This is one of the funniest business stories that you will ever read. Now funny can be defined as humorous or occasionally as peculiar. This story has elements of both. Had this happened to some little backwater company it might even be viewed as tragic but when the company is one of the biggest multinational technology companies in the world then it’s funny.
This story happened in South Korea a few weeks ago. Samsung—the guys that make a galaxy of electronic devices including a certain line of smartphones—also happens to own a brokerage company. An employee at Samsung Securities was trying to key in a dividend payment of 1,000 won (the local currency used in South Korea) to a group of 2,018 employees. Now 1,000 won is about 94 cents in US dollars. Instead of keying-in this amount for a dividend payment for each share the employees owned, some Samsung employee issued 1,000 shares of Samsung stock for each share owned by the employee group.
Samsung—home of the biggest math error in the Galaxy
The dividend was supposed to be 1,000 won ($0.94) per share. But the employee mistook the form of measurement, confusing won and shares. The error caused Samsung Securities to issue a dividend that was 1,000 times the value of each share held by the group of employees.
In all, the company deposited 2.8 billion shares worth more than 111.8 trillion won ($104.8 billion) into employee accounts—more than 30 times the company’s existing issued shares.
A Samsung Securities spokeswoman said the firm realized the mistake shortly after, but failed to take immediate action.
Sixteen staff members sold a collective five million shares worth about $186.9 million minutes shortly after receiving them. It took the brokerage 37 minutes to completely block employees from selling the accidental shares, according to South Korea’s Financial Supervisory Services, a financial watchdog.
Some of the 16 staffers sold stock despite receiving warnings from the company not to do so, the FSS said. Samsung Securities said employees who had done so—along with the employee who had made the initial calculation mistake—have been temporarily suspended from their duties.
Unless you are a CRA member, living under a rock, voted for Hillary, or have any Park Family Genes in your DNA, you have likely heard Toys R Us is liquidating their business here in the United States and all over the globe. What caused a giant big box that controlled 20% of the toy market to collapse you may ask? Well a combination of things, but the internet, Amazon.com and high prices were none of them.
First some background on Toys R Us. The company was founded in 1948 by Charles Lazarus who interestingly died the same day the company decided to liquidate all stores. The company had sustained success and was even referred to as a “category killer” which is similar to how people view Amazon.com today (a company that is almost impossible to compete with).
Editor’s note: As a child, the highlight of every Christmas was receiving the Sear’s Christmas catalog. In my youth this was Christmas. We only wanted to get toys from Sears because it was literally a one-stop shop for everything. From their catalog, our parents could order anything and have it waiting for us under the tree. Seemingly out on nowhere, along came Toys R Us and stole Christmas from the oldest and most well-known retailer in the country.
Retail icon, Toys R Us, fades into oblivion
The company prospered for many decades but in the late 1990’s Toys R Us started having issues competing with Target, Wal-Mart, and Amazon.com. In 1998 it fell behind Wal-Mart in market share. This is when the chain’s issues started. They tried Kids R Us, a clothing discount chain, and it failed badly and was liquidated after 5 short years. They began growing their Babies R Us chain, to essentially focus on commodities like diapers and bottles, this was also a bad decision. Even more costly was the expensive remodeling of all stores in 2000 by former FAO Schwartz CEO John Eyler. This predictably didn’t change the competitive landscape so in 2005 with the stock struggling on Wall Street, it was sold in a leveraged buyout to 3 private equity firms. This further exasperated the problems facing Toys R Us. The buyout to take Toys private was 6.6 billion dollars, led by Bain Capital (After Mitt Romney had left) Vornado Realty Trust, and Kohlberg Kravis & Roberts.
Leveraged buyouts are not always bad things, there are benefits to being private and you do not have to answer to public investors on Wall Street and can work out corporate and company issues behind closed doors. In N Out and Chick-fil-A are both private and the lines are out the door, down the street, and in most cases backed up to the freeway! Michael Dell—yes that Dell—took the company he founded, Dell Computer, private. Dell Computer had been struggling for many years but taking it private has allowed it to turn around. Typically, after these types of buyouts, private equity firms wind up taking the company public again (more on this later).
So how do these buyouts work? When a public company has a major drop in stock price and has fundamental issues like Toys did, then in come the White Knights saying they can fix everything and will offer to buy the shares of the entire company. In the case of Toys, the private equity guys offered a price 67% higher than what the shares were trading for on Wall Street; banks are happy, stockholders are typically happy, everyone gets paid and then the company is private. In the case of Toys, it was 6.6 billion. So, did the private equity guys have to pay 6.6 billion for Toys? No, they borrowed the money from investment banks—think Goldman Sachs, Morgan Stanley, etc.—and used the company’s cash flow as collateral. Truth be told, the private equity guys in this case likely put up only about 10% of that 6.6 billion.
So, from the start, Toys had a debt load of 6 billion to pay back, at interest rates likely in the 8-9% range! Banks extract large fees from these loans and add it to the debt load—think the housing crisis circa 2008. The banks just rolled the expenses into the loan then sold it to an unsuspecting group of investors. In this case Toys was now controlled by 3 large companies that didn’t know how to run the toy business at all. However, one thing these 3 companies know a lot about is how to extract money from their investment, (more on this later as well).
