Layoffs and Guitar Hero

No doubt, the sultry news about many layoffs amidst this depressing economic environment requires offsetting good news. So here it is:

Strong demand for Activision's Guitar Hero:analystWednesday, November 19, 2008 10:51:00 AM

(AP) Strong demand for Activision's Guitar Hero:analyst
NEW YORK
Hollywood
movies were popular during the Great Depression, drawing huge crowds looking to
escape the financial gloom. Will video games be the escape of choice for a 21st
century recession?

Certainly, Santa Monica, Calif.-based Activision
Blizzard Inc., the maker of popular titles like World of Warcraft and Guitar
Hero, hopes so. And the company got some good news from a Citi Investment
Research analyst Wednesday.

Despite seemingly ceaseless reports of
layoffs and cutbacks, analyst Brent Thill told investors in a research note
Wednesday that based on his checks with traditional and Internet retailers, that
consumers continue to snap up Guitar Hero World Tour packages _ priced at $190
each.

The title comes with an unusual amount of hardware _ plastic
guitars and drum sets that make for particularly animated living room scenes.
Gamers play along with rock classics like Aerosmith's "Dream
On."

Last month, an NPD Group report on video games showed
disappointing sales last month in the music genre. Thill said sales of the
Guitar Hero package are below expectations, but online retailers like
GameStop.com, Amazon.com and Walmart.com have all sold out with seven weeks to
go before Christmas and sales at traditional retail stores look pretty good
too.

Great Britain, also staring at a potentially steep recession,
is showing a healthy appetite for the game as well, selling out Amazon's U.K.
site. There, bundles are going for $225.

Thill noted figures from
the sales monitor Chart-Track showing that video game sales last week in Britain
were the eighth highest ever, helped by Guitar Hero and Activision's Call of
Duty.

Activision shares lost 9 cents to $10.02 in morning
trading.

So, there you have it folks, take note: During financial troughs, escape to Video Game Land? Anybody want to come over and play Guitar Hero with me?

Social Math

I thought I’d do a little bit of “social math”. As far as I understand, these are “workforce adjustments” that are not thru so-called “socially responsible programs”, but rather true job cuts as reported in the press these recent months.

A good example of what can be written to capture what’s going on here is:
Allegheny Technologies recently announced reducing their workforce by 700 jobs. Since the average pay of production workers in Allegheny’s industry is $54,590, the company might claim to save about $38.2 million dollars. However, last year, they paid their CEO, Patrick Hassey about $23.3 million dollars. Had they moderated Hassey’s pay to 25x the industry’s average worker pay – a reasonable $1.3 million - they would have saved about 400 jobs. In other words, given a goal of reducing costs by $38.2 million, if the first place they looked was at the executive suite, they would have only had to cut 300 jobs. Are the savings worth it, given the destruction of the morale (and perhaps productivity) of their remaining employees? Is there something to say about shared sacrifice during these times of economic turmoil?

A ratio of 25x is not a new concept. Respected management thought leader, Peter Drucker used to write that any pay greater than 20 to 25 times the average worker corrodes mutual trust[1].
Perhaps unknown to many, the ratio between the US President’s salary ($400,000) and the lowest paid federal employee is about 25:1[2] Legislation in fact has been put forward first by representative Martin Sabo, and now sponsored by Congresswoman Barbara Lee (see H.R.3876) that proposes CEO pay above and beyond 25x the lowest paid worker ought not to be tax deductible. The idea is for the public purse not to subsidize the style of pay that contributes to the demoralization of society[3].

Also, if we want to add something positive along the lines of shared sacrifice, today the AFP reported that Goldman’s executives are foregoing 2008 bonuses (http://news.yahoo.com/s/afp/20081117/bs_afp/useconomycompanygoldmansachs;_ylt=AkMq.K6awkixPZ0Qrv44zSioOrgF).

