Thursday, June 30, 2011

Corn Con

“Completely Wasteful”: Steven Rattner Slams Government Support for Corn Ethanol

Democrats and Republicans are locked in a death-grip over how to cut the deficit but agree the government must get its financial house in order. So you'd think there'd be bipartisan support to end the $6 billion annual subsidy for corn ethanol, which most experts agree is money poorly spent.

Former Car Czar Steven Rattner calls the corn ethanol subsidy "completely wasteful" and almost entirely about naked politics.

"Almost since Iowa — our biggest corn-producing state — grabbed the lead position in the presidential sweepstakes four decades ago, support for the biofuel has been nearly a prerequisite for politicians seeking the presidency," Rattner writes in a recent NYT op-ed entitled The Great Corn Con.

"Those hopefuls have seen no need for a foolish consistency. John McCain and John Kerry were against ethanol subsidies, then as candidates were for them. Having lost the presidency, Mr. McCain is now against them again. Al Gore was for ethanol before he was against it. This time, one hopeful is experimenting with counter-programming: as governor of corn-producing Minnesota, Tim Pawlenty pushed for subsidies before he embraced a 'straight talk' strategy."

In addition to $6 billion in direct government subsidies, Rattner notes the "real" cost to American consumers is much higher. Thanks to mandates requiring certain amounts of ethanol be blended into gasoline, about 40% of U.S. corn production is diverted toward ethanol. That, in turn, drives up the price of feed for cattle and pig, which puts upward pressure on food prices. In the past year, corn prices have doubled while the price of bacon is up 24%, Rattner notes.

Citing these "hidden costs" of mandates, the government's corn ethanol policies are a "much more pernicious force" then even most critics realize, he says.

All this despite studies suggesting corn ethanol is energy inefficient — meaning making a gallon the fuel consumes more energy than it produces.

"Of all the examples I've come across in my time both in Washington and watching Washington, this is one of the most remarkable, inexplicable, inexcusable [subsidies] I've come across," Rattner tells Dan and I in the accompanying video.

Last month, the Senate voted 73-27 to end the subsidy. But the vote was largely considered symbolic since the White House has basically taken a 'mend it, don't end it' approach, meaning Senators had cover to cast the "tough" vote.

Still, the Senate vote is "a signal of the fact the world is changing," Rattner says, holding out hope the political winds are finally shifting away from corn ethanol.

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The New Egypt -- Saudi Arabia without the oil

It's over. We know where the Egyptian revoluion is headed. Let's welcome the new Saudi Arabia to the fold of Islamic theocracies creating misery wherever they're found. It's really a telling measure of Obama's ability to bring change to the middle east when Egypt goes from bad to worse.

U.S. recognizes Muslim Brotherhood


The U.S. has decided to formally resume contact with Egypt’s Muslim Brotherhood group - which does not recognize Israel – in a move that could further alienate some Jewish voters already skeptical of President Barack Obama, it was reported.

One senior U.S. official said the Brotherhood’s rise in political prominence after the forced departure of former President Hosni Mubarak earlier this year makes the American contact necessary.

“The political landscape in Egypt has changed, and is changing… It is in our interests to engage with all of the parties that are competing for parliament or the presidency,” said the official, who confirmed the news to Reuters on condition of anonymity.

The Muslim Brotherhood - founded in 1928 to promote a conservative version of Islam in politics, culture and society – has previously had some communication with the U.S. through Brotherhood Members of Parliament who had been technically elected as independents. U.S. diplomats had been instructed only to deal with Brotherhood members in their role as Members of Parliament.

The decision to resume contact with the Muslim Brotherhood group may worry members of the Jewish community and Israeli officials, Reuters reported.

POLITICO’s Ben Smith wrote yesterday about the increasing anxiety of center-left Jewish Democrats who are losing faith in Obama, most recently because of the speech in which he called for the country’s 1967 borders to be the basis for peace talks, with “land swaps.”

Muslim Brotherhood spokesman Mohamed Saad el-Katatni told Reuters that no American contact with the group has yet been made, but he added: “We welcome such relationships with everyone because those relations will lead to clarifying our vision.”

In recent years, the Muslim Brotherhood has asserted that it renounces violence. The group is not considered a foreign terrorist organization by the United States – but organizations sympathetic to the Muslim Brotherhood, like Hamas, have not renounced violence against Israel.

Egypt will hold parliamentary elections in September, and the country’s military government has promised an election for president by the end of this year.


Obama's Bank Flees

The most important assets a bank has are its people. But the assets that appear on a bank's balance sheet are the loans and other obligations its people assets bring in. There are no factories or machines used to produce assets. It's the money raised by banks that is behind the creation of those other assets.

What does this mean? It means bankers can work in an office in Singapore as easily as they can work in an office in Manhattan. Naturally, they'll choose an office located in a place that creates the fewest headaches for efficient and profitable operators. As many bankers know, the better place is outside the US. Apparently Obama cannot grasp the obvious. Instead of doing his best to make the US the magnet for every business in the world, he's encouraging our most profitable industries to pack up and leave, which they are.

And they will take their profits with them. For the US, that's a net loss. The bankers don't need large fields for factoris, they don't need rivers or oceans on which to transport goods. They don't need to fill rail cars or trucks with their products. They only need comfortable office space and good communications services. After they get those two basics, they want low taxes and minimal government intrusion. In the US they can find the first two requirements, but not the second two.

Wall St. jobs exodus

O's reforms spur 'exports'

June 30, 2011

Charles Gasparino

Why is Goldman Sachs pre paring to outsource traders, salespeople and investment bankers from here in America, where it has made untold billions over the years as Wall Street's premier trading firm, to places like Singapore and India?

The answer can be found largely in the 2,000-plus pages of last year's Dodd-Frank financial "reform" law -- which will eventually translate into some 40,000 pages of regulations. The financial industry is still frozen, waiting to find out how bad these regs will turn out; but what all the CEOs of the big banks know for sure is that it's about to get a lot more expensive to do business here.

The only real question is by how much more expensive. And the banks aren't sitting around to find out.

Of course, the slowdown that's crimping Wall Street profits is a factor in banks' frenzy to cut costs by eliminating US jobs while expanding in lower-cost places overseas. But they'd expect the business environment to get better eventually -- if the regulatory environment weren't sure to get worse.

Then-Sen. Chris Dodd, Rep. Barney Frank and President Obama all said that they pushed for regulatory reform to prevent another financial meltdown. But their legacy may well be the decimation of the US financial-services industry, which for all its bailouts, blunders and other ills pumped billions upon billions into the economy over the years, especially here in New York.

It's not just Goldman, which wants to expand a once-tiny Singapore office by hiring 1,000 executives while it contemplates a major job reduction at home. (Yesterday, Goldman told the labor department it's cutting at least 230 jobs.) Just about every major US bank is looking at outsourcing as a way to pay for the new costs of doing business as regulators hammer out new rules.

JP Morgan chief Jamie Dimon recently lambasted Fed Chairman Ben Bernanke, saying the prolonged uncertainty over the Dodd-Frank regulations is making it difficult for his bank to lend money to small businesses to help grow the economy. What he didn't say during his mini-tirade is how much his bank is committed to growing outside America to keep pace with competitors like Citigroup, Bank of America, Morgan Stanley and Goldman.

"Everyone is screaming that the money is now overseas," said veteran market analyst Richard Bove. "Well it's overseas in American banks. What we are seeing is an escape from US regulation."

The biggest irony is that Wall Street has long been the engine financing the New York welfare state -- yet it's being squeezed by lefty politicians who believe in expanding the national welfare state. The winners are places with well-educated, English-speaking workforces plus lower taxes and less regulation -- in Goldman's case, Singapore and India.

These same people also claim the mountain of new regs will prevent another banking collapse. But regulations didn't do the job in 2008 and won't in the future. Dodd-Frank fails to get at the root of the problem: Banks were bailed out so many times in the past, they came to expect it -- and so they took on ever-greater risks while chasing ever-greater profits, until some players' huge bad bets were enough to take everybody down.

Of course, the banks expected some response to that mindless risk-taking. But the monstrosity of Dodd-Frank is that it doesn't touch the real problem -- even as it squeezes profit margins and sends jobs overseas.

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Monday, June 27, 2011

Hydraulic Fracturing -- Great for Jobs, Great for America

The Facts About Fracking

The real risks of the shale gas revolution, and how to manage them

The U.S. is in the midst of an energy revolution, and we don't mean solar panels or wind turbines. A new gusher of natural gas from shale has the potential to transform U.S. energy production—that is, unless politicians, greens and the industry mess it up.

Only a decade ago Texas oil engineers hit upon the idea of combining two established technologies to release natural gas trapped in shale formations. Horizontal drilling—in which wells turn sideways after a certain depth—opens up big new production areas. Producers then use a 60-year-old technique called hydraulic fracturing—in which water, sand and chemicals are injected into the well at high pressure—to loosen the shale and release gas (and increasingly, oil).

The resulting boom is transforming America's energy landscape. As recently as 2000, shale gas was 1% of America's gas supplies; today it is 25%. Prior to the shale breakthrough, U.S. natural gas reserves were in decline, prices exceeded $15 per million British thermal units, and investors were building ports to import liquid natural gas. Today, proven reserves are the highest since 1971, prices have fallen close to $4 and ports are being retrofitted for LNG exports.

The shale boom is also reviving economically suffering parts of the country, while offering a new incentive for manufacturers to stay in the U.S. Pennsylvania's Department of Labor and Industry estimates fracking in the Marcellus shale formation, which stretches from upstate New York through West Virginia, has created 72,000 jobs in the Keystone State between the fourth quarter of 2009 and the first quarter of 2011.

The Bakken formation, along the Montana-North Dakota border, is thought to hold four billion barrels of oil (the biggest proven estimate outside Alaska), and the drilling boom helps explain North Dakota's unemployment rate of 3.2%, the nation's lowest.

All of this growth has inevitably attracted critics, notably environmentalists and their allies. They've launched a media and political assault on hydraulic fracturing, and their claims are raising public anxiety. So it's a useful moment to separate truth from fiction in the main allegations against the shale revolution.

