In 1930, James Dewar, the manager of the Chicago Hostess Bakery plant, was probably tired. He spent most of his days overseeing the tedious production of the company's delicious cakes. Complete with strawberry filling, the variety of pastries produced in Chicago were certainly being enjoