Corpulent Compensation It’s unseemly.

And that’s the best one can say about the big banks on Wall Street making gobs of money again – with taxpayer help – or Baltimore County Councilmen (there are no women on the Council) taking pensions at 100% of their pay. Meanwhile, unemployment remains sky high; and although Maryland is doing better than most states, times are very scary for the average family here.

The big banks on Wall Street are back in business making money again, so much so that TARP funds are being repaid and huge bonuses are being handed out to employees.

What is galling is that these banks would not have been in a position to make money had it not been for the actions of the Bush and Obama administrations to shore them up with billions of dollars. And while they are generous with the money they have made using cheap money provided by the Federal Reserve, they are pretty stingy when it comes to doing what they are supposed to do: make loans.

It’s no wonder that the president is mad at them. The rest of us are too.

Both administrations were right to act quickly to stave off panic and a total financial collapse. But they were all too generous with the terms they gave these banks; and now that the TARP loans are being repaid, their leverage has been greatly reduced.

Jawboning by the president isn’t going to be enough to get the banks to rein in compensation and to start making loans again. Fundamental regulatory reform is what is needed.

The New York Times editorialized Tuesday that banks should be prohibited from becoming too big to fail. Separating commercial from investment banking would be one way to achieve that worthy objective.

Paul Volcker has advocated returning to the principles of the Glass Steagall Act that separated commercial banking from investment banking and proprietary trading. Glass Steagall may have been stodgy, but it worked in prohibiting the concentration of financial control that eventually resulted in the financial meltdown. Requiring investment banks to use their own capital instead of the public's would be another step in keeping a healthy relationship between risk taking and compensation.

In the not too distant past, investment banks were independently owned businesses. Risk was managed carefully because ultimately it was the partners’ money that was at risk. Compensation was more directly tied to the success of the firm; and while many partners, like those at Goldman Sachs, became very wealthy, it was hard to begrudge those partners who made a lot of money. As John Houseman used to say: “they earned it.” Today, the principals at those investment banks are relatively sheltered from the risks they take. Even if they fail, their pay packages are sufficient to provide financial security for many generations of their families. They just take their money and leave the problems to others.

Like pensions for county councilmen.

Even though the amounts at stake are wildly different, there are parallels between exorbitant executive compensation and outsized pensions being paid to retiring councilmen and legislators.

Goldman Sachs CEO Lloyd Blankfein justified the crazy compensation he and his fellow execs were getting by saying they were doing “God’s work”. Perhaps that same feeling of misplaced loyalty is behind the pensions Baltimore County Councilmen feel they are owed.

As the big Wall Street banks rush to pay back their TARP funds to get the government off their compensation committees, panicked contenders to the county executive position in Baltimore County are now proposing to cap the council’s generous pensions. But why are lawmakers at either the state or local level even entitled to pensions? After all, these are part-time jobs, and in a sense, voluntary since they don’t need these jobs. If they want pensions, like many of us do, let them contribute to their own 401k. But don’t ask us to contribute.

A favorite cartoon depicts a slight man standing in a huge office in front of an enormous desk with its equally enormous occupant. The man at the desk is saying: “Johnson, you have become indispensable to this company, and we can’t allow anyone to become indispensable, so you’re fired!”

Next fall we will find out if voters in Baltimore County are as fed up as they seem today and whether they will decide their representatives (and their pensions) are as indispensable as they apparently think they are.

With unemployment high and people worried about their future, people have a right to be angry with the Wall Street likes of Lloyd Blankfein and the current councilmen of Baltimore County.

The right thing would be for each to voluntarily cap compensation and pensions. But don’t expect a Christmas miracle.

At least one local company looks like they get it. In an overdue move, Constellation Energy’s Mayo Shattuck announced that the company is planning to give shareholders more say in executive pay and executives will forgo their golden parachutes.

It’s what the government has been rightfully demanding of its banking beneficiaries.

Lloyd should call Mayo for some advice.  7:57 AM •  8 Comments • Links to this post

Cardin and the Crazies So much for rational debate.