• Fracking contaminates drinking water.
One claim is that fracking creates cracks in rock formations that allow chemicals to leach into sources of fresh water. The problem with this argument is that the average shale formation is thousands of feet underground, while the average drinking well or aquifer is a few hundred feet deep. Separating the two is solid rock. This geological reality explains why EPA administrator Lisa Jackson, a determined enemy of fossil fuels, recently told Congress that there have been no "proven cases where the fracking process itself has affected water."

A second charge, based on a Duke University study, claims that fracking has polluted drinking water with methane gas. Methane is naturally occurring and isn't by itself harmful in drinking water, though it can explode at high concentrations. Duke authors Rob Jackson and Avner Vengosh have written that their research shows "the average methane concentration to be 17 times higher in water wells located within a kilometer of active drilling sites."

They failed to note that researchers sampled a mere 68 wells across Pennsylvania and New York—where more than 20,000 water wells are drilled annually. They had no baseline data and thus no way of knowing if methane concentrations were high prior to drilling. They also acknowledged that methane was detected in 85% of the wells they tested, regardless of drilling operations, and that they'd found no trace of fracking fluids in any wells.

The Duke study did spotlight a long-known and more legitimate concern: the possibility of leaky well casings at the top of a drilling site, from which methane might migrate to water supplies. As the BP Gulf of Mexico spill attests, proper well construction and maintenance are major issues in any type of drilling, and they ought to be the focus of industry standards and attention. But the risks are not unique to fracking, which has provided no unusual evidence of contamination.

• Fracking releases toxic or radioactive chemicals.
The reality is that 99.5% of the fluid injected into fracture rock is water and sand. The chemicals range from the benign, such as citric acid (found in soda pop), to benzene. States like Wyoming and Pennsylvania require companies to publicly disclose their chemicals, Texas recently passed a similar law, and other states will follow.

Drillers must dispose of fracking fluids, and environmentalists charge that disposal sites also endanger drinking water, or that drillers deliberately discharge radioactive wastewater into streams. The latter accusation inspired the EPA to require that Pennsylvania test for radioactivity. States already have strict rules designed to keep waste water from groundwater, including liners in waste pits, and drillers are subject to stiff penalties for violations. Pennsylvania's tests showed radioactivity at or below normal levels.

• Fracking causes cancer.
In Dish, Texas, Mayor Calvin Tillman caused a furor this year by announcing that he was quitting to move his sons away from "toxic" gases — such as cancer-causing benzene — from the town's 60 gas wells. State health officials investigated and determined that toxin levels in the majority of Dish residents were "similar to those measured in the general U.S. population." Residents with higher levels of benzene in their blood were smokers. (Cigarette smoke contains benzene.)

• Fracking causes earthquakes.
It is possible that the deep underground injection of fracking fluids might cause seismic activity. But the same can be said of geothermal energy exploration, or projects to sequester carbon dioxide underground. Given the ubiquity of fracking without seismic impact, the risks would seem to be remote.

• Pollution from trucks.
Drillers use trucks to haul sand, cement and fluids, and those certainly increase traffic congestion and pollution. We think the trade-off between these effects and economic development are for states and localities to judge, keeping in mind that externalities decrease as drillers become more efficient.

• Shale exploration is unregulated.
Environmentalists claim fracking was "exempted" in 2005 from the federal Safe Water Drinking Act, thanks to industry lobbying. In truth, all U.S. companies must abide by federal water laws, and what the greens are really saying is that fracking should be singled out for special and unprecedented EPA oversight.

Most drilling operations — including fracking — have long been regulated by the states. Operators need permits to drill and are subject to inspections and reporting requirements. Many resource-rich states like Texas have detailed fracking rules, while states newer to drilling are developing these regulations.

As a regulatory model, consider Pennsylvania. Recently departed Governor Ed Rendell is a Democrat, and as the shale boom progressed he worked with industry and regulators to develop a flexible regulatory environment that could keep pace with a rapidly growing industry. As questions arose about well casings, for instance, Pennsylvania imposed new casing and performance requirements. The state has also increased fees for processing shale permits, which has allowed it to hire more inspectors and permitting staff.

New York, by contrast, has missed the shale play by imposing a moratorium on fracking. The new state Attorney General, Eric Schneiderman, recently sued the federal government to require an extensive environmental review of the entire Delaware River Basin. Meanwhile, the EPA is elbowing its way into the fracking debate, studying the impact on drinking water, animals and "environmental justice."

Amid this political scrutiny, the industry will have to take great drilling care while better making its public case. In this age of saturation media, a single serious example of water contamination could lead to a political panic that would jeopardize tens of billions of dollars of investment. The industry needs to establish best practices and blow the whistle on drillers that dodge the rules.

The question for the rest of us is whether we are serious about domestic energy production. All forms of energy have risks and environmental costs, not least wind (noise and dead birds and bats) and solar (vast expanses of land). Yet renewables are nowhere close to supplying enough energy, even with large subsidies, to maintain America's standard of living. The shale gas and oil boom is the result of U.S. business innovation and risk-taking. If we let the fear of undocumented pollution kill this boom, we will deserve our fate as a second-class industrial power.

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Ted Turner -- A Big Chicken Little

Whatever happened to the Scientific Method? When it comes to Globa Warming, it seems that a lot people think method of developing and validating scientific hypotheses is just hot air.

In short, Global Warming is a conclusion based on hypothesis that has never been tested. It's too complex to test. It's so complex we cannot identify and factor in all the components that are supposed to bring us to the Global Warming conclusion. In other words, the conclusion that Global Warming will destroy life on Earth is a guess. A wild one. And it's as valid as the recent Doomsday Rapture prediction. Or Y2K. Silliness. Utter silliness.

When it comes to predictions of mass death and global catastrophe, the predictors have a bad record. They're 0 for, well, you pick the number of predicted Doomsdays. I suppose the Global Warmists remind themselves that even a broken watch is right twice a day. But even that old bit of sophistry has failed them.

The Global Warming believer, Ted Turner, thinks the reason people fail to grasp the issue is due to its complexity. He's got it backwards. To validate a hypothesis predicting Global Warming means that scientists would have to correctly predict the outcome of every action -- every change -- occurring on Planet Earth for decades to come. It's impossible. We are incapable of such a feat. The Environment is too complex.

Ted Turner: Climate Change ‘Most Serious ... Problem Humanity Has Ever Faced’

June 24, 2011

Ted Turner and members of the board of UN Foundation. (Photo: UN Foundation)
( – Media mogul Ted Turner says climate change is “probably the most serious--and, in all fairness, the most complex--problem that humanity has ever faced.”

He added: “It is really easy to understand how some people don’t get it, because it’s so complex and complicated.”

Turner took part in a telephone news conference on Thursday, held by his United Nations Foundation on the island of Svalbard, one of the northernmost regions of Norway.

His comments came in response to a question posed by reporter Sunny Lewis of the Environment News Service about how to change the minds of climate change skeptics.

“A few climate skeptics and deniers seem to be holding up action to curb climate change,” Lewis said. “What can be done to convince and persuade these holdouts as to actually realize what so many scientists know and are telling us in urgent terms?”

Turner applauded the question.

“That’s a very good question," he said, "and if we knew the answer to it, we’d already have an energy policy in the United States. You know, my good friend Boone Piockens points out, and absolutely correctly, that the United States, in its history, has never had an energy policy including during the Arab oil shocks of the ‘70s, and we still don’t have (one), and we need to.

“The only thing I can think of, is we just have to keep working, just like we are doing now, and get as much publicity as we possible can for the issue, and increase the amount of the debate, and persuade people with both the evidence, which is overwhelmingly in favor of climate change being a serious problem, probably the most serious--and in all fairness--the most complex problem that humanity has ever faced,” Turner said.

Referring to climate change skeptics, Turner added: “It's really easy to understand how some people don’t get it because it’s so complex and complicated. But that doesn’t mean we have to do, all of us, do what we can to try to convince people to do the right thing and then motivate them to take the action.”

Turner is the founder and chairman of the United Nations Foundation, and presided over the organization’s semi-annual meeting, which took place June 19-25 in Oslo.

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Sunday, June 26, 2011

Bad News about Hugo Chavez is Good News

As previously noted, Hugo Chavez went to Cuba for medical treatment that was supposed to remain a state secret. But, eventually, especially in these days of Facebook and social media, some truth leaks out. Chavez is in much worse shape than his flacks have admitted. Now he must truly worry about a coup. Perhaps he will remain in Cuba, a retiree living on a pension.

Report: Hugo Chávez in Critical Condition In Cuban Hospital

Adrian Carrasquillo

June 25, 2011

Hugo Chávez extended stay in a Cuban hospital is because he is in critical condition, according to a report in El Nuevo Herald.

The Venezuelan president, who was last seen in public June 9 and last heard from on June 12, on a phone call with Venezuelan state television, was said to have been treated for a pelvic abscess in Cuba.

During the call Chávez said that medical tests showed no sign of any "malignant" illness.

But according to the report in El Nuevo Herald, Chávez finds himself in "critical condition, not grave, but critical, in a complicated situation."

The Miami newspaper cited U.S. intelligence officials who wished to remain anonymous.

Chávez silence has led to chatter and speculation in Venezuela that the socialist leader is actually suffering from prostate cancer. Intelligence officials could not confirm a diagnosis of prostate cancer but Chávez family did go to Cuba in the last 72 hours, according to wire service EFE.

Chávez daughter Rosinés and his mother Marisabel Rodríguez "urgently" left the country and headed to Cuba in a Venezuelan air force plane.

Cuba's state media website, Cubadebate, released photos on June 17 that showed Chávez posing with Fidel and Raul Castro in his hospital room. Chávez smiled for the camera in a track suit, while a frail-looking Fidel clutched Chávez arm.

Before the report that Chávez was in critical condition, his brother sought to reassure Venezuela that he was recovering well.

"In response to all the rumors, I can give faith that the president is recovering in a satisfactory manner," Adan Chávez, who is a state governor, told state television Wednesday. "The president is a strong man."

Adan Chávez added that "it's not clear" when his younger brother would return home, but said the president is expected to leave Cuba within 10 to 12 days.

Possibly to stave off rumors of bad health, Chávez personal Twitter account went active on Friday, for the first time in 20 days.

"I'm here with you during the hard battles every day! Until victory always! We are winning! And we shall win!" he tweeted in Spanish.