So after the dust settled, Toys was saddled with 400 million in annual interest payments to satisfy the terms of their loan. Think about that, 400 million in annual revenue goes first to paying off debt interest, not keeping the lights on or paying salary, just debt. Then the private equity companies charge a “management fee” of usually 2-3% of revenue every year, further straining cash flow to pay bills. Then they pay themselves a dividend every year of around 5-8% on their “investment” once again straining cash flow even further.
With sales falling, Toys began to run low on cash. As a result, cuts had to happen across the company because no way would the private equity companies take a cut in fees. In such circumstances, the research and development department gets cuts first, then other sales, general and administrative expenses are slashed next, followed by a hiring freeze, then changes to the accounts payable department. What used to be 30 or 45 day terms are changed to 60 or 90 day terms. After that benefits are cut/eliminated and salaries for new hires are slashed to minimum wage. This is all being done to pay interest and dividends to private equity companies.
The result of this ultimately led to the death of the company. Because of financial constraints, Toys can’t innovate much. For example, toys are only made by a couple different companies—Hasbro and Mattel being the big ones—so in a sense you are limited by their innovation in that space. On price, Toys only had about 800 stores in the United States compared to Wal-Mart and Target which have 800 in the western U.S. alone. This hurt the negotiation power Toys had with suppliers. For example, Toys wants to buy one million GI Joe toys from Hasbro, and Hasbro sells them to Toys for $10 a unit. Wal-Mart orders three million GI Joe toys and Hasbro cuts them a volume discount based on $7 a unit. As a result Toys sold GI Joe for $14 and Wal-Mart could sell for $10. Toys then agreed to price match the competition, so now on that same GI Joe instead of making $4 per unit, they were breaking even; such a business model is not sustainable.
Also, there was no money being re-invested back into the business. Toys used to be known as a huge demonstration and interactive place for children to visit, try out the toys, and then scream and cry until mom or dad bought it for them. Those demo areas disappeared. Toys became a big box store and worse yet couldn’t compete on price with other big box stores like Wal-Mart. In a world where price is now everything, Toys had an advantage at one time. The child could play with and decide they want the product and unfortunately for the parents, they couldn’t wait two days for Amazon Prime because little Mike wanted it NOW.
Even as the business declined, Toys still controlled 20% of the market. Finally, the private equity guys turned to turnaround artist David Brandon, you may recognize the name, he turned Domino’s Pizza into the company it is today and brought it back from the dead. The problem for Toys was that it was too late. Toys remodeled several hundred stores, brought back the demo areas, improved their website, but the damage from private equity had been done. The flow of money away from operations led to customers opting for other big box stores or internet websites. They couldn’t attract top talent anymore and began to close stores several tranches at a time.
This spooked suppliers and as a result; Hasbro, LEGO, and Mattel changed the terms under which they would sell products to Toys. The result, Toys ran out of inventory during the Christmas shopping season! With unsustainable debt, the company could not pay its bills and as a result the only option left was bankruptcy protection. A big store like Toys—similar to Sports Authority and Sport Chalet—no way the creditors would allow them to go through a restructure, they would need to liquidate. Thus, the end of Toys R Us. But don’t feel bad for the private equity groups. They collected fees and dividends for over 15 years and then during bankruptcy sold the inventory and everything else to liquidation firms. Additionally the lack of profitability also gives tax advantages to these groups since they tend to own many companies. The employees? They got nothing, except a pink slip of course.
Could Toys have been saved…I think so; there is room for a toy store chain in the United States. This is what I would have done. I would have run the stores similarly to Best Buy or a grocery store. I would have found a tenant or two to sublease floor space, so they could demo their own products. I would have set up an area to host children’s birthday parties, and maybe reached out to LEGO to see if they wanted to create a LEGO Land in the stores. This would give predictable cash flow every month and given you a way to spruce up your business to make it more appealing to customers. Have you been to a Best Buy lately? I don’t even think Best Buy owns much of its own leased stores; Pacific Sales, Sprint, T-Mobile, Magnolia, Google, and HP/Apple lease a ton of floor space from them. As far as price match goes, that’s a battle big box stores win by attrition. I would have focused on making the stores into a place both parent and child want to go to because I don’t think anyone admits publicly to wanting to go to Wal-Mart. But alas, a large part of most people’s childhood is gone with the wind.
“X”
Last week, I took a roadtrip to Ogden Utah to see the middle child. Along the way I had a few ideas that might end up being blog topics but I thought I’d jot down some thoughts that I had.
First, Elon Musk is a fraud. As soon as you depart the once Golden State in your privately owned vehicle, you will find zero charging stations along the Interstate 80 corridor. While electric vehicle travel within California is a sketchy proposition, outside of California it is not possible or practical. Hybrid automobiles are a rare sight away from the Left Coast and electric ones are unheard-of.
