Saturday, October 20, 2012

Real Time With Bill Maher: Counterpoints and Retrospective (10/19)

Not a very good show tonight. We had one loud Republican and one loud Democrat with a visibly annoyed Maher. There was a lot of shouting over, but the show had enough substance to do a counterpoints post on. So let's get to it.

1. GMOs: Maher had Gary Hirshberg, chairman of Stonyfield Farm as the pre-panel interview guest and the guy spouted a litany of complaints against GMOs, the companies that manufacture them, and some other standard green stuff. So it bears mentioning a few things.

Norman Borlaug saved a billion lives with GMOs. When Hirshberg tells the audience that GMOs don't increase crop yields, he is flat out lying to American public. There is only so much arable land in the world. It is important to get as much food as possible from it. And that's what GMOs do.

Monsanto is not this huge, wildly profitable company contributing nothing to society. They made 11.8 billion dollars in revenue last year and had a profit of 1.7 billion dollars. That's a profit margin of 14.4%. While it's significantly above the S&P 500 average of 7.8%, there are many big companies that have far bigger margins. And it's not like Monsanto is duping consumers into buying their products. Most of its revenue comes from business to business sales. Obviously their primary customers find value in the products that they offer otherwise they wouldn't buy them.

Hirshberg also took a cheap shot at DDT, the banning of which has led to hundreds of millions of lives lost to malaria and other mosquito-borne diseases. DDT is extremely effective at keeping mosquito populations suppressed and if it weren't for some ridiculous concern of thinning egg shells for peregrine falcons, millions more would be alive today. I'm for the conservation of wildlife, but not at the direct expense of human lives.

 2. Private Equity and LBOs: The second interview guest was Matt Taibbi, who is an extremely effective writer although he always plays fast and loose with the facts and never hesitates to put a left-leaning spin on his articles. And he went in and trashed Bain Capital for its private equity practices. But let's examine the main claim of PE firms saddling up firms with debt to pay dividends and fees to make money regardless of whether the firm is successful or not.

There is only one way for a PE firm to make money on a leveraged buyout no matter whether if the bought out company is successful or not: if they buy the company at a value less than the proper value of the company.

For example, Consolidated Widgets has a thriving operation selling various doodads. It owns 20 factories, employs 15000 employees, and last year it made 1 billion dollars in profit. It's projected that it will make more this year. It currently has no debt and over 5 billion dollars in cash or near-cash reserves.

If Bain Capital comes in and says "we wanna buy your company for 10 billion dollars", the current owners of the company would be idiotic to sell their company for that amount. Using traditional valuation models, Consolidated Widgets would be worth at least 20 billion dollars. And buyouts of companies are always done at a price premium, which means a company like Bain would have to pony up more than what the company is worth.

Bain Capital's mission is to make money. Their current business model is to buy out companies, make them more valuable, then sell those companies at a profit. There's no way they can go in, buy a company, saddle it with debt, issue dividends to themselves, reap management fees, and completely run the company into the ground and still make a profit unless they bought the company at a value less than what the company was worth. In which case, the previous owners were idiots.

This isn't to say that saddling a company with debt and issuing dividends isn't a sound strategy. The Wall Street Journal today just reported that many PE companies are doing so because interest rates are so low (negative real interest rates for companies with sterling credit grades).

What you have to remember is that the people who are lending that money also expect to make a profit on it. Everybody is looking out for themselves and if bondholders didn't think that money was going to be paid back, they wouldn't have lent to those companies in the first place.

I'm going to close with this: there are many things in the business world that are very confusing to the average person. Trying to reduce a complex business operation into a simplified explanation is even a bigger disservice.

Most people hate collections agencies (and I'll be the first to admit that some of them have very unscrupulous tactics), but they also serve a purpose in the economy by making credit more widely available. If credit card companies couldn't sell off bad loans to those agencies, they'd be less willing to extend credit in the first place. And credit, when managed responsibly, is a good thing.

3. Obamacare and Papa John's: When John Schnatter, in a conference call to investors, said that the PPACA would raise the cost of their pizzas by 15-19 cents, many people were like "I'll pay that much more to provide those employees insurance". While that may be true at an individual case, it's not true for the economy as a whole.

If the PPACA raises pizza costs by 15-19 cents, how much will it raise costs for other consumer goods. It affects every company in the US, so what happens if everything suddenly becomes 15-19 cents more expensive? Cents start adding up to dollars. And dollars start adding up to significantly less purchasing power, especially for low income households.

Government regulation has real costs that businesses have to deal with. Some of them pass the cost onto the consumers; others try to avoid the activities that engender regulation. As a secondhand example, the lead software developer on my team rewrote some billing software my company uses. They spent a lot of time dealing with SOX (Sarbanes-Oxley) compliance.

Lead software developers cost a lot of money for a company. Every hour that my boss has to spend writing code to deal with a government regulation is an hour less than he has to write code to deliver real business value to the company. During lunch today, one of my friends (who is a forensic accountant) remarked that if it weren't for SOX, he probably wouldn't be in the industry that he's in.

Government regulations imposes costs onto certain parties in order to produce benefits for other parties. But today, many regulations oftentimes have no net benefit to society. Health care is the most heavily regulated sector of the economy and has numerous cost control provisions. But it still doesn't stop health costs from rising much faster than the general rate of inflation.

It's a truism that actions have consequences. Government regulation has consequences too. Many of them negative. But it seems like the Democratic Party and its supporters feel that there's still too little regulation.


  1. That was one of the most annoying panel discussions I have seen on any program. I have not been watching the show long, but I hope that shouting over panelists are rare on the show.

    1. It all depends on the temperament of the guests. The panel is what makes Real Time. And two panelists who vehemently disagree with each other will usually ruin the show.

  2. "It's a truism that actions have consequences. Government regulation has consequences too. Many of them negative. But it seems like the Democratic Party and its supporters feel that there's still too little regulation."

    It's never about the amount of regulation, but what it actually consists of, and the problem with out health care provision is that the current system doesn't do a very good job when it comes to cost control. Single payer systems, however, do a very good job at this, which is why we've instituted a regulatory framework to simulate a single payer system (since Republicans wouldn't allow an actual one).

    And guess what? Simulated single payer is more complicated than what its simulating. This is the bed the Republicans chose to sleep in, deal with it.