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Friday, June 24, 2011

Hugo Chavez Goes Doctor Shopping

Are there no competent doctors in Caracas? Did they all flee to Havana? Hugo Chavez went to Cuba for surgery. Hmmm.

When do dictators seek medical treatment in countries other than their own? Hmmm. When they've got a problem too serious for the local doctors. Or, more likely, when they don't want anyone at home or elsewhere to know the truth about their condition.

As we all know, when it comes to medical care in Cuba, the treatment includes secrecy. Nobody knows what medical problems required Fidel to have abdominal surgery. And no one knows exactly how the surgeon botched the surgery, which left Fidel in a permanently weakened state. Anyway, it seems Chavez wants secrecy more than anything else. Why would he want secrecy? Maybe because he's got cancer. Maybe he's got a serious problem and he wants to keep the facts from his enemies, both internal and external.

He's probably worried about a coup. If Chavez were to admit he's in Cuba because he's receiving treatment for a serious condition, the folks back home might decide it's a good time to replace him.

Meanwhile, we can hope that Chavez receives the same quality of care that Fidel got. Following his surgery, Fidel was no longer able to control Cuba.

Chavez may return to Venezuela within 12 days

Jun 22, 2011

CARACAS, Venezuela (AP) - President Hugo Chavez is recuperating well from his surgery in Cuba and is expected to return to Venezuela within 12 days, one of his brothers said Wednesday.

Adan Chavez told state television that "it's not clear" exactly when his younger brother would return, but the leader expects to depart for Venezuela within 10 to 12 days.

"The president is recovering in a satisfactory manner," he said. "The president is a strong man."

Chavez underwent surgery in Cuba for a pelvic abscess June 10.

The condition is an accumulation of pus that can have various causes, including infection or surgical complications. Neither Chavez nor doctors treating him have disclosed what caused the abscess.

Venezuelan Vice President Elias Jaua said Chavez is attending to his day-to-day government duties while recuperating.

"He's signing documents for social security retirees and resources for the education ministry, reading reports," Jaua told Union Radio. "The president is following all current events in the country."

Chavez's absence and his relative silence has concerned some of his supporters.

The loquacious leader has communicated by telephone with program hosts on state television several times since the surgery, but Venezuelans are accustomed to the president's near daily speeches and television appearances that can last several hours.

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Wednesday, June 22, 2011

Obama -- to him John Henry should have beaten the Machine

What can you do when the president knows nothing about economics? He calls for Shovel-Ready projects, as though the US is a nation of ditch diggers. He allowed GM to hand off its pension and retiree healthcare expenses to the taxpayers with the promise that the post-bankruptcy GM will earn lots of money making Chevy Volts and other cars. At the same time, he does his best to choke off an expansion of the domestic oil industry.

The result is America's contribution to higher global oil prices. How can the president bail out GM while simultaneously punishing the buyers of GM products with higher operating costs? Is that the way to stimulate car sales? By doing everything possible to diminish the US energy industry? By putting an end to more energy jobs here and sending those jobs to oilfield workers in other countries? How dumb is this president?

Obama vs. ATMs: Why Technology Doesn't Destroy Jobs

Doing more with less is what economic growth is all about

The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren't there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman's response: "Then why not use spoons instead of shovels?"

That story came to mind last week when President Obama linked technology to job losses. "There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers," he said. "You see it when you go to a bank and you use an ATM, you don't go to a bank teller, or you go to the airport and you're using a kiosk instead of checking in at the gate."

The president calls this a structural issue—we usually call it progress. And it isn't exactly a new phenomenon. It's been going on for centuries, and its pace has accelerated over the past 50 years. Businesses relentlessly look for ways to replace workers with machines. The machines get better and smarter. We go from spoons to shovels to excavators, not the other way around.

Telephone switchboard operators lose jobs to automated switching. Toll collectors get replaced by E-ZPass. Auto workers get replaced by robots.

The magnitudes are stunning. As the Washington Post reported in 2007:

"The textile industry has been particularly aggressive in replacing people with machines. A half-century ago, a typical North Carolina textile worker operated five machines at once, each capable of running a thread through a loom at 100 times a minute. Now machines run six times as fast, and one worker oversees 100 of them."

That's a 120-fold increase in output per worker. When a worker is 120 times more productive, you usually don't need as many workers as you did before.

Or look at eggs. Today, a couple of workers can manage an egg-laying operation of almost a million chickens laying 240,000,000 eggs a year. How can two people pick up those eggs or feed those chickens or keep them healthy with medication? They can't. The hen house does the work—it's really smart. The two workers keep an eye on a highly mechanized, computerized process that would have been unimaginable 50 years ago.

But should we call this progress? In a sense it sounds like a deal with the devil. Replace workers with machines in the name of lower costs. Profits rise. Repeat. It's a wonder unemployment is only 9.1%. Shouldn't the economy put people ahead of profits?

Well, it does. The savings from higher productivity don't just go to the owners of the textile factory or the mega hen house who now have lower costs of doing business. Lower costs don't always mean higher profits. Or not for long. Those lower costs lead to lower prices as businesses compete with each other to appeal to consumers.

The result is a higher standard of living for consumers. The average worker has to work fewer and fewer hours to earn enough money to buy a dozen eggs or a pair of shoes or a flat-screen TV or a new car that's safer and gets better mileage than the cars of yesteryear. That higher standard of living comes from technology. It isn't just the rich who get cheaper TVs and cars, plus the convenience of using an ATM at midnight.

Somehow, new jobs get created to replace the old ones. Despite losing millions of jobs to technology and to trade, even in a recession we have more total jobs than we did when the steel and auto and telephone and food industries had a lot more workers and a lot fewer machines.

Why do new jobs get created? When it gets cheaper to make food and clothing, there are more resources and people available to create new products that didn't exist before. Fifty years ago, the computer industry was tiny. It was able to expand because we no longer had to have so many workers connecting telephone calls. So many job descriptions exist today that didn't even exist 15 or 20 years ago. That's only possible when technology makes workers more productive.

It's true, there are some structural issues in the labor market. New jobs are being created but not at the usual pace and not fast enough to soak up the unemployed. But President Obama is wrong to blame innovation.

A bigger problem is housing, where hundreds of thousands of workers have lost their jobs. The source of that problem isn't technology but an over-reaching housing policy and distorted finance. The solution is to let the housing market clear—let interest rates rise, stop subsidizing mortgages, and clean up the foreclosure mess. That would let housing starts return to something like normal.

The other challenge is simply confidence. Businesses aren't hiring because they're uneasy about the future. There's no easy way to instill confidence, but we know how to kill it—create uncertainty about taxes and regulations. Reducing that uncertainty would certainly help.

In the meanwhile, enjoy the ATM machine and the kiosk at the airport with a clear conscience. Doing more with less is the road to prosperity. When confidence returns, even more Americans will share in the bounty from innovation.

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Tuesday, June 21, 2011

The Charge is Gone from Electric Cars

Something we could have told you the day this car was presented to the world. Nobody's going to buy it. Just like the Chevy Volt, another electric car that lives on only because GM can afford to lose money on it.

Tesla Roadster reaches the end of the line

June 21, 2011

The Tesla Roadster has generated far more conversations than sales, but Tesla hopes to sell far more of the upcoming Model S sedan.

NEW YORK (CNNMoney) -- The road is coming to an end for the Tesla Roadster.

Automaker Tesla Motors (TSLA) will stop taking orders for the car in the U.S. in about two months as the carmaker focuses on its Model S electric sedan.

782Print Priced around $109,000 dollars, the two seat Tesla Roadster sports car was never intended to be a huge seller. Tesla reported sales of 1,650 Roadsters worldwide by the end of April, 2011. The car is sold in North America, Europe and Asia.

With its performance and relatively long driving range, the Tesla Roadster helped change the perception of electric cars from being little more than golf cars with doors to actual viable production vehicles.

The Roadster can go from zero to sixty miles per hours in under four seconds, according to Tesla, and can travel about 250 miles on a charge.

Former General Motors (GM, Fortune 500) vice chairman Bob Lutz has credited it with helping to spur GM's development of the Chevrolet Volt

Tesla's next big thing: Tesla's roadster production is coming to halt as the maker of battery-powered cars switches its focus to the upcoming Model S electric sedan.

The first sales of the Model S sedan are expected to begin around the middle of 2012.

At a starting price of about $58,000, the base model will have a driving range of 160 miles, Tesla said, but buyers will be able to pay more for versions with larger battery packs and longer driving ranges. The first ones sold will have an estimated driving range of 300 miles with a price tag closer to $80,000.

Model S will be able to seat up seven people when equipped with an optional third row of rear-facing seats. Tesla hopes to be able to sell as many as 20,000 of the cars by 2013.

Besides building its own cars, Tesla has a business partnership with Toyota Motor Co (TM). to produce a plug-in electric version of the Rav4 SUV and a deal with Daimler (DDAIF) to provide batteries for an electric version of the Smart ForTwo minicar.

The Model S sedan will be built in a California factory that was once used jointly by Toyota and GM.

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The Italian Job

The nations of Europe are seeing their economies fall like dominos. The day may arrive when the currency of Europe collapses. What about the US? Has the US seen enough to realize that following the European model of heavy spending on healthcare and other social programs is a bad idea?

Italy Will Fight Last Stand in Debt Crisis

Tuesday, 21 Jun 2011

For more than two years, we have witnessed the economic demise of several European countries. This soon led to the financial community systematically assessing the health of several peripheral southern European countries, tumbling investment grade ratings and spikes in required rates of return on government debt of these sovereigns. As the European Central Bank continues to dole out rescue packages, many are now looking for the next country to suffer a financial attack and wondering if the euro will even survive.

Some analysts feel that Spain is the last bastion for the euro’s survival. We do not. We believe that the final battle will be fought on the picturesque shores of Italy, resulting in Rome’s emergence as either hero or villain with respect to the survival of the euro.

Most European politicians dearly want the “run” on several of its “club” members to end and its rescues to restore confidence.

This is, unfortunately, a dream that is likely to be shattered as the next domino – Spain – suffers the scrutiny of intense solvency analysis.

