From the humor category, BNET recently published its list of Business Blunders of 2009. Some were amusing. For example:

Mistake #3: The “Smart Choice” food label

In August, 14 of the country’s largest food companies — including PepsiCo, Kellogg’s, Kraft, and General Mills — join forces to launch a multimillion-dollar food-labeling program, dubbed “Smart Choices,” to guide consumers in selecting nutritious foods amid the nation’s obesity epidemic. Soon, however, the program’s green checkmark logo is seen popping up on jars of fat-laden mayonnaise and boxes of Froot Loops cereal, a product that lists sugar as its top ingredient. In October, after the FDA announces plans to crack down on misleading labeling, the program is voluntarily halted.

Mistsake #5: IBM offers foreign assignments to its laid off employees

IBM lays off thousands of North American workers, and then gives them the opportunity to apply for similar jobs in countries such as Brazil, India, Nigeria, and Slovenia — if they’re “willing to work on local terms and conditions.” Big Blue magnanimously offers to help with moving costs and provide visa assistance.

Mistake #6: Unions firing their own employees

The powerful, 1.7-million-member Service Employees International Union announces a layoff involving 75 national field staffers and organizers. The union representing those employees, the Union of Union Representatives, quickly files a complaint with the National Labor Relations Board, accusing the SEIU of engaging in unfair practices such as unilaterally laying off UUR members without proper notice, outsourcing their jobs to non-union workers, and selecting workers for layoffs “because of their [UUR] membership and/or activities.”

Mistake #12: Now here’s an incentive

In July, jobless citizens seeking benefit information from the Web site of the Brazilian Labor Ministry must type in the passwords “shameless” and “bum” to access the relevant details. The ministry blames the prank on a private Internet security firm whose contract with the government had not been renewed.

Mistake #20: Now this is REO

After a couple hit by the Bernie Madoff ponzi scheme is forced to surrender its $12 million beachfront home in Malibu, Calif., to Wells Fargo, neighbors notice something odd: a large party being thrown in the presumably vacant house. After an investigation, Wells Fargo admits that the house was being used by an employee, identified by the Los Angeles Times as Cheronda Guyton, a senior vice president in charge of foreclosed commercial properties. The employee, who neighbors say had been spending weekends at the house with her family, is fired for violating bank rules against personal use of bank-owned property.

There are some other good ones in there. To see the full list, click through to Business Blunders of 2009. Some funny stuff!

I came across an interesting article yesterday that discussed the impact of the U.S. dollar weakness (and Canadian dollar strength) on the state of the National Hockey League (see Currency Rise Helps Canadian NHL Teams).

The decline of the American dollar has led to a trade imbalance north of the border, on the rinks of the National Hockey League

Over the past two decades, the Canadian teams in the N.H.L. were considered poor cousins of their colleagues in the United States. Some floundered financially, others packed up and moved south. The league even created the Canadian Assistance Program to subsidize the country’s struggling teams.

But the landscape in Canada has changed drastically, because of a rise of more than 50 percent in the Canadian dollar since 2002. A stronger currency has made it cheaper for the six Canadian teams to pay their players in United States dollars and to reduce debts. It has also inflated the revenue of the six Canadian franchises and, in turn, the league’s revenue.

…The rising Canadian dollar is nearing parity with its United States counterpart. The Canadian dollar, whose value against the United States dollar fell to a low of 62 cents in 2002, is worth about 96 cents today. As a result, the revenues for the six Canadian clubs helped the entire league earn its highest operating profit in more than a decade, according to Forbes magazine.

…added revenues have had the biggest impact for the Canadian teams with player salaries, which must be paid in American dollars under the collective bargaining agreement between the N.H.L. and the N.H.L. Players’ Association.

MY COMMENT: In hindsight, I bet that some players wished they had negotiated to be paid in Canadian dollars.

The Canadian teams’ relative wealth is quite a turnaround, given that the league initiated the Canadian Assistance Program at the start of the 1995-96 season to help small-market Canadian teams stay afloat.

The N.H.L. prefers exchange-rate stability, but recognizes that the rising Canadian dollar has helped revive some teams, which is good for the league.