Musk thinks he can sell ten thousand vehicles a week and sustain that production? It’s a Ponzi scheme. He can’t even get to 5K per week and is running out of cash and good will.
Musk is a flimflam guy of the first order and gets lots of other people’s money (often tax dollars) from Liberals to do stuff that is not market based because these guys believe that governments not markets should decide what our economy should look like. The AB-32 crowd wants to use the power of the State to force us into electric vehicles that are not able to leave the gilded cage of California just because it is their religion. Their arrogance to pick losers and winners is hubris of the highest order.
Second, the path from Reno to Salt Lake City is the only proof of a universal flood anybody should need. Except for a few mountains here and there, this whole path is clearly a shallow sea that was only recently drained. This was within the last few millennia not millions of years ago.
Third, Brigham Young sure picked a crappy spot to proclaim the new Zion. My biggest gripe of the area is the lack of trees. But he did have big plans.
The Territory of Deseret would have comprised roughly all the lands between the Sierra Nevada and the Rockies, and between the border with Mexico northward to include parts of the Oregon Territory, as well as the coast of California south of the Santa Monica Mountains (including the existing settlements of Los Angeles and San Diego). This included the entire watershed of the Colorado River (excluding the lands south of the border with Mexico), as well as the entire area of the Great Basin. The proposal encompassed nearly all of present-day Utah and Nevada, large portions of California and Arizona, and parts of Colorado, New Mexico, Wyoming, Idaho, and Oregon.
Brigham seems to have wanted the 1840’s version of “fly-over country” to be united under his banner; whether as a state or a separate country depends on what you read. The presence of Los Angeles and San Diego as part of his territory would indicate a separate nation was in the back of his mind. The war of northern aggression ended that dream and he reluctantly settled for Utah statehood after yet another rewrite of Mormon Scriptures to get rid of polygamy. Why the “god’ of Mormons is not the same yesterday, today, and forever like the one revealed in the Bible is a subject for another day.
Fourth, the amount of indigent and homeless people in Ogden really surprised me. Latter Day Saints try really hard to cultivate the reputation that they care for their own—maybe they do—but for the folks outside their church, clearly they are on their own.
Fifth, the amount of young people with ridiculous amounts of body art and piercing was a surprise to me. I was expecting Donny and Marie type youth but clearly not everyone follows this expectation. My wife thinks that Ogden draws youth from outside the LDS world for the skiing. Maybe this is true. Clearly a large segment of young people are nonconformist.
Sixth was a news story that I saw on the local television station. This is interesting because the LDS church is front and center of a story about a man named Joseph Bishop.
(Note: Although the LDS church has clergy with the title of “bishop” this is not the same as in Protestant Christian Churches and not Mr. Bishop’s title just his last name.)
Mr. Bishop was in charge of training youth that knock on your door as missionaries. Mr. Bishop is accused of giving private lessons to some of the female candidates under his care—much like President Clinton did in the Oval Office with Monica.
SALT LAKE CITY — (KUTV) – On March 20, as a sexual assault scandal was exploding around former Missionary Training Center President Joseph Bishop, his son, and attorney Greg Bishop sent an email to 2News unsolicited.
In the email, he unspools a five-page dossier about the past of the woman who had accused his father of rape.
The email included the woman’s criminal record, alleged false allegations she’d made in the past, and jobs she’d lost.
It even included details about an incident that occurred when she was 17 years old. Bishop encouraged reporters to examine the woman’s past adding, “consider the source.”
In the last two days, 2News has obtained a letter that was written by David Jordan, a lawyer at the firm, Stoel Rives,acting on behalf of The Church of Jesus Christ of Latter-day Saints.
The document is a response to a letter from the woman’s attorney, Craig Vernon, requesting a settlement from the LDS Church.
The document includes everything we saw in Bishop’s email, plus a review of her ecclesiastical church record.
At the bottom, the Jordan indicates that he sent the letter to Greg Bishop.
It appears Bishop took portions of the letter, and at times, repeated allegations word for word and sent it to the media.
The woman told 2News Bishop had been grooming her, taking her out of class to talk about the sexual abuse she had suffered as a child. She said he seemed to enjoy the discussion, then one day he invited her to a place he called, “special.”
“He didn’t tell me there was a bed or a TV or a VCR down there, he just said it was this really special room,” she said.
“I was nervous and uncomfortable, and I should have listened to that feeling.”
Once she and Bishop got into the small room, he advanced on her.
“He tried to kiss me and I pushed him off, I was like, ‘oh my gosh, here’s this old man, I’m 21 years old,” she said. “Then he pulled my blouse and rips my buttons off. It had little pearl buttons, then he ripped the back of my skirt, it was an A-line skirt, and then with one hand he pulled my garment and my pantyhose down, there he was, trying to rape me.”
The woman tried to tell officials in the LDS Church on multiple occasions including her bishop.
2News documented as many as four times when the woman tried to speak out to church leaders, but the woman says she had told as many as 10 different church leaders about the alleged abuse.
“Oh no, oh no, I have been talking to bishops and stake presidents for years; one bishop in Colorado Springs called me a liar and wouldn’t even talk to me.”