Spain, which has almost twice the amount of government debt outstanding as Greece, has well known infirmities – namely an anaemic economy, an unemployment rate more than 20 percent, a devastating real estate debacle and a consequent banking crisis.

The need for a potential bail-out of Spain is not only possible, but likely and manageable even with the mounting aggregate debt assumption by the other, stronger euro partners, its central bank and the International Monetary Fund.

Thus, we turn to Italy. The country has far more sovereign debt outstanding, almost $2,000 billion, than any of the other problematic governments.

While ultimately the euro’s survival will come down to political realities we feel the euro’s financial market “battle” will come down to the plight of Italy.

Its debt, if added to the mounting EU and IMF’s responsibility, may simply be too much and the euro will then crumble. Our theory is rooted in the use of a new metric to estimate the financial health of sovereigns.

In addition to the standard sovereign risk “top-down” macroeconomic analytics, whose variables are consistently reported and debated, we believe that most nations can be evaluated by the health and robustness of their private sectors.

The metric we developed is simple and a more powerful version of the well known “Altman Z-Score”.

It involves the calculation of a company’s credit score distilled from three types of variables: 1. Fundamental firm performance and risk ratios, such as profitability, leverage and liquidity. 2. Stock market equity measures and 3. Capital market and economic statistics, such as corporate debt risk premiums and unemployment rates.

We applied our model to nine European countries, and the US, before the crisis was apparent in early 2009 and again in early 2010, and found that for the most part, the hierarchy of sovereign risk was observed.

The result of the Italian “battle” is not clear. We know that, despite its huge public debt, sluggish economy, ageing population and political uncertainties, Italy enjoys a wealthy consumer and corporate reservoir of capital and perhaps as much as 65 percent of its outstanding public debt is held by Italian private individuals and institutions.

In addition, Italy has several comparative advantages, namely tourism, fashion, some very strong companies and an improving banking sector, not to mention a dynamic but fragile small and medium-sized companies sector.

Still, our overall credit risk metric, while better than two years ago, places Italy among the riskiest private corporate sectors.

If the European stock market, and Italy’s especially, suffers another downturn, our risk measure will surely deepen and leave Italian government debt vulnerable to the same type of market attack the other peripherals endured, with the attendant increase in interest rates and credit insurance premiums.

Even today, despite low interest rates, the European Commission reports that Italy’s government interest payments as a percentage of gross domestic product are 4.8 percent, second only to Greece’s 6.7 percent and considerably higher than all other major European countries and the US (2.9 percent).

Even Portugal’s ratio is lower at 4.2 percent. So far, the credit default swap (CDS) insurance market and other market measures have shown some, but not excessive, concern about Italy, despite Moody’s warning on Friday that it could downgrade Italian debt amid fears about contagion from Greece.

Italy’s five-year implied probability of default based on CDS spreads is relatively average (13.4 percent, up from 9 percent about a month ago).

But it is just a matter of time until we see whether Italy becomes the euro’s hero or villain.

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Just Words -- Book Review

Leave it to a liberal bombasticator to claim that everyone with whom he disagrees is a liar. Keith Olbermann and Michael Moore come to mind, but they're just two of the more visible gasbags and blowhards.

Don't Blame Mary McCarthy

Oh, for the days of Lillian 'Pants on Fire' Hellman. Now accusations of lying often just mean: I disagree with you

At some point in the mid-1990s, academic authors in the humanities began to use the verb "complicate" when they didn't have anything useful to say. They were always talking about how some new consideration or alleged insight "complicates" our understanding of this or that. "Such a view of early Victorian culture," they'd say, "complicates our understanding of Tennyson's metrical romances."

Well all right, one thought, but could we get to the part where you uncomplicate it? But they never did. They felt that it was sufficient to point out that something was more "complicated" than was hitherto thought.

Alan Ackerman's "Just Words" falls firmly into that tradition. Mr. Ackerman, a professor of English at the University of Toronto, is typical of academics in the humanities in this regard: He feels that he has done his job by making his topic more confusing than it was—no need to clean up the mess. The book "challenges assumptions" and "raises questions" on page after page, but nowhere amid all the assumption-challenging and question-raising is there any sign of resolution.

On the face of it, the premise of "Just Words" is an interesting one. Its point of departure is Mary McCarthy's famous quip about Lillian Hellman: "Every word she writes is a lie, including 'and' and 'the.' " McCarthy, a grande dame of American letters, made the remark on "The Dick Cavett Show" in 1980. She had said the same thing in interviews before, but this time Hellman was watching, and she sued for libel.

By then Hellman was an elderly woman; she had made her mark first as a playwright in the 1930s, then in the early 1950s as a suspected communist or communist sympathizer who refused to answer questions before the U.S. House Un-American Activities Committee. Mr. Ackerman thinks that the lawsuit against Mary McCarthy, which dragged on until Hellman's death in 1984 and cost McCarthy enormous sums in legal fees, tells us something about a "crisis in American moral discourse" dating back to the 1930s.

There are at least two problems with Mr. Ackerman's idea. The first is that it's never clear what sort of "crisis"—or "failure of public conversation"—he is talking about. The nearest he comes to describing the "crisis" is this: The Hellman-McCarthy lawsuit "represents a clash between two models of language: one, as McCarthy saw it, that reports transparently on matters of fact, and one"—presumably as Hellman saw it—"that is self-consciously rhetorical and shaped by desire." Unless I'm mistaken, that's a highfalutin way of saying that the question of what constitutes truth in particular utterances is often disputable. I'm not convinced that we need a 300-page monograph to tell us that.

The second problem with Mr. Ackerman's idea is that, although McCarthy intended her remark to be witty rather than strictly true, it wasn't particularly witty and came awfully close to the truth.

Hellman was, in fact, a chronic liar. She wrote three memoirs: "An Unfinished Woman" (1969), Pentimento (1973) and "Scoundrel Time" (1976). Reviewer after reviewer during the 1970s and 1980s—including Irving Howe in Dissent, Hilton Kramer in the New York Times, Alfred Kazin in Esquire, Martha Gellhorn in the Paris Review and most devastatingly Samuel McCracken in Commentary—showed beyond any doubt that these books were full of outrageous omissions and flagrant departures from the historical record.

In the worst instance, a story in "Pentimento," Hellman claimed that she had gone to heroic lengths to aid a young American woman named Julia in supporting anti-Nazi conspirators in Germany. In due course it emerged that the real Julia was a woman named Muriel Gardiner and that Hellman, who had heard her story from someone else, had simply stolen it and put herself in the lead role.

I say all this is a problem for Mr. Ackerman's thesis because if there is any "crisis in American political discourse," it is the nonchalance with which eminent commentators and now even politicians make accusations of dishonesty. A "liar" is now someone who simply holds a contrary opinion or who supports a policy with which one strongly disagrees. But Lillian Hellman's lies were actually lies; she based the latter half of her literary career on intentional, egregious untruths about herself and others.

But there is at least one corrosive tendency in America's "public conversation" that is nicely illustrated by Mr. Ackerman's book—though unintentionally. Academics on the political left often spend so much time talking to one another, both literally and through their books and articles, that they develop a way of expressing themselves that fails even to recognize the existence of anything outside the small world of left-wing academia.

Mr. Ackerman writes of the "widely noted corruption of political language" by the Bush White House (the statement doesn't have to be supported, Mr. Ackerman seems to think, so "widely" was it "noted"). He uses the name Rush Limbaugh as shorthand for debased political discourse. Paul Johnson is a "conservative journalist," but Mike Barnicle, a liberal, is just a "journalist." And so on.

There is nothing astonishing about any of this, of course. But it is highly irritating, and one might have expected more from an author concerned with the "failure of public conversation in America."

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What If Jews Had Followed the Palestinian Path?

If there's one outcome of Islam, it's most visible in the failure of the so-called Palestinians. They set their course for destruction and self-defeat, and they are enduring their own self-inflicted misery with the help of muslims everywhere.

Postwar Jewish refugees left everything they had in Europe—no 'right of return' requested

It is doubtful that there has ever been a more miserable human refuse than Jewish survivors after World War II. Starving, emaciated, stateless—they were not welcomed back by countries where they had lived for generations as assimilated and educated citizens. Germany was no place to return to and in Kielce, Poland, 40 Jews who survived the Holocaust were killed in a pogrom one year after the war ended. The European Jew, circa 1945, quickly went from victim to international refugee disaster.

Yet within a very brief time, this epic calamity disappeared, so much so that few people today even remember the period. How did this happen in an era when Palestinian refugees have continued to be stateless for generations?

In 1945, there were hundreds of thousands of Jewish survivors living in DP Camps (displaced persons) across Europe. They were fed and clothed by Jewish and international relief organizations. Had the world's Jewish population played this situation as the Arabs and Palestinians have, everything would look very different today.

To begin with, the Jews would all still be living in these DP camps, only now the camps would have become squalid ghettos throughout Europe. The refugees would continue to be fed and clothed by a committee similar to UNRWA—the United Nations Relief and Works Agency for Palestine Refugees in the Near East (paid for mostly by the United States since 1948). Blessed with one of the world's highest birth rates, they would now number in the many millions. And 66 years later, new generations, fed on a mixture of hate and lies against the Europeans, would now seethe with anger.

Sometime in the early 1960s, the Jewish leadership of these refugee camps, having been trained in Moscow to wreak havoc on the West (as Yasser Arafat was) would have started to employ terrorism to shake down governments. Airplane hijackings in the 1970s would have been followed by passenger killings. There would have been attacks on high-profile targets as well—say, the German or Polish Olympic teams.

By the 1990s, the real mayhem would have begun. Raised on victimhood and used as cannon fodder by corrupt leaders, a generation of younger Jews would be blowing up buses, restaurants and themselves. The billions of dollars extorted from various governments would not have gone to the inhabitants of the camps. The money would be in the Swiss bank accounts of the refugees' famous and flamboyant leaders and their lackies.

So now it's the present, generations past the end of World War II, and the festering Jewish refugee problem throughout Europe has absolutely no end in sight. The worst part of this story would be the wasted lives of millions of human beings in the camps—inventions not invented, illnesses not cured, high-tech startups not started up, symphonies and books not written—a real cultural and spiritual desert.

