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Tuesday, May 01, 2007

Would You Like Cheese With Your Propaganda?

shhhhh! A loyal reader over at Bank of America Securities points me to the growing trend of union developed blogs on private equity.  Clever Going Private readers will immediately recognize the political agenda that underlies these blogs and be entirely unsurprised (and uninspired) by their tenor and the thinly veiled propaganda that is shot through their rhetoric.  Among the more sinisterly subtle is "Behind the Buyouts," a seductively data-filled "dot-org" that practices the "modicum of truth, a plethora of lies" disinformation methodology.  Let us delve into the depths:

Though exact figures are hard to come by, the hallmark of the private equity industry is the incredible wealth being created for the small number of individuals who drive the buyout business.

The key principals at the largest private equity firms are billionaires. Using money from banks, insurance companies, pension funds, and other wealthy individual investors, they continue to launch corporate buyouts worth billions, even tens of billions of dollars, extracting fees of hundreds of millions of dollars from the companies they buy and often generating profits of 20 percent or more.

These profits come during a period of historic income inequality in America, at a time when millions of Americans are working harder and harder for less, with less health care, less retirement security, and less time to spend with their children. According to a report released in March 2007 by two leading economists, the top 1 percent of Americans—those with incomes above $350,000—received the largest share of national income since 1928.

Ordinarily, one might wonder after the point of an income equality discussion in the midst of a private equity backgrounder.  However, these pronouncements have become quite common, can be recognized in the wild by the presence of the distinctive snowcloneish phrase "the top [w] percent of [x] earn [y] percent of [z]."

Not surprisingly, the kow-tow to "income equality" or "income disparity" has become a rally cry against business (focused lately on private equity and hedge funds in particular).  A few voices, however, point out some flaws in the focus on "income equality," as a measure of anything relevant.

One good place to start is the Economist's special report on inequality.  The Economist Blog also has a bit of rationality to inject into the debate.  Another is the recent op-ed piece (subscription required) in the Wall Street Journal by Alan Reynolds which points out that "wealth" rather than just "income" is a more useful construct:

In recent years, an increasingly huge share of the investment income of middle-income savers is accruing inside 401(k), IRA and 529 college-savings plans and is therefore invisible in tax return data. In the 1970s, by contrast, such investment income was usually taxable, so it appears in the Piketty-Saez estimates for those years. Comparing tax returns between the 1970s and recent years greatly understates the actual gain in middle incomes, and thereby contributes to the exaggeration of top income shares.

In a forthcoming Cato Institute paper I survey a wide range of official and academic statistics, finding no clear trend toward increased inequality after 1988 in the distribution of disposable income, consumption, wages or wealth. The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on these seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other.

The politically correct yet factually incorrect claim that the top 1% earns 16% of personal income appears to fill a psychological rather than logical need. Some economists seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems for which higher taxes are, of course, the preferred solution. In Washington higher taxes are always the solution; only the problems change.

But the important thing is to recognize what the heart of this argument is: "Shame on you for making money while ordinary families are working harder."  Extending this argument, shame on "ordinary families" for making so much while so many children in Africa starve every day.  Personally, I am highly suspicious of anyone who wants to shrink the pie because any one group has "more than its fair share," whatever that means.  Long time Going Private readers will be well acquainted with my feelings on the use of the word "fair" in such contexts.

And even if the 6 paragraph discussion of income equality didn't get you, you still need to be afraid because:

Unlike publicly traded companies that are subject to federal securities laws and regulations as well as to daily scrutiny by financial analysts and the business media, private equity buyout firms operate virtually free of oversight and public accountability, their profits and practices largely hidden from view. Far from a coincidence, this lack of transparency is built into their business model, providing buyout firms with investment advantages that publicly traded companies do not enjoy.

Don't worry though.  The SEIU has some guidelines that will solve all of our economic problems.

The SEIU Principles for The Private Equity Buyout Industry:

The buyout industry should play by the same set of rules as everyone else.

Workers should have a voice in the deals and benefit from their outcome.

Community stakeholders should have a voice in the deals and benefit from their outcome.

Sounds kind of like Venezuela.


of capitalists

...the best laid plans....

Thursday, May 03, 2007

Private PostSecret

post secretProbably as a consequence of the excellent voyeuristic pleasure that is PostSecret, and the fact that I respond to too much reader mail, Going Private has recently been getting anonymous postcard confessions from finance professionals all over the world.  Previously, I had ignored these, but it seems like a good time to share them (particularly because I don't want to write about Dow Jones today).






Some Lego Are More Equal Than Others

resolve My favorite analysis group, Long or Short Capital, has issued a "short" recommendation for the Seattle based Hilltop Children's Center.  Their recommendation follows an article titled "Why We Banned Legos" on some site called "Rethinking Schools," in which a number of "educators" describe events, including a Hurricane Katrina of other children that wipes out Legotown, that led them to ban Lego (please note: the plural of Lego is Lego, "Legos" do not exist) from playtime at an after school program for 8 years olds, before imposing a set of universal rules for future Lego use.

As they closed doors to other children, the Legotown builders turned their attention to complex negotiations among themselves about what sorts of structures to build, whether these ought to be primarily privately owned or collectively used, and how "cool pieces" would be distributed and protected. These negotiations gave rise to heated conflict and to insightful conversation. Into their coffee shops and houses, the children were building their assumptions about ownership and the social power it conveys — assumptions that mirrored those of a class-based, capitalist society — a society that we teachers believe to be unjust and oppressive. As we watched the children build, we became increasingly concerned.

Aside from what should be rather an acute distaste on the part of parents for having their children used in a uncontrolled behavioral study and the anti-capitalist thread that ran through it, much of the discussion bears a disturbing likeness to certain works by Ayn Rand.

I think it useful to explore the practicality of the rules imposed by our novel Seattle think-tank in the real world and reflect generally on the lessons taught to the children described in the article.

Issues of  fairness and equity also bubbled to the surface during the animated discussion  about the removal of the Legos:

Lukas: "I think  every house should be average, and not over-average like Drew's, which is  huge."

Aidan: "But  Drew is special."

Drew: "I'm the  fire station, so I have to have room for four people."

Lukas: "I think that houses should only be as big as 16 bumps one way, and 16 bumps the other way. That would be fair." ["Bumps" are the small circles on top of Lego bricks.]

Hell with the fire station, Drew you capitalist pig, you.  Fair is fair!  You'll get your 16 bumps and like it, buddy, or we'll call in the political officer.

All structures are public structures. Everyone can use all the Lego structures. But only the builder or people who have her or his permission are allowed to change a structure.

Lego people can be saved only by a "team" of kids, not by individuals.

All structures will be standard sizes.

Where else have I heard this?

Our unification of thoughts is more powerful a weapon than any fleet or army on earth.
We are one people.
With one will.
One resolve.
One cause.
Our enemies shall talk themselves to death and we will bury them with their own confusion.
We shall prevail.

