SEC gives a company before it files an enforcement action), and the general counsel determined that wasn't a material event requiring disclosure (Translation: We insiders know the stock is about to tank, and we want an opportunity to dump our shares before the public finds out. That's called insider trading kids. I wish I made his salary for giving that kind of advice.). Then GS issued a statement claiming the SEC complaint had no basis in law or fact, a statement that will be classified as a material misstatement in a disclosure should there prove to actually be a basis to the complaint (and it will so prove). And GS has kept swinging from there. The stupid, it burns.

GS could start getting smart and try to resolve this thing, which everyone expects it to do. The question there is whether the SEC is ready to deal or if it wants a pound of flesh and doesn't care about Portia's collateral damage arguments. GS may find itself in a box and try to get out using the nuclear option of showing the SEC just how deep the rabbit hole goes, disclosing other deals and other players. And then the fun will spread, because the markets will not be able to ignore a mess like that the way they've ignored economic reality the last year.

Of course there's a "Happy Happy Joy Joy" crowd that thinks nothing will come of this, it's just political, GS didn't do anything wrong. Fareed Zakaria, CNN's alleged financial genius talking head, says this morning that the SEC case is weak because it's based on the CDO going bad, which just happens and isn't illegal. Excuse me Fareed, but you're exactly wrong. The complaint is based on material nondisclosure, and you just showed the world you've been drinking deeply from Alan Greenspan's "No One Could Have Known" Kool-Aid jug. That sound you hear is whatever respect I had for Zakaria running over the hill with its hair on fire.

So what's next? Well, the markets are going to have to stop their exuberant climb, which was based on nothing anyway. And the Too Big To Fails will find that failure is an option because their revenue is based on destructive practices that need terminated. These changes are necessary if our economy is to survive, and they will be painful. Just not so much to those of us who are mere mortals and do not live in such rarefied air. Let's face it, how many of us have seen any return from the market run-up this last year? How many of us get financing from the likes of GS? Not that many. Jobs are scarce and shaky. Our customers are scared and aren't buying. The little banks that finance us and our customers are still failing at a record pace (and the Bigs are taking the rake, so any clampdown on them is a plus for us), and financing will only get tighter as an even bigger tsunami of ARMs resets over the next two years (which will also result in more foreclosures and more real estate deflation). We're in a mess that will take years to sort out, and what comes out the end will be a completely different animal than what went in.

Just do yourselves a favor. Introduce yourselves to your neighbors and local businesses. They're the people you're going to be depending on for the next several years.

Dear WSJ: Missing a Step?

2010-01-13T09:34:00.001-07:00

The Wall Street Journal came out with this article this morning on Bank of America's successes from its real estate investments. Note that the article nowhere mentions the SEC's expanding investigation of BofA (The article also refers to Deutsche Bank's revenues without mentioning its exposure to Dubai's unfolding defaults, but that would be asking for just too much, wouldn't it.). You think that cooking books and pumping offerings might have some effect on posted earnings? Apparently the Journal doesn't; BofA's revenues are just from great management. So, do you think the Journal is an information source, or just a cheerleader?

How 'Bout That Recovery

2010-01-11T16:58:00.003-07:00

I'm not one of those people trying to gain fame and fortune from constantly preaching doom and gloom. I wish we were pulling out of The Great Recession, and I believe that the stimulus is a good idea and that we need more (Regardless of the big headline this morning in which AP trumpeted that its analysis shows the stimulus hasn't done anything. An analysis AP has yet to release, giving us only selected quotes from the economists AP selected to review the analysis. What's with that?). That said, I'm not seeing evidence that we're pulling out or that we will any time soon.

Today's case in point: Kiddie Kandids, the ubiquitous mall store for children's photos. Not so ubiquitous now. Employees got word last night that the stores weren't opening this morning and the company is diving into Chapter 7. The company has set up a blog to provide updates, but all it currently amounts to is a press release, and it doesn't take feedback.

Another hole in the mall. Actually, a couple hundred malls. More dark retail space, more jobs lost, more bad loans, more of less. The mere fact that a few thousand people are making a mint on Wall Street doesn't mean this economy has leaped from its sick bed and entered the decathlon. Regardless what the pundits are saying, most people are in pain, and if the pain is reducing, it's only because people are going numb.

You Have to Call Things What They Are

2010-01-07T21:24:00.004-07:00

I try to be a decent person, at least as far as my profession allows me (Don't be fooled by distraction noise from bar associations about "civility guidelines." That has no bearing on how Biglaw attorneys will treat mere mortal laity and even less bearing on how they treat lesser attorneys such as Yours Truly.), but ultimately things should be called what they are. The economic commentary site www.marketoracle.co.uk is a sack of Randonazi and Deep Libertarian nutbars, and as is SOP with folks of such persuasion, they are mind-numbingly hypocritical, espousing free speech while crushing it at every turn. I have posted several comments taking issue with some of their more absurd, tin-foil beanie commentators (cough, Gary North, cough, Nadeem Walayat, cough), often agreeing with another commentator on the site (e.g. my comment on Walayat's posting on Iceland's rejection of the Icesave agreement, in which I agreed with Mike Shedlock's posting, which was 180 degrees from Walayat's), and none of them have been approved. As in NONE. Nada. Zip. Gar nichts.

Well I'm sorry, but that's just crap. And so is Market Orifice.

Dubai: Lead Domino of the Next Round?

2009-11-27T11:18:00.004-07:00

Last week, just in time for the inevitable information lockdown created by the Eid holiday, the United Arab Emirates requested that creditors of Dubai World, the state-owned investment company that essentially manages the UAE's investments and development projects, delay repayment of approximately $60 billion in debt coming due next month. This comes after Sheikh Mohammed sacked, among many others, Dr. Omar bin Sulaiman from all his posts last Saturday and named Ahmed al-Tayer as the new governor of the Dubai International Financial Centre, signaling further retrenchment by the al-Maktoums by purging the Ivy League New Guard and replacing it with old, family allies. This also comes after a $5 billion bond issue that had been represented as ear-marked for next month's debt payments but that is now obviously going to something the UAE considers more pressing, but what that something is remains a mystery.

But it doesn't stop there. The bond prices of course tanked, and the spread on insuring Dubai debt shot past Icelandic levels as the threat of sovereign default became a real player at the table. Then there is the effect on the $123 billion in debt held by foreign banks. $50 billion is held by UK banks, notably HSBC, Standard Chartered, Barclays, and RBS, but there is plenty to go around. BNP Paribas holds about $1.7 billion, Citigroup $1.9 billion, and Goldman Sachs a mere $600 million. Any bets on how fast this ends up on the books of US and UK taxpayers?

And this morning I read something really disturbing. It's an open question how much Dubai's problems will spread throughout the Gulf. The spreads for Bahrain, Abu Dhabi, and Qatar have jumped appreciably. But when asked about the growing cost of finance in the Gulf, a spokesman for Munich Re said, "As for whether the cost of insuring debt in the Gulf will soar it is too early to judge the situation."

Wait a minute, isn't it your job to judge these situations? And if the reinsurers aren't making these "judgments," what exactly is the current market in hedging instruments based on other than balloon juice? Two years into this train wreck, and we haven't learned a thing.

Capmark Craps Out

2009-10-25T18:38:00.002-06:00

Capmark Financial Group, formerly GMAC's commercial real estate finance arm spun off to a consortium of KKR, Goldman Sachs Capital Partners, and Five Mile Capital Partners three years ago for a cool $2.1 billion, has filed Chapter 11 bankruptcy in Delaware. Word is that KKR had all ready written off its investment in toto. Gee, someone knows how to mark to market after all. A Warren Buffett entity had an offer on the table to buy every asset that mattered for $490 million (Over 75% hair cut! Love them green shoots!), but the bankruptcy will require more of the deal to be cash, so we'll see if The Sage walks away. If he does, the only "reorganization" coming out of this Chapter 11 will be moving the chairs around at the auction of everything that can be characterized as an asset.

Note that Capmark Bank, Capmark's wholly-owned industrial bank based here in Utah to take advantage of our nonexistent banking laws, is not part of this bankruptcy. Now before all you jingos start going, "Hoowah Utah!" be aware that earlier this month the FDIC forced Capmark and Capmark Bank into a series of cease and desist orders that: 1) required Capmark to pony up an additional $600 million in capitalization for Bank, 2) requires Bank to file a new cap plan by Thanksgiving, and 3) effectively precludes Bank from even breaking a roll of quarters without prior FDIC approval. With Capmark in BK, that cap plan is about as likely as my winning the Mr. Universe title. Worse, the US Trustee in Delaware may well say, "That $600 million needs coughed up and put in the bankruptcy estate." Which means that Capmark Bank and its $10-11 billion in "assets" (not marked to market) is circling the drain as we speak.

On top of all this, a 4 September article from Bloomberg said that regulators ranked Capmark Bank as "well-capitalized." The C&D orders were entered less than a month later. Is there anyone driving this bus? Do I really need to ask that question?

Warehouse Fire

2009-08-14T17:29:00.002-06:00

And as if CIT's clubbing of its bondholders weren't bad enough, here comes news that Colonial Bank is cooked. A Federal court has frozen its assets.

Colonial Bank is a major source of warehouse lines of credit, which basically means that it's a place mortgage banks go for revolving credit to originate loans. The number of sources for warehouse lines has diminished drastically in the last two years, and the loss of Colonial puts a big hole in a shrunken market. Even before this, it looked like there would be a 20% shortfall of warehouse lines relative to mortgage demand. Now? It could easily shoot through 25%. The good news is that, as mortgage rates go back up, demand will go down, so there will be a new equilibrium. It won't provide much in the way of "green shoots" for our "recovery", though.

What Small Business Financing?

2009-08-14T17:04:00.002-06:00

Any small business owner can tell you that financing is tight. A lot of lenders have disappeared, and the ones that are still around have locked the vault. If what's going on with CIT Group is any indication, in spite of all the recent smiley faces, things aren't going to improve soon.

CIT Group provides a broad range of financing for businesses. In a very real sense, the retail sector would cave in without CIT, because it provides financing for a substantial chunk of the vendors for the major retailers. And we know what the economy would loook like if retail went any further south.

By Spring, CIT was one of the few left standing in this area. Then it started to sink too, and it seemed headed for Chapter 11. At the last minute, its bondholders agreed to bail it out. Not much of a choice on their part, really; they could either fork over more or lose what they had. But now the bondholders are being asked to give up more. CIT has a tender offer on the table for about $1 billion of bonds maturing Monday. The tender expires tonight, so we're sitting around waiting to see what happens. CIT is offering the bondholders a 12.5% haircut, down from the 20% haircut initially offered but still significant.

How does this affect you? Bondholders provide the capital that makes loans possible. If banks are requiring both bailouts and haircuts of their capital sources, how many of those capital sources are going to decide it isn't worth it? And what do you think that will do to loan availability?

Bankuptcy is an option, but...

2009-08-06T15:23:00.003-06:00

Bankruptcy is hot in Utah right now. Filings for the first half of 2009 were up 62% over the first half of 2008. Given the way the economy is, this is no great shock, but what's a little more surprising is that Utah rates so high in its filing rates (e.g. 9th in Chapter 13 filings). A pair of professors at BYU, Lars Lefgren and Frank McIntyre, seem to have figured out why: Filing rates are higher in states that have less protection for debtors, especially protection from wage garnishment. Makes sense. If creditors are grabbing your paycheck, you need to do something about it, and if bankruptcy is all you can do about it, that's what you do.

That doesn't mean a head-long rush to the bankruptcy court is a good idea, though. I've seen too many cases where the debtor waited until the roof was falling in before seeking counsel and then insisted on the attorney filing the petition immediately if not sooner. Such cases seldom end well. For a lot of reasons.

First, if you're a consumer debtor, you can't just jump into bankruptcy. You have to take a debt counseling class to get through the door. Then there's also a detailed analysis of your income, expenses, assets, liabilities, and such. These things simply take time. If you're a business debtor, you don't have to take the class, but believe me that the extra analysis of your business affairs required more than makes up for any time gained there.

So what can happen if you rush things? Well, if there were 100 things that could go wrong, you could think of maybe 50 of them. And there are a lot more than 100 things that can go wrong. And you don't need anywhere near 50 to create a disaster. Most problems consist of numbers that don't add up and need corrected, resulting in increased expense and delay, and coming under the trustee's whithering glare that can burn a hole in battleship plate. Sometimes the consequences get more exotic and severe. For example, in the Mount Holly Club bankruptcy, a major creditor is moving to dismiss because it alleges the company didn't get proper, member approval to file. Oops, did someone miss a step? We'll see.

Just remember, in bankruptcy as in business as in life in general: Proper Planning Prevents Poor Performance.

With Friends Like This

2009-08-05T19:20:00.002-06:00

The Republican Party is ostensibly the party of business, and it certainly has burnished that image in Utah. Which makes you wonder just what Rep. Carl Wimmer is trying to prove with his campaign against the federal health care initiatives.

In case you hadn't noticed, if you're a small business, health costs are a big burden. If you provide health insurance, you already know what I mean. But the burden is there even if you don't. First, if you don't provide health insurance, you're competing for talent with those that do, and guess who wins. Second, if you aren't providing health insurance, chances are your employees don't have any, which makes it more likely they'll get sick and either miss work altogether or (worse) show up to work sick. Third, lack of health insurance imposes a hidden tax on all of us that I call The Bankruptcy Tax. In spite of the current downturn, the single biggest cause of personal bankruptcy remains medical bills (And a significant cause of several, recent corporate bankruptcies has been the increasing burden of medical costs on pension plans.). Have you ever had to write off bills because the customers filed bankruptcy? Chances are it was medical bills that drove them there.

So before you start screaming about "socialized medicine" and "federal interference", take a look at the costs the current system is imposing on you. They're big.

Which leads me back to wondering just what Wimmer is trying to prove. Maybe he's trying to distract attention from his "special relationship" with Rick Koerber.

Is This Any Way to Run an Education System?

2009-08-05T18:44:00.004-06:00

By any, objective measure, Utah has its peculiarities. Perhaps none are so glaring as its treatment of schools, in spite of a lot of lip service being paid to kids and their education. Among the many oddities, I shall point out these: 1) Although we have burgeoning subdivisions full of burgeoning families, schools have no authority to ensure that developers set aside land for schools; 2) as the Canyons-Jordan debacle shows, sections of school districts may secede without any say from the rest of the district (or other districts that end up having to pay equalization money); and 3) you can just about open up a school out of the trunk of your car.

Witness the Bob Jones tandem train wreck, the John Locke Academy and the School for Autistic Healing. A real estate developer, Jones was flying high until the market turned. He used his cash flow to finance the schools, and by most reports, they were good facilities. But then the market did turn, and the money ran out, and the schools crashed and burned. Parents were left scrambling for alternate schools, especially tough for special needs kids, and often after having paid tuition up front for educations that now would never happen.

I can't say Jones is blameless in this. He looks like yet another Utah glad-hander who stretched everything well beyond the breaking point. But I have to ask, "Where's the bonding? Where's the back-up plan?" The quick and dirty answer is that they don't exist because there is nothing in Utah law requiring them. Our Glorious Legislature is very keen on making it easy to provide "alternatives" to public schools, but it doesn't want anyone to be responsible when those "alternatives" go belly-up. Anyone, that is, except the public schools, which must now scramble to find places for all these kids.

The "Free Capitalist" Roped In

2009-05-28T15:10:00.004-06:00

As anyone who reads my blogs knows, I was always leery of the real estate boom. I've seen too many of them bust. By the end of 2005, I was warning anyone who would listen they were making long term investments with a short term upside. By the end of 2006, I was setting off flares. Nobody wanted to hear, and here we are.

During all those smoke and mirrors, people were either shoveling money in or getting others to shovel in. And they all had good excuses. Everybody was doing it (Which was nearly true.). There didn't seem to be anything wrong with it because it was all out in the open and no one was getting busted (Which was also true. TV, radio, and billboards were full of ads for strawmen and flips, and neither the state nor the feds seemed to be cracking down on it in any way.). And there was one company with a massive profile that seemed to be doing it all without any regulators saying "Boo": Franklin Squires. I tell you it was impossible in the face of all that to convince people to stay away from the game.

And of course the face, the brains, the man on the throne of Franklin Squires was Rick Koerber. And as things fell apart, a lot of the people who got into serious legal trouble seemed to be Koerber's alums. Yet Koerber himself was unscathed. In fact he got louder, directly challenging the regulators, at one point seemingly making the state securities division turn tail.

That was curious. And the reason was obvious. FIHP. Koerber had friends in high places. Specifically Herriman's own Carl Wimmer, who ran interference for Koerber and even instigated a legislative audit of the securities division when it had the temerity to investigate Koerber. You tax dollars at work.