None of this happened, of course. Instead, the Jewish refugees returned to their ancestral homeland. They left everything they had in Europe and turned their backs on the Continent—no "right of return" requested. They were welcomed by the 650,000 Jewish residents of Israel.

An additional 700,000 Jewish refugees flooded into the new state from Arab lands after they were summarily kicked out. Again losing everything after generations in one place; again welcomed in their new home.

In Israel, they did it all the hard way. They built a new country from scratch with roads, housing and schools. They created agricultural collectives to feed their people. They created a successful economy without domestic oil, and they built one of the world's most vibrant democracies in a region sadly devoid of free thought.

Yes, the Israelis did all this with the financial assistance of Jews around the world and others who helped get them on their feet so they could take care of themselves. These outsiders did not ignore them, or demean them, or use them as pawns in their own political schemes—as the Arab nations have done with the Palestinians.

I imagine the argument will be made that while the Jews may have achieved all this, they did not have their land stolen from them. This is, of course, a canard, another convenient lie. They did lose property all over Europe and the Mideast. And there was never an independent Palestine run by Palestinian Arabs. Ever. Jews and Arabs lived in this area controlled first by the Turks and then by the British. The U.N. offered the two-state solution that we hear so much about in 1947. The problem then, and now, is that it was accepted by only one party, Israel. No doubt, the situation of Arab residents of the Middle East back then may have been difficult, but it is incomprehensible that their lot was worse than that of the Jews at the end of World War II.

We don't hear about any of this because giving human beings hope and purpose doesn't make great copy. Squalor, victimhood and terror are always more exciting. Perhaps in the end, the greatest crime of the Jews was that they quietly created something from nothing. And in the process, they transformed themselves.

Golda Meir is credited with having said that if the Jews had not fought back against the Arab armies and had been destroyed in 1948, they would have received the most beautiful eulogies throughout the world. Instead, they chose to stand their ground and defend themselves. And in winning, they received the world's condemnation. Meir said she would take the condemnation over the eulogies.

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Saturday, June 18, 2011

Chu -- Hydrogen is Bad Gas

For once an Obama cabinet member has reached a sane conclusion. Hydrogen is not the answer -- today. We all know hydrogen is the most common element in the Universe. But we also know that nearly all of it is bound into molecules. Thus, as a fuel source, hydrogen is million miles from being price competitive with oil.

When the economics become favorable, well, then America can revisit the technology. This is one case where the US can let Germany and other nations handle the research. If they can develop a competitive hydrogen technology, then we should gladly allow them to bring it to our domestic auto market. We do not need to be first.

Obama Hydrogen Fuel Failure Conceded by Chu Paring Budget

Jun 14, 2011

Energy Secretary Steven Chu, whose mandate includes getting more fuel-efficient cars on U.S. roads, is disregarding advisers in his own department and seeking to cut almost half the federal funding for hydrogen-powered autos.

A Nobel Prize-winning physicist who also researched advanced biofuels, Chu says hydrogen fuel-cell technology developed by carmakers such as General Motors Co. (GM), Daimler AG (DAI) and Toyota Motor Corp. (7203) isn’t yet practical. Auto companies and members of a government panel say he’s wrong and that they will be ready to market such cars by 2015.

“Secretary Chu has firmly set his mind against hydrogen as a passenger-car fuel,” Mary Nichols, chairwoman of California’s Air Resources Board, said in an interview with Bloomberg Government. Her agency’s regulations affect more drivers than any other state’s. “Frankly, his explanations don’t make sense to me. They are not based on the facts as we know them.”

The Obama administration’s fading support for hydrogen is a challenge for carmakers who say advanced gasoline engines, batteries, biofuels and fuel cells are all needed to curb U.S. oil consumption and carbon emissions. Chu’s proposed budget, which cuts funds for hydrogen stations, creates roadblocks for retail sales of fuel-cell cars, the companies say.

Chu is “hostile to hydrogen,” Robert Walker, a former member of the Energy Department’s Hydrogen and Fuel Cell Technical Advisory Committee, said in an interview. Walker, executive chairman of Wexler & Walker Public Policy Associates, a Washington lobbying firm, and a former Republican House member from Pennsylvania, resigned from the panel in April over the budget proposal.

‘More Likely’ Options

Chu, 63, has advocated battery cars and biofuels as options more likely to meet U.S. energy and environmental goals in the near term. Discounting hydrogen means the U.S. risks falling behind Japan, Germany and South Korea in the technology because those nations are moving ahead with plans for extensive fuel- station networks to serve buyers of the cars.

“The secretary believes that we should fund fuel-cell research and development as part of a diverse energy portfolio, including both stationary and mobile applications -- and we are,” said Stephanie Mueller, an Energy Department spokeswoman.

Chu, who said in 2009 that the Obama administration was “going to be moving away from hydrogen-fuel cells for vehicles,” declined a request for an interview.

$4 a Gallon

Consumer interest in alternative-fuel vehicles has grown this year as gasoline neared $4 a gallon. U.S. drivers bought about 275,000 gasoline-electric hybrids last year, led by Toyota’s Prius, and GM and Nissan Motor Co. are boosting sales of rechargeable Volt and Leaf vehicles.

“Fuel-cell technology is viable and ready for the mass market,” Chris Hostetter, Toyota’s U.S. group vice president for advanced planning, said in a May 10 interview at the opening of a hydrogen filling station in Torrance, California. “Building an extensive hydrogen refueling infrastructure is the critical next step in bringing these products to market.”

Automotive fuel cells are layers of platinum-coated plastic film sandwiched between metal plates that create electricity from the chemical reaction of hydrogen and oxygen. Vehicles use the same type of electric motors and controls as battery-only models, and neither emits tailpipe pollutants.

$10 Billion Bet

Toyota plans to sell a fuel-cell car in the U.S. and other markets by 2015 or sooner, Hostetter said. Japan’s largest automaker has said the model may sell for about $50,000, without elaborating.

Honda Motor Co. and Daimler offer a limited number of fuel- cell vehicles for lease in the U.S. Honda reported 17 leases last year, none yet this year. Daimler reports four leases through May this year. Automakers estimated the cost of fuel- cell vehicles was about $1 million each as recently as five years ago.

Globally, automakers have poured an estimated $10 billion into fuel-cell vehicle research, saying hydrogen provides range and rapid fueling that is comparable to gasoline and superior to plug-in electrics.

The Energy Department cut hydrogen funding to make way for biofuels, battery vehicles and increased fuel-efficiency standards, Steven Chalk, deputy assistant secretary for renewable energy, said in an interview.

‘Folks Are Frustrated’

“If folks are frustrated with that position, I understand that,” Chalk said. In a time of budget constraints, “we’re trying to focus on the things that are going to make the impact in the time frame that matters, which is in the next five years.”

The $100 million the department is requesting for hydrogen, down from $177 million provided in the 2010 fiscal year, “is still quite an investment, and we think we can be competitive,” he said.

President George W. Bush announced a $720 million research and development effort for hydrogen-powered cars in his 2003 State of the Union address. Congress in 2005 created the advisory committee that Walker ran, which tracks progress by fuel-cell manufacturers, automakers and energy companies pushing to commercialize hydrogen technology.

During his two years on the job, Chu hasn’t met with the committee, according to Walker and Chalk.

Chu told the Senate Appropriations energy and water development subcommittee on May 18 that hydrogen tanks for fuel- cell vehicles are inadequate and that the technology contributes to carbon emissions, linked to climate change, because natural gas is the main source of industrial hydrogen.

Carbon Emissions

Toyota, Honda, GM, Daimler and Hyundai Motor Co. (005380) all say the hydrogen tanks on fuel-cell vehicles they’re testing in California and elsewhere provide the same range of 250 miles (402 kilometers) to 400 miles as gasoline autos.

Vehicles powered by hydrogen made from natural gas produce at least 50 percent fewer carbon emissions than the cleanest gasoline autos, according to Energy Department estimates.

Natural gas “will have to be significantly more abundant and less costly,” to make hydrogen affordable, Chu said at the Senate hearing.

Natural gas prices have fallen 66 percent since July 3, 2008, when it reached $13.577 per million British thermal units. The price for July delivery declined to $4.646 per million BTUs yesterday on the New York Mercantile Exchange.

“Why is it that the secretary can’t look at the data, look at the facts, and arrive at the same conclusion that his own advisory committee has reached?” Robert Shaw, who is chairman of the 18-member advisory panel, said in an interview. Shaw is president of Arete Corp., a venture capital-fund manager based in Center Harbor, New Hampshire.

Taxpayer Funds

“It’s just not a good use of taxpayer funds,” Joseph Romm, a senior fellow at the Center for American Progress, said in an interview. Romm’s duties as an Energy Department official during the Clinton administration included supervising the hydrogen program.

Without an adequate refueling infrastructure, few consumers are going to buy hydrogen vehicles, he said. Without knowing whether the autos will be a success, there’s little incentive to build stations.

The U.S. has 58 hydrogen fueling stations, according to the Energy Department.

Germany, Japan

In 2009, Germany announced plans for 1,000 hydrogen stations. In January, Japan said it will have 100 hydrogen stations in place by 2015, and South Korea may have 50 by the end of next year and more than 100 by the end of the decade.

Electric vehicles can plug directly into wall outlets. They have the highest “bang for the buck,” Romm said.

Making hydrogen from natural gas costs $3 to $4 per kilogram, or the equivalent of a gallon of gasoline, Shaw said in a March letter to Chu, and fuel-cell vehicles are twice as efficient as gasoline autos.

Air Products & Chemicals Inc. (APD), the second-biggest U.S. industrial-gas producer, estimates it can sell hydrogen from natural gas for about $5 per kilogram, Ed Kiczek, the company’s senior business development manager, said in an interview.

The company, based in Allentown, Pennsylvania, plans to install hydrogen fuel pumps at 10 or more Southern California gasoline stations in the next two years, he said.

California expects automakers to sell at least 53,000 hydrogen vehicles in the state to comply with emissions rules in 2015 through 2017, Nichols, head of the state air board, said, citing her agency’s surveys of automakers. Those saying hydrogen vehicles won’t be ready haven’t been keeping pace with advances made by automakers, she said.

“The conventional view is always a few years out of date, unfortunately,” Nichols said. “There’s also just a wrong premise that these different fuels have to compete with other, and one has to be a winner. We need all of them.”