I find it interesting that the LDS Church saw fit to release a letter concerning the character of the accuser and defending Mr. Bishop by saying there is no need for them to look into this matter. The LDS church has a long history of circling the wagons when things don’t go their way.
Here is another example of the “see something, say something” mentality. Put yourself in her place, do you want your church releasing an official letter about your past?
When has your church ever made an issue of your:
• Juvenile behavior?
• Morals?
• Employment record?
• Criminal record?
• Marital status?
Sorry, I thought churches were in the business of changing lives thru the power of God’s Word not keeping a tally of what notorious sinners we are just in case they need to shut us up.
At the same time this story is going on, another one about sexual abuse had faithful Mormons marching in the streets.
Seventh, we went to Easter services at an Orthodox Presbyterian Church in Ogden. It was a nice service that emphasized the importance of the bodily resurrection of Christ.
I often quote Randy Stonehill’s lyrics, “We put criminals in office because its way too crowded in the jails” but today’s story is about another fraud, this one is in Silicon Valley. Unfortunately, this person will never see a day in jail. I don’t get why Enron executives and Bernie Madoff go to prison and this person got nothing of consequence.
Meet Elizabeth Holmes. She is described by the New York Post as a “Silicon Valley wunderkind ” and “Steve Jobs wannabe who dresses exclusively in black turtlenecks ”. Per the Post article, her net worth is estimated at 4.5 billion dollars.
Silicon Valley wunderkind Elizabeth Holmes
So what was the crime of this 34 year old babe? A few years back, she started a blood testing outfit called Theranos. Here are a few claims made to investors.
• “Theranos told investors about the Department Defense using its blood tests…”
• “Theranos distributed pitch books to investors containing articles … written by other pharmaceutical executives — lending the startup institutional clout…”
• “…Theranos said (it) was able to test for diseases with only a pinprick, and more cheaply than what was commercially available…”
Claims like the above convinced investors to trust 700 million dollars to the company.
However, the Securities and Exchange Commission (SEC), has come down hard on little miss valley girl and her fake company. The Post article describes the situation this way:
The charges amount to one of the biggest scandals to rock the tech world since the bursting of the tech bubble in 1999.
Theranos and 34-year-old Holmes ran “an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance,” according to the SEC.
Elizabeth used to claim that Theranos had “a valuation north of $9 billion”.
While Theranos had said it was on track to make $100 million by the end of 2014, the real figure was “a little more than $100,000,” according to the SEC. And, contrary to what Theranos told investors about the Department Defense using its blood tests, they were “never deployed by the DOD in the battlefield, in Afghanistan, or on medevac helicopters,” according to the settlement.
The disgraced CEO also misled employees about its institutional backing, according to the charges. Theranos distributed pitch books to investors containing articles purportedly written by other pharmaceutical executives — lending the startup institutional clout —but were in fact written by company employees, according to the charges.
Theranos started to unravel in 2015 after the Wall Street Journal reported that its blood tests were actually being conducted by commercial analyzers, and that the actual technology wasn’t special.
Oh, the SEC fine given to Elizabeth for her indiscretions, was $500,000.
Let’s run the numbers again.
Net Worth 4.5 billion
Defraud Investors 700 million
Fine ½ million
Thus her fine is 0.0714 percent of the amount that she defrauded from investors and 0.0111 of her net worth. To put this in numbers that you might understand better, if you stole $45,000, your civil fine would be $32.14 and you don’t have to repay the investors.
There is no indication that any criminal charges are pending.
A headline caught my eyes this week and I knew I had to do more in depth research, “JM Smucker Company announces global pet food recall.” Ummm, why is a jam and peanut butter company recalling pet food I wondered aloud? I’ll get into this a little more later. As I continued reading the article I figured the dog food may not have been heated/mixed/prepared correctly…wrong, they added pentobarbital….yeah as in the lethal injection death penalty drug. For those of you in Soviet California, other states use lethal injection to wipe clean the earth of scum, you guys just let them out of jail with a slap on the wrist. But back to my point, how in the world does pentobarbital get introduced into the food supply of a huge company? I mean I thought the point of buying dog food was to keep Fido alive not kill him/her or if you’re in California your gender neutral dog. The brands recalled were; Ole Roy, Kibbles n’ Bits, and Gravy Train, all wet dog food products only. Besides the fact that wet dog food is basically processed diarrhea I still honestly wonder how in the world pentobarbital was introduced to the supply chain. What was it even doing in the factory? I will explain below.
The FDA has this to say regarding ingesting pentobarbital “Consuming high levels of pentobarbital can cause coma and death. However, pentobarbital present in the withdrawn products is at a low level unlikely to pose a health risk to pets.” You should feel much more assured now, it was just a low dose so likely nothing would happen to your dog. What a line of crap.
Editor’s Note: Our readers in the Orient should understand that this FDA pronouncement does not consider the cumulative effect of consuming dogs or canine products over a long period of time. Participants in the recent Winter Olympics were unlikely to have been exposed to enough canine products during their time in South Korea since each athlete was issued 37 condoms by the International Olympic Committee and thus are presumed to have been too occupied doing other things to suffer ill effects of canine exposure.
