Stiglitz on shareholders’ mistreatment

A few days ago I published a book review of “The Roaring Nineties” by the Nobel prize Joseph E. Stiglitz. I wanted to share here some passages related to how shareholders, investors are mistreated by those who are supposed to work for them and how alignment of incentives play a role in this.

[On boards of directors] “Here again there was another conflict of interest. Boards are supposed to protect the interests of all shareholders. But some boards, whose members often receive large fees for membership and attendance, were frequently more concerned with pleasing the CEO than fulfilling their supposed fiduciary responsibilities.”

[On one-offs] “[executives] found ways to boost their earnings – through sam transactions which allowed them to book revenues even if they didn’t really have them, or by moving expenses off the books, or by using one-time write-offs (time and time again), to try to give the appearance of robust normal profits. Their objective was to create the appearance of alluring success [...] and cash out before the world discovered the truth.”

[On incentives] “The bankruptcy report spoke of “numerous failures inadequacies and breakdowns in the multilayered system designed to protect the integrity of financial reporting system at WorldCom, including the board of directors, the audit committee, the company’s system of internal controls and the independent auditors”. The problem, I would argue, was deeper, and touched not only WorldCom: the problem was with incentives – for the management, and for those who were supposedly watching over management.”

[On the subject of fines] “They accepted fines of unprecedented levels [...] but, in most cases, only after being assured that their CEOs would not do [jail] time. [...] in many cases it was not the CEOs but the companies that paid them;  indeed, the fines imposed on corporations for such bad behavior represent a curious case where the victim is punished twice over. For ultimately, the shareholders – who have already been cheated by corporate management- bear the costs of such fines.

[On executives' greed and regulation] “The deregulation mentality made the suggestion of increased government regulation [...] an anathema. What worried many were shareholder suits, which they viewed as simply reflecting the rapacious greed of lawyers, not part of a system of checks and balances against the rapacious greed of corporate executives.”

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The Roaring Nineties

 

The Roaring Nineties, Joseph E. Stiglitz.

The Roaring Nineties, Joseph E. Stiglitz.

Joseph E. Stiglitz (1) served and later chaired the  Council of Economic Advisers (CEA) during the Clinton Administration from 1993 to 1997. He was awarded the John Bates Clark Medal (1979) and he Nobel Prize in Economics (2001). After leaving the CEA he moved to the World Bank. He taught in the past at Stanford and now teaches in Columbia University. He also served at the OECD and several other positions to which he has been appointed throughout his career.

Stiglitz wrote “The Roaring Nineties” in 2003 to offer an insider’s view of economic policy making and the economic boom and bust of the nineties. I loved the book. I use to make some annotations and marks in the books I read. I counted the ones I made reading this book: 52.

Stiglitz is frank in admitting that all the focus that the Clinton administration had at the beginning of the term in passing laws to improve the living of the disfavored ones was suddenly put aside due to the mantra of deficit reduction. He openly regrets it several times throughout the book and offers some criticism on the administration he took part in and others before and after. Especially Reagan’s and Bush II’s.

Now, in 2014, there are many who brag about their seeing of the bubble that caused the financial crisis which burst between 2007-2009. It would be rather easy to see what they really said beforehand. See what Stiglitz published in 2003:

The huge tax cuts of 2001 and 2003 were larger than the country could afford. The surplus of 2% of GDP of 2000 was converted in short order to a deficit of 5% of deficit – a huge turnaround in a short space of time. Americans were not saving enough to finance this deficit, and so the country, in effect, turned to the rest of the world. The country is living well beyond its means, borrowing more than a billion and a half dollars a day. [...]