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Friday, June 17, 2011

Group-on Behavior -- and the Madness of Crowds

Groupon? What does it do? It sells discounts. Does it work? In a way I suppose it does. Those who buy Groupon discounts use them as a way to sample opportunities they would otherwise skip. Thus, like most bargain hunters, they are always on the hunt for bargains, and rarely pay retail.

Inasmuch as most of the promotional offers from those businesses hoping to benefit from Groupon are money-losers, it will eventually dawn on those businesses that they will always lose money when Groupon customers come through the door. It won't take the owners long to realize they've got to stop the losses due to the heavy discounting that Groupon requires.

Groupon: The Good, Bad and Ugly

June 17, 2011

Groupon has been taken behind the proverbial woodshed to be roughed up.

And deservedly so. The deal Web site's S-1 form released last week exposed many weaknesses, including a loss of over $400 million last year. After reading the registration statement, it's obvious the company is growing like a weed, yet has done so at a cost -- namely, huge marketing expenditures to acquire customers.

I've broken down my observations from the S-1 and my own experiences to make sense of whether the Groupon IPO may be a good investment. There were some surprises -- both good and bad -- that other analysts haven't picked up on. And there's some real ugliness.

The initial public offering is expected by the fall, following other hotly awaited IPOs including LinkedIn and Pandora.

The good -- 83 million subscribers:

Ignoring the fact that Groupon has been paying through the nose to acquire customers, we must still acknowledge one thing: It has a huge customer base. Whether the company can build a profitable business based on its existing model remains to be seen. Yet the company is taking steps to further leverage its impressive position.

Groupon Now, which lets consumers search for deals within a certain proximity to a specific location, is one step in the right direction. The recent acquisition of Pelago, the creator of the mobile app WHRRL, looks to be a smart move as well, as Groupon is attempting to add social interactivity a la FourSquare into its deal model. And the moves to partner up with companies such as Live Nation and Expedia to expand into the concert ticket and travel verticals make sense. I would imagine both of these moves should help Groupon expand revenue in the near future.

But what is Groupon worth? Is it worth the $20 billion-plus valuation being offered up as a potential value for the company? Let's look at Travelzoo as an example -- a company that has a business built on vendors providing up-front advertising expenditures. The company has formed a successful online travel business on the back of its now 20 million-plus subscribers. It recently reported record quarterly revenue of $37 million in the first quarter, equating to $7.80 per subscriber (on an annualized basis).

Travelzoo, which is now profitable, is valued at roughly 8 times trailing 12-month revenue, or $50 per subscriber. Could we relate the same sort of valuation to Groupon? First, the business models are slightly different. Travelzoo releases a Top 20 Deals email in which travel providers pay a specific fee to be included on the list. Yet, Travelzoo has recognized the potential of the local deals market, and has ramped up this portion of its business aggressively. But, more importantly, Travelzoo is profitable, with no debt. Groupon, on the other hand, could effectively be considered insolvent. As of the most recent quarter, the company owed $290 million in payables to merchants, with only $209 million in cash on hand.
But just for comparison sake, lets apply the $50 per subscriber valuation to Groupon, which gets us to $4 billion.

And, as far as the revenue valuation goes ... well, that's a bit more complicated. See, Groupon reports revenue on a gross basis, meaning that on financial statements, the reported revenue totals include revenue gained from each deal, even though a significant portion of this is passed on to the vendor.

Forget the reports of first-quarter revenue of $644 million. Instead, look at net revenue, which was $270 million. If we use the revenue metrics provided for the Boston and Chicago markets, which show more normal growth over recent quarters of around 30%, then we can assume that Groupon could earn nearly $1.67 billion in net revenue over the course of 2011. And at eight times revenue, this would equate to a valuation of around $13.3 billion. That valuation is optimistic, given that the company is still unprofitable, and that the balance sheet is ugly, to say the least. I'm sure once the IPO hits the market, these valuations won't matter, but I would say for any investor looking to capitalize on the growth in local deals, take a look at Travelzoo for a safer, longer-term investment.

The bad -- customer-acquisition costs are out of control:

Groupon is spending heavily to acquire customers. After laying out $240 million for all of 2010, Groupon spent $179 million in the first quarter of this year on marketing expenses. If we do some rough math, based on expenditures during the first quarter, and the increase in subscribers of over 33 million from the end of 2010 up until the end of the first quarter, Groupon spent $5.50 for each customer. In comparison, Travelzoo spends only $1.74 for new subscribers.

The average price of a Groupon sold in the first quarter was $23. Groupon makes an average gross profit on this deal of 42%, or $9.66 per deal. So these acquisition costs would be perfectly acceptable if Groupon sold a deal to each customer, but that's not the case, since only 20% of Groupon's subscribers have purchased a deal. If we look at the change in actual subscribers who purchased a deal during the first quarter, Groupon's acquisition costs come out to $26.60 per paying customer. If we assume that Groupon makes an average (gross) of $9.66 per deal, then in order to meet these costs, they would need these paying customers to purchase nearly three deals to break even.

Groupon is certainly banking on the future potential of these subscribers, and hoping to convert a higher percentage into paying customers. A recent survey of Internet users by Bank of America's Merrill Lynch found that only 37% of users subscribe to daily deal companies, and of those who are subscribers, 58% have purchased a deal. And 44% of the survey respondents expected to buy more deals over the upcoming year. Interestingly, 79% of subscribers to daily deal sites are Groupon members, followed by LivingSocial, at 45%.

The ugly -- the business model is flawed:

I've heard Groupon referred to as a "loan shark," and its service as mentioned as a "loss leader" for small businesses. Groupon, for example, sells a $50 certificate for $25, and provides the business owner with roughly $12.50. If an owner sells 1,000 so-called Groupons, it is, in essence, selling $50,000 worth of merchandise for $12,500.

For some businesses, this might work. For example, a local bed & breakfast during a slow season may have rooms that might normally go unbooked; a Groupon deal might be the perfect remedy to bring in business (albeit at a lower rate) that might have never been there to begin with.

Travel deals, however (for now), are a very small portion of Groupon's advertised deals. Most of Groupon's clients are restaurants and service providers. Many have probably heard the story of Jessie Burke and Posie's cafe. Posie's sold 900 Groupons for $6 each, offering $13 worth of food and beverages at the Portland, Ore., cafe. The deal turned out to be a disaster for Posie's, which had to take $8,000 out of personal savings to cover payroll and rent.

The problem is that many small-business owners are blinded by the bright lights of Groupon and the potential to drum up big-time sales, while ignoring the inherent costs in providing such a discount. A study by Utpal M. Dholakia titled, "How Effective are Groupon Promotions for Businesses?" surveyed past Groupon business owners to discover the level of satisfaction. When asked if they would run another Groupon promotion, 42% of respondents said no.

One restaurant owner from the Midwest had this to say about the experience with Groupon: "The return business has been non-existent. It was very harmful to our bottom line during the months we ran it. We still get people coming in to redeem their groupon even though the promo has been over for four months, and they are very upset they cannot get the full discount."

And this, in my opinion, is truly the major flaw in the daily deal model. When running a discount, a restaurant, spa or other small business runs a promotion thinking that the deal, while possibly leading to short-term losses, will in the end produce new customers. The unrecognized, or ignored, issue is that the majority of Groupon's subscribers are deal-seekers, people looking to get the next groupon so they can save money on their next night out, haircut, massage, etc. If I spend $25 to get $50 worth of Mexican food at Joe's Cantina, what are the odds I return and spend full price at Joe's next time if I can buy the same type of Groupon deal at Jesse's Cantina?

As for spas and salons, is there really any loyalty gained with these deals? One spa owner in the study by Dholakia wasn't impressed. "It is obvious that many Groupon users are only looking for deals ... not a business that they will return to many times. They buy the maximum number of deals allowed and then move on to another salon that has deals as well. The percentage of people actually looking for a new stylist was low and not many of them returned."

So how long can this cycle play out? Not long. As more business owners connect and wise up to the financial destruction caused by these deals, the less frequently they will be willing to partake in Groupon deals. And with new competitors coming online every day, the margins will only get smaller for Groupon as time goes on. Google Offers and Facebook Deals are by far the biggest threats at this point. Both have leverage in the form of subscribers, and both will be able to provide deals at a much lower price point.

If you are an investor considering partaking in the Groupon IPO, hopefully it's just to try and make a few bucks on a trade. While the company has quite a few things going for it, such as a wildly popular brand and huge subscriber base, the model has yet to prove itself over the long term.

Be careful, as the valuation for the company will likely be extreme and not representative of the actual fundamentals of the business. Take a lesson from LinkedIn, which is a good business but overvalued. The stock, which soared past $100, is now trading at less than $70. If you're looking to get in on a deal, consider Travelzoo, which is rapidly expanding its local deals business and has consistently grown profits.

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Standard & Poors and Moodys -- Government Agencies

What happens when agencies with the government seal of approval then extend their good name to give high ratings to securities of dubious value? Here's what happens. The analysts at S&P and Moodys who helped Wall Street firms by giving high rating to complex securities are rewarded with lucrative jobs at those Wall Street firms. Just like high ranking military officers who become lobbyists for defense contractors.

There are ten firms that are known as Nationally Recognized Statistical Ratings Organizations. Moodys and S&P are two, the best known two. Thus, when it comes to opinions on all the securities these firms evaluate, the government has stood behind them and their word. Big mistake. The government should treat this issue the same way it treats religion. There should be a separation between the Church of Wall Street and Government. Instead, the government has put a premium on the work of the 10 ratings firms. Thus, their words was not doubted and challenged when it should have been. Big mistake.

Raters Draw SEC Scrutiny

U.S. securities regulators are weighing civil fraud charges against some credit-rating companies for their role in developing the mortgage-bond deals that helped unleash the financial crisis, according to people familiar with the matter.

The Securities and Exchange Commission's long-running probe into the deals has widened to the major credit-rating firms, including Standard & Poor's, the people said.

The leading ratings companies have been criticized by lawmakers as "key enablers" of the financial meltdown, helping to fuel the $1 trillion Wall Street mortgage-securities machine before the boom ended.

But the major ratings firms have largely avoided any regulatory crackdown and beaten back private lawsuits. Their business has rebounded as financial markets regained their footing.