Smucker had an even better one, get a load of this “We take this very seriously and are extremely disappointed that pentobarbital was introduced to our supply chain,” Barry Dunaway, President of Pet Food and Pet Snacks said in a statement. “We will continue to work closely with our suppliers and veterinarians to ensure the ingredients used in our products meet or exceed regulatory safety standards and our high-quality standards,” Dunaway continued. “Above all, we are a company that loves pets and understand the responsibility we have in providing high quality food for the pets our consumers love.”
Literally this Dunaway has admitted nothing other than they are embarrassed; yeah like a child sorry they got caught, not sorry for what they did. Then he goes on, but don’t worry we will work closely with our suppliers (sounds like you should terminate the contract), veterinarians (But notice not the Vet you will be taking your sick dog too) and they still love your dog (they love your $$$ and hope their ignorance doesn’t kill it). Clearly Smucker’s legal team wrote the press release and Dunaway signed his name. The kicker is this waste of human flesh is a president of the pet food division, like he actually has major responsibilities. Apparently, there is no brain cell requirement to hold a high-ranking position at JM Smucker Co.
The over laying issue here is about 10 companies control 90% of the market on most food and other essential products we use in our lives. Best examples; you hate Pepsi because they are evil and their soda causes diabetes, so you reach for Aquafina or Quaker Oats instead…PepsiCo makes those products. Gatorade, Tropicana, or Lays….yup all owned PepsiCo. Coca-Cola makes Coke, but did you know they make Dasani bottled water? Or Fairlife milk? Campbell’s Soup tastes awful, so I will grab a V8 instead…both owned by Campbell’s. MARS, the maker of M&M’s also owns Banfield Pet Hospital…yeah. I am attaching a graphic to show the depth of this. The point I’m trying to make isn’t about a monopoly or anything it’s that the Stock Market/Wall St. are so demanding that companies have no choice but to buy other brands. As William has said, it’s a 90 day cycle you need to beat last quarters numbers, or the same quarter from last year’s numbers and if you don’t there are consequences. These consequences sometimes result in buying of other brands, most often though layoffs occur.
You may remember the old Campbell Soup plant in Sacramento, its closing had nothing to do with productivity, it was closed because it was old and the County wouldn’t pony up major tax breaks so they left. Mondelez International moving Oreo production from Oregon to Mexico had nothing to do with streamlining of the company it had to do with the input costs are less in Mexico then the USA. These are done to appease Wall Street investors and big banks and investment firms. Uncle Pennybags and his brethren want their quarterly divided or there will be hell to pay.
Back to my point, when one of these conglomerates buys a brand, they destroy it in the name of saving a few dollars. Look at Annie’s, it’s an organic line of food designed for children, it was bought by General Mills, they stripped out the natural ingredients and now the product is trash. Look at McDonalds, what used to be an all-beef patty, is now a frozen hockey puck of mystery meat, and a bad tasting one at that. These examples underscore that when you live in a 90 day cycle and anything necessary to drive profits can and will be done. Look at what Coke did years ago, replaced cane sugar with corn syrup, the effect has been great, it was more addictive and tasted the same, and sales soared.
Enough rambling, back to Smucker; the problem now is companies used to actually make their products now they just mix ingredients together and package them. A good example is Campbell Soup, I used to know an employee there, and he told me the ingredients were all locally sourced (within 5 hour drive) and were mixed and cooked at the plant. That practice ended a decade ago. I’m sure it is the same at Smucker, their ground meat is from one country, the gravy from another, the bits from another, they show up on a flatbed truck, in unlabeled boxes, you throw them into a mixer and voila! Ole Roy wet dog food is created, can it, label it and it’s off to the local market. Not sure where the pentobarbital gets mixed in but it’s in there somewhere. The bigger issue is corporations like this have numerous suppliers for the same product so there could be 5 that supply the gravy mix, and it all comes in unmarked boxes making it impossible to know what supplier/country of origin it came from.
The point of this article isn’t to scare you, most all corporations make food that is completely healthy and safe to eat, but “hitting the numbers” causes corporations to use lower quality ingredients or layoff the food safety inspectors, and this is where these problems lie. Conagra Foods, maker of Chef Boyardee, laid off most of their food safety inspectors, and hmmm 2 months later issued a global recall of 100k cans of pasta, just saying.
Til next time,
X
PS Mark Cuban had a bad week…….maybe time to dance on his grave!
I’m just wondering what things are like in your corner of the world? Here in the shadow of California’s capitol, I keep hearing how great the economy is but I think its wishful thinking. Prices of food and energy keep going up due exclusively to government policies. In my town, Elk Grove, the city council is spending money faster than a drunken Congressman with a new girlfriend.
The only fault here that any politician will admit is a housing shortage. What shortage? The only thing in short supply is affordable housing. Ten years ago, at the peak of the housing boom, it cost about $100,000 per lot just to get a building permit. Wages, taxes, and utilities cost much more than ten years ago, but real estate prices in my area have never recovered their peak values of the last decade.