Households took on more debt because interest rates were low and they could afford it. But as interest rates inevitably rise as the economy strengthens, households will find it difficult to service their debt. This will be further aggravated in the years to come as large budget deficit means interest rates will be higher than they otherwise would be, putting an extra burden on the country. Many households will be forced into bankruptcy. Many will be forced to rein in their consumption. There is a strong risk that the real state bubble will break, or at the very least, prices will stagnate [...] What is clear, however, is thar the Bush-Greenspan strategy, entailing greater reliance on low-interest rates and mortgage refinancing to maintain the economy through the period 2001-2004, and tax cuts for the rich, providing far less stimulus to the economy than would have been provided by investment tax credits or tax cuts for the poor, was a risky one, and has put the future of the American economy in jeopardy.” (emphasis is mine)

The risk then became an issue, which is still lasting 10 years later. This comes just in the preface of the book. Stiglitz specialization is information asymmetry. He gives some examples of such asymmetry in different passages of the book when analyzing errors, incentives, etc., in accounting, auditing, special interest agendas.

Let me quote some of the gems I had marked in his book:

“[...] one of the reasons that the invisible hand may be invisible is that it is simply not there”

“[...] “Voodoo” economics of Reagan, who somehow believed that by cutting taxes you could raise tax revenues [...]“

“Developing countries were told to open their markets to every imaginable form of import [...]. Meanwhile, we maintained stiff trade barriers and large subsidies of our own on behalf of U.S. farmers and agribusiness, thereby denying our market to the farmers of the Third World. [...]

These were not the only examples of what struck those abroad as blatant hypocrisy.”

“We scolded the developing nations about their disrespect for intellectual property laws that we, too, had scorned in our days as a developing nation. (The United States didn’t get around to protecting the rights of foreign authors until 1891)”

“[...] the folly of the Reagan tax cuts. [...] a theory scrawled on the back of a napkin, called the Laffer curve – after Arthur Laffer, who then was at the University of Chicago- which claimed  that as taxes got higher and higher, people worked less hard and saved less [...]“

“Over the years, I have become convinced that the confidence argument is the last refuge of those who cannot find better arguments; when there is no direct evidence that deficits directly promote recovery or adversely affect growth, then they do so because of confidence.”

“Fiscal responsibility was supposed to be the province of the conservative Republicans, but after twelve years of fiscal profligacy, a tax cut that Reagan said would pay for itself through energizing the economy but did not, it was left to Clinton to do the dirty work, without the help of the Republicans, who voted unanimously against Clinton’s deficit reduction plan. Their opposition confirmed the more diabolic interpretation of the Reagan tax cuts. They didn’t really believe in supply-side economics, the theory that the tax cut would spur the economy so much that tax revenues would actually increase. Instead, they knew that there would be shortfalls, and they hoped that the shortfalls would force a cutback in government spending. The true agenda was thus to force large cutbacks in the size of government [...]“

“[...] the IMF was founded, under the intellectual aegis of Keynes: to provide with the money necessary for expansionary fiscal policy in an economic downturn. But the IMF has forgotten its original mission [...]“

“The New Economy-the innovations which continue to fuel the productivity growth and form the basis of this country’s long-run strength depend on the advances of science, on researches at universities and research labs, who work sixteen-hour days and more in the tireless search to try to understand the world in which we live. These are the people we should have been rewarding, and encouraging.”

I think that with these excerpts you get a glimpse of the directness of the book. It touches economic policies, creative accounting and accounting standards, conflicts of interests, incentives, the case study of Enron, employment, the role of central banks, the danger of quick adoptions of deregulation, corporate hypocrisy, globalization…

I strongly recommend the reading of this book (about 380 pages).

(1) You may follow him in Twitter.

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Airbus E-Fan

Yesterday, a small event for employees was organized at Airbus Delivery Centre in Blagnac to see the concept airplane E-Fan, a prototype 2-seater electric aircraft. The airplane is expected to go into series production by 2017, by then the design will evolve in a side-by-side seating.

During yesterday’s event, the plane was to make a couple of flights. In the end it only made the first one, which I missed, and thus I didn’t get to see it flying. Nevertheless, I could get into the hangar, where the colleagues involved in the project were starting to disassemble it and I could take some pictures, ask some questions, wander around… #avgeeking.

See below the pictures I took and a video from Airbus Group Youtube channel:

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Refuelling or not refuelling?

Last week, I took my brother and sister onboard of one of my flight lessons. Ahead of the flight I reminded my instructor that I would bring them along and asked what flight route should I prepare. His response: “prepare the weight and balance report, the destination will be a surprise”. And so I did.