Well, the legislature couldn't audit the SEC or the FBI or Brett Tolman's office. And now Koerber's indicted, and Wimmer is backstroking so fast I think he just burned Michael Phelps. I guess he wasn't too big to fail (And trust me on this, nothing is. Empires have failed. What makes banks and brokerages think they can't?).

Remember as you go down the road that there are certain truths that never seem to go away:

If it seems too good to be true, it is.

There's no honor among thieves.

There's always a bigger fish.

The Big Boys Get Different Rules

2009-05-21T08:48:00.004-06:00

The statement in the title of this entry should come as a surprise to no one, but the Wall Street Journal provided us a reminder yesterday of just how different those rules are.

Businesses have always purchased life and disability insurance on their executives and key employees. That just makes good business sense. The loss of such a person puts a serious dent in operations.

Now suppose you have a small business. You might think all your employees are key, and there's some merit to that. It's certain, though, that you have an employee or two other than management who are crucial. Where would you be without that secretary who knows all the "informal" procedures and can get that vendor to deliver tonight instead of tomorrow? She's definitely key to your operation, but if tried to insure her, the insurance companies would tell you that you don't have an insurable interest and reject you.

That isn't what they tell the big boys, though. Outfits like Bank of America, Chase, AIG, and yes, even dear old Zions routinely insure not only their executives but their lackeys and spear-carriers and use the proceeds to fund executive compensation (Check the Journal article I've linked to for information on a case a Zions subsidiary is embroiled in.).

Let's face it, folks, the system is broken, an no one who's been allowed to have a set of tools is inclined to fix it. Running the game with two sets of rules is bad. Enhancing revenue by betting on employees' deaths is worse (Not to mention the conflicts of interest. I wonder how many of those deaths were caused by work-related risks?). Using that revenue to fund executive perks is off the charts.

Junk in the Trunk

2009-04-25T19:53:00.000-06:00

As I pointed out on 8 October and again on 14 January, Zions Bank is feeling the pain. It seems I'm not alone in that assessment. Moody's has downgraded Zions' senior debt to junk status. S&P cut the credit rating to the bottom of investment grade, but how long that will hold is a good question. Zions simply has too much garbage on its books, both self-acquired and forced on it by the FDIC. Zions has had to acquire several of the FDIC's regional problem children; Zions could well be the next problem child. Perhaps Utah needs to get used to not having an independent, local bank.

Ch-ch-ch-changes. Wah!

2009-04-25T18:28:00.000-06:00

I realize nothing lasts forever, especially not in an economy like this. When I was a kid, the auto industry drove the American economy. Now GM and Chrysler are headed to bankruptcy court to be parted out. Every week another icon collapses into the dust. As I tell my kids, life is hard.

But Sam Weller's! I know, it's not closing, just relocating. But that relocation is part of a larger malaise. The purpose of a bookstore was not merely to have the book you wanted; it was to have the book you could stumble across. And then have a corner someplace where you could flip through it. And then have other books by that author. It was a place to get lost in on a rainy day. Sam Weller's was that kind of place.

Now it's downsizing because it simply can't fill that space any more. It can't have high shelves of stumble-upon books. It can't have side aisles and corners to tuck away in. The market simply won't support it, the same way the market won't support a newspaper you can sit at the kitchen table and read. Oh, the new store will still have an excellent selection of books. But it won't be a place to get lost in. It won't even smell right.

The owners of Sam Weller's are making a smart business decision, and I don't begrudge it at all. If you want to keep the doors open, you need to stay out in front of shifting customer demands. I don't expect business owners to subsidize my peculiar passions. But at some point society must ask itself what it loses when it decrees that immersing oneself in the language is an unaffordable luxury. How impoverished must a society be when it has so devalued its ultimate form of exchange?

Speaking of the Rule of Law

2009-04-24T17:46:00.000-06:00

Magna is a peculiar institution. For decades it has been run by two entities: the Town Council and the Community Council. If you wanted to do something that required a land use decision, you needed the approval of both.

That's the problem. While state law gives such authority to the Town Council, it gives no such authority to the Community Council. The Community Council is simply a private entity that has been allowed to wield authority as if it were public.

I will readily admit that the Community Council has done a lot of good things for Magna. That's not the point. Suppose you wanted to develop some property or build a facility for your business, and you were told you would have to get the approval of the local Chamber of Commerce or Lions Club or Shriners or American Legion Auxiliary or whatever. A group that can meet and decide in private. Or not meet at all; a few, key members could simply get together at a church potluck and decide the fate of your proposal.

Why should any private group have that kind of power? It shouldn't. That's why such decisions need to be made by entities that are established and controlled by law. The laws are there to protect you, and if you don't believe it, imagine the fate of your business hanging on the decision of the local ladies' book club after they've finished discussing Twilight.

Lowry vs. Rule of Law

2009-04-24T17:03:00.000-06:00

As an attorney, I have a vested interest in the rule of law. As a human being, I do too. I believe that citizens are considerably better off if their lives are governed by a set of laws that remain set unless changed in certain, prescribed ways than they are if their lives are governed by the arbitrary edicts of a Great Leader.

Which is why Matt Lowry's take on the torture memos disturbs me. He wants to characterize them as a shining example of a nation ruled by laws taking the time, in the midst of a national security crisis, to debate the legality of its response. The memos may ultimately have been wrong, but the fact that we did not strike without first thinking through the legal issues means we remain a nation that respects the law.

There's a teeny-tiny problem with this argument, namely that the memos were condoning conduct the U.S. had tried and convicted people for after World War II, and the people "debating" the legal issues knew it. They also knew that the laws against "enhanced interrogation techniques" had become more stringent over the intervening decades, not more lax, so the only reason to reverse our previous position was political expediency. Which means those memos weren't part of a debate. They were pre-ordained to justify an already decided upon course of action. They were about as respectful of the rule of law as any of Hitler's or Stalin's show trials.

No, Mr. Lowry, the torture memos are not a shining example of our belief in the rule of law. They are damning evidence of our readiness to abandon it.

Surely You're Kidding, Mr. Friedman

2009-02-24T16:06:00.000-07:00

It amazes me how people continue to view the Friedman Twins (Milton and Thomas) as gurus. Milton's gospel of deregulation left the foxes guarding the henhouse (We tried that once, you know. It resulted in the 1929 Crash. And now, rewind and replay.) and resulted in our current mess. Brilliance.

And Thomas? Well, today's editorial is just too typical. He condemns giving money to auto manufacturers and advocates giving it to venture capital firms that will then finance bleeding edge technology that will save the economy from its current free-fall. Uh huh, pull the other one.

Let me make it clear that I have opposed the bailouts from the start, and I'm no fan of the Big Three. I've always thought that, if the government wanted to throw money their way, it should take over their pension funds, thus keeping a pile of retirees off the welfare rolls and making it easier for well-managed auto companies to buy them out. But Thomas's approach is just noodles.

First, another "New Economy" theory? Please. Remember 10 years ago when we were all being told that the Dot Com Boom had changed all the rules? Turns out it hadn't. And none of the innovations Thomas is banging the drum for now will change them either. New tools? Yes. New rules? No.

Second, just what kind of crystal balls do you think the venture capital people have, Thomas? I remember reading one of the tech tabloids that were all around Seattle during the Dot Com Boom and looking at a cartoon of a scruffy teenager announcing that he had created a website for his cat and then watching the suits line up to dump money on him. It was about that bad. And of course the VC people also made the real estate bubble possible. Let's just say they haven't proved infallible in locating long-term investments.

Third, and here's the kicker, your economy isn't even real, let alone sustainable, if all it produces is electrons and documents. We have a textbook case in the United Arab Emirates right now: Dubai and its "New Economy" are having to be saved from ruin by Abu Dhabi and that dirty, old school dinosaur stuff it pumps. If you want an economy that lasts more than ten years, you need to make stuff: food, tools, stuff you can touch, stuff you can pick up, and yes, stuff you can drive around in.

Problem is that the US (and the UK for that matter) has gotten pretty weak in the "making stuff" department. You see, in order to make stuff, you need people who can make stuff. You need pattern makers and tool-and-die operators and folks like that. We haven't been paying attention to that, though. While Europe and Asia were making sure of their next generation of engineers and lab technicians and skilled trades, we were making sure we'd have an endless supply of lawyers and investment bankers. The closest anyone got to science was computer programming, which amounted to little more than retraining classes teaching people to cut and paste code someone else had written. Everybody in the US was going to work behind a desk. Not possible. Not even desirable. All those desk jobs can be moved to Mumbai with the push of a button. Which Thomas has argued is a good thing.