Oh... yeah.

Tuesday, May 08, 2007

Buried Cable (Part II)

boom For some reason this afternoon (EST) Going Private got plastered with traffic.  It happened right when I was adding "search" to the sidebar.  Accordingly, the site was blank for an hour or so.  Rather than respond to each of the dozens of emails I got (very flattering, thanks) I'm posting here.  Again, I will not be partaking of any "software as a service" unless it's absolutely necessary.

Much Ado About Nothing

fearless reporter There are few individuals who have had a greater impact on Going Private (and by extension Equity Private) of late than DealBreaker.com's Bess Levin.  The 22 year old Intern become Staffer prowls the financial world for the obscure, obnoxious, obtuse and the obscene and delivers it with a particular (and wonderful) brand of humor.  Of course, on occasion, Going Private has not escaped her astute eye.

Late Tuesday, DealBreaker, tipped off by some anonymous someones or another, suggested that your faithful author might be related to a noteworthy and famous LBO mogul.  (The tipster can hardly be blamed for the speculation.  Certain facts would fit rather well were I the progeny of certain famous LBO moguls- and one in particular- aside from the fact that I'm not married and I don't work in the luxury goods industry).

So substantial is Bess' readership, that the ensuing traffic swamped poor Going Private right while I was trying to add a much-requested search function to the side bar.  The front page of Going Private remained blank for about an hour before I noticed.  This, in turn, enraged certain fans of Going Private, who took poor Ms. Levin to task for "outing" me- a rather silly accusation given that Ms. Levin is merely reporting the news- and blaming her for Going Private being "taken down" (I assume they thought this was in response to the rumor).  This is quite ironic, really, since it was these selfsame fans who actually took Going Private down.

Dear readers, DealBreaker, one of Going Private's favorite sites, deals in rumor and nuance.  We would hardly enjoy it if it became so straight-laced and humorless (or rumorless) that it was just another DealBook (which has some uses still).

Bess (unlike Muffie) is a good friend of Going Private, and aside from being mildly amused, the rumors of my being married and working in the luxury goods industry were received here uneventfully.  I am not so thin skinned, and other reporters have speculated even more wildly (and less interestingly) on my identity.  Asked about such rumors my standard response is "print it."  That's just the nature of the beast when one doesn't have a real-name by-line.  (And all press is good press).

Regardless, I have elected to unite the fans of Going Private and Bess Levin, to cleanse the path between them, with a new feature I hope will take hold here at Going Private, "Going Public: 20 Questions for [victim]."  Our first victim is, of course, Ms. Bess Levin.  Ironically, we had been working on this interview before the recent fracas.  (No surprise.  I suspect that the anonymous, speculating tipsters may well have been drawn out by my recent tongue-in-cheek appearances on DealBreaker).

For those that do not know, Bess Levin was born and raised in the remarkably Jewy town of Livingston, New Jersey, where Bess is best known for starring in her 1997 Bat Mitzvah.  Apparently, she attended Amherst College, where she received a first-hand account of the species known as the WASP and its manifold mating practices, ceremonies and rituals.

Levin graduated from Amherst in May, and there are two conflicting stories as to how she landed at DealBreaker shortly thereafter. One version has her stalking Elizabeth Spiers for a rather lengthy period of time, during which Levin extolled her coffee-getting/making and photocopying skills to Spiers's great impress. The other is that she was found on the doorstep in a basket with a note pinned to her chest; each may or may not be wholly untrue, except for the part about how good she is with coffee and photocopying.   Apparently, she excels at both.

Bess presently spends her days outing filthy bulge bracket banks, (certain blog authors too), schooling John Carney at ping pong and getting her "Fuck Me, I'm a Hedge Fund Manger" t-shirt to the perfect level of softness.  She maintains that for this last season of the Sopranos, all of the writers went on strike and Michael Imperioli wrote the episodes, which would explain why they're so painful to watch.

Most recently, Bess was awarded the Metropolitan Transportation Authority's "You Jumped the Gate" Scholarship, a negative $85.00 award.

She insists that she has no idea what animal she would most like to be.

Her next big project is compiling an Excel spread sheet of the best massage parlors in the city and abroad, with more particulars that you would ever know what to do with.  We joined Bess in the wake of her Going Private "outing" non-scandal.

Equity Private: Bess, if you were an animal, which animal would you be?

Bess Levin:  Benjamin Franklin said there are only two certain things in life, death and taxes. You can't live on taxes. But you can live on dead things--if you're a maggot.  So, I'd be a maggot.

EP:  Of course there is the most obvious question given that you are a woman in a finance related field, do you drink Cosmopolitans?

BL:  Are they made out of whiskey, ice and burnt tobacco?  Then yes.

EP:  Admit it, Michael Douglass' performance as Gordon Gekko in Wall Street was the reason you got into finance.  Right?

BL: To be honest, Wall Street was a bit before my time.  I didn't see it until I had been working at the Breaker for maybe a month or two and—

EP:  They forced you to watch it?

BL:  Yes, some sort of hazing process that I can't really discuss.  Anyway, to answer your question, it was Willem Dafoe's performance as David Caravaggio in the English Patient.

EP:  The cutting off thumbs?

BL:  That sounded like working in finance to me.

EP:  As a general rule, who is more obnoxious?  The private equity people, or the hedge fund people?

BL:  Without a doubt, hedge fund people.  Have you met Schwarzman?  Kravis?  (-ahem-) They're darling.  Wouldn't hurt a fly.  Hedge fund guys would take 2 and 20 from a blind homeless man's change cup.

EP:  Does the homeless guy even get the common courtesy of a high-water-mark NAV calculation?

BL:  I doubt it, frankly.  That being said, is it a well documented fact that I am head over heels in love with Philip Goldstein, and try to spread the gospel of the Holy Church of Phil wherever I go.  How could you not adore a man who says stuff like "You motherfuckers aren't going to get away this!" and "I'm not going to let some pompous ass sitting in Boston tell me I can't talk to somebody.  What's the big deal?  We're not planning a kidnapping here."  Of course, you couldn't not adore such a person.

EP:  Oh, I forgot to put Goldman people in the options.  Where do they rank?

BL:  Goldman people defy categorization.  Though I maintain that the song "I Touch Myself" (you know it: "I don't love, anybody else, when I think about you, I touch myself")

EP:  Uh, yeah.  I know it.

BL:  That was written about the specimens that inhabit 85 Broad, so if you want to connect any dots there, you have the floor.

EP:  What kind of chairs do the DealBreaker offices have?

BL:  Aerons, of course.

EP:  Are those any good?

BL:  They're not bad.  Though, just between you and me, New Guy Keith broke his yesterday.  He's by no means an overweight person, so perhaps there's a flaw in the design.  Either way, it was pretty hilarious, given that he already has a problem purging after lunch.

EP:  Who's the most interesting person you've met as a consequence of your DealBreaker position?