According to the Baltimore Sun’s report of Senator Ben Cardin’s Town Hall meeting earlier this week, former GOP gubernatorial candidate Ellen Sauerbray wore a pin that said “Euthanasia”. The assumption behind her message is that the healthcare bill supports euthanasia when it provides funds for end of life counseling – a view that even the Republican sponsor of this provision in the Senate described as “nutty”.

But she could just as easily have been referring to Ben Cardin’s Town Hall meeting and the rude protests that greeted the Senator and killed any possibility of rational debate, which is a shame.

There are legitimate concerns - and I share them - about the various healthcare proposals being hashed out in Washington. But you wouldn’t know it from the nonsense spewed at these town “mauls” as they have been referred to. The antics of the protesters which have become a daily occurrence this August are beyond tiresome and ultimately stifle citizen input that is necessary.

And let’s not dignify these protestors by saying these are just passionate folks worried about losing their healthcare and exercising their rights as citizens. These groups have more in common with the angry mobs that stood at the steps of school houses in the south trying to prevent desegregation than the patriots who dumped tea into Boston Harbor. At best, they act like four-year-olds having a temper tantrum.

The hysteria is often generated by misinformation from politicians and talk show bloviators who should know better - like Sarah Palin who wrote recently that the Obama reforms will create “death panels” that supposedly will make end of life decisions for you and your loved ones.

The fear they generate with this nonsense is misplaced.

What they really ought to fear is the fact that the cost explosion in healthcare is the biggest threat we all face. It is bankrupting Medicare and is a huge financial burden on businesses and individuals. They should worry that the United States spends far more on healthcare than other western countries that provide better if not complete access to health care for their citizens, with no better health outcomes.

The more the protestors shout down diligent moderate senators like Ben Cardin, the more they undermine the airing of legitimate concerns about where the healthcare legislation in Congress is heading.

And there are a lot of concerns about whether the various plans will go far enough to control costs; and whether in the goal to create universal coverage, they may place additional cost burdens on small business struggling in this economy.

But despite the craziness of the town hall protestors, the element of mistrust they express towards Congress and their lobbyist benefactors shouldn’t be ignored. The push for healthcare reform highlights the need to reform how Congress does business.

And, not surprisingly it is business as usual on Capitol Hill. Insurance and drug companies are actively lobbying Congress and giving generously. As Frank Rick wrote in this past Sunday’s New York Times, industry groups contributed $1.8 million over the first six months of 2009 to 18 House members of both parties directing health care reforms, including Speaker Nancy Pelosi and Maryland’s Steny Hoyer.

The insiders tell us this is how the “system” works, but most of us are sick of it. The whiff of corruption creates a legitimate sense that the people are going to get screwed in the process.

If this sense becomes pervasive – from liberals that the plan doesn’t go far enough in taking on the insurance and drug companies and from the right that the government is going to control your lives – then the various healthcare plans being debated in Congress are heading for intensive care.

The healthcare system is immensely complex and confusing to everyone. The stakes to individuals and to our economy are huge. There are tough choices that need to be made, and sacrifices that are going to be required. But unless everyone feels that the sacrifice is both necessary and the burden evenly distributed, the euthanasia Ellen Sauerbray fears may be applied to healthcare reform.

That would not only be a shame, it may be a disaster for the long-term fiscal and medical health of our country.  10:59 AM •  19 Comments • Links to this post

NEA, Michael Steele and a Good Idea What do they have in common? It isn’t obvious, but bear with me as I try to weave this rather tenuous thread.

Yesterday, citybizlist.com published the letter from New Enterprise Associates (NEA) counsel Louis Citron informing Mayor Dixon that NEA was leaving the city for an office in the suburbs, and taking the $200,000 in revenue that it generates for local merchants (oh dear, like the Maryland Club!) with it.

The letter cited the increase in crime in the neighborhood. There is no doubt that this is a legitimate concern for all who live in the Mt. Vernon area which has seen crime spill over into this relatively peaceful neighborhood.