And so here we are, needing to make things ourselves because we can't afford to buy them any more, and we've nearly forgotten how. Meanwhile, Thomas drives his Lexus past the olive trees on his way to an exclusive country club outside Calcutta, oblivious to the slums he passes and to how they are reflected more and more by the spreading slums back in the US.

Transition Game

2009-02-23T10:47:00.000-07:00

Some sports have leisurely transitions when there's an offense-defense switch. Personnel shuttle on and off the field, players and coaches have opportunities to regroup and plan, there may even be a complete stop in the game. Football, baseball, and cricket come to mind.

Other sports have their transitions on the fly. Soccer, hockey, rugby. I was watching the championship of the USA Rugby Sevens tournament yesterday, England vs. Argentina. England seemed to be in control, but in the final minutes Argentina took advantage of a transition off a penalty to score the winning try. Adapting on the fly is crucial in such a sport.

Basketball is another such sport. And business requires transition on the fly as well. And with Larry H. Miller's death last Friday, we will see if the empire he built can play the transition game, or if it will look like the Jazz in their more inept moments.

Miller undoubtedly laid some foundation for this. He built the business with an eye to passing it on, and he put his son in charge several months ago. But that's like a coach running a practice or drawing up a game plan. The issue now is whether the players can execute on the court.

It's a reasonable question. Several pieces of Miller's empire are vanity projects he subsidized with his core element, the auto dealerships, and we know what auto sales are looking like these days. Miller built it all up in good times, but the times have changed. He kept it going with the force of his personality, but that personality is gone. The new management team may find itself in the position of having a great win-loss record from playing the Clippers at home but now have to go on the road against the Lakers. Something is going to give, and fast.

This is stupid...

2009-02-23T10:14:00.000-07:00

...even for Utah.

We've all received spam from some "government official" in Nigeria who's sitting on millions in ill-gotten gain and wants your help to move it out of the country. All you need to do is open a bank account and send him the information so he can transfer the money, part of which is yours to keep. Of course what's really going on is simple money laundering by common thugs, and all your assistance will yield you is a knock on the door by men with dark suits and shiny badges.

Well, some schmuck in Texas fell for it and opened up an account. Then the crooks moved on Utah, and the idiocy readings went off the scale. They forged a few documents, submitted them to the state treasurer, and voila, had $2.5 million transferred to the account, no questions asked. The only reason it stopped is because the bank in Texas called the treasurer's office and asked if it had any idea what was going on. Talk about rhetorical questions.

This is amazing. It tells me that the state lacks basic accounting and auditing principles. It makes me wonder about the current deficit figures because it makes me wonder how they know what's there and what's supposed to be there. If a public company did this, the FBI would be kicking in its door. Instead, we just keep re-electing the same circus to what amounts to life appointments.

I think it's long past time for the fools on the hill to stop paying so much attention to The People's Morals and start paying more attention to The People's Money.

Whither Rio Tinto?

2009-02-02T06:27:00.000-07:00

Rio Tinto, Kenecott's parent, is being hit hard by the downturn in metals prices. Shedding about 15,000 employees worldwide (250 here in Utah) wasn't enough. Selling mining and processing assets last week to raise $1.75 billion wasn't enough. It is now prepared to sell a big chunk of its iron ore and aluminum business to Chinalco, the Chinese state-owned aluminum company. Chinalco already owns 9% of Rio Tinto, and this sale would probably turn it into the major player in RT's ownership.

People have been wondering what China was going to do with all the Yankee Dollars it was piling up. I've been saying for some time it was going to do two things: 1) shower it in places where China wants to make friends and influence people (Look at China's aid and development programs in Asia, Africa, and South America.), and 2) buy up real assets in its deficit trading partners (See for example my 9 October entry about liquidity and solvency.). It's happening. Well, maybe Utah can get stronger direct ties with China out of it.

Short Circuit City

2009-01-16T11:59:00.000-07:00

Circuit City isn't closing just a few stores; it's closing them all. It announced today that its efforts to reorganize/sell the company have failed, and it's going to liquidate. 30,000 jobs gone. 567 more dark anchors in strip and regional malls. Well, Best Buy must be happy. At least for now.

Small Business Status

2009-01-14T17:09:00.000-07:00

Things are definitely rough out there for small businesses. The Zions Bank Small Business Index has dropped to its lowest point ever, and everyone expects things to get rougher this year.

But as I've pointed out here and in Utah CEO, just how secure is your job? Look at the big companies closing down. Flying J is the 16th largest privately held company in the country, but it was forced to file bankruptcy because its creditors started calling in their markers. Job cuts can, and will, strike anywhere. Build an ark now.

Lots of people are starting their own businesses, typically out of necessity (such as the most recent position on their resume being at Lehman Brothers). They identify something they can produce or market that people will pay for, and they go for it. You should too.

Try to keep the start-up borrowing as low as possible. Shoot for zero. If you need some, it's out there, but it's getting scarcer, so expect to fight for it. For example, Zions has been the biggest small business lender around here, but it also is Flying J's biggest creditor and owns the mess that is SunCrest, and that just can't help the loan pool any.

Bankruptcies Build Up

2009-01-14T16:23:00.000-07:00

Bankruptcies went up 47% in Utah in 2008. That's still just half what they were before Congress granted the credit card industry its wish and locked the courthouse doors to most people, but given the new barriers for filing, it's a graphic representation of the dismal state of affairs. It doesn't promise to improve soon, either. Where the traditional cause of a bankruptcy filing used to be a specific event (divorce, job loss, hospital stay), it now seems to be systemic. Households and businesses alike have simply accumulated so much debt over time that it's crushing them. And the triggering element in that debt load is more frequently real estate, with debt service going through the roof and value going through the floor, be it personal residence or investment property.

And what if you're one of the millions being crushed. Bankruptcy is not the end of the line; it's a new beginning, at least if you get smart about your finances. I took a construction company into Chapter 11 bankruptcy (used for reorganizing businesses) in Fall 2007. Normally you have to file a plan in Chapter 11 explaining how you're going to reorganize and operate the company. We didn't need to get that far. We negotiated away a few problem debts, and were able to dismiss the case. The company emerged stronger, and today, in spite of the construction climate, the company is still making its way.

Happy Holidays?

2008-12-24T16:33:00.000-07:00

And so it is Christmas. And what have we done?

To any objective, ground-level observer (as opposed to the tower-dwelling elite still drinking the Friedman Twins' Kool-Aid), times is hard. Office Depot has axed two stores. Kennecott is set to whack a big chunk of the few remaining, living wage jobs around here. KB Toys finally filed for bankruptcy. Costco's profits are flat. General Growth Properties continues to teeter on the edge of bankruptcy, threatening to leave the Cottonwood Mall site as a huge hay field (which I suppose beats the sewer lagoon Mecham has left in Sugarhouse). R&B SunCrest has scrapped its plan to take over The Incredible Sliding Subdivision, leaving Draper once again holding the bag. Jobs are hemorrhaging in town-sized blocs. Big boxes and anchors are going dark. Even though we've torn half the malls in the valley down, the surviving half are barely surviving. The only reason Sportsman's Warehouse has any chance of making it is because a Canadian farmers' co-op wants to buy it and use it as a Merc for its members. And having leveraged itself to the moon to follow gas prices earlier this year, Flying J has now had to file bankruptcy.

How did it come to this? It boils down to a simple fact, folks: We bought a load of hooie. We bought that everyone could own a home. They can't (I don't own a home now, and I won't be buying one soon. If you're smart, you won't either.). We bought that financial experts could take large piles of garbage and make them squeaky clean by dividing them into smaller piles of garbage. How's that again? We bought that we didn't need to grow or make things any more; we could all sit in offices and generate paper and electrons all day, and that would be a sustainable economy. Yeah, right.

We bought and swallowed so much crap, we finally exploded. Just how surprising is it really that we now find ourselves standing here with our guts hanging out?

So what do we do next? So far I don't hear anyone in the halls of power even asking the right questions. So I'll start with this: We've dumped $3 trillion on saving the finance industry; we spent $3.8 trillion (in current dollars) to fight World War II. We fought WWII to save our country and way of life. What sort of country and way of life are we saving with our current spending?

What a Business Can Mean

2008-11-04T22:39:00.000-07:00

Rex Rogers has run his barber shop at the same location in old downtown Draper for over 50 years. Yesterday he buried his wife. This morning he was back in the shop and gave me a haircut.

Why was he back in his shop so soon? Because it's his place. Because it's where he can connect with his customers, his friends. Because it beats sitting at home being maudlin. Because after all those years, that shop has as much of her in it as it does of him.