BL: In my mind: Andrew Ross Sorkin.  In reality: Carl Icahn.

EP:  Who would you most like to have by your side if you met Jeffrey Epstein in a dark alley?

BL:  Daniel Loeb—he does yoga.  Might even teach it, too, though you should fact check that.

EP:  What about a bright alley?

BL:  Dennis Berman.  He seems tough.  (And didn't email me anything about the Dow Jones bid before it was public, even though I flooded his inbox demanding that he confirm or deny what I sensed was an upcoming announcement from Rupert Murdoch.  That says he he's not going to kowtow to me or anyone else.

Also, that he can keep a secret.  (I like that in a man).  If for some reason Dennis is unavailable, I'd settle for a Jim Cramer (bobblehead).

EP:  Do you frequent dark alleys?

BL:  I make it a habit of walking down a shady dark alley where it's been documented that people have been assaulted and/or robbed, at least once a week, just so I can remind myself of what it's like to be alive.

EP:  What about bright alleys?

BL:  No.

EP:  Are you disappointed you weren't named personally in the recent suit against DealBreaker by Solengo Capital?

BL:  Equity, I expected more of you!  Not only was I named in the suit, but I was the first person they contacted and sent papers to.  What I'm disappointed about is that I practiced my "You can't handle the truth!" delivery in the mirror for about a week and it was all for nothing.

EP:  I didn't know.  The news was all about Carney.  Ever watch Frontline?  They did a great special on accounting scandals back when.

BL:  Accounting scandals don't really make my nose twitch.

EP:  Can I keep this pen?

BL:  No, I'm going to need that back.

EP:  What's the worst pick-up line you've gotten from a fan?

BL: "Your hair looks really good today," Dealbreaker Editor in Chief, John Francis Carney III.

EP:  What's the female version of the pick-up line, "There's a party in my pants and everyone is invited."?  I always get this line from fans.  I've never understood it.

BL:  For the last several years, I've used, "Wanna go halfsies on the abortion?" with a success rate of 100%.

Hate Mail

poison Typically, reader mail is a pleasure.  Just occasionally, however, the natives get restless.  This is never more so here at Going Private than when offended members of the financial media emerge from their lairs, fangs drawn, to lunge at my criticisms of the slop that, too often, passes for financial journalism today.  Obviously, I've edited this letter prior to posting it here.  It is true that this letter is written to a specific journalist who spat at me across the ether, but it might as well be addressed to any one of dozens.  (Not that all financial journalists are so careless, but the diamonds- Bess Levin, John Morris, Vipal Monga, some others- get rarer and rarer every day).

From:  Equity Private <[email protected]>
To:  [Member of the Financial Media]

Date:  Tue, 08 May 2007

On Tue, 08 May 2007 17:22:47 -0500 [Member of the Financial Media] wrote:


>I have to say, I was pretty put off by what you wrote about [   ]. I just got around to
>reading it now.
>Why the need to be such an ass hole?
>I think you're a woman, but the term still applies.

I believe that's contracted, as in "asshole" not "ass hole," but perhaps both uses are enshrined in "American English."  I wouldn't be the best authority here, as English is my third (or arguably, fourth) language.

Actually, I believe the gender equivalent you are searching for would best be accomplished with "cunt."  (Or perhaps, "See you next Tuesday" if you are squeamish in a Victorian way).  The shock value of the word has recently been diluted by its overuse by financial professionals of the British persuasion who wield it to describe everything from corked wine to a bad sandwich, but I think it still has some impact in the United States.  Still, if you think you are the first with this bit of profanity, or that I am impressed by it, you are sorely mistaken.

>Who knows? Maybe some English teacher at your Ivy League school told you you
>couldn't write and you thought [   ] was the man to lash out at.

Actually, I was always encouraged to pursue a career in the humanities.  Unfortunately, (or perhaps fortunately) I'm not enough of an aesthetic for this to have appealed.

>What you wrote was downright mean.

In my view, [   ], such as he is, wrote a totally brain-dead peace on the ills of private equity that was so poorly reasoned and lacking in facts (or even understanding) that he is quite fortunate that Justin Fox of Time just happened to offend me more.  So much more, in fact, that I did not award [   ] Going Private's Maxwell Smart Prize for Mediocrity in Financial Journalism because Mr. Fox deserved it so much more richly.

(See: http://equityprivate.typepad.com/ep/2007/03/going_private_a.html )

His offense was complicated by the fact that he purports to write for [   ], (Fox does not) a position that would tend to suggest some passing familiarity with the economic forces that drive such transactions and (perhaps this is a stretch) a basic knowledge of statistics, sample size, confidence intervals and logical argument derived therefrom.

It is highly incumbent on members of the Fourth Estate (which, perhaps unfortunately, even [   ] happens to be) to preserve their franchise thereof.  This is, after all, a franchise granted by the people.  Abusing it is done at one's peril.  Instead, the Fourth Estate should jealously guard this franchise with the utmost reverence and zealously protect ethical standards of factual discourse and rational, critical discussion when exercising it.

[   ]'s piece exhibited none of these qualities.  In fact, it was among the more fear mongering and poorly reasoned works I've read on the subject.  I won't go into his rather wanton butchering of the English language specifically, as that I think I covered quite well [before], but one assumes he is a native speaker (journalists writing in a given language should be) and so his excuses for sub-par performance here are limited.

As for his wounded pride, well, perhaps there are less public endeavors that might appeal to him more directly if public criticism of his writing is too difficult to bear.  (As a note, it wasn't long ago when the Japanese would commit ritual suicide in the face of such shame, but, alas, these are less chivalrous times).

>And it's a lot easier write things like that when you're anonymous.

You will be interested to learn that anonymous speech has a long and prestigious history among English writings, particularly those of the political and economic variety.  Perhaps you were unaware that the most of the Federalist Papers were written anonymously, but, as a member of the financial press, you should be keenly aware that many if not most of the Economist's pieces are written anonymously (the outgoing editor of the Economist had a wonderful op-ed on the value of anonymous writing last year, I think it was.  You should really endeavor to review it).

[And technically, Going Private's author is pseudonymous, not anonymous].

Anonymous writing, anonymous speech, as it were, permits the reader, even the critic, to concentrate on the words, rather than the author.  I understand that in modern critical thought it is felt important to focus on the biases of the writer, but this is a fall-back for the feeble-minded and dull-witted.  (Your use of it here is instructive).  Those who cannot critique arguments on their merits but, rather, must rely, as is quite American in tradition, on attacks "against the man," (or, perhaps, as it is in my case, "against the woman") do not deserve much respect in my eyes.  This brings us nicely to my point:

>I doubt you'd have the guts to say that stuff to [   ]'s face.

Please.  I have called more than one Fortune 500 CEO, and more CFOs than that liars to their face.  You will get little reaction from me by accusing me of having a problem with "speaking truth to power."  The issue is the truth, not the speaking or the power.  This is what the press, through instruments like [   ], has lost sight of.