Was it just me, or did the tone of the letter make me wonder what NEA’s real motive is? Could it be that they wanted to consolidate operations in one office – after all, the St. Paul Street office is small and housed only 35 employees. That it would want to consolidate its operations in the area would be understandable for one of the largest private equity funds in the world with $8.5 billion in capital.

That they had to write a public letter to the Mayor struck me as disingenuous and grandstanding. If they were so concerned about the crime problem, they could have spoken to the Mayor about it in advance. According to the Mayor’s office, they didn’t. As a very wealthy fund, NEA could easily afford private security guards to escort its employees to their cars. The NEA partners obviously felt that it is government’s obligation to provide for the public safety. And it is. But as businessmen, they also know that the city is strapped financially and that police resources are stretched. If NEA had wanted to stay in the City, they could have kept their employees safe and their fancy cars too.

It could be that they just didn’t want to spend the money. After all, the private equity industry is facing the now certain prospect that the Congress will tax the “carried interest” portion of their compensation as ordinary income, and not as capital gains. The argument that capital gains treatment is justified because of the risk that equity funds take has lost currency with a Congress looking for revenue and wise to the fact that very little of equity partners’ capital is actually at risk. And as Warren Buffet has said, there is something wrong with a tax system where the income of the secretaries is taxed at a higher rate than the income of the equity firm’s partners.

Speaking of politics, the Republicans’ Senate and House campaign committees had a big fundraiser in DC last night and a friend of mine gave me a few little anecdotes from the evening. She noted that Michael Steele, the GOP Committee Chair was nowhere to be seen and didn’t even merit a mention from the parade of speakers on the podium. This seems pretty strange for a party that desperately needs to show some diversity. The evening was mostly a lackluster affair; the GOP is still apparently in shock at their diminished influence in Washington, and in awe at how Obama is hogging the limelight.

It was so bad that video introduction to Master of Ceremonies Jon Voight included a scene from the movie Pearl Harbor where Voight plays President (and democratic icon) FDR. In the scene, the paralyzed president struggles to his feet to angrily exclaim “don’t tell me it can’t be done”. The tepid applause from the republican crowd of 2,000 reflected, I think, their confusion at whether they should be applauding a democratic president’s defiant statement, or his portrayal by one of the party’s most conservative spokesmen. That confusion shows, well, how confused the GOP is.

The feckless GOP is left to hope that Obama (and the country) falls flat on its face. But in Maryland, the GOP has become so irrelevant that won’t be enough to save them.

So, here’s the idea. The June 6th Economist magazine has an article about Washington State’s system of holding non-partisan primaries which allows independents, Democrats and Republicans to vote on the same ballot. The top two vote getters in the primary, which could be of the same party, then have run-off in the general election. The effect of this is to enfranchise a large number of voters, particularly independents who are barred in Maryland from voting in primaries, and less polarization as the process leads to the election of moderate candidates. This might save the GOP in Maryland from self-destruction.

Such a system will never got adopted in Maryland because the Democrats know they would be giving up power.

But that is probably the best argument for it.  11:29 AM •  2 Comments • Links to this post

Purchase The Preakness Spring, among other things, is the start of horse racing season. I am not a horse racing buff. I have only been to the Preakness once, though I have been to various tracks and always manage to watch the Kentucky Derby and the Preakness on television.

There is something about horse racing that captures the imagination. It is the combination of watching exquisite animals and the excitement of sport at its most basic level. A coach of mine once said racing is true sport, the rest are just games. Racing is competition in its purest form – the winner is the one that gets to the finish line first. There are no referees or umpires to affect the outcome; and no coaches that can make a difference in the last minute with a key time out or play calling. As an athlete, you have no teammates you cannot rely on.

The Preakness was a Baltimore and Maryland state treasure long before the Orioles and Ravens came along. But unlike those two teams which have beautiful stadiums to play in, Pimlico is a dump. It needs to go, but The Preakness must be preserved.