This is what it means to own a small business. Whether you're a farmer or a shopkeeper or a craftsman, you and your business are ultimately reflections of each other. Run your business so that you like the reflection. So that it supports you in ways other than just financially. Like Rex.

We Have a New President

2008-11-04T22:32:00.000-07:00

In the interest of full disclosure, I voted for Obama. However you may have voted, you have to acknowledge that this is historic. I remember when Blacks were beaten and killed for trying to vote. Now we've elected a Black president. If that isn't historic, nothing is.

Experts Agree Everything is Fine

2008-10-22T12:21:00.000-06:00

These people get paid for these opinions? A bevy of local experts has met and concluded that SLC will face no more than an economic bump and will soon be right as rain. They quickly gloss over the vacant lots, vacant storefronts, and aging "For Lease" and "For Sale" signs. They focus on all the construction cranes downtown. Never mind that there is no logical connection between the LDS Church's ability to build City Creek and merchant's and consumers' abilities to populate it. Of course one of these "experts" is Frank Gray who has been completely outflanked on the Sugarhouse pit fiasco by Craig Mecham, who isn't the sharpest knife in the drawer, so logical conclusions shouldn't be expected. In the mean time, the county's revenue projections are down nearly $11 million due to the economy. Yeah, that sounds fine to me.

If you're in business, there are times when you need experts: an accountant here, a lawyer there, an HR adviser some other time. When it comes to determining if you have enough business, though, or what your customer traffic is going to look like when half the tenants in your shopping plaza go dark, you are the expert, and if someone tells you things are fine when you know otherwise, turn down the sound.

The Rate Cut Is No Fix

2008-10-09T07:21:00.000-06:00

The headline in today's Trib screams, "Rate cut won't be a quick fix." I beg to differ. It won't be any kind of a fix. Time for a lesson every business owner should sit through: the difference between liquidity and solvency.

A rate cut reduces the cost of money and encourages people to borrow. This would be a fix if the problem were lack of demand, but that isn't the problem. There's plenty of demand, but people can't find credit.

So the problem must be supply, right? And you encourage supply by encouraging lenders to lend more, such as by providing them with cheap capital to land and guaranteeing their loans (Which is what the recent bailout does, except it goes a step farther and says, "We'll guarantee you loans no matter how idiotic they are." Also, the federal government, by encouraging both demand and supply, is now moving in opposite directions simultaneously, which should surprise no one.). But the problem isn't supply, at least not that kind of supply. The problem isn't that the supply is there but the pump needs primed to get it flowing so everything can get back on track.

The problem isn't liquidity. The problem isn't that the system is strapped until pay day and needs something to cover until then. The problem is solvency: There aren't enough assets to cover the liabilities. The only way you can get a lender to bring more to the table in those circumstances (to allow you to increase your liabilities) is to bring more assets. And we're talking about hard assets, not IOUs and other paper.

For example, my cousins in Iceland have ridden the finance boom like Viking raiders. Unfortunately, the longship has sprung a leak, and they might not be able to bail fast enough. Iceland's three main banks are all in trouble, and the government shut one of them down yesterday. Personally, I think they're going to have to go back to herding sheep and eating rotten shark for a couple of generations, but in the mean time they're desperately trying to maintain the status quo. They've even asked Russia for money, but Russia wants real assets, not paper. Iceland has offered the old, US airbase at Keflavik. Think a bit about the irony of that one. But that's the way it will be, even for the US. In order to increase our liabilities (budget deficit, trade deficit), we shall have to give up assets (land, factories, companies). That's the difference between being illiquid and being insolvent. You can paper over illiquidity, remain intact, and move on. If you are insolvent, people will take pieces of you until there is no more you.

Liquidity problems are short term. There is no such thing as long term illiquidity (Back to the Trib headline. If the rate cut doesn't solve things quickly, it won't solve things at all, because the problem isn't liquidity.). If you are constantly borrowing to cover operating costs, your problem isn't illiquidity but pending (or existing) insolvency, and if you don't correct it right away, you're spinning in.

Choosing a Bank

2008-10-08T08:28:00.000-06:00

This used to be a fairly simple process. Convenient location probably dictated your choice. Maybe you knew somebody at the branch. If you were really interested, you'd check interest rates and fees.

Not so simple any more. Now you have to worry about whether the bank is going belly-up.

Case in point. I've banked at Washington Mutual for years. Now it's gone, swallowed by Chase. Now I could stay, and turn into a Chase customer, except that I don't like Chase and don't trust it any farther than I can drop kick an anvil. So I'm shopping.

The obvious choice around here is Zions Bank. But I'm not going to go with the obvious choice. Some people out there are saying, "Oh, it's because you're not LDS." That has nothing to do with it. Zions doesn't care about my religious affiliation, and I don't care about its. My concerns are strictly what any business person's should be when making such a decision: business.

Zions has made a lot of loans. If SunCrest is any indication, a lot of those loans are garbage. I know there is a substantial amount of collateral tied up by the ANB receivership because ANB and Zions have the same collateral. That isn't good.

Zions also seems to have become the FDIC's local go-to guy for buying up problem banks, Silver States being the latest example. The FDIC's demands for those services are about to go up, and the value of the takeovers is about to go down. I'm wondering if Zions will find a way to just say "No."

Finally, Zions has engaged in some creative accounting, as evidenced recently by its having to pull off-books investments back onto the books. How can I tell what its liabilities actually look like?

If you aren't going through an analysis like this, you're asking for it. It simply isn't simple any more.

Coincidence?

2008-10-03T06:42:00.000-06:00

So Wachovia agrees to be taken over by Wells Fargo instead of Citi. And unlike Citi, Wells won't use FDIC assistance for the takeover (At least not yet. Watch for something down the road when all the dust has settled and it can slip under the radar.). And now Wachovia has put partial freezes on Commonfund's Short and Intermediate Term Funds.

How does all this tie together? 1) The FDIC can say, without needing Botox to maintain a straight face, "See, the system works. We aren't insolvent. (Yet.);" 2) Instead of three banks (JP Morgan Chase, Citigroup, and Bank of America) holding nearly one third of the deposits in the US and Citi weighing in at over 11%, you will have four (Add Wells.) at nearly 40% and none over 10% (Appearance is everything when looking at market concentrations.); 3) The presidents of the 1,000 or so colleges and universities with investments in Commonfund will be calling Congress today screaming, "Do something!"

All this just in time for the House revote on the bailout.

Coincidence?

Naked Shorts

2008-10-02T14:49:00.000-06:00

No, it isn't a porn film. Short selling is selling something (typically stocks) you don't have in the hope you can buy it later for less than you already sold it for and pocket the difference. In a regular securities short sale, the seller borrows the stock from somebody who already owns it, closes the sale with the borrowed stock, then buys stock and gives it to the guy he borrowed from. In a naked short, the seller doesn't bother borrowing; he closes the sale when he buys the stock down the road.

A lot of people think naked shorts have caused much of the recent market downturns. As I've noted previously in this blog, Patrick Byrne, CEO of Overstock.com is one of them. He's convinced naked shorts are what have driven down Overstock's stock (conveniently ignoring Overstock's chronic inability to turn a profit greater than the neighborhood lemonade stand). And the SEC announced on 17 September that it is piling more regulations on "abusive naked short sales."

Byrne is feeling his oats about this now and is lecturing on the evils of naked shorts today at the U and tomorrow at the Miller Business Center. I read about these lectures in yesterday's Tribune in an article by Steve Oberbeck. Oberbeck says in the article that naked shorts are "an illegal trading tactic." I emailed him to correct him; they aren't illegal, just restricted. He hasn't bothered to respond or correct.

A word of caution to those of you who count on PR: If you turn an item over to the media (print or broadcast, it doesn't matter) and it contains a legal issue, it will get screwed up. And chances are they won't correct it.

No, Not Everyone Believes The Same Way You Do

2008-10-02T13:30:00.000-06:00

Let's face it folks, whether you like it or not, the workplace is becoming more diverse, and with that come culture conflicts. Observant Jews begin Sabbath at sunset on Friday (which comes mighty early in Seattle in the Winter) and don't have much use for your Spring and Winter vacations that "just happen" to coincide with Easter and Christmas. They want other days off instead. Muslims have similar issues, and they're also supposed to pray five times a day.

Managers really need to get out in front of this. Eventually, somebody will be asking for religious accommodations, so you might as well come up with a plan now. Give it some though, get some help from an HR professional and/or an attorney. And don't think you'll solve the issue by simply refusing to hire them thar ferners. All that approach will get you is a visit from another attorney and someone from the government who isn't there to help, and they'll tell you to open your check book and write however many zeros they tell you to.