Shall we discuss courage?  Grant me consent to publish your letter on the blog.  Then you might consider lecturing me on anonymous writing.  Actually, the more I consider it, I might redact it and publish it anyhow.  [I have now done this].

You have [   ] as your forum.  Write your own critical discussion of Going Private, if you wish.  Surely, your readership is larger than mine.  (That should be self-evident, but on reflection I guess it might not be).

>You should be ashamed of yourself.

And yet, I am quite proud to critique poor writing and a lack of reason.

>Call me any time you want to talk about it.

Thank you, but I will have to pass.

I do not, as a rule, speak to press in person.  I have too many personal experiences with the hatchet jobs that pass for "journalism" in this day and age.  You have only your colleagues (and the profession) to blame for the fact that "The Media" is the least respected and the most hated institution in the United States today (even when the IRS is offered up).  The Gallup poll on this is fascinating.  You should read it.

The days of automatic respect attached to being a member of "The Media" are, thankfully, over.  High time too, given the feces that has, hitherto, been the normal excreta from such organizations.

>You KNOW who's writing this email.

Do I?


Wednesday, May 09, 2007

The Master

g-loeb-al Though this has been floating around for awhile, sometimes you just have to discover The Master for the first time, all over again. 

Dual Class (Corporate) Citizens

corporate franchise We proceed from the assumption that, on the whole, the separation of ownership and control is a good thing.  Market actors come by capital in any number of ways (some noble, some neutral- reading Fooled by Randomness makes it apparent that this may well be the lion's share- and some less than noble).  It follows then that not all holders of capital will be competent (or even tolerable) managers of enterprises.  Outstanding managers may not, consequently, be holders of capital.  Making capital a necessary prerequisite to the exercise of managerial skill would seem, therefore, to work a social ill.

The separation of ownership and control, combined with a robust market for corporate control (to promote efficient competition for managerial talent) permits specialization by managers and permits holders of capital to, well, do whatever they like.

Going Private readers, being keen students of the theory of the firm, will quickly recognize the ugly hints of the "principal-agent problem" herein and, when they encounter such governance issues, wonder what mechanisms keep the interests of managers and owners aligned and how well those mechanisms have been priced into the asset being managed.

Going Private readers also scoff at use of the term "moral hazard" in these cases, (the offense of this sort of misuse being committed primarily by certain financial journalists and politicians; the former because "moral hazard" is a much better catch phrase than "principal-agent problem," and the later because the former think "moral hazard" is a much better catch phrase than "principal-agent problem").  Instead, Going Private readers recognize that, while both moral hazards and the principal-agent problem are related to information asymmetry, the use of "moral hazard" as a blanket term here is flawed.

Much hand wringing and many tears have been spilled over defining the appropriate balance between ownership and control, particularly in markets efficient enough to facilitate short-term speculation, which disrupts (not necessarily in a bad way) continuity of ownership and, to the extent long-term ownership yields firm specific experience, reduces ownership knowledge in the aggregate.  (The shareholder who remembers 40 years of management teams likely knows more about the underlying firm than the shareholder who purchased the stock last week).  Of course, you don't want the old widow of the long dead partner in the firm holding up shareholder meetings to demand the plant be painted pink either.  Getting the balance right, goes the theory, is critical to avoid harm befalling the owners.  I find this blanket treatment distasteful, and I think with good reason.

Different firms require different balances of ownership and control.

Any number of mechanisms for fine tuning this balance exist (poison pills, super majority voting, staggered boards) and have evolved (with predictable consequences to their complexity) over a long history of battles for corporate control.

Lately, however, dual class share structures have come into the spotlight, primarily, I think, because of the host of newspaper and "old media" firms which- readership dwindling, embattled by the realities of transforming markets and the historically unprecedented (and mostly well deserved) disdain and mistrust of The Fourth Estate by the public at large- look cheap and have therefore come under acquisitive attack.

Dual class share structures take any number of forms but the most common is to issue a "Class A" set of shares and a "Class B" set of shares.  The Class A set of shares may, for instance, get 10 votes per share.  Class B might, instead, get 1.  In this way, unless Class A shares are in short supply, it is highly difficult to overcome Class A voting power.  Google uses this structure (to avoid being "evil" I guess, but let's just not mention that whole China thing).  The question of who gets Class A and who gets Class B shares at Google (or anywhere else) is left as an exercise for the reader.

Newspapers, to some extent by a trick of fate, also happen to be among the most common firms to employ dual class share structures.  Part of me suspects that this is in no small part a consequence of the fact that, because of how newspapers were built after the turn of the century, print media companies tend towards dynastic owners.

Newspapers were, almost by definition, contrarian endeavors tasked with scrutinizing the powerful while themselves dominated by powerful and highly public personalities.  Dual class share structures typically concentrated the power in the ruling family and were explained by the need for newspapers to be fiercely independent of the whims of the market (or any other whims for that matter).

I have some sympathy to these structures with media companies, or I used to.  Buffett seems to agree with me.  He believes in dual class structures for newspapers and has been somewhat vocal about it to boot.  Berkshire owns a large chunk of the Washington Post, a dual class structure with the Graham family owning all of the voting shares.  Berkshire has dual classes too, but Buffet's power isn't related to any supermajority of voting shares.  He holds equal voting weights in all the Berkshire classes and given his plans for his fortune, its hard to say that firm is going to be a dynastic one.

Dual Class structures aren't always a legacy holdover.  Sometimes they are used pro-actively to restructure power to the ruling class.  About a year ago The Wm. Wrigley Jr. Company issued a special dividend.  One share of Class B stock, with 10 votes, for every 4 shares of common with 1 vote.  There was a hitch.  The voting rights of a Class B share are non-transferable.  The shares effectively convert to common if sold.  Of course, this means that every time a Class B share is sold, the existing holders of Class B shares enjoy voting accretion.  The elegance of this structure is in the self-selection bias it introduces to the shareholders.  If they want the money (they are shorter term focused) then they dump the voting rights.  (Who wants short term shareholders voting, after all?)  If they want the power, then they have to forgo the money.

After the dividend, William Wrigley Jr. had about 28% of the vote.  If only a third of the shareholders sold their Class B's he'd hold 40% and the remaining Class B shareholders would, by definition, be believers in management.  (Nicely done.  I wish I knew who did their legal and corporate finance work).  Of course, as a member of "the family" you almost pray for a sharp downturn in the stock price to flush out the fickle, which presents interesting principal-agent problems itself.  (I highly recommend "The Hudsucker Proxy," as an amusing diversion in this direction).  This was an interesting approach which may well have been driven by mid-1990s rules imposed by the NYSE on dual class structures.  Those rules had grandfather clauses for firms that already had such structures in place.  (One more reason Google listed on NASDAQ, perhaps).