With Magna Entertainment, the owner of Pimlico, filing for Chapter 11, the Governor quickly secured passage of a bill giving the state eminent domain over The Preakness Stakes.

It now needs to take the next step. As important a symbol as The Preakness is to Baltimore and Maryland, the state should exercise eminent domain right away and take over operation of the track and The Preakness.

But the state shouldn’t stop there – it should build a new track downtown, near Camden Yards and near the Middle Branch and move the Preakness there.

Like Oriole Park, a state of the art facility could be built that is elegant and a pleasant place to be on a warm spring afternoon or summer’s night. Like the ball park, it could evoke the history of racing in Maryland. It could borrow from Saratoga with its pastoral feel and mimic Churchill Downs’ grandeur. It could be built to make smaller crowds enjoy the intimacy and the excitement of being close to the horses yet accommodate the large crowds that will come for the Preakness every year. Slots, which have had a hard time attracting interest from private investors, could be located there too. With Oriole Park and Ravens (does anyone really call it M & T Bank?) stadium, the new track would become the third jewel in Baltimore’s sporting crown.

Those in favor of a free market that keeps government out to the hands of private enterprise will yowl. Plus, they will say that horse racing is a dying sport and a certified money loser (all true).

Parents and community activists will say that the money spent on a new track would be better spent on schools (I don’t disagree).

But Camden Yards and the Ravens stadium are much more than places to watch games. They are symbols of a revitalized Baltimore and a source of pride to the community. And not insignificantly, they provide a lot of jobs in relation to the tourism and hospitality industry. It was Mayor and Governor Schaefer's vision that created those facilities. It is time to use that same boldness to save The Preakness by building a new facility.

A new track would fit that mold of public works projects that add to the City’s ambience and image. It would enhance the appeal of The Preakness which is losing its luster because Pimlico has become so seedy. And what of Pimlico? Tear it down and sell it to a developer for some other use that is more in keeping with the community where it is located.

My bet is that a new track will rekindle interest and excitement in horse racing. Where will the money come from you ask? The Preakness is a brand that has tremendous value. With that asset, we can figure it out.  10:07 AM •  5 Comments • Links to this post

Maryland's Ugly Earmarks The Maryland General Assembly just ended its annual session facing the prospect of having to address another $1 billion budget gap without the benefit of the $3 billion federal stimulus that helped it to avoid more drastic cuts.

Meanwhile, in the parallel universe of the U.S. Congress, the Baltimore Sun reports that Maryland’s Congressional Delegation has requested more than $1 billion “earmarks” funding for special projects in the state.

Maryland’s state lawmakers’ spending is held in check by the requirement to balance the state’s budget. Not so our folks in Washington. From the list of earmarks, it looks like some of the state’s members of congress have never met a program that they don’t think deserving.

Bringing money home to their districts is what congressmen do and it makes them friends. This can be a good thing especially in hard times when state funding isn’t available for otherwise deserving projects. There is something for everyone in these earmarks requests: those for the elderly, kids and education are mostly ok. But how do you justify $500,000 for the Cal Ripken Foundation for programs for disadvantaged youth? I don’t question that programs like this aren’t worthy, but should federal money be used to fund Cal Ripken’s foundation programs? No. Cal should ask his wealthy friends to support his programs, not the taxpayer.

But private companies and federal agencies? Not ok.

Many of the projects listed in Maryland’s congressional wish list have to do with military and national security projects. There is no doubt this is an important industry in our state. But you have to ask if they are so important, why they weren’t funded from the defense budget or other agencies with responsibility for these areas? The Sun article cited an appropriation request for a $60 million Cray computer for the National Security Agency. I don’t question that the NSA needs a Cray computer. But the NSA’s request was probably knocked out of the budget process because the Obama administration had higher spending priorities. So the NSA went to their congressman for an earmark to get around that.

