Bad Banks on LeShow

On the October 2, 2011 episode of LeShow, Harry Shearer's interviews Yves Smith, a financial expert w/ experience at companies such as McKinsey & Co., Goldman Sachs, and Sumitomo Bank. If you appreciate the smart and straightforward perspective Elizabeth Warren brings to credit- and debt-related issues, you must listen to Smith's insights into the U.S. and European banking crisis. She's the author of ECONned and the blog Naked Capitalism. Her earlier conversation with Shearer about U.S. housing foreclosures ("the new F-bomb") is also worth checking out.

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LeShow has earned a regular spot in my podcast rotation. The weekly radio program occasionally centers on an expert like Smith or perhaps a jazz musician; more often, however, it consist of Shearer reading choice excerpts from the week's news. He's a satirist (not nearly as broad as you'll find on the Comedy Central "news" programs), and has a knack for highlighting details or entire stories that have been given short shrift in the popular press. Two of his regular features are called "The Buried Lead" and "News from Outside the Bubble." KCRW describes the show as a "romp through the worlds of media, politics, sports and show business, leavened with an eclectic mix of mysterious music." LeShow is broadcast on many NPR stations and available on the internet and via podcast.

In addition to LeShow and his roles on The Simpsons, Shearer produced The Big Uneasy, a documentary film about levy system in New Orleans (his adopted home) during hurricane Katrina.

Paying for The WSJ

Via Nieman Journalism Lab



Alan Murray, Executive Editor of The Wall Street Journal Online, April 4, 2009
The WSJ is credited (and it seems rightly so) with creating a successful pay wall around select content. Its example may not be applicable to other services, though. It would be interesting to know how many WSJ subscribers personally pay for the content and how many subscribe through work. I suspect a large slice are reading on the bossman's dime. In general, if readers don't perceive a service as unique and professionally/financially valuable, then it may not rate the expense.

My take-away from this interview: news companies should stop insisting consumers pay for services that are currently free and create something perceived to be indispensable.

Profitable newspapers

Google the sentence "the business model for newspapers is broken" (in quotes) and you'll get 19,000+ results. This statement has become widely accepted as true, and it's now used as a jumping-off point for a discussion of what comes next for journalism. We may be moving too quickly, though. There seems to be plenty of value left in the newspaper industry.

This Advertising Age article from last February reveals that most daily papers are still making a profit, and it’s the parent companies that are posting losses because of high debt.

A few highlights:

“Not a lot of papers are operating at a loss,” said John Morton, the veteran industry analyst. “There are roughly 1,400 daily newspapers. We only hear about the top markets That leaves at least 1.300 papers out there.”

Publicly owned newspapers averaged an operating profit of 10.8% in the first three quarters of last year [2008], Mr. Morton said. That’s not the margin enjoyed by newspapers when they were monopolies, but it’s not nothing either.

The owners, on the other hand, are variously posting huge losses, at least on paper; watching their stock prices plunge; and crucially, struggling to make payments on debt they took on under projections that didn’t pan out.

Some owners even borrowed that money to double down on newspapers, which aren’t engines of growth even when their balance sheets are healthy.

...Take a look at Lee Enterprises, which operates papers primarily in midsize markets but reported an $899 million net loss for the 12 months ended Sept. 28. Its loss primarily reflected a huge acccounting write-down as the company adjusted its estimated value. It’s not that $899 million of cash flowed from the coffers just to make payroll and keep the presses running.

...In a similar fashion, McClatchy is freezing pensions and hunting another $100 million in budget cuts. The company, publisher of papers including the Sacramento Bee and the Fort Worth Star-Telegram, is struggling under more than $2 billion in debt, much of which it assumed in 2006 to buy Knight Ridder--doubling down on newspapers at a cost of $4.6 billion.

But look past the interest, taxes, depreciation, amortization and charges such as severance; they matter, but they affect the owner’s balance sheet more than they reflect newspapers’ viability. McClatchy’s underlying newspaper portfolio just delivered a 21.5% operating profit margin.