The New York Times, presently in the spotlight on this issue, has what must be the best self-serving proxy statement on this issue ever written:

The primary objective of the 1997 Trust is to maintain the editorial independence and integrity of the New York Times and to continue it as an independent newspaper, entirely fearless, free of ulterior influence, and unselfishly devoted to the public welfare.

One is led by this to believe that the firm gives its profits to "Jerry's Kids" or something.  To shed some more light, the 1997 trust is overseen by eight trustees.  All of them are family members.  Making a modification to the trust requires the vote of six of the eight trustees.  If you were looking for a model to insulate an organization from outside pressure, this is a pretty good place to start.

Dow Jones, owner of, among other things, The Wall Street Journal, is facing similar scrutiny with the absolutely massive premium attached in the form of a $60.00 per share bid (the stock traded at $34.50 just last week) by Rupert Murdoch.  If one needs a demonstration of the power of dual share structures, this bid with its 45% premium has a "40% chance of success," in the words of a UBS analyst (for whatever that's worth).  Even the risk arbitrage people aren't so sure.  As of this writing, the stock hovers at $53.64 per share, a sharp discount from the offer price.  It is also illuminating to recognize that the bid comes from another potent media personality.

The Observer demonstrates the pickle comically with a "scratch to win game" that highlights the absurdity of close control in (most) dynastic control structures that have persisted more than a single generational passing of the torch.  Look at who you have to win over to prevail.  (But then, there are some pretty batty public shareholders out there too, I suppose).

So do dual class structures have a place?  Do they even present severe problems?  Well, it's clear that they have effects on corporate performance.  Masulis, Wang and Xie's "Agency Problems at Dual Class Companies" is but one of a slew of papers examining the issues surrounding dual class share structures.  From their abstract:

These findings support the hypothesis that managers with greater control rights in excess of cash-flow rights are prone to waste corporate resources to pursue private benefits at the expense of shareholders. As such, they contribute to our understanding of why firm value is decreasing in the insider control-cash flow rights divergence.

But so what?

I have commented on Cablevision's "Dolan Factor" here before.  Specifically, that a lack of confidence in management is priced into a stock's price by rational actors.  Also priced in is the potential to change management.  There is ample evidence that investors on the margin make buy and sell decisions based in no small part on corporate governance issues.  In addition, these issues have gotten a lot more exposure in recent years, particularly with the rise of activism.  Pricing a "Dolan Discount" into a stock is par for the course, and that discount doubtlessly gets a multiple if a dual class structure entrenches the Dolans in the firm.  This is as it should be.  All is well with the market.

Let's remember for a moment that shareholders who buy common in a dual class structure with weighted voting rights to founders or their dynasty got what they paid for.  Giving what amounts to free voting rights (and the consequent repricing of the shares to include the value of said voting rights) to shareholders who never had them in the first place is a free lunch.   That won't stop activists from using dual class structures as a political weapon, but that doesn't particularly bother me either.

In reality, dual class share structures, at least in newspapers, probably are necessary anymore.  The days where the public capital markets were the only place to go to get the kind of money you needed to build or maintain a national newspaper's infrastructure are long past (not to mention that the infrastructure is much cheaper today).  Any number of sources, including going private transactions, are available to newspapers today, and doubtless the competent managers in the industry could command significant control for themselves in a private transaction.  (Look at what News Corp is willing to pay for Dow JonesThe Journal).

All Press Is...

reporter It is my general policy not to talk to press on the record, but Canadian Business Magazine asked, oh, ever so nicely, that I consented to answer questions by email which they then graciously published.  It is, frankly, hard to resist a reporter that asks me to "make finance spicy," and equally hard to resist some shameless self-recognition.

Thursday, May 10, 2007

Paper Tigers

down and out in the newsroom One of Going Private's favorites, The Stalwart, wonders aloud after the "specialness" of newspapers.  In particular, our friends wonder, if there isn't a little bit of hypocrisy both from the papers and critics of media occupying the public capital markets.  Having delved into this topic yesterday at some length, I obviously have an opinion.

Sayth The Stalwart:

"...one of my big pet peeves is the idea that the media (newspapers in particular) should somehow exist in this extra-market state.  A lot of old-school journalist types think that the news media should be solely focused on reporting the truth and holding government and large corporations accountable, and that it shouldn't have to worry about pesky things like the profit motive."

My own commentary had more to do with structure than with the question of newspapers turning a profit, but this was likely an oversight on my part.

It is certainly true that taking the "we need to be independent in order to properly speak truth to power," argument to its extreme suggests that even profit should be abandoned as a goal for "pure" media.  And, indeed, this argument has its emotional appeals.  One suspects that unpopular (but valid and important) journalism wouldn't sell particularly well.  But two facts blunt this argument significantly.  First, there is already at least one active marketplace for non-commercially viable journalism (and it produces what I think is the best programming out there).  Second, as I pointed out before, media need not rely on the public markets for capital anymore.

The Stalwart goes on to quote Gary Weiss over at Salon:

Public ownership has been a disaster for newspapers not just because it invites hostile takeovers. Quite simply, much of what newspapers do has no clear investment rationale. Entire segments of the business -- such as foreign bureaus and investigative reporting -- are inimical to profitability, particularly when viewed on the quarter-by-quarter basis favored by Wall Street.

Well, of course this line of argument, to which I am typically quite sympathetic given my view on the "tyranny of the quarterlies," seems to rely on the fact that investment in foreign bureaus and investigative reporting are somehow big cost centers that do not create return.  Let's examine that for a moment.

The CBS Evening News used to be the gold standard of reporting, way before I was ever aware it even existed.  Their international news, it seems, was the "go to" desk to inform yourself about world events.  Now that program is hosted by Katie Couric, who departed her position as "permanent co-host" for the Today show, which cannot be described as much other than a candied morning program (it doesn't get more substanceless than Bryant Gumble after all) that I struggle to describe without using the word "schlock."  Couric reportedly turned down a $20 million a year salary offer to join CBS.  Despite this, she remained pretty much the highest paid news anchor with a $15 million a year salary.

Let us pause for a moment and consider the import of these kinds of salaries for what are described as "media personalities."  Quite obviously, this is celebrity salary.  This is professional athlete salary.  It is so large because CBS is paying for entertainers.  Why is this?  Dan Rather purportedly quipped that "...it was the day that the news became entertainment that all was lost."  (Ironically, Rather, after being effectively forced out at CBS over the purported forgery of the "Killian documents," joined Mark Cuban's HDNet.  Like I said.  professional athlete salary.  So much for the evil of news as entertainment, Mr. Rather.

It comes, therefore, probably as little surprise that the CBS Evening News has fallen from grace.  In fact, it has also fallen quite a distance from the low bough of mediocrity.  Reuters, a plucky schadenfreund to other media, runs this (today, ironically) under the headline "CBS eyes more hard news for ailing Couric newscast":

"On the short list of things to improve at CBS News is the standing of "CBS Evening News With Katie Couric," which started with a lot of fanfare in September but has faltered. Last week's viewership was the lowest since at least 1987, probably longer, according to Nielsen Media data issued Tuesday."