At least the congressman making that request, Dutch Ruppersberger, sits on the House Select Committee on Intelligence so just maybe he knows something that Intelligence Chief Leon Panetta doesn’t. But what of John Sarbanes' $6.5 million earmark to a Columbia defense contractor for a “Seacatcher UAS Launch and Recovery System”. Maybe this is a good program and maybe it isn’t, but I am not sure that Sarbanes is in a position to know because he doesn’t sit on any committees that deal with military matters. Defense Secretary Gates just announced cuts to wasteful military programs. If the Seacatcher were a priority for the Defense Department I expect it would have been included in the department’s appropriation request.

I am all for federal spending in Maryland. Better the money come to Maryland than go to Montana. And, I am not picking on any of these congressmen in particular. Unfortunately, this is the way the game is played. As long as they can do it, they will.

But accepting business as usual got us where we are today. President Obama opposes earmarks as part of the Washington insider culture that needs to be changed (full disclosure: I did too when I ran for congress). Why? Plain and simple: there is too much temptation for favoritism, and there is too little oversight and accountability. Earmarks circumvent the appropriations process, and that’s the point.

As Congress plays with its earmarks, they should consider that maybe there isn’t a whole lot of difference between earmarks and the indiscriminate loans made by the financiers that got us into the current financial mess. The regulatory system failed the public and we are all paying for the consequences. The earmark addiction represents an abdication of the legislative process in favor of, well, favoritism.

In his inaugural address, the President said it was time for government to put aside childish things. The Gates defense budget shows that his administration is willing to make tough choices.

But it’s obvious that Congress can’t, and won’t give up its earmark toys. It’s going to be up to President Obama to take them away.  12:13 PM •  0 Comments • Links to this post

The Incredible Fecklessness of Being Republican I shouldn’t listen to talk shows, especially by conservative Republicans.

With a national economic crisis created under a Republican’s watch, Rush Limbaugh’s answer is to bash President Obama and ridicule the GOP’s new leader Michael Steele. At home, it is Bob and Kendell Erhlich whining about Martin O’Malley on their Saturday radio show in Baltimore.

Is it any wonder that the Republican Party has such little support?

To be fair, there are some serious commentators out there – Ron Smith at least strives to provide an intellectual basis for his arguments.

The rest, from Limbaugh to the Erhlichs just want to rant. They keep reciting the same old arguments and mistake the noise from the echo chamber as wide support for their positions. But their arguments are tired and old.

What do they rant about? Big government! Wake up! We have had big government since the days that Lyndon Johnson was President. And since LBJ, we have had Republican presidents 28 of the past 40 years.

A remarkable fact is that since Johnson, every democratic president has increased revenue faster than spending while the opposite has been true with the five Republican presidents increasing spending faster than revenue since that time.

With that kind of track record, they should like what Obama is doing.

We face an economic crisis of monumental proportions. Yet all the Grand Old Party can do is come up with the same old nonsense. John Boehner, the GOP leader in the House of Representatives answer to the crisis is to reduce spending. Even conservative economists say the economic crisis warrants increased government spending. Is it any wonder few take them seriously?

There are legitimate criticisms to be made about President Obama’s budget and spending plans. But most of those arguments are coming from democrats like Paul Krugman who think we need even more spending, and Tom Friedman who thinks the money we are spending should go into new tech industries and not to prop up the auto companies which are dying.

Today’s GOP is mostly bereft of new ideas.

If the national party is unserious, then the state’s GOP has become, or more accurately, has gone back to being irrelevant. Bob Ehrlich had a chance to make a mark as Governor but he was more interested in lecturing the legislature than offering serious legislation. He had no notable successes much less good ideas compared to, for example, Republican Governor Mitt Romney’s health care for all program in Massachusetts.

It is too bad. Maryland would benefit from a Republican party that offered up good government policies beyond cutting taxes and cutting programs. The party has been hostage to its right wing since Ellen Sauerbrey beat Helen Bentley in the 1994 GOP gubernatorial primary. The most recent example of the republican right eating its own occurred last year when Congressman Gilchrest was beaten by State Senator Andy Harris. At the national level, Steele’s capitulation to Limbaugh was in this tradition.