Retract That Retraction

2008-09-10T15:55:00.000-06:00

Well, PC Club is gone after all, and for reals this time. Apparently NAOC Holdings took over just long enough to file bankruptcy itself and shut everything down. Looking through the windows, it looks like a lot of people still have their computers in there. A quarter-century ago, I lost some home electronics when the repair place went bankrupt. I think if my computer were in there (and it has been on several occasions, since we bought it there), and my wife and kids were whining at me to do something about it, I'd be compelled to conduct a midnight requisition manuever. Not that I'm advising anybody.

Know When to Say "When"

2008-09-09T07:54:00.000-06:00

The trustee in the MILA bankruptcy in Seattle is suing Layne Sapp, the former CEO, for pulling millions out of the company while it was going down. He had a plane and a yacht and was receiving millions in dividends while he was Trying to get Deutsche Bank Securities to float a fraudulent private placement. I can't resist: What a Sapp!

I'm shocked, shocked to find that looting has been going on at these mortgage companies. The next thing they'll be telling me is that the Earth goes around the Sun, or some such.

People, if your company is in trouble, fix it. If you can't fix it, close it. Don't blame a conspiracy of little green men. And don't loot it. Creditors have a lot of ways to come back to bite you.

Heavy Flack Over Salt Lake City

2008-09-08T08:27:00.000-06:00

A few days ago I received an announcement from a company I do business with periodically telling me in the most breathless manner possible that it had brought a new partner on board. This announcement has every marketing buzzword imaginable (Although I now note that it's missing "powerful." I guess it needs a rewrite a la Steve Goodman's addition to his "You Never Even Called Me By My Name" after David Allan Coe critiqued it.) It even calls the new guy a marketing "evangelist" (Folks, understand this: No one wants salesmen to preach at them. And if I were into evangelical religion, I'd be a bit bent out of shape that my beliefs were being cheapened like that.).

The purpose of an announcement is to let people know something. Breathless sales pitches only catch the attention of folks with perverse senses of humor, like me. They certainly won't catch the attention of any news outlet you want to pass the story along, except maybe to get pinned up on a business editor's wall as a laugh. If you want a news outlet to run your story, learn the outlet's style and match it. And give it a story, not a hyperventilated marketing presentation.

The Long and Winding Road

2008-09-08T08:13:00.000-06:00

I grew up on a farm and in a small town (population 250 and falling) out in the sticks. We were a long way from stores, and going to town to buy things was a cost (in both money and time) you simply factored into life.

Until this Summer there was a market up in the SunCrest development on Traverse Ridge. It was a general store type of place for the people living up there. It ran into the same problem every small town merchant has run into: not enough traffic to cover the costs. Now it's gone.

And now the folks up there are going, "Gee, I have to drive all the way to town for my brie. And gas is so expensive." I guess it's lucky for them Harmons just opened a new store at the base of the hill. I can't sympathize much. This is the sort of thinking that led them to build McMansions in a wind tunnel on a sand pile next to a fault line in the first place. But I digress.

If you're planning a business, location counts in new ways. Fuel costs will be dictating not only your expenses but your customers' behavior.

The Cookie Crumbles

2008-09-08T08:00:00.000-06:00

Mrs. Fields couldn't restructure its debt and is now in bankruptcy. For those of you panicking about your cookie fix, all those stores out there are franchises and shouldn't be affected. It makes me wonder, though, if they didn't have new store overhead, where did the debt come from? All those mansions they built? Keep it simple, people. Chances are you don't need a private jet and a landing strip for it in your back yard.

By the way, total bankruptcies in Utah for the first half of 2008 were up 42% over the first half of 2007. Consumer bankruptcies nationwide for the periods were up 30%.

I'm not you friend, I'm your....

2008-08-26T15:28:00.000-06:00

I had to shake my head over a recent Hariette Cole column in the Trib. A parent writes in, concerned that her son will have trouble making friends when he goes to the University of Michigan because it's so much larger than the prep school he's been attending. First, I got my law degree from the University of Michigan, so I know a thing or two about the place, and believe me that no preppy is going to have any trouble finding his own kind there. Cole misses that obvious point, though, and instead advises that the boy should read Dale Carnegie's How to Make Friends and Influence People. I'm going to get into trouble here, but I've always considered that book to be grossly mislabeled. It isn't about making friends; it's about making sales, about building networks of acquaintances you can market to. It may help the boy perfect his pitch, but it won't help him create college memories and friendships he'll pack with him through the decades.

If you're in business, you have to remember that you have friends, and you have customers. There will be some overlap, but you should never confuse the two. Because if everybody's your friend, you're not going to make a living. There's a great bit in Bonfire of the Vanities where an attorney explains the difference to a client. Read the book, and not just for that.

My Smiling Face

2008-07-02T14:23:00.000-06:00

I am smiling. The picture you see on the blog accompanies my article in Utah CEO Magazine. I write about something I've written about here: The poor economy is a reason to start your own business, not a reason to avoid starting. Check it out. I like Utah CEO better than its chief rival Utah Business. Utah Business is decidedly oriented toward the cloud dwellers, the deities who live on Mt. Olympus and barely know the rest of us are here, which is no big surprise given that it's owned and operated by entities that have express policies of having no time for us peons (one entity in particular, which shall remain nameless but which should be obvious if you read a few issues). Utah CEO is written for us normal folks.

Correction

2008-05-17T14:41:00.000-06:00

Well, now the Trib is reporting that PC Club is back in business, having been bought by an outfit called NAOC Holdings. I can tell you that the stores here in Utah are open again, but I can't tell you anything else, including whether PC Laptops is actually willing to take on PC Club customers. If I were a PC Club customer, though, I'd be inquiring, because something here smells like last week's diapers. I can tell you for a fact that if you file bankruptcy, you won't get to sell out within 48 hours (If anyone has definitive word on the bankruptcy filing, I'd like to hear it. Apparently the media couldn't be bothered to check it when they reported it.). Also, it is my considered opinion that, if you're about to sell your business, you don't hang a sign in your door reading, "Sorry, we've filed Chapter 7," and you don't have your website go dark with only a "Thanks for X years of business" message.

No Recession?

2008-05-15T08:08:00.000-06:00

I read this morning that the Wall Street Journal, quoting experts of course, thinks we've headed off the recession. How's that again? I'm reminded of a poster of a '50s-style family gathered around the TV while the talking head says, "Experts agree everything is fine." Bankruptcies are up, foreclosures are up, repossessions are up, unemployment claims are up, food stamp use is up, and people are using their credit cards to buy bread, but we're OK. Who is "we"?

People, just because everything (And I mean everything. Food, fuel, goods, services, debt, equity, realty.) has been turned into investment vehicles and those vehicles have been hijacked by day-trading speculators who are currently pumping them doesn't mean everything is fine. It just means The Great and Powerful Oz is telling you to ignore the man behind the curtain.

PC Club Is Gone

2008-05-15T07:37:00.000-06:00

PC Club, a computer sales and repair company with three locations here in Utah, slammed the doors shut and filed Chapter 7 bankruptcy yesterday. Chapter 7 is liquidation, i.e. "throw your empty wallet on the table and let your creditors fight over it." PC Club will not be back.

PC Laptops, as it has done for several other computer companies, has agreed to take over the warranty work on PC Club machines. Another savvy move by Dan Young; he adds another block of customers to his base.

If you have equipment at PC Club, though, you have a problem because your gear is locked up where no one's answering the phone. Get to work on this RIGHT NOW. PC Club's attorney is Robert Hsu in Pasadena, 624-584-7055, robert@rhsulaw.com. You'll probably have more success as a united front, and I'm willing to help you get in contact with one another if you contact me here or at KARife@RifeLegal.com.

You know you need a new PR person when...

2008-05-09T15:48:00.000-06:00

...the local paper calls your current PR person about a hot story, and he tells them, "You don't deserve any reaction." That's what Russ Callister of Mecham Investments told the Tribune when it asked about the City demanding that Mecham do something about the great sinkhole it's created in Sugar House. See my entry today in The Real Estate Spot for my disclosure about once having officed in what is now a hole in the ground.

I honestly can't believe he said that to the paper. Folks, if you're going to be in business, you're going to want some publicity, and if you are a developer, being in the public eye is part of the game, so get used to it. Responding as Callister did isn't just unprofessional, it's stupid. It's acting like you're entitled to be in business, and believe me you aren't. Every day is a battle, and there's no entitlement to it. Why make your life harder by picking a fight with people who can spin your image any way they want?