Yes, it is a long cycle, but pulling news out of a network news program eventually implodes as a strategy.  At the tail and of that cycle you end up with something like "To Catch a Predator," which relies more on shock value for ratings than it does "investigative reporting," but captivates the audience in a blind, brainlocked trance.  A perfectly suggestible state to pepper them with advertisements for Triple Action Gold Bond Medicated Powder.

I think the best non-entertainment shows on television today are Frontline, The News Hour with Jim Lehrer, The Nightly Business Report and Nova.  (And this only because Louis Rukeyser is dead).  All of these, of course, are on public television.   (For entertainment I'm a fan of Rome, production of the consummate "for pay" television network, HBO, and I am pissed, by the way, that it's run its course). That says something.  But what?

Perhaps that the American public no longer has a taste for real news.  True, societies in luxury often find news of foreign wars and economics tedious (unless a conquest is being celebrated).  But public television is, in a microcosmic way, its own free market with scarce resources that are lusted after by multiple programs.  Frontline documentaries (don't miss the one on "The Media," they are all available free online) are almost all made by freelancers.  After all, you have to convince a producer your production is worth making.  They call their customers "sponsors," but in reality that's advertizing.  It just has a lovely liberal burqa over its feminine head.

So how to preserve the integrity of news?  What if we didn't bother?  Surely, proponents among Going Private's readers of information asymmetry would enjoy a world where political slop dominated the WSJ.  A dumbed down market is a boon for smart players who do their own homework and rely on The Journal primarily for "reading the street," nicht so?  Sure, it would be sad to lose The Journal to a slot "somewhere between O'Riley and Fox News," but then, you see disaster, I see opportunity.

And, then, the "nothing more than another rich family without Dow Jones" Bancrofts could always take the damn thing private.

"Fairing Up" Carried Interest

dangerous fool? Anyone can be wrong about a person once or twice.  I mean really, that is ok, right?  Once or twice.  So I was wrong about Andrew Ross Sorkin.  I originally thought he was an almost charming but mostly harmless, boobish gadfly who didn't really understand finance.  I couldn't have been more wrong.

In fact, after reflecting on this carefully, it is now my considered opinion that Sorkin is a dangerous fool who is prone to do some serious damage wandering around carrying a Louisville slugger with nails driven through it while wearing a red bandanna fashioned into a blindfold and swinging wildly at dangling financial issues in the middle of a seven year old's birthday party.

So no surprise, then, that when Percy Walker's blog recently outlined a wonderfully Nixonian "enemies list" that enumerates (quite accurately in my view) the many enemies of private equity (that is the many people who would remove the capital gains treatment from carried interest in private equity, effectively more than a 100% tax hike on the funds in question) Sorkin (who ranks #1 on the list) goes over the deep end.  He blows a gasket at Walker and lowers himself (in typical leftist style) to attacking the man, as if credibility in this game was the match point.  To wit:

...but when contacted last year by Forbes magazine — which failed to find any mention of Mr. Walker in public documents — the operator of the blog said: 'I lack the desire to establish that I even exist,'"

I suspect that both Sorkin and Forbes missed the essence of the joke that is the fictional Percy Walker.  True, it is a little subtle.  Hint: your first clue should have been the stock photo of the annoyingly diverse (two minorities on a four person team) office staff- but, given that this must trigger far-left fantasies of utopian workplaces, perhaps the blinding effect explains the sudden mental density on the part of Sorkin and the financial press.  Still, it was obvious to the rest of us.  But then, no one (that I know) accused Sorkin of having any qualities even remotely resembling a sense of humor.

Interestingly, I had an exchange with Sorkin (who I have actually met in person on at least one occasion) not so long ago where he worried that I was "out to get him." I explained that I was merely "out to get" his anti-market prattle (and it is hard for this not to be a full time job by the way).  He seemed unconvinced, but his concern in this regard seemed not to prevent him from asking me out, sight unseen since he could not remember who I was (women, finance, it happens a lot).  (I will, by the way, post the logs of this exchange only if Sorkin first denies it occurred).  Luckily for me he promised to safeguard my identity if we met.  Thank god, imagine if my friends found out I was out on a date with him.  Very generous offer, given the circumstances.

You know, on further reflection, I feel that making this change in tax treatment is entirely logical and needed to sustain the economy.  We know how desperate the Treasury (subscription required) is for revenue this year.

Sorkin is right behind me on this:

Let’s be honest: it is a charade that private equity firms have claimed their 20 percent performance fees at the lower capital gains rate. To qualify, they invest a nominal amount of their own money to demonstrate that they have put something at risk, but it’s a ruse. They are paying capital gains rates for doing their job, which should be taxed at the regular income rate.

Indeed.  We cannot let people take capital gains on profits derived from "other people's money" after all.  And I agree with Sorkin.  And he is right.  The 1% of capital contributed by the general partner on a $1 billion dollar fund is definitely "nominal" in terms of personal wealth.  I know Sorkin sneezes in intervals of $10 million.  By this standard I think we might need to examine the investments of some of the limited partners too.  To the extent they only have a few percent in the game how can their capital be said to be "at risk?"  See, because ignoring diversification and betting the ranch on natural gas futures is what we want to encourage.  (It makes for great copy when those blow up too, you know).

In fact, while we are at it, there are any number of situations that have a similar stench about them.  Closing these criminal loopholes for "the rich" will be an outstanding way to boost revenue for the Treasury and deter the use of leverage in all situations.  For that matter, the tax deduction on interest payments in general is a terrible idea.  All we have to do is look to any number of the more conservative organized religions (or the Germans) to get a good view on the evils of "Schuld."

Actually, this idea didn't originate with Sorkin.  I know.  Surprise.  It seems to have found traction after a paper written by Victor Fleischer which, in the much more measured fashion of its later drafts, worries after salary that would otherwise have been paid to private equity professionals being pumped back into their funds to enjoy tax deferral and capital gains treatment.

Mr. Fleischer, however, at least has the grace to appear a little embarrassed about the brouhaha he has caused, and it is easy to forgive him if you read the original work, one that has been taken far afield of its original intent by democrats eager to geld private equity in the deluded belief that it will somehow improve the economy (or perhaps just to fleece the productive segments of the economy in the interest of "fairness.")

Fleischer toned down his suggestions, which have more to do with tax deferral and shifting of real income into partnership structures than with the capital gains treatment, I think but am not sure, in response to peer review.  Sorkin is quite late to the party here, but then he probably never read the paper in the first place.  Obviously he hasn't been reading Going Private carefully, or he would know this as I commented on Fleischer's paper more than a year ago.  That doesn't stop him, of course, from flailing about as if he were leading the charge.  I suppose that's what financial press do, however.