Nevertheless, single people that I know at work are paying apartment rental that is double what my monthly mortgage is costing me. What is worse is that there is plenty of housing available. I have three empty homes in my neighborhood that are within a two minute walk of my driveway. Two of the three are not even listed as being for sale. Yep, they are just sitting there. One has been empty for about two years and another for six months, and the third for about four months. Another family on my street is closing up shop and heading out of state later this year. If this is a common occurrence then things are worse than I imagine.
I fear that by the time Gavin Newsom and the gang in the “bill mill” are done with this state, we will be comparing ourselves to Haiti or Puerto Rico. That’s when you know that California has achieved its goal of being the worker’s paradise that we have been promised. Oh, and then government will have created affordable housing to boot. Until then, buckle-up.
One of the most frustrating things for Conservatives is the lack of concern that the elected folks and those in government have concerning underfunded promises made by government. This is especially true when we look at government funded pensions and Social Security. California’s State Treasurer admits that California governments (state, county, and local) are 1.5 trillion dollars in debt (Link: Treasurer Debt Watch) and this does not include the estimated 1.4 trillion in underfunded pension liabilities for the State (state, county, and local). From our perspective, the government officials are behaving much like Mad Magazine’s Alfred E Newman who is best known for saying, “What, me worry?”
Finally, I have an explanation; mind you it’s not one I like or agree with but I would like to share it with you.
This fall, I took a class on government accounting that was sponsored by the California Department of Finance. Much of the class focused on the way California does things. Please understand that the Dept. of Finance is the government agency that assembles the budget presented each year by the Governor to the Legislature for approval. When the Dept. of Finance speaks, powerful people listen. (Think Moody’s, Standard and Poor’s, etc.)
I could get into much vocabulary on things such as GAAP (Generally Accepted Accounting Principles) and GASB (Governmental Accounting Standards Board) but it’s not necessary for this discussion; instead you only need to know one term, measurement focus. When this term is applied to governmental accounting, it looks like this:
Governmental fund financial statements are prepared using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized in the accounting period in which they become available and measurable, and expenditures are recognized in the period in which the fund liability is incurred…
The key phrases in the quote above are “current financial resources” and “modified accrual”.
This is radically different from what people do in the private sector. Normally, businesses use accrual accounting. Under accrual; assets and liabilities are recognized when they happen. For example, in a private business when you bill a customer, an accounts receivable is created. The A/R is treated as an asset at that point, you don’t wait until the customer’s payment is in your bank account.
Government doesn’t do that. Instead they purposely ignore certain things because under current financial resources, government only cares about the current fiscal year. In the example above, government only recognizes the receipt of cash as an asset when it is deposited in the bank, except at year end. Assets and long-term liabilities are purposely ignored except on a few special year end reports.
So practically speaking, this is how government treats pensions:
• Employee money withheld from paychecks for retirement are sent to the federal government for Social Security and state retirement is sent to CalPERS. Assets are done.
• Retirees in the system are sent their retirement checks. Liabilities are done.
• Conclusion, pension system is ok.
Seriously, their view is really that simplistic. Why? Because the current fiscal year was taken care of.
Oh, just so you know, they treat bonds this way also. As long as they can cover interest payments for the current year then per government accounting, everything is wonderful.
I realize that from a practical point of view this makes no sense but that is how it is. It goes back to GAAP. Specifically, the Generally Accepted part. If governments agree that things should be done a certain way, then that is the way they will do them. It’s not a matter of what is right or more technically correct or responsible to the next generation, if it is generally accepted not to worry about long term obligations then they don’t have to.
Don’t just take my word for it, here’s straight from the textbook:
The employees earn the right to the benefits during the periods that they work but don’t receive the cash (or whatever form the benefit may take) until after they retire. The employer, however, receives the full value of the employment exchange during the periods the employees work; therefore, the employer’s obligation for paying both salaries and benefits arises during those working periods.
But what if the government budgets for those benefits on a purely cash basis; that is, by not budgeting for the benefits until the years the actual payments are due, after the employees retire? Is the budget “balanced” if the government fails to set aside money for the benefits in the years the benefits are earned? We suggest such budgets are balanced in form—on a cash flow basis—but not in economic substance.
In fact, some governments consistently do not budget in the current year for the full amount of pension benefits earned by employees in the current year, andvirtually every government budgets for retiree health care benefits in the year they are paid, not when the employees earn the benefit.
And there you have it ladies and gentlemen of the jury. The fix is in and they are all in on it. It is clear that the authors of the textbook are just as indignant as we are about it but as they say, “Such is life”.
So next time you hear someone claiming the California budget is balanced remember the unspoken weasel words they are omitting, “Budgets are balanced in form…but not economic substance”.