Now, SEC officials are focusing on the question of whether the ratings companies committed fraud by failing to do enough research to be able to rate adequately the pools of subprime mortgages and other loans that underpinned the mortgage-bond deals, according to people familiar with the matter.

It is a common tactic for regulators to accuse financial firms of fraud for allegedly misrepresenting information to investors, either recklessly or intentionally, according to lawyers. In the case of the rating companies, the firms could face allegations from the SEC that they relied on incomplete or out-of-date information supplied to them on the pools of loans in the mortgage-bond deals or ignored clear signs of problems among subprime loans and so gave unduly high ratings to slices of the deals that were then sold to investors, say people familiar with the matter.

The SEC is looking closely at the conduct of Standard & Poor's, a unit of McGraw-Hill Cos., said people familiar with the matter. They said the agency is also reviewing the role played by Moody's Investors Service, owned by Moody's Corp., in relation to at least two mortgage-bond deals.

The inquiry may not lead to charges against any of the credit-rating firms.

A Standard & Poor's spokeswoman declined to comment. Michael Adler, a spokesman for Moody's, said: "Although Moody's is uncertain as to what The Wall Street Journal is referring, we would certainly cooperate with any requests we receive from the SEC."

The inquiry into the rating companies marks a broadening of the SEC's long-running investigation into the sales and marketing of the mortgage-bond deals by several major Wall Street's banks. Goldman Sachs Group Inc. was sued by the SEC last year in the first big case to come out of the inquiry. Goldman paid $550 million to settle the charges. The firm admitted making mistakes but didn't admit or deny wrongdoing.

A new wave of cases involving fraud allegations against banks and other financial firms related to the deals is expected shortly, say people familiar with the matter. They said the agency is aiming for a second wave of settlements in the fall, with a third and final group possible by the end of the year.

J.P. Morgan Chase & Co. is among the first banks in line for a settlement of charges expected by the SEC, people familiar with the matter said. The New York investment bank is expected within weeks to settle these allegations related to its sale of a $1.1 billion mortgage-bond investment, called Squared, as the housing market was collapsing in early 2007. J.P. Morgan and most of the other banks that are expected to face allegations of fraud in relation to mortgage-bond deals are expected to agree to pay about half or less than the $550 million Goldman paid to settle the SEC charges, according to people familiar with the matter.

J.P. Morgan and the SEC declined to comment.

Other financial firms in the SEC probe include Citigroup Inc., Morgan Stanley, Bank of America Corp.'s Merrill unit and UBS AG, according to people familiar with the matter. The companies declined to comment.

The widening of the SEC inquiry to credit-rating companies puts them back in the regulatory and legal spotlight. The firms played a crucial part in the creation of the mortgage-bond deals, known as collateralized debt obligations. CDOs are based on complex pools of mortgages and other loans, made up in part of risky subprime mortgages. The pools were sold in slices to investors.

The ratings firms assigned coveted triple-A ratings to many of these CDO slices in the run-up to the crisis, before doing mass downgrades when the housing market collapsed and the subprime mortgages soured.

To be sure, the credit-rating companies aren't responsible for the accuracy of the data supplied to them to rate securities. But they could be accused of ignoring obvious flaws in the data, such as it failing to reflect the deterioration of the mortgage market, according to lawyers.

The ratings companies also enjoy significant legal protections, which they have used to fend off some lawsuits. In May, the credit-rating firms notched a legal victory when a U.S. Court of Appeals ruled that they can't be held liable for their ratings of mortgage-backed securities. Their ratings, the judges wrote, were "merely opinions" and protected by the First Amendment, a defense the firms have often used in the past.

A rare example of a regulatory case against the companies is the lawsuits filed last year by Richard Blumenthal, the then-Connecticut attorney-general, against Standard & Poor's and Moody's. The suits, alleging the firms knowingly assigned tainted credit ratings to mortgage-bond deals, are being contested by both firms.

Moody's and Standard & Poor's have mostly avoided costly legal settlements since the financial crisis.

The credit-rating companies have also benefited from a law that was expected to improve their performance. The Credit Rating Agency Reform Act of 2006 bars the SEC from regulating the substance, criteria or methodologies used in the credit-rating models. The current investigation avoids these areas.

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Thursday, June 16, 2011

Ethanol -- Too Corny

Senate Backs Repeal of Ethanol Tax Credit

WASHINGTON—The Senate voted Thursday to repeal a $6 billion tax credit for ethanol producers, a move that could signal the end of some federal subsidies as part of an eventual budget and debt-ceiling compromise.

A bipartisan group of senators—40 Democrats and 33 Republicans—joined together in a 73-27 vote to support an end to the subsidy. The subsidy gives refiners a 45-cent-a-gallon tax credit for blending ethanol into gasoline and has been a factor behind higher corn prices in recent years. Sen. Chuck Grassley (R., Iowa), a longtime supporter of the credit, objected to the measure.

The U.S. ethanol industry is protected by a tariff of 54 cents a gallon on imported ethanol and that, too, would end under the Senate measure.

The ethanol provision was added to unrelated legislation that would renew a program directing federal funding to deprived parts of the country to help local governments attract private investment. Even if approved by the Senate, the legislation isn't expected to be taken up by the House, possibly limiting the vote to symbolic significance.

The vote could prove important in the ongoing budget negotiations. By voting in favor of ending the subsidy, it opens Republicans up to the charge that they are supporting tax increases—ending the subsidy would result in higher taxes on ethanol producers. Republicans have rejected higher taxes as a component in any deal on the budget deficit and accumulated debt.

Democrats, led by Sen. Charles Schumer (D., N.Y.), argued this week that it would be impossible for Republicans to maintain that position after the vote this week. But Sen. Tom Coburn (R., Okla.) said he believed an end or reduction to the subsidy would form part of the final budget deal.

"It should send a good signal—if you had $6 billion that you had as an earmark in an appropriations bill that was going to the [ethanol] blenders and we took it away, nobody would've ever said anything about taxes," Mr. Coburn said.

An earlier vote on ending the ethanol subsidy failed on Tuesday, but that was largely because of Democratic anger at the manner in which the measure was brought to the floor.

The amendment was sponsored by Sen. Dianne Feinstein (D., Calif.) who has long pushed for an end to the tax credit.

Senators are now voting on a separate measure that would prevent federal funds from being used for ethanol storage facilities or blender pumps, another attempt at limiting federal support for production of the fuel alternative. That measure is backed by Sen. John McCain (R., Ariz.).

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Saturday, June 11, 2011

Drug Legalization -- They've Lost Their Minds

Seems George Shultz and Paul Volcker are suffering dementia. There is no surer way to guarantee that America becomes a dytopian nightmare than by legalizing recreational drugs.

Is there anything more frightening than the US government forming a partnership with recreational drug makers? What could be worse than a paternship between companies that market addicting producs and a government desperate to maximize tax revenue? Have we learned nothing from our tobacco addiction?

What a nightmare.

A Real Debate About Drug Policy

George P. Shultz and Paul A. Volcker on why the 'war on drugs' has failed—and what to do next


"The global war on drugs has failed, with devastating consequences for individuals and societies around the world."

That is the opening sentence of a report issued last week by the Global Commission on Drug Policy. Both of us have signed on to this report. Why?

We believe that drug addiction is harmful to individuals, impairs health and has adverse societal effects. So we want an effective program to deal with this problem.

The question is: What is the best way to go about it? For 40 years now, our nation's approach has been to criminalize the entire process of producing, transporting, selling and using drugs, with the exception of tobacco and alcohol. Our judgment, shared by other members of the commission, is that this approach has not worked, just as our national experiment with the prohibition of alcohol failed. Drugs are still readily available, and crime rates remain high. But drug use in the U.S. is no lower than, and sometimes surpasses, drug use in countries with very different approaches to the problem.

At the same time, the costs of the drug war have become astronomical. Inmates arrested for consuming drugs and for possessing small quantities of them now crowd our prisons, where too often they learn how to become real criminals. The dollar costs are huge, but they pale in comparison to the lives being lost in our neighborhoods and throughout the world. The number of drug-related casualties in Mexico is on the same order as the number of U.S. lives lost in the Vietnam and Korean wars.

Throughout our hemisphere, governance and economic development have suffered because of drugs. It is no accident that the initiative for this global commission came from former presidents of Latin American nations. These countries, sometimes with American support, have made strong efforts to reduce drug supplies. But they have increasingly concluded that drug policies in the U.S. are making it more difficult for their people to enjoy security and prosperity.

The problem starts with the demand for drugs. As Milton Friedman put it forcibly over 20 years ago in the pages of this paper: "It is demand that must operate through repressed and illegal channels. Illegality creates obscene profits that finance the murderous tactics of the drug lords; illegality leads to the corruption of law enforcement officials."

We do not support the simple legalization of all drugs. What we do advocate is an open and honest debate on the subject. We want to find our way to a less costly and more effective method of discouraging drug use, cutting down the power of organized crime, providing better treatment and minimizing negative societal effects.

Other countries that have tried different approaches include Britain, the Netherlands, Switzerland, Portugal and Australia. What can we learn from these varied experiences, some more successful than others? What can we learn from our own experience in reducing sharply the smoking of cigarettes or in the handling of alcohol after the end of Prohibition?

Simple legalization is by no means the only or safest approach. One possibility is to decriminalize the individual use of drugs while maintaining laws against supplying them, thus allowing law-enforcement efforts to focus on the drug peddlers. Some of the money that is saved can be spent on treatment centers, which drug users are more likely to seek out if doing so does not expose them to the risk of arrest.

The situation that confronts us today is dangerous. After 40 years of concentrating on one approach that has been unsuccessful, we should be willing to take a look at other ways of working to solve this pressing problem. As the global commission concludes: "Break the taboo on debate and reform. The time for action is now."

—Mr. Shultz, former U.S. secretary of state, is a distinguished fellow at Stanford University's Hoover Institution. Mr. Volcker, former chairman of the Board of Governors of the Federal Reserve System, is professor emeritus of international economic policy at Princeton University.

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Friday, June 10, 2011

Banking on Bankruptcy

Bad news is good news when you know what you're doing.