For those not initiated, each aircraft has a defined maximum take off weight (MTOW). Before the flight, the pilot needs to ensure that the aircraft will be below that weight. On top of that, the centre of gravity must be within certain limits. That is the weight and balance (1).

For a small simple aircraft like the Robin DR-44 we flew, it is a rather easy calculation that can be done with a pencil. See in the image below two ways of calculating it: making the numbers or using the graphic at the bottom of the image.

Weight and balance report for Robin DR-44.

Weight and balance report for Robin DR-44.

Let’s review the numbers. We flew the DR-44 with immatriculation F-GSRR, which empty weight is 616kg. I estimated that the instructor and I, fully dressed and with headsets would weight ~160kg. My brother and sister behind, another 160kg. Baggages: I almost emptied mine and weighted it, 2.5kg. My instructor’s one is rather heavy, I assumed that together they would be 10kg. Principal fuel deposit: 110L of Avgas, with a density of 0.72kg/L, 79.2kg. Another 50L for the reserve deposit, 36kg.

Summing up: 1,061kg.

You can read in the image that the maximum take off weight for the plane is 1,000kg…

What to do then? Clearly, the aircraft is a given, so weight shall be reduced from somewhere else. But, from where? Either we left someone on ground or reduced baggage weight (my instructor left his and brought along only a book with aerodrome charts). However, baggage weight contributed only 10kg to the initial calculation. I then calculated: what is the maximum fuel we can carry?

Forget the reserve deposit: 36kg less. Let’s go with the principal deposit. What is the maximum fuel volume that would enable us to be within the 1,000kg limit? It would be somewhere about 80L (vs. the capacity of 110L of the deposit).

When I arrived to the aerodrome, I came with the message to my instructor: “Thierry, we can only carry 80L, if the plane is filled up with fuel, is there a way to purge it?” “No.” I then explained the numbers I had made and we went through them together.

Next step: check the fuel indicator of the plane… ~3/4… or about 80L, with the reserve deposit empty. We would be just within the limit!

We then proceeded with the preparation of the route, the pre-flight check, etc., and had good time with the flight (see report of the experience by my sister, in Spanish).

From this experience I learned a take away for future flights: when finishing your flight, it is normal etiquette towards the next pilot to refuel the aircraft if you see that the deposit is almost empty, however, it can be counter productive to fill it up completely if the next pilot is going to fly with passengers and close to the MTOW. I would then suggest that it is better to just fill it up to the volume where you know that the next pilot can have all choices open. For our DR-44 that would be filling it up to 3/4 of the main deposit (leaving reserve empty) (2). If the next pilot wants to travel along to a far distance needing more fuel he can always fill up more litres. This target weight will be different for each aircraft.

(1) See here another post I wrote two years ago about weight and balance calculations in the same plane model.

(2) Bear in mind that I found the airplane with precisely ~80L: coincidence or the previous pilot had come to the same conclusion at some point?

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Mister India

I was reminded by the following tweet from a fellow Toastmaster from Finland of a funny anecdote from a few years ago.

In May 2011 Luca and I attended the annual shareholders’ meeting of Berkshire Hathaway (see here a post describing the experience). One of the activities for shareholders that we joined was to dine on Sunday evening at Piccolo’s, a steakhouse popularized by the taste of Warren Buffett, apparently a frequent customer (we indeed happen to have him dining together with Bill Gates two tables away).

The anecdote I wanted to share in this post stems from my rather strong Spanish accent when speaking English, together with the little vocalization effort that I put sometimes in my speech plus the use of the phonetic alphabet to spell words.

When I wanted to book a table at Piccolo’s to have that dinner, I was asked my surname, which is uncommon even in Spain, thus I spelled it: India, Romeo, Alfa, Sierra… Hours later, we arrived at the restaurant and informed the waiter that we had a reservation, at the name “Irastorza”. She went to check her registry. Swiftly and politely she said: “sure, come along with me”. I was close enough to her to see that in the book she had just noted: “India”.