By now you should know X always has his smoking gun aimed at someone. I’ve even been made abreast of the fact that some citizens of this republic are sleeping with both eyes open instead of just one. If you need another reason to be vigilant and join their ranks ponder this next…
I want to train my fire on one Elon Musk, the CEO of Tesla. Turn on a finance show, read a paper, or just listen to small talk and you hear people placing this guy in the same category as Bill Gates, Steve Jobs, Warren Buffett and Larry Ellison. I have never really understood it, Gates, Buffett, Ellison, Jobs were all great innovators and leaders of companies that essentially print money to this day. Hence as William laid out in a different post they are all quite wealthy. Musk on the other hand runs a company (Tesla) that is basically doing what Amazon.com does; they are selling what is essentially their take on the future.
Tesla—if you’re wondering—is behind the electric cars that you see every once in a blue moon on the road. Also they own a network of charging stations, mostly in California. However, Tesla has never managed to be profitable, yet their stock has surged over the last few years. I wondered aloud, why is this?
I must say I am fascinated by Musk in the same way other people are. He speaks eloquently and always talks like a slick sales man selling a promise of prosperity just beyond the horizon. He has some very innovative ideas like trying to make an all-electric car go mainstream. He wants to take cars to space through his SpaceX program, and bought SolarCity—who is the largest solar panel provider in the USA.
Here is where the fascination stops and reality sets in. Musk fancies himself as an Amazon.com style disruptor, truth be told he is anything but. SolarCity is run by his cousins, both of whom just left the company I may add. Also in 10 years of operations, despite being the #1 rooftop solar company, they have yet to turn a profit. Tesla is simply promising a future that is unrealistic at best and the next Enron/Solyndra/Fisker at worst. In a daring and in my mind foolish gambit, Musk rolled all the SolarCity debt into Tesla just to keep his empire afloat.
Allow me to explain my thesis. Musk and his corporations are fully subsidized by you and I; Joe Taxpayer. Why do cities and states keep sending money to Musk, especially since it’s a failing enterprise? Easy answer, Musk is very good at playing the game! He is very close to the Governor of New York, Andrew Cuomo. This relationship paid off handsomely; the state gave SolarCity $750 million to build a large factory and only charges SolarCity $1 a year for rent. Seems pretty lucrative for a company that still cannot post a profit. SolarCity and Tesla don’t just play in New York, they have been very active in California, Arizona, and a handful of northwest states. (Of course California is fertile ground with funding sources like AB-32—thanks Arnold) Reno built a battery facility for his Tesla subsidiary that I am sure was at a cost very little to Musk.
In total, Musk and his cronies have received north of 5 billion in subsidies and tax breaks over the past decade, a total that interestingly enough amounts to about half of Musk’s net worth. However that’s not even the most brazen thing Musk has done.
Danny DeVito in poster for 80’s movie Other People’s Money
Now Musk is playing in the political game. He donated over 3 million into a race for public utility commissioner in Arizona. He was the only donor. I’m sure he is getting his people on the commission to advance his SolarCity subsidiary. He can’t afford another fiasco for SolarCity like Nevada. Source: Nevada solar power collapse
My issue: he is doing this lobbying with money taken from the taxpayers. Musk is enriching himself while making the public responsible if he fails. Great gig, where do I sign up?
So why does the stock of Tesla keep going up if it is a Ponzi scheme? Easy answer, right now the words “disrupter” and “green” are buzzwords that are dominating the political and financial scene. Musk as I mentioned earlier is very gifted at promising investors and politicians that success is literally just beyond that corner or just over that horizon. Most all of these political and consultant types eat this stuff up; hence Musk is able to get a factory in Buffalo, New York for free, or a battery plant for next to nothing in Reno. Musk is the current poster child for the Liberal belief that government creates jobs.
Wait until Gavin Newsome gets elected in California, the money spigot may not shut off for 8 years! Chiefly my concern is this, while electric cars may be the rage and solar may be good for the environment, why are we continuing to allow the government pick and choose what type of business succeeds in this country? This is because the liberals are able to successfully convince other politicos in the room to vote their way every so often. The Left in this country have a vision; Obama tried it with Solyndra and Fisker. Liberals would love to see everyone driving a Tesla Model S and have rooftop solar everywhere thus eliminating utilities and pollution emissions. As long as Musk is able to continue buying himself more time and earning more subsidies he will eventually become too big to fail, think that is his end game?
When Enron, MCI, and World Com failed, investors and those affected said they wish they would have known sooner. This was their warning then and mine now, I personally would not touch this company with a 100 foot pole. If you need more proof go to your local Home Depot, watch the SolarCity rep chase customers around the store in a desperate attempt to sign-up new clients. Oh, and if you do sign on the dotted line, don’t forget, Musk gets all those government tax rebates for “going solar”, you just get a bill for the next 30 years to pay your solar lease because he owns the equipment on your roof. It may not save the planet, but it allows Musk to live another day off of taxpayers like you and me.
If you want to get a feel for how Noah felt while building the Ark, try being a Conservative in California.
The financial reality is that your unborn grandchildren are broke and this generation does not care.
As of a few years ago, the combined debt of California government (state, county, and local) was 1.4 trillion dollars. I think it’s really more but that number is what state officials will publicly admit.
Eleven California counties have more registered voters than voting age people and this generation does not care.