MY COMMENT: Of course the league prefers relative exchange-rate stability (in a floating exchange-rate regime), as do most businesses that operate across multiple country markets. Exchange-rate stability makes predicting future states of the economies in which companies operate a much easier task. That said however, the larger question for the league is whether the strength in the Canadian dollar and the weakness in the U.S. dollar represents a temporary, transient effect or a more permanent, structural economic state (see Forces Impacting the Dollar).

Below are some links and teasers to articles that I found interesting:

Selling Foreign Goods in China (The Economist)

Every year, says Paul French, head of Access Asia, a research firm based in Shanghai, the same company buys the same report from him on the market for a particular product in China. That is because each year the company in question sends a new executive to China with instructions to break into the local market, who soon departs in despair—having failed to find an opening given the (brief) time and (insufficient) resources allotted.

The promise—and frequent disappointment—of doing business in China has been a common theme since at least the 19th century, when weavers in Manchester were said to dream of adding a few inches to every shirttail in China.

It is incredibly difficult to do business in developing markets (see So You Want to Do Business in a Developing Country), and China is no exception. The interesting thing to me about entry into developed markets is how managers systematically overestimate the benefits and underestimate the costs. And sadly, I am not aware of any evidence that suggests that we are becoming better at making these entry decisions over time.

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Shazam, Maker of Phone App, Draws Investment (New York Times)

Cellphone applications can turn your phone into a mobile dictionary, help you find your way when you are lost on a hiking trail and identify mystery songs on the radio. But can they make significant money?

That question has been hounding the entrepreneurs and venture capitalists behind the start-up companies that create the software programs.

An interesting ditty about how making apps may actually be a commercially viable business. Be sure to look for their IPOs in an equity market near you…

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Schumpeter Centenary (The Economist)

The centenary of Joseph Schumpeter’s birth has not brought forth an avalanche of academic tributes and retrospectives. There is no Schumpeter industry to compare with the one on Keynes. No pop biographies. No “Schumpeter and the Post-Schumpeterians”. Yet his academic reputation at the height of his powers was of the same order, and the impact of his analysis continues to be strongly felt.

An interesting look at the history of an influential economist. He certainly left his mark on the fields of innovation and entrepreneurship.

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Wall Street Smarts (New York Times, ht Neysa)

“IF you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence.”

The statement came from a man sitting three or four stools away from me in a sparsely populated Midtown bar, where I was waiting for a friend.

“O.K.,” I said. “Let’s hear it.”

“The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.”

Hysterical anecdote (with more than a grain of truth) about the near-collapse of the financial system (see Krugman’s post on same)

Happy weekend everyone!!

A hearty hat tip to Muir for sending this along. Hysterical! Enjoy…

If for whatever reason you cannot view the embedded video, you can see the video by clicking through to MBA Ethics Oath.

Stumbled across the following in New York Magazine — Hot Waitress Economic Index. According to Hugo Lindgren, there may actually be a better gauge of economic activity than GDP.

Are things getting better? The answer is rarely straightforward.

In New York, we have our own economic indicators, often based on the degree to which people are being thwarted by the lack of opportunity. An old standby is the Overeducated Cabbie Index. The Squeegee Man Apparition Index is another good one. There’s also the Speed at Which Contractors Return Calls Index: within 24 hours, you’re in a recession; if they call you without prompting, that’s a depression.

The indicator I prefer is the Hot Waitress Index: The hotter the waitresses, the weaker the economy…

Interesting hypothesis.

Check out the full satire by clicking Hot Waitress Economic Index.

I am officially confused.

Much has been written about how managers respond rationally to pay incentives, and how their supposedly “rational” behavior manifests as excessive risk taking with other people’s money. Many have even detailed how excessive risk taking brought about by distorted pay incentives was central to the financial crisis.

I agree that excessive risk taking played a role in the financial crisis. This has been well documented. Moreover, I am willing to concede that in some cases the behavior observed may have seemed rational. At the very least, the managerial behavior was a response to some form of incentive. And after all, we know incentives work, …even distorted ones.

Indeed, I have even written a bit about executive compensation and managerial excess on this blog (see Op Ed on Executive Pay, The Credit Crunch and Executive Pay, New Approach to Executive Compensation, and Revisiting Executive Pay). But for me, the issue of executive pay is a systemic, economy-wide problem, not simply limited to the financial sector.

That said, there is one thing that has always bothered me about the explanation that somehow managers acted rationally, and that this “rational” behavior to an existing incentive structure caused the financial crisis. That is, it implies that someone else, somewhere, acted irrationally.