The party should focus on new ideas to improve services that are delivered in the state. Meaningful progress on improving schools in poor areas still eludes us. Individuals and businesses struggle with ever escalating health care costs. This state has a woefully inadequate public transport system. It takes too long to get things done – Baltimore's Red Line is a case in point. They could find ways to streamline government and improve services.

They are also going to need a leader who is willing to take on the party’s ossified old guard. That is no small task given how nasty they have been, especially with their own.

The party has become too comfortable with complaining. It has become morally rigid and intellectually lazy. It is, after all, far easier to rant than to do the hard and serious work of coming up with new ideas.

But if they don’t, they will deserve a new name – the Feckless Old Party.  8:26 AM •  1 Comments • Links to this post

The Wreckage in Constellation’s Orbit The ever unfolding financial disaster is like the US and Russian satellites that recently collided in outer space. Their wreckage is expected to orbit the earth for thousands of years, posing a hazard to other satellites that we have come to rely on.

Like the detritus from these satellites, the current financial wreckage is going to cause long term damage to the economy. As if the short term hasn't been bad enough.

One of Baltimore’s most prominent companies, Constellation Energy narrowly avoided disaster but still gets most of the heat from the press. The press loves it because it’s a story that combines all key attributes of an exciting drama: a stodgy business is turned into a high flying company by a charismatic youthful king with a sexy cheerleader wife. The company narrowly avoids disaster when it is rescued by a famous financial knight. But the knight wants control of the kingdom so the youthful king finds another less demanding suitor and pays a tribute to make the financial knight go away. Chastened, the youthful king vows to mend his ways. The people (or at least Jay Hancock of the Baltimore Sun) want the king’s head but the king’s knights of the rectangular table believe the guy who almost killed the company also saved it.

Compared to what has happened to some of Baltimore’s other famous companies, they may be right.

For all the drama, at least Constellation has solid assets that create real heat and light; and its shares, while down substantially from their high, still have value.

Barely visible in Constellation’s penumbra are far bigger corporate disasters in Baltimore. Like MuniMae, which has become a black hole that has sucked out almost all of its shareholder’s equity.

At the beginning of February, MuniMae announced that it had finally completed its 2006 financial audit. That audit showed shareholder equity of about $668 million. Today, the company is in default under its loan agreements; its stock price is 25 cents a share and its market capitalization is less than $10 million. MuniMae’s liquidity problems resulted in its auditors issuing a “going concern” opinion that casts substantial doubt on the company’s ability to survive.

It is likely that MuniMae’s failures are a result of the financial and real estate vortex that has mercilessly sucked otherwise good companies into near oblivion. Like Constellation, management took risks with leverage that have now come home to roost. But unlike Constellation, management hasn’t yet found a way to salvage the company. It is trying to sell assets to raise cash, but its assets are hard to value since many are securities that are collateralized by real estate. In this market, whatever they are able to sell may be too little and too late to save the company.

Another company that has been orbiting in never never land is NexCen Brands. NexCen has become very adept at reincarnation, so much so that it is unrecognizable from what it was at birth. For those with a short memory, NexCen used to be Aether Systems, which became a dotcom disaster (but not before that private equity that fueled its rocket stock price got a great return). With not so exquisite timing, it then transmogrified into a mortgage company before jettisoning that identity and acquiring a variety of lesser known retail brands that include ice cream, pretzels, cookies and shoes. NexCen’s stock is currently 7 cents a share, down from its 52 week high of $4.31 and light years from Aether’s stock price that was inflated to several hundred dollars a share in the dotcom craziness.

Others have tried to make these individual brands work in far less challenging economic climate and have failed. The track record of companies that own multiple, disparate brands has not been good especially ones as different as shoes and pretzels.

If nothing else, NextCen has demonstrated an instinct for survival. But at its current stock price, it would take about 1500 shares to buy a pair of Nike’s and a pretzel.

Stockholders might want to take that deal.  8:37 PM •  0 Comments • Links to this post