Mr. Fleischer, by contrast, even had the courage to self-nominate himself for Going Private's Thai Medal, one of the prizes offered in connection with the Going Private Awards.  (Nominations are still open).

The Thai Medal
This beautiful, forty eight pound brass and pewter medallion is ribboned for display around the neck of the recipient.  Awarded to the individual or organization most responsible for fostering regulatory or legislative initiatives leading to the frustration of efficient markets.

I reproduce his letter (with his permission) below:

On Tue, 20 Mar 2007 19:42:02 -0500 Victor Fleischer wrote:

Dear Equity Private - I hope you are doing well.  I hereby self-nominate for the Thai Medal.  I actually think changing the tax treatment of carry is good for economic efficiency, altho I gather from your previous blogging that you disagree.

Anyway, here's the most recent version of the paper, which is a bit more moderate than the version you saw before.  The paper has reportedly  contributed to the stirrings on Capitol Hill.

Don't hate me.


Says Fleischer in another email to me:

Apparently some folks on the Hill are still reading from my March 2006 version, which wasn't as balanced a view as the current version.

Victor Fleischer, dear readers, is a class act, even if he is from California.

Interestingly, Sorkin only manages to credit Mr. Fleischer in passing and then only because he is listed on Walker's "enemies list."  Convenient, that.

But let's not shoot the messenger.  Despite what he would have you believe was original thought, it's not his idea after all.  Let us instead consider the many ways that people earn money with "other people's money."  Obviously, all of these should be closed as "loopholes."

Housing Loans

I mean really.  A home owner puts down a paltry 20% of the purchase price, borrows the rest from big and stupid banks that don't know they are being taken advantage of and then pockets the gain for themselves.  Big stupid banks only get the interest rate but when the house is sold all the gain to the homeowner is taxed at capital gains rates.  And what does the homeowner have at risk?  Hurricane?  Insured.  Flood?  Insured.  Fire?  Insured.  Let's be honest.  It is a charade that home owners have claimed the gains on home sales as capital gains.  They were only doing their job, servicing interest rates and improving the property.  What's worse, if they buy another house they can defer the taxes until their next sale and then defer them again after that one.  We have to close this loophole immediately, clearly.  No wonder the housing market has been out of control the last ten years.  Think of the revenue to the Treasury too.  That's always a priority for market actors.

Car Loans

This is exactly the same thing.  Someone else's money (the stupid finance company) being used to make money for the car owner.  Not only do they get the use of the car, but if they profit from it at the end, well, you can see where I am going.  We need to close this loophole.  Anything this car trades for or sells for over the Blue Book value should be taxed at double ordinary income rates.

Margin Purchases of Stock

Again, traders are ripping off the brokerages by borrowing someone else's money to make a profit.  How can we allow this to be taxed favorably?  I don't care if you held that stock for 4 years and paid margin on it the entire time.  This should be taxed at ordinary income rates.  We'd hate to encourage participation in the capital markets, after all.

Employee Stock Options Plans

Well it's clear that the employee didn't pay for these.  They borrowed them from the company until the time of exercise, in effect.  Definitely, ordinary income.  Come to think of it, why are we letting the company get away with promising stock that hasn't been paid for yet anyhow?  That looks like a loan.  This needs to be taxed.  This would solve a lot of the Treasuries problems along with a lot of the problems around excessive executive compensation.

Debt Funded Purchases of Capital Assets

Why in the world, when these are resold, should we permit companies to use other people's money to get tax breaks?

I think you can see that this solves several problems.

1.  It destroys the advantage of evil leverage and thereby reduces the incentive to borrow (with predictable advantages for the economy).

2.  It makes everything fair.  Who says life cannot be fair?  Let's just move to a flat tax of 40%, in fact.  That's much more fair.

3.  Left as an exercise for the reader.

DealBook closes with:  "You would think that all the buyout kings who wear American flags on their suit lapels would be proud to pay a big tax bill."

I think that we need to consider this too.  Any true, red-blooded American firm should work hard to maximize taxes.  After all, it is the Treasury that is important.  Corporations that fly the American flag in over their headquarters should be proud to pay a big tax bill.  We have massive unfunded liabilities in union negotiated pensions to bail out, after all.

Friday, May 11, 2007


and counting It will probably interest no one (but me) that Going Private received its one millionth hit today.  Yay me.

Double * (Standard/Taxation)

et tu? The always yummy Abnormal Returns and Going Private have long had "behind the scenes" discussions about the nature of the alternative investment (and general investment) world.  Today, unsurprisingly, the topic of taxing carry for private equity funds came up, and with it an interesting point that might have deeper ramifications than appear on the face.

Back in April, the Wall Street Journal ran a piece (subscription required) on the Blackstone IPO.  In it, the Journal wonders after the "mark to market" like or "fair value" accounting Blackstone intends to use in their financial disclosures.  Says the Journal:

Blackstone Group's planned initial public offering of shares is shaping up as a test case of controversial new accounting rules that could allow the buyout giant to book profits upfront on deals whose value could take years to realize.

At issue are rules adopted by accounting rule makers in February. They allow companies to book income from their investments immediately -- using estimates of what management determines to be their "market," or fair value, rather than to keep a static value of the investments on the books until the company cashes them out.

Of course, it was impossible for the Journal to resist the parallels to Enron, the observation that perhaps we haven't learned anything since 2002 and these are all valid points.  Beneath this glossy surface, however, there is another question.

Doesn't this accounting treatment, coyly asked our friends at Abnormal Returns, suggest that Steve Schwartzman considers these profits "ordinary income?"

Thursday, May 17, 2007

"Fairing Up" General Aviation

grounded My intense dislike of the word "fair," grows daily.  It has gotten to the point where only the phrase "for your protection," strikes me as more intelligence insultingly full of shit.  As I have more than a passing interest in aviation, and more than that in general aviation, the recent scrap over the manner in which the FAA will be funded in future, and the frequent use of the word "fair" in that argument, has caught my attention.  Sub Rosa has done a number of aviation related deals and yours truly has 1126 hours of single time tacked onto a multi-com-ifr ticket.  The current proposals floating around will inflict serious harm on what is, believe it or not, the most efficient and safe aviation transportation infrastructure in the world.

At the center of the issue is the introduction of "user fees," into the FAA's funding system.  User fees require each aircraft to pay a fee every time it flies.  The fee is administered and collected by monitoring take off and landing and air traffic control use.  User fees are primarily used in the European system today, and range from annoying to prohibitively expensive for smaller aircraft operators (read: private pilots).  The high end of the range is typically motivated by protectionist ideals put in place long ago to defend state-owned national airlines from people flying themselves to and fro.  Of course, with the privatization of many of the major airlines in the last 20 years, the user fees were not attenuated because the protectionist motive was reduced.  The United States, by contrast, has some of the lowest costs and therefore the most vibrant aviation economies in the world.  (You may also be surprised to know that a Cessna 172 can manage 15 miles to the gallon at cruise, and doesn't have to drive around curves- not exactly inefficient).