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Aircraft market forecasts accuracy (update 2014)

About two years ago I wrote a post in which I analyzed the accuracy of commercial aircraft market forecasts. In particular, Boeing’s series of yearly Current Market Outlook (CMO). In that comparison, between the CMOs from 1997 and 2012, we could compare the predicted and the actual world fleets at 2011 year-end. Except for the twin-aisle segment and especially the large aircraft sector, the accuracy was remarkable, as the estimated global fleet only exceeded the actuals in 1%.

In this post, I just wanted to provide an update with the figures from the latest CMO (2014), released a few weeks ago, in comparison with 1999’s CMO. In that CMO from 1999 [PDF, 1.5MB], we find the following chart showing Boeing’s forecasted fleet size and distribution for 2003, 2008, 2013 and 2018 year-ends.

1999 Boeing CMO year-end fleet forecasts for 2003, 2008, 2013 & 2018.

1999 Boeing CMO year-end fleet forecasts for 2003, 2008, 2013 & 2018.

In 2014 CMO, Boeing offered figures of 2013 year-end fleet (1).

Fleet at year end 2013 - Boeing 2014 CMO.

Fleet at year-end 2013 – Boeing 2014 CMO.

And now, the comparison is immediate:

Comparison of aircraft fleet at year-end 2013: 1999 forecast vs. actual (sources: Boeing CMO 1999 and 2014).

Comparison of aircraft fleet at year-end 2013: 1999 forecast vs. actual (sources: Boeing CMO 1999 and 2014).

Some reflections:

  • The forecasts for all segment except for single-aisle (737-800) predicted higher numbers of aircraft in the fleet than the actuals have shown 15 years later (2).
  • The total fleet figure was missed by 11%, a larger deviation than the 1% from two years ago.
  • The 737 has been the model outselling the forecasts, offsetting partially the lower demand in all other segments. In particular, even if deviations per segment have been higher, the global forecasted figure for passenger aircraft has been missed by only 3%.
  • The forecast is especially off mark the twin-aisle, where there are over 1,700 less aircraft in the current fleet than forecasted (3).

For the next such comparison we will need to wait some years, as from the year 2000 Boeing provided CMOs in a different fashion, offering a view of the forecasted fleet only 20 years from the date in question, instead of a view every 5 years. Therefore, we will have to wait until 2017, when we will be able to compare the 20-year forecast from 1997 CMO with the actuals of 2016 to be provided in 2017 CMO.

(1) In order to see the detailed split per segment differentiated between passenger and freighter aircraft, until the released of the full CMO, it is needed to use the exploring data tool offered in Boeing’s site.

(2) The differences in accuracy between the lower and higher end of the small-aisle segment should not be taken into account, as they are influenced by the different consideration of the cut off number of seats between a CMO and the other.

(3) Possibly a reason why Boeing plays down on the 747-8I and A380 segment.

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“A bird in the hand is worth two in the bush” (speech)

Thanks to the drive of some individuals (Sarah, EduardoDominique) a new Toastmasters corporate club (1) is being created within Airbus in Toulouse, where I work.

I joined Toastmasters in 2007 when I lived in Madrid and I have written often about Toastmasters in this blog, however I had become inactive in the last couple of years. This new initiative is very convenient and thanks to it I am engaging myself again in the association.

Today, I gave again a prepared speech in Toastmasters (2). In this post I just wanted to share it. Find it here, “A bird in the hand is worth two in the bush”, and below:

A bird in the hand is worth two in the bush

The topic of the speech is known for the reader of this blog: impact of delays in aircraft development projects seen as investment projects, the time value of money, discounting cash flows, break even, etc.

The feedback that I got: It was well received, especially the introduction, the interaction with the audience, the structure and how the topic was introduced and the main points called back in the end. However, I lost some individuals with the last slide, which needed some more explanation. I should have simplified the graphic. Some demanded more pauses and better vocalization.

(1) Up to now it is a prospect Toastmasters club.

(2) Project #1 of the “Speeches by Management” advanced manual: “The briefing”.

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