Hipster Battles Hedge Funds

Nate Thoma stood up in a Delaware bankruptcy court last December in a sharkskin suit and delivered a 24-minute argument that changed the course of one of the largest bankruptcies in U.S. history.

The 33-year-old Washington Mutual investor, with no legal experience, delivered what people in the courtroom called an unusually eloquent speech, helping persuade the judge to investigate trading by some of the nation's biggest hedge funds and to reject a plan for the bank's exit from bankruptcy.

The net result was a settlement between small investors and the hedge funds, which included Appaloosa Management and Centerbridge Partners. That deal has paved the way for the bank to exit from bankruptcy and gives the little guys a chance of recovering some of their losses.

Mr. Thoma's court appearance added new drama to an already contentious case, which began when the U.S. government seized the bank in September 2008. The court-ordered probe riled hedge-fund managers, who said they did nothing wrong, and made Mr. Thoma a folk hero among Washington Mutual's legions of small investors.

Mr. Thoma, who had traveled from Queens, N.Y., to lodge his objections in person, came across as "intense and smart," though "somewhat lacking in experience in the legal arena," says Edgar Sargent, a lawyer representing Washington Mutual's shareholder committee.

Sitting in a Greek tavern in Astoria, N.Y., on a recent afternoon, sporting a hipster-perfect scruffy beard and dressed in a plaid shirt and jeans, Mr. Thoma recalls thinking Judge Mary Walrath would cut him off after a few minutes.

"But halfway through, I noticed she was paying attention," he says. "I realized she was going to let me go on, and I went for broke."

Mr. Thoma, who gave up computer programming to become a trader in 2005, estimates he probably made 10 times his money in Washington Mutual, in part because he bought up cheap securities that will get a payout.

Mr. Thoma spent as many as 10 hours a day analyzing various pieces of the Washington Mutual case before appearing in court, and presented 33 pages of documents. In her written opinion, Judge Walrath cited Mr. Thoma's arguments six times, though she pointed out that much of his evidence was inadmissible.

"Some things were wide of the mark," concedes Mr. Thoma. "But it's my first bankruptcy."

No wrongdoing by the hedge funds was proved by the investigation ordered by Judge Walrath. Appaloosa and Centerbridge, as well as Aurelius Capital Management and Owl Creek Management, were ordered to divulge trading records and answer questions from lawyers for common shareholders.

The funds declined to comment, as did Washington Mutual's attorney.

While Mr. Thoma's impact on the case could inspire other small investors, they probably won't get as loud a voice. Judge Walrath was particularly attentive to smaller shareholders during the Washington Mutual case, in part because of the number of individuals hurt when the bank was seized, according to people involved in the case.

Soft-spoken and with about $500,000 in investments, Mr. Thoma is an unlikely agent for change in the halls of American finance and an even more unwelcome adversary for the hedge funds involved. His actions infuriated the likes of David Tepper, head of Appaloosa. They also served as a call to arms for small investors in the case, many of whom lavished him with accolades on Yahoo message boards.

When Appaloosa responded to Mr. Thoma's claims with demands for research, correspondence and trading records, shareholders, many of them from Europe, rallied to Mr. Thoma's defense, flooding the Delaware court with more than 150 objections. "Apparently, I'm big in Switzerland," he says.

Mr. Thoma, who didn't finish college, says he taught himself to trade, much like he taught himself computer programming. He is also following in the footsteps of his grandfather, who actively traded and retired early on his stock-market investments.

"When I was little, he would show me stock charts, but it didn't register," Mr. Thoma says. "Years later, it occurred to me, 'I can do this.'"

His transformation from small-time investor to activist shareholder began following the seizure of Washington Mutual. Mr. Thoma's shareholding in the bank was wiped out. He spent weeks in front of his Scottrade account, trying to figure out how to recoup money he had lost.

"I started looking at the capital structure, and I saw an opportunity to make back my investment," Mr. Thoma said. He bought trust preferred securities, a hybrid of debt and equity, which rank above common and preferred shares. That enabled him to essentially jump ahead in line for any money distributed from the bank's estate.

It also put him in the same pool as Appaloosa, Aurelius, Centerbridge and Owl Creek, which were snapping up the same securities.

Those securities were quoted at around one cent in November 2008, when Mr. Thoma first started buying—they are now at 16 cents—but they rarely traded and were hard to buy through his online brokerage account.

In the following months, Mr. Thoma bought in lots of 500 or 1,000 units. But he noticed other investors were occasionally able to buy them in much larger amounts, at one point as many as six million units in a day.

"I was envious," he said. "They were like whales passing in the night."

Mr. Thoma suspected the buying was being made by hedge funds, which already owned the bank's bonds. Owning large chunks of both classes of securities would help them control the bankruptcy's course, he figured. While this practice is standard in most bankruptcies, in the case of Washington Mutual, the hedge funds' strategies affected thousands of retail investors, who still owned the bank's securities.

In his December objection, Mr. Thoma said he thought it was unfair that hedge funds were able to eventually negotiate on behalf of trust preferred holders, seeing as they were also bondholders and involved in settlement talks. He questioned whether they were acting in all of the preferred holders' best interests.

Judge Walrath listened, and ordered the probe into the buying.

Mr. Thoma says he is still obsessed with the case, and his wife has banned Washington Mutual from household conversations.

But this battle is likely to be his last. He says that despite his success, his experience has left him disillusioned.

"The thrill is gone," he says. "It's such a big game, [individuals] just can't compete. I'm picking up freelance Web work again."

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David Mamet -- Conservative Playwright

The road to self-discovery -- what a trip!

The Secret Knowledge
By David Mamet
Sentinel, 241 pages, $27.95

Enter Stage Right

In a celebrated 2008 essay for the Village Voice, David Mamet made the startling announcement that he was "no longer a brain-dead liberal." I think it only fair to mention here that I rejoiced.

Mr. Mamet is a terrific playwright, maybe even a great one ("American Buffalo," "Glengarry Glen Ross") and a screenwriter of the first rank ("The Verdict," "The Untouchables"). That a writer of such talent and stature had become a conservative seemed to me to promise some relief from the soporific political conformity of the American arts.

So I rejoiced—and I also sympathized. Breaking free of leftism while working in show business is like escaping from "The Matrix" only to find oneself in "Invasion of the Body Snatchers."

You wake to a risky but bracing new reality of individual liberty, limited government and free markets and are instantly beset by zombified statist dreamers determined either to make you rejoin their ranks or to destroy you. Mr. Mamet reports that a certain prominent left-leaning newspaper actually panned his first openly conservative play not once but twice for good measure. (Libertarian humorist Greg Gutfeld has introduced a "Mamet Attack Clock" on his late-night cable show to measure just how fast critics will now downgrade their opinions of the playwright's work.)

Under such circumstances, it is natural that Mr. Mamet would develop the urge to cry out, like Kevin McCarthy in the famous last scene of "Body Snatchers": "Listen to me! Please listen!" From that urge, no doubt, arises Mr. Mamet's new work of nonfiction, "The Secret Knowledge." It is his attempt to explain and disseminate the thinking behind his conversion to the right.

"Liberalism is a religion," he writes. "It affords a feeling of spiritual rectitude at little or no cost. Central to this religion is the assertion that evil does not exist, all conflict being attributed to a lack of understanding between the opposed. Well and good, but this does not accord with the experience of anyone."

There are inherent difficulties with a predominantly creative writer taking on what is effectively a work of political science. Those who are familiar with Mr. Mamet's previous nonfiction books — which are primarily about the theater and Hollywood — may rightly approach with caution. In trenchant works such as "On Directing Film" (1992), "True and False" (1999), and last year's brief handbook, "Theatre" (2010), Mr. Mamet often makes blunt, startling, dogmatic assertions that do not necessarily hold water as universal truths.

This mode of argument, though, is standard operating procedure among artists of all kinds when pronouncing on their respective crafts. Their manifestoes and declarations are understood not as axioms but as personal attempts to fashion an artistic response to the controversies of the age.

When, for instance, in "True and False," Mr. Mamet says that an actor can't explore the inner life of his character because "there is no character. There are only lines upon a page," the claim does not render Method acting obsolete. It is just Mr. Mamet insisting on the primacy of the text and spelling out the theoretical underpinnings of the deadpan, staccato, rough and hilarious style of dialogue known as Mamet-speak. It is Mamet creating Mamet.

But that explanation won't wash in politics. The blessings of liberty are not the stylistic and artistic preferences of an age. Either human life is ennobled by the dangers and rewards of freedom or we are better off when governments baby-proof reality and shepherd us to the good. It is one way or the other, and history and reason must be brought to bear in order to determine which.

This means that Mr. Mamet the political theorist must essentially reiterate the work of those more expert than he: Thomas Sowell, Friedrich Hayek, Milton Friedman and other architects of modern conservative thought.

Since these brilliant men are frequently ignored or underrated by mainstream critics, it is no bad thing to have a writer as concise and engrossing as Mr. Mamet offer us a sort of digest of their most salient observations on the depredations of the ruling class. And in fact, "The Secret Knowledge," written in Mr. Mamet's tough and funny style, is entertainingly informative.

But the book only really becomes indispensable when it is personal and specific to Mr. Mamet's experience. Take, for instance, this delightful exchange between the playwright and an ideologue in a class he was teaching, who feels that as many plays as possible should strive to demonstrate the humanity of homosexuals.

"Are gay people people too?" I asked the student, and he said that of course they were. "Are they aware of that fact?" I asked him. And he responded similarly. "Then why," I asked, "as they are aware of the fact, would they find its repetition on stage entertaining?"

"Ah, but," he said, "the straight people should see it."

"Ah, but," I said, "the straight people don't care. They may reward themselves for the ability to be bored by a play with a Good Message, but they, just like the gay people, come to the theater to be entertained. Your enlightenment is insufficient to capture the audience's attention for two hours."

This one piece of advice alone, if heeded, could revolutionize both Broadway and Hollywood for the good, and the reader might wish that there were more such wisdom in this book. "Theatre" is packed with such stuff and will, I think, do far more to advance both conservatism and show business.

That said, "The Secret Knowledge" remains a sharp-tongued and heartfelt primer on modern American conservatism. And for those who have already read Thomas Sowell and Friedrich Hayek and the rest, it might make an amusingly irritating present for a liberal friend.

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