Before Congress allows anti-trust exceptions for papers, or philanthropic dollars begin to prop-up news operations, let's not overlook this lesson: poor business decisions can break any model.

The wasted half

"Half the money I spend on advertising is wasted; the trouble is I don't know which half."

This quip from department store pioneer John Wanamaker (1838-1922) has come to mind a lot lately. I'm wondering if the increasing sophistication of online metrics is providing the insight Wanamaker wished for, and, if so, is the 'wasted half' of advertiser expense/ad seller revenue being wrung from various business models? More specifically, I'm curious about the implications for the news industry. More to come...

Oil in the news

Today's SF Chronicle included this front-page story: Low oil prices take wind out of renewable fuels.

Now oil costs less than half what it did this summer. Ditto natural gas. If prices keep dropping and stay down, future fuels like cellulosic ethanol and biodiesel will have a harder time competing. So will solar and wind power projects, which compete against power plants that burn natural gas. Public interest in alternative energy may dwindle as well.

The headline reminded me a passage from Zoom: The Global Race to Fuel the Car of the Future, a book written by two correspondents for The Economist. The authors spoke with Vinod Khosla, a venture capitalist at Kleiner Perkins Caulfild & Byers, who put is own money into start-up firms developing cellulosic ethanol.

Khosla himself says that after he made his ethanol pitch at a recent Davos summit of world leaders and corporate titans, a senior Saudi oil official sweetly reminded him that it cost barely a dollar to lift a barrel of Saudi oil out of the ground, adding, "If biofuels start to take off we will drop the price of oil." (p. 256-257)

The Chronicle article goes on to describe increased demand for oil in China and India, a similar spike and drop in oil price during the 1980s, and new legalisation that may keep alternative fuel efforts afloat during the current dip. It also references the per barrel cost of oil on the New York Mercantile Exchange, the peak being $145.29 per in July 2008 and last Friday's close being $64.15. What article doesn't mention is the influnce of unregulated exchanges on this market.

Last month McClatchy newspapers ran this article: Did speculators use unregulated markets to drive up oil prices?

[U]nregulated markets account for about two-thirds of oil trading on financial markets, and they could be used to manipulate oil prices on the regulated exchanges that account for the remaining oil trading. 

The finding that some speculators exceeded positions allowed in regulated markets is sure to spark debate about how much the [Commodity Futures Trading Commission] knows about the markets it regulates, whether more stringent reporting requirements are needed and whether the government should require more disclosure from speculators and investment banks.

In a recent interview, CFTC Commissioner Bart Chilton told McClatchy that his agency lacks all the tools it needs to gather market information. 

"It's not responsible to reach conclusions about speculators based uponcurrent data," he said.

Apparently, even participants in the regulated markets are tough to keep tabs on. Two months ago, The Washington Post published this story: A Few Speculators Dominate Vast Market for Oil Trading. The Post detailed techniques used by firms to gain tremendous influence in the regulated markets.

The [Commodity Futures Trading Commission], which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency.

The article continues by supplying background on the unregulated markets referenced in the McClatchy piece.

The most successful of the private platforms was InterContinental Exchange, or ICE, founded by Goldman Sachs, Morgan Stanley and a few other big brokerages in 2000. ICE soon opened a trading platform in London, allowing its founders to trade vast quantities of U.S. oil overseas without being subject to regulation. 

The exemptions for swap dealers and the development of overseas markets allowed big brokerages to open the door for more hedge funds, pensions and big investors to move into commodities. 

In the coming years, commodity investments by funds could grow to $1 trillion, veteran hedge fund manager Michael Masters said in testimony before the Senate earlier this year. In an interview, he said this trend could raise commodity prices for everyone in the coming years and "have catastrophic economic effects on millions of already stressed U.S. consumers."

The article points to the Commodities Futures Modernization Act as the enabler of these practices. "The law formally allowed investors to trade energy commodities on private electronic platforms outside the purview of regulators. Critics have called this piece of legislation the 'Enron loophole,' saying Enron played a role in crafting it." Antonia Juhasz, author of Tyranny of Oil, does a fine job of describing the 1999 passage of that measure in this recent Fresh Air interview.