For example, Calculated Risk, discussing Martin Wolf’s column (see Financial Reform and Incentives or Reform of Regulation), writes:

[Martin] Wolf discusses how it is rational for management…to gamble when the risks are asymmetrical (huge potential winnings, limited losses).

But this begs the question: Why was a system that provides managers the incentive to make stupid bets like that constructed in the first place? That seems pretty irrational to me.

If the person/people who built such a system were rational, they would have anticipated the deleterious consequences of the system that they were about to enact, and they would have refrained from so doing.

So then who are all these irrational people running around building silly executive compensation systems? Aren’t they, after all, current and former managers – boards of directors, compensation consultants, and the like?

So then remind me again, how can managers be the rational ones??

In previous posts (see Chrysler Still Needs a Miracle or Chrysler/Fiat Update) I suggested that the Fiat/Chrysler deal looked increasingly like a longshot. Fiat was asking for deep concessions from both the auto union and Chrysler’s creditors, and it seemed unlikely that Fiat was going to receive those concessions.

But over the past few days, the Obama Administration, the auto union, and Chrysler’s creditors seemed to have come to some sort of understanding (see Treasury Close to Deal with Chrysler Creditors, Chrysler Reaches Agreement with UAW, and UAW Gets 55%).

Hallelujah??

Maybe, but not so fast. Several issues remain:

1. Creditors must agree to the debt cancellation.

According to the NY Times:

Chrysler has about $6.9 billion in secured debt owned by big banks like Citigroup and JPMorgan Chase and a group of hedge funds. Under the proposal, all of the debt would be canceled in exchange for $2 billion in cash…

The Treasury drew up the latest proposal in consultation with Chrysler’s biggest secured creditors, which hold about 70 percent of the company’s secured debt. It requires approval by almost all of the secured lenders. That could be difficult as some lenders, including several hedge funds, may hold their ground and reject it.

2. The issue of pay for union workers must still be resolved. Although Chrysler, the federal government, and the union have come to terms with respect to pension and benefits, my understanding is that they have not yet reached a meaningful agreement to reduce wages. Just how important are wage reductions to Fiat? That remains to be seen. According to the Michigan Messenger:

The new agreement does not cut wages, but it does apparently reduce Chrysler’s commitment to pay into the UAW-run retiree health care fund.

3. According to the latest accord, the auto union will get a 55% equity share in Chrysler. The US government will get a 10% share. Fiat would get a 20% share. Where does the other 15% go? Is this 15% set aside for Fiat depending upon whether it meets performance goals? Will this 15%, or a portion of it, get doled out to Chrysler’s creditors? This was not entirely clear to me.

4. Ultimately, Fiat needs to agree to be party to the alliance. Until that happens, there is no deal. Time will tell if these concessions are enough to convince Fiat that the deal is worthwhile.

Nevertheless, given the concessions that all parties have made to help Chrysler avert bankruptcy, a Fiat alliance seems far more likely today than it did as little as one week ago. Chrysler is no longer looking for a miracle. Perhaps now just a random act of kindness.

But assuming a Fiat/Chrysler deal goes through, the question then becomes: Is this the best outcome for Fiat, Chrysler, and the auto industry? It is not entirely clear. The global auto industry continues to be plagued by massive overcapacity. Keeping a weak competitor around will certainly not resolve systemic overcapacity.

For Fiat, it might be a bit premature to re-enter the U.S. market (the most competitive auto market in the world) and sign on for a complicated global expansion/integration (see Fiasco for Fiat?). Let’s also not forget that Fiat is a firm that, as little as two years ago, was on the verge of bankruptcy itself.

Finally, for Chrysler, it is not clear that its products (even with technology infusions from Fiat) can improve quickly enough for it to once again become a profitable enterprise. For this reason, and as I’ve mentioned before, Chrysler likely needs more than Fiat and an additional $6 Billion infusion from the federal government to survive.

So even if the deal goes through this week, it is entirely possible that Chrysler might end up right back in the same place – on the verge of bankruptcy.

And we wait…

From the vault of the sublime, a friend recently e-mailed me a story (hat tip Joel) about how the Topps Company plans to release a set of trading cards depicting the “world’s biggest hoaxes, hoodwinks and bamboozles” (see Topps to Issue Cards with Swindlers). According to Fortune:

This year’s product will…nod to Madoff’s financial chicanery as part of a group of cards featuring the “world’s biggest hoaxes, hoodwinks and bamboozles.” Among the other do-badders in the subset are Charles Ponzi, The Runaway Bride, and Enron.