Self-Defeating Complexity

2008-05-04T17:58:00.000-06:00

I was reading today about farmers who consider themselves to be in dire straits because they can't hedge the price of their crops by buying futures. The modern farmer has grown accustomed to "insuring" the value of his crops by buying futures. The problem is that speculators have bid futures contracts up so high that mere mortals such as farmers can't afford them.

My grandfather, who spent his life running a corn-hog farm, would have heard this kvetching and said, "What the Sam Hill is this hooey?" First, he would have found it "unrealistic" (My euphemism. He would have said "nuts.") to expect some sort of guaranteed price. Second, he knew that, as the growing season went on, more cash grain buyers would come out of the woodwork to buy grain to fill those futures contracts. Finally, if the price didn't come around, he would feed the corn to the hogs and sell the hogs (frankly the best hedge there is).

Of course, there were certain bits of wisdom he practiced that supported these positions. He didn't leverage himself to the hilt and beyond in the belief that his grain prices were "insured." He kept good relations with the people who bought his grain and livestock. And he actually had livestock, namely Hampshire hogs, that he could feed corn to (and that provided a significant amount of "byproduct" that he used for fertilizer, thereby avoiding the cost of synthetic, petroleum-based fertilizer). In other words he kept things simple in ways that kept his costs down and his options open. Ways that modern farmers apparently can't be bothered with, and so they now find themselves caught in their own webs.

A cautionary tale for all businesspeople: Keep It Simple (not so complex it's), Stupid.

Small Business Capitalization

2008-05-04T16:24:00.000-06:00

I was at an event at U.S. District Court the other evening, and the discussion topic turned to the federalization of criminal law and how just about everything is a federal offense these days. I remarked that, when clients approach me about raising capital, I tell them to deal cocaine; at least then they would know what they were doing wrong, and when they got caught, the punishment would be lighter than for a securities violation.

Nobody laughed. The problem was, it was no joke. The securities laws are so complex and draconian that it is virtually impossible not to run nastily afoul of them unless you spend all the money you raise on attorneys and accountants. I'm overstating, but I'm exasperated, and this is my blog. As for the so-called "safe harbors," they aren't safe; they're just less than certain death.

So if you own a business, squeeze it. Pare it down. Fund it with friends and family (although that will probably be subject to the securities laws too, so watch it). Maybe you can sell it to somebody else and let him worry about it. Just make sure you don't run afoul of the franchise/business opportunity regulations.

About that Costa Rican retirement...

2008-05-04T11:29:00.000-06:00

...just how is that going to work now?

A lot of Americans have been planning on retiring overseas because the dollar traditionally has stretched farther in "developing countries," a major consideration for folks on fixed incomes. The game has changed, though, folks. The dollar has dropped against all other major (and most minor) currencies like a shot quail, and even those currencies that have traditionally pegged their value to the Yankee Dollah have been taking extreme evasive maneuvers to minimize exposure to this decline. That means your money is worth less, a lot less, just about everywhere. To put the value decline in perspective, just about the entire run-up in petroleum prices and the overwhelming bulk of the run-up in food prices have been the result of the declining value of the dollar.

If this continues, you folks who have been planning that cottage in Central America for the last 20 years may be compelled to conclude there's no place like home.

"Expelled" Flunks Intellectual Property 101

2008-04-27T22:35:00.000-06:00

The new Ben Stein movie Expelled is catching heat for using songs without permission. Yoko Ono is suing for their use of "Imagine," and others are likely to follow. In an incredible display of chutzpah, stupidity, or a combination thereof, the spokespeople for Expelled claim their use of the songs falls within the fair use doctrine because the movie is a documentary. I'll forgo any comments on whether it's a documentary because it doesn't matter. They incorporated someone else's intellectual property into their own for-profit work without permission. By definition, that lands nowhere near fair use.

People, nicking someone else's intellectual property is the same as hijacking someone else's truck to make your deliveries. And the ultimate result will be that one day someone who looks like Tony Soprano will serve you some nasty looking documents drafted by someone like me.

Goodbye, All My Memories

2008-04-27T22:10:00.000-06:00

Draper scrapbooking store All My Memories closed yesterday. The Trib did a nice article on it last week, perhaps a bit too nice. The owner talked about closing the store because she didn't want to sign a five-year lease, and the reporter let that go at face value. Other bits and pieces in the story indicated that the problem was far deeper than a simple lease dispute, though. The owner had already shut down three other retail outlets and her supply manufacturing facility. That would indicate that, contrary to the owner's claim that the scrapbooking industry has plateaued, it is in fact careening down a cliff. That's information business owners and those of us who serve them would like to know, but the reporter didn't go there, pulling a Mary Sunshine instead.

I like media coverage of local business, but I like it to be coverage. Tossing softballs a la Larry King doesn't give readers the information they need.

A Tip of the Hat to the ABA

2008-04-27T21:10:00.000-06:00

The American Bar Association has decided to demonstrate some proactivity concerning the current lending mess. It has set up a site called Safeborrowing.com, providing a lot of consumer information about mortgages, student loans, credit cards, and auto financing. Check it out.

JPMorgan Fogs One By

2008-04-17T09:33:00.000-06:00

JPMorgan Chase announced better than expected Q1 earnings, and there was great rejoicing. The problem was what was going on behind the scenes. JPM simultaneously filed notice with the SEC that it was trying to raise $6 billion real quick-like. Is the Bear Stearns buy-out failing to prevent the unwinding of JPM's CDS positions as it had hoped? Is JPM expecting some barbarians to show up at the gates?

Another Retailer Spinning In

2008-04-14T08:40:00.000-06:00

Watch for Linens 'n Things to file Chapter 11 this week. Retailer restructurings and bankruptcies seem to be picking up steam, which is a bad sign for owners of retail space, especially since we just keep building more. There is some debate over why all these stores are going dark. Some say it is just part of the general mall restructuring; stores are closing in traditional malls and opening in new, open-air malls. The numbers don't add up, though. There are more closings than openings. It also ignores the fact that strip malls, especially the newer ones, are effectively open-air, but they're hating life. And it ignores the reality of consumer confidence. The American consumer is tapped, people, and simply can't afford to buy stuff.

Watch for more dark boxes.

Byrne Takes a Counterpunch

2008-04-14T08:08:00.000-06:00

Overstock.com's crusade against short sales, spearheaded by CEO Patrick Byrne, will take a serious turn this week. Overstock has been suing Gradient Analytics for allegedly conspiring to drive its stock price down (See my 22 September entry A "Victory" for Overstock.com.) as well as pursuing a separate suit against virtually every major brokerage. Beyond avoiding dismissal, Overstock has seen little success, and the SEC closed its investigation of Gradient over a year ago. Now Gradient is going to countersue Overstock and Byrne for defamation. Since damages are tough to get in such cases, I suspect Gradient is really angling for an injunction to shut Byrne up. Yeah, good luck with that.

As I've said before, the "Litigation Road to Success" business model is at best highly questionable and should be avoided (Ask Darl McBride.). If your company is bleeding cash, your time is better spent fixing your company, not riding off on crusades.

About that robust local economy...

2008-04-11T08:01:00.000-06:00

...have you looked at the first quarter bankruptcy figures? Nationwide, bankruptcies were up 27% over first quarter 2007; in Utah they were up 44%. As usual, Utah is behind the curve, but that doesn't mean it isn't going down the same track.

Another Blow to Local Ownership

2008-04-11T07:52:00.000-06:00

In the latest sign of the dependence of the local economy on the wider world, Iomega has been purchased by Boston-based EMC. Iomega has been hurting for awhile, and there were fears it was a goner, but it appears to have now been bailed out. It just won't be a Utah company any more, and it could be swept out of here in an instant. Welcome to modern times.

You too Can be a Securities Fraud

2008-04-11T07:01:00.000-06:00

Many in the securities industry breathed a sigh of relief when the Supreme Court ruled in Stoneridge vs. Scientific-Atlanta that private individuals may not sue those who allegedly aid or abet a securities fraud (For a full examination of this, see Mark Perry's analysis.). You may wonder why this is a good thing; those who aid fraud should be sued. The problem is that the statutory and regulatory definition of "securities fraud" is so broad and the threshold for it is so low that virtually every law firm, accounting firm, securities firm, and business partner in the country could get swept up, and the resulting litigation tsunami would become the full-time job of the federal courts for time and eternity.