Also, AIG decides to drop their deferred compensation program (a program that saves executives tax dollars). However, this move affects nonsupervisory employees as well and was done in order to remove the incentive for mass exit of employees. (http://www.cfo.com/article.cfm/12624103?f=alerts)



[1] Wartzman, Rick (2008) BusinessWeek. Put a Cap on CEO Pay
[2] 2008 General Schedule (GS) Pay table, U.S. Office of Personnel Management. http://www.opm.gov/oca/08tables/indexGS.asp; How Much Does the U.S. President Get Paid? HowStuffWorks.com, Discovery Communication, LLC; Anderson, Sarah, and Pizzigati, Sam (2008) Rewrite Bailout Rules on CEO Pay. Seattle Post-Intelligencer.
[3] THOMAS-Library of Congress. H.R. 3876 sponsored by Congresswoman Barbara Lee http://thomas.loc.gov/home/bills_res.html

Derivatives curriculum

In my CFA studies on derivatives this weekend, I read this:

Question: With the rapid growth of the market (for credit derivatives like credit-default-swaps), is a crisis brewing?
Answer: The main risks in the credit derivatives market are potential defaults, widening spreads,...Defaults are a given…or having a cluster of defaults will not bring down the system; we have weathered numerous defaults without adverse consequences in the past…one of the barriers is the regulatory environment…

My point is not to discredit the CFA curriculum, but rather to point out that sometimes curriculum is based as much on beliefs as it is on science. As someone I respect, Scott Klinger (a name familiar to some at KLD) once warned me when I asked for his advice on whether to go for a CFA credential (he is credentialed): watch out for their teachings on derivatives. To be fair, the textbook does say, “I believe default rates will start to pick up in the next few years and that this will be the primary risk that we will have to manage going forward.” I received this textbook this summer. The copyright is 2009 by the CFA Institute.

Derivatives themselves are not to blame, if the system allows for a safety net in case these risks do pick up. The credit-default swaps (CDS) involved in this crisis work like insurance. Just like any insurance, there are capital requirements. However, a “Modernization Act” in 2000, advocated fiercely by Phil Gramm, called for deregulation of such instruments.

Interesting huh?

Bailout Blues

Arrgghhh!! I fell for it again…I read another Naomi Klein piece! I’ve stopped reading Shock Doctrine months ago because I couldn’t stand feeling so awful about how “the system” works, yet, the Rolling Stones magazine in my backpack tempted me one night on a subway ride home. (Don’t get me wrong, I do appreciate Klein’s insights…sometimes, I just feel I need something positive to supplement it…where’s the thanksgiving turkey?)

So, since we’re all about spreading , I thought I’d share this article with a fair warning of ‘you will feel disgusted’. Must read with a punching bag beside you...(aha! that’s what we need in this office)
http://www.rollingstone.com/politics/story/24012700/the_new_trough/print

Quick Take:
About how the bailout money is being administered.

Catchy phrase: Has the Treasury partially nationalized the private banks, as we have been told? Or, is it the Treasury that has been partially privatized by Wall Street, with its massive rescue plan now entirely in the hands of a private bank it is directly subsidizing?

I think it does not get mentioned enough that government stakes on recipients of bailout money are in the form of preferred stocks or warrants – securities which do not come with voting privileges.

Here’s a paragraph representative of the entire article:

"There is no obligation for banks to lend the money one way or the other,"
Jennifer Zuccarelli, a Treasury spokeswoman, tells Rolling Stone. "But the banks
have the understanding" that the money is intended for loans. "We're not looking
to control their operations."

Unfortunately, many of the banks
appear to have no intention of wasting the money on loans. "At least for the
next quarter, it's just going to be a cushion," said John Thain, the chief
executive of Merrill Lynch. Gary Crittenden, chief financial officer of
Citigroup, had an even better idea: He hinted that his company would use its
share of the cash — $25 billion — to buy up competitors and swell even bigger.
The handout, he told analysts, "does present the possibility of taking advantage
of opportunities that might otherwise be closed to us."
And the folks at
Morgan Stanley? They're planning to pay themselves $10.7 billion this year, much
of it in bonuses — almost exactly the amount they are receiving in the first
phase of the bailout. "You can imagine the devilish grins on the faces of Morgan
Stanley employees," writes Bloomberg columnist Jonathan Weil. "Not only did we,
the taxpayers, save their company...we funded their 2008 bonus
pool."

It didn't have to be this way. Five days before Paulson
struck his deal with the banks, British Prime Minister Gordon Brown negotiated a
similar bailout — only he extracted meaningful guarantees for taxpayers: voting
rights at the banks, seats on their boards, 12 percent in annual dividend
payments to the government, a suspension of dividend payments to shareholders,
restrictions on executive bonuses, and a legal requirement that the banks lend
money to homeowners and small businesses.

In sharp contrast, this
is what U.S. taxpayers received: no controlling interest, no voting rights, no
seats on the bank boards and just five percent in dividend payouts to the
government, while shareholders continue to collect billions in dividends every
quarter. What's more, golden parachutes and bonuses already promised by the
banks will still be paid out to executives — all before taxpayers are paid back.