“These cards feature 20 perpetrators of some of the most notorious pranks, dubious claims, and outright frauds of the last 2 centuries,” boasts a Topps sell-sheet for the collection.

Apparently the “gimmicky” cards depicting the deplorable will be inserted into packs of baseball cards.

Upon hearing the news, I confess I chuckled at first. I’m always game for a good laugh. But then reality set in: The cards would be much funnier, and certainly less crass, had the victims of these “hoaxes, hoodwinks and bamboozles” not lost so much money.

I received an e-mail message yesterday from the folks at Weber Shandwick (GM’s PR firm) calling my attention to a recent blog post by Tom Wilkinson, GM’s news relations director (see Why Not Bankruptcy?).

In that post, Mr. Wilkinson objects to those who have called for bankruptcy reorganization as a viable option for GM. He writes:

Let me briefly review why we think a tough out-of-court reorganization is best for GM, the taxpayers, and other stakeholders.

Bankruptcy reorganization takes cash – lots of it. For a company like General Motors to operate in Chapter 11, it would need massive debtor-in-possession loans. With credit markets frozen, there is realistically only one source of such loans – the federal government. We estimate loans needed to reorganize GM in Chapter 11 could top $100 billion, far more than the out-of-court fix envisioned in our restructuring plan.

MY COMMENT: OK, what’s the problem with that? So the government becomes the de facto DIP financier. And perhaps it is to the tune of $100B (although I think that might be a bit overstated). But that money does not fall down a sinkhole. It is a loan that is collateralized by GM’s enterprise, whatever the value of that may be. The real question is not whether the federal government would have to pony up $100B now if it forced GM into bankruptcy. The government could easily reach (if not exceed) that amount under the current arrangement, only in $10-20B increments.

The real question is whether a GM turnaround would result more quickly, efficiently, and effectively via bankruptcy; whether GM emerges as a healthier organization after bankruptcy; and, whether the likelihood of the federal government getting paid back is higher as a result.

I am not necessarily opposed to additional out-of-court aid for GM, provided that it come with extremely strict terms. However, in many ways, bankruptcy allows GM greater flexibility to reorganize (see GM Plan, Pre-Packaged Bankruptcy, and Preventing Moral Hazard for details).

Mr. Wilkinson continues:

One reason this [$100B DIP financing] figure is so large is that GM’s revenues would plunge in bankruptcy. I ask: “Would [customers] buy a car or truck from a company in bankruptcy, when there are similar products available at another dealership right down the block?” I expect that if they were honest, they would answer “Probably not.” So why do they expect other shoppers to behave differently? The GM viability plan includes a detailed analysis of this revenue risk (Appendix L, Exhibit 3), an analysis bankruptcy advocates seem eager to dismiss or ignore.

MY COMMENT: I am not so sure the answer to Mr. Wilkinson’s question is “no”, or even “probably not”. And this is where I take some issue with the GM plan.

GM assumes that post-bankruptcy revenues for their products will fall by around 35%-40% (compared with the non-bankruptcy alternative). They use Daewoo’s experience as a benchmark. They also try to gauge potential consumer demand via survey instrument.

I am not sure that Daewoo is the right benchmark. Moreover, I am skeptical of the surveys. The fact is that a GM bankruptcy would be very different from a “traditional” bankruptcy. As Mr. Wilkinson points out, in the case of GM, the federal government will act as the DIP financier. With the federal government as the DIP financier, GM not only has the explicit backing of the US government, but the implicit guarantee that it shall continue as a going concern. Moreover, the federal government can stand behind GM warranties. Those stylized facts alone are enough to diminish consumer flight.

It’s no surprise that GM management is strongly advocating an out-of-court solution. After all, an out-of-court solution maximizes their chances of continued employment with GM.

With respect to GM’s position on the matter, the insight of Milgrom and Roberts (RAND, 1986) rings true: Beware (and be skeptical) of information provided by interested parties.

So, YES, GM could survive bankruptcy, and we needn’t be frightened by the prospects, …no matter how much GM tries to convince us that it would spell the apocalypse.

Some funny stuff (hat tip Henry)…