On the other hand, the Supremes made it very clear that the SEC has full authority to pursue such aiders and abettors, and that means if you're even tangentially involved with securities, there could be a wide net and a big club waiting for you. Attorneys and accountants are facing what OB-GYN doctors have faced for years: They can't afford insurance and so stop practicing in that field. It's to the point where the only professionals in the field are ones that small businesses (real small businesses, not ones that look like Microsoft but that the government still defines as small) can't afford. Small businesses will still need money, though it's just that they won't get professional help before they raise it, thus exacerbating the problem. So whether they're issuing promissory notes to investors, printing the money in the basement, or dealing meth behind the shop, they'll end up breaking the law. Except that dealing meth carries smaller fines and shorter prison sentences.

And it Continues

2008-03-31T07:02:00.000-06:00

When I posted last week about the decrease in local ownership of Utah business, I neglected to include a piece of information I had received a couple of days before: TenFold had agreed to a reverse IPO merger. Versata Enterprises, another business software company headquartered in Austin, will buy out the shareholders. TenFold went public in the dot-com boom but has been a penny stock for some time. It overhauled its management in 2005 and has been aggressively marketing since, but as many have suspected, it was merely to attract suitors. A sign of how far TenFold has fallen is that it also had to sign a $300,000 promissory note in favor of Versata and secured by all remaining assets. You can expect TenFold to be folded by Fall.

And this morning I learned that Nexia Holdings, which owns Landis Salons and Black Chandelier stores, is publicly begging for a buyer. Since Nexia is public, its principal carrot is that it can take a private suitor public via reverse merger without an IPO. Nexia has had two reverse splits in the last year, trying to keep its value above that of Zimbabwean currency, but apparently it's over.

I notice that Nexia's CEO is Richard Surber, a major local player in penny stock public shells, whose schemes seem to benefit him a lot more than the companies he "advises." There are a pile of such sharpies operating here in Utah, taking advantage of small business owners who are looking for capital. I can't see how these stores have any business being publicly traded. If anyone tells you that you ought to go public through a reverse merger with a public shell, at the very least get legal help. You probably ought to put a death grip on your wallet and run away.

My big concern is whether I should invest in anti-depressants. If Black Chandelier goes under, my daughters will be in a major funk.

Too Close to Home

2008-03-27T16:31:00.000-06:00

I opened the paper earlier this week and learned that there was another mass killing involving Hills Bank in eastern Iowa (There was one about 20 years ago when a farmer shot his wife, a bank officer and then himself.). This time a bank officer killed wife and four kids before killing himself. He'd been indicted for embezzlement and was scheduled to go to trial in federal court next month.

I titled this entry "Too Close to Home" because my parents bank there, as did my grandparents. We know everybody there. And I have to say this is another, albeit extreme, example of the Great American Tragedy. He got wrapped up in maintaining a lifestyle at whatever price, and he lost sight of everything else.

I've seen this play out a lot of times in my career. People get on a track, and before they know it, they're a million miles away from whom they thought they were. Some have managed to switch back on their own. Some have gone through bankruptcy. A few ended up in prison. But a disturbing number ended the problem, or at least their concern for it, permanently and violently.

Let's face it folks: Lifestyle is an ephemeral thing. Even under the best of circumstances, cancer or a car crash can blow it all away. Consequently, when you start your career, it's a good idea to sit down and write down what you hope to achieve, and then review and revise periodically. If you're self-employed, it's even more important to do that, first because you're calling the course for both your life and your business, and second because you don't have an employer to set any agendas for you.

When I help clients set up businesses, I like to sit with them and help them make those lists of goals and priorities. First, if I don't, I can't give them the best legal advice. Second, I've seen too many examples of what happens to people who don't lay that kind of foundation. Usually I've seen it as a lawyer, but there were too many times I saw extreme examples when I was a coroner. Believe me, such results are worth a little planning to avoid.

And if you want to pretend you're an international player...

2008-03-25T16:44:00.000-06:00

...it's not a good idea for the Legislature to accuse an esteemed international training program of being a Commie plot.

The International Baccalaureate program is a rigorous, uniform program designed to prepare our kids for the global economy and create at least some modicum of an international diploma standard. In effect, it allows our high school students to say, "See, I really do match up with kids from other countries."

Relatively few Utah schools offer the program, and the cost isn't that great compared to the whole state eduction budget. But when proponents sought funding from the Legislature, Sen. Margaret Dayton of Orem decided the program was "anti-American" and got Sen. Darin Peterson of Nephi and my own Sen. Howard Stephenson to vote with her to shoot down the funding. After a general uproar, the Legislature agreed to provide some token funding, but Stephenson is still pushing for an investigation of the program because he's "heard some concerns from teachers and parents."

There are those who believe that teaching anything other than American Hagiography is treason. Folks, such a course does our kids no favors. The IB program introduces kids to different points of view. Given the world they are marching off into, that's a good thing. Even if they never leave Utah, the odds are getting pretty good that their co-workers and even their bosses will be from someplace else and hold opinions vastly different than theirs. They might as well get used to that reality now. And so should the Legislature.

What's the Gov Smoking?

2008-03-25T16:19:00.000-06:00

At his Economic Summit at the Grand America last week, Governor Huntsman said, "Our state's economy is resilient and strong."

Earth to Jon: Utah doesn't have an economy. The descendants of the sturdy pioneers of '47 like to believe this is still an enclave in the wilderness, but as my grandfather used to say, "That's a bunch of hooey." Utah isn't California; it doesn't create its own economic climate. Utah is a derivative of everywhere else.

Take a look around. ZCMI is long gone. Novell's HQ is elsewhere. SCO will be dragged out of bankruptcy by New Yorkers and Arabs (BTW, take a good look at Utah County. The only local businesses of any size there are network marketing companies.). Howell's Photo is gone (a tragedy, in my not-so-humble opinion). After 18 years, Dreyer's has dropped the hammer and discontinued Snelgrove's (Oh, the humanity!). The Downtown and Trolley Square overhauls will be populated by national chains, not Utah businesses. Utah is a leaf blown by national and international winds.

On the other hand, there will always be people who want to walk into a business and talk to the owner. With such businesses getting scarcer, it may be time to open up your own.

Starting a Business? Now?

2008-01-30T06:56:00.000-07:00

Utah bankruptcies are up 25% (40% nationally), stocks are bipolar on a good day and trending downward, the Fed has savagely cut rates (and will do so again today) and seems bent on reducing the value of the dollar below that of toilet paper, and we're probably already in a recession. Sounds like it's time to start a business.

Huh? Rife, has your choo-choo jumped the tracks? Nope. Think about it for a second. How secure is your job in this economy? If it can simply disappear overnight (Let's all join with Bob the Builder: "Can it vanish? Yes it can."), how much extra risk is there in doing it yourself?

The real question is whether you have something people will pay for. No, really pay for. The legions who joined the real estate and mortgage industries in the last few years are now back out of those industries because they were just riding the wave, not bringing real value. In this economy, it comes down to what you bring.

If you have something to offer, you might as well offer it and get paid for it. You should also set things up properly right from the start. I've seen way too many businesses with good things to offer go down the tubes because of an insurmountable legal or accounting problem that would have been simple to fix earlier. Get professional help. And with any luck, that won't include psychiatric, at least not for awhile.

Hide everything,...

2007-12-11T17:22:00.000-07:00

...the Utah State Government is coming to help. Governor Huntsman thinks his mandatory insurance plan is going to fix things. Let's just say I'm skeptical.

As I understand it, the plan will have three income tiers. Folks in the bottom tier will receive something like Medicaid. Folks in the middle will receive subsidies to help them pay for insurance. Folks in the top tier will have to buy their own. At least they'll have to if they want to do such mundane things as go to school or get a job, because they'll have to provide proof of insurance in order to apply. And you won't be able to employ them without that proof of insurance, either.

Does anybody else see anything wrong with this? Suppose your income increases and you bump up a tier, but you can't afford your insurance any more (an existing problem that this plan exacerbates)? Suppose you bump up a tier, and private insurers won't insure you? Suppose you're an employer, and the promotions and raises you provide your employees do them more harm than good? Do you have any idea how much pressure employers will be under to pay under the table, or to pay in barter? Do you have any idea how the underground economy will explode?

This disaster needs headed off.

Everything old...

2007-12-11T17:05:00.000-07:00

...is new again. Things sure have changed since the dot-com days. No cash to burn, no Segways and lobster tails for everybody. You may have to raise your money from the Three Fs (Family, Friends, and Fools). You may have to work out of your apartment. You may have to pinch pennies. You may have to eat at home, and not take-out either. Oh yeah, and you actually have to have a product. That people will buy. And you have to sell it to them. And you have to service it. Yep, things sure have changed. Back to reality. About time.