The current proposal plans, among other things, to introduce a user fee on turbine aircraft.  This is a clever bit of politics, as turbine aircraft are generally the most expensive "high end" aircraft in general aviation and their owners, therefore, the least sympathetic.  The next step down is the "piston" owners which includes the little four-seater Cessna 172.  Of course, anyone who thinks these users won't eventually be "faired up" with user fees is kidding themselves.  (Just ask the many Canadians, Australians and New Zeelanders who were lulled into complacency with the promise of limited user fees only to see even that thinly maintained fiction tossed by the wayside at the first opportunity).

These fees are a substantial switch from the current state of affairs where the FAA is funded by the Aviation Taxpayers Aviation Trust Fund (75%) and the taxpayer general fund (25%).  The Trust Fund is where all the excises on tickets, per-gallon fuel costs and the like that form the current source of funding are collected.  In addition, many countries (Germany, for example) charge user fees for safety related services like weather briefings.  I'm not sure why we would want to create a disincentive for private pilots to use these services, and thereby reduce safety, exactly, but I'm sure it is just because I am missing something obvious.  It is a little known fact that a private pilot can fly from coast to coast without once talking to an aircraft controller.  Flying "VFR" this way is entirely legal in the right weather.  It does, however, fail to take advantage of "another set of eyes," those being the controllers.  Even with VFR flights, it is possible to use controllers for "VFR Flight Following," to route you around other aircraft or warn you of their presence- a much safer state of affairs.  Twacking a user fee on these services will push more aircraft out of the optional flight following system, and even push more of them out of the IFR system in marginal conditions.  This is not the brightest idea someone ever had.

The FAA's official position is that they are going broke, the Air Traffic Control system is inefficient, and that use fees are needed to fund the added expense of the locus like Very Light Jets that will soon clog the sky.  This is as much noise.

The Aviation Trust is actually very flush with money and is projected to be in surpluses for the next 10 years.  A look at their own budget reports tells the tale.  Anyone who insists that there is a crisis either isn't in tune with the facts or is outright lying.

The Air Traffic Control System in the United States handles twice as many operations per controller as Canada, six times more than Germany and seven times more than the Netherlands.  It is actually the most efficient system in the world.  It is also the safest and among the cheapest in terms of cost per operation.

As for gnat filled skies, you don't have to be an analyst to figure out that there aren't going to be more than a few thousand Very Light Jets in the air in the next five years, even if every manufacturer currently known to man exceeds its production targets.  Just as a bit of comparison, there are around 90,000 aircraft flights in the United States per day.  Only around 30,000 of these are schedule commercial flights.  General aviation makes up the rest.  Between 2,000 and 5,000 commercial aircraft are in the air at any given moment in the United States.  The idea that the addition another 3,000 aircraft (which hardly fly every day) over 3-5 years is somehow going to clog the system strains even the most liberal imagination.

The airlines are next to the podium, and whine that they are "overpaying," with the current fuel and ticket tax and that the system is not "fair."  They conveniently fail to point out that all of the additional excise taxes are passed on immediately to their customer anyhow and since any increase in fuel tax applies across the commercial world and equally to all commercial carriers, it is hardly a competitive issue.  The airlines like to quote the total tax revenues and then cite their "disproportionate" contribution thereto.  They fail to point out that they burn the most fuel and gross the highest receipts when they make this argument.  True, the fuel tax is used to pay for air traffic service, but it is also there, intentionally or unintentionally, to encourage fuel conservation.  Burn twice as much, pay twice as much.  That is "fair," at least in the traditional sense, which has long since lost all meaning.

Of course, the airlines like to portray general aviation users as "fat cats," a term that has also lost much meaning.  The reality is much more benign.  The median income of a General Aviation aircraft owner's household in the United States is $200,000.  Two standard deviations from the mean household income of members of the Aircraft Owners and Pilot's Association (there are in excess of 400,000 of them) is $30,000 - $100,000 in household income.  In fact, it is only in the United States that someone of a middle class background can ever hope to be a private aircraft owner or operator, so expensive is ownership in the rest of the Western world.

Let's consider for a moment also, the cost of collection.  As an excise tax, the tax on fuel and the tax per ticket is painfully easy to collect.  Fuel is the most simplistic, as the tax is simply withheld at the refinery level for Jet A and 100LL fuel.  Per ticket taxes are a bit more burdensome, but once you have a system in place it costs nothing to withhold tax on a commercial ticket.  Altogether the collection costs for this system are tiny.  The IRS spent about $1.75 million to collect $55 billion in excise taxes in the 1990s.  That's 0.001%.  User fees are highly expensive to collect.  A registration system and a billing system has to be put in place all over the country and,

So why in the world would the FAA and the big airlines want to move to a less efficient collection system that threatens safety and will make flying less affordable for hundreds of thousands of people?  Well, for the airlines it's easy.  Anyone who isn't flying themselves fills a seat.  Plus, they would, obviously, love to throw their tax burden on the "fat cats" whenever they can.  The FAA's motivation is less obvious and requires an understanding of the nature of the FAA's budget process.

Currently, the FAA has to seek approval for their budget and is subject to significant congressional oversight on the matter.  Given the remarkable increase in aviation safety over the last twenty years, I believe this is a Good Thing (tm).  It should come as no surprise, however, that with the new proposal the FAA will not be subject to nearly the same level of congressional oversight.  They will be able to set their own user fees unilaterally and hike them at will.  This is more a power grab by the FAA than it is an attempt to prove the system.  Avoiding their annual battle of the paper-clips seems to be the priority.  Add to this the fact that the FAA has started outsourcing critical services (Lockheed Martin currently runs Flight Service Stations and pilot briefing centers) and suddenly one wonders how involved government contractors are in the process of fighting for user fees.  It certainly would make what once looked like a marginally profitable contract a massively profitable contract (until you account for the use reduction that these cost increases would cause).  It is easy to see how one would be lulled into thinking this was a great idea for shareholders of Lockheed Martin.

Well, ok, so what?  Who cares what happens to a few hundred thousand fliers?  You should.  General Aviation by itself is a $20 billion industry that generates around $150 billion in indirect economic activity annually.  Nearly 2 million Americans are employed in general aviation and these jobs tend to be high skill and therefore high wage.  The current system has created a robust mini-economy by widely expanding the pool of people who can fly.   60% of all the pilots in the world are in the United States and there is an airport of some size within ten miles of almost every community in the country.  There are, in fact, almost 25,000 landing facilities in the United States (four times the number of the runner up).  Less than 550 are serviced by commercial flights at all and 85% of commercial flights are between just 30 "hubs."  Putting another 100,000 passengers into the commercial airline system overnight might sound good to the airlines, but it most definitely will not turn out well for passengers.  More importantly, the use of the word "fair" here is unadulterated bullshit.

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