The letter noted that 11 California counties have more registered voters than voting-age citizens: Imperial (102%), Lassen (102%), Los Angeles (112%), Monterey (104%), San Diego (138%), San Francisco (114%), San Mateo (111%), Santa Cruz (109%), Solano (111%), Stanislaus (102%), and Yolo (110%). The letter also noted that Los Angeles County officials “informed us that the total number of registered voters now stands at a number that is a whopping 144% of the total number of resident citizens of voting age.” Link to source
Second Amendment groups have issued a travel advisory to California because of the crazy laws here designed to deny people the right to self-defense. Bringing a weapon from outside the state is a felony in many instances.
Small businesses know better than to relocate to this State due to taxes and regulations.
Churches, private schools, and other religiously oriented groups are on the endangered species list here if they wish to adhere to biblically based values.
I could go on but… I think you can add many other things to my list which is fine but my point is this, nobody here cares. I try talking to people at work about various issues as they appear in the news and absolutely nothing penetrates. As long as their daily life goes on, it doesn’t matter. Talk about living in darkness.
God closed to door of the Ark seven days before it started raining. There is no record of anybody knocking on the door to see why or asking to be let in. Contrary to the recent Hollywood movie, I think the Bible is silent on this because that is exactly how it happened. Nobody cared until the rain fell on them. This is the sad future that you will live to see.
Class warfare is a staple of the Democrat Party. They are constantly berating Republicans for being rich and claiming they are for the little guy. In my previous article I showed extensively the comments of a coworker that leans Left. He blames Republicans for being rich, greedy, and screwing the little guy. In his mind that is their only reason for existence. For people like him, “the rich” are often defined as anyone making a dollar more than you do. Envy and jealousy are biblical names for this particular sin.
After reading my blog post (08-02-2017) to my wife last night, she challenged me to research the rich and try to refute my coworker with facts.
My first thought is that followers of the Democrat Party are not persuaded by facts only emotions. However, I’m up to a challenge so I took a look at the subject.
As with everything else in our society, everything I found in my research was highly politicized to try to prove either that most rich are Republicans or most rich are Democrats. My first observations were these:
• Many “rich” play both sides of the political divide but typically lean heavily one way or another.
• The one figure that is cast in both camps depending on who you read is Oracle owner Larry Ellison.
Second, there are actually two types of “rich” in our society. In times past they were called the wealthy and the nouveau riche. For those from Rio Linda, perhaps a definition is in order before proceeding.
Nouveau riche (French: ‘new rich’) is a term, usually derogatory, to describe those whose wealth has been acquired within their own generation, rather than by familial inheritance. Link: Definition Nouveau Riche
Before going further, let’s talk about wealth. Most people think in terms of payroll because that is how they get paid. They are more than happy to vote to tax the rich—especially here in California—but they are dupes. Yeah, they will be able to get taxes from some middle manager in Silicon Valley or aspiring actress in Hollywood but the CEO types? Never! You see, after a certain level, wealthy folks don’t get large paychecks. As a result, a 13 percent state income tax in California or a 39 percent federal income tax rate (combined tax rate of 52 %) don’t bother them. Wealthy folks have trusts, derivatives, municipal bonds, and other financial vehicles that aren’t available to folks like you or me. That’s why Warren Buffett can say that his secretary pays more in taxes than he does and get a standing ovation from the Democrat National Committee for making the comment. You see, his wealth isn’t from a payroll check—he is beyond the likes of such inefficient stuff. However, he is perfectly fine pitting the poor and middle classes against the nouveau riche ‘cause it’s no skin off his nose.
When you hear about the Forbes lists of wealth people, rest assured that you have left the lifestyle of the nouveau riche far behind. The top of the 2017 list by Forbes is dominated by Democrats even when you put Larry Ellison into R bucket. Guiding these folks are literally the best lawyers and accounting firms that money can buy.
Beyond the Forbes list, I began to take a look at the broader group of wealthy and their political contributions and the subject was permeated with so much partisanship that it was impossible to make sense of the information. I found one list that said by grouping the rich by families that 75 percent were Republican and another list that claimed 75 percent were Democrat. Hard money, soft money, 527’s, surrogates, etc. it’s simply impossible to track it all down. Maybe the Sith Lord has time to try but the rest of us are too busy. Direct contributions are easy to identify—to a point—but after that the trail gets cold rapidly. Anybody that claims to be in full possession of the facts is blowing smoke. What you can say is that some folks on each side are more public than others about giving in certain areas be it politics or charities. We all know there are other ways of giving that keep your fingerprints off the contributions.
Additionally, since the days of Bill Clinton, money from other countries has been flowing into US politics but those receiving it find excuses not to keep track of it. We may have some idea of how much but not from where. The bottom line is if you have a will to give, there is a way that you can do so—the variable is the paper trail that you are willing to leave behind.
Clearly, Buffett and the Tech Kings are on top of the hill in terms of assets. They openly favor the Democrat brand and many of us on the Conservative side expect them to remake the party of Clinton and Obama in their image sooner rather than later. Maybe starting in 2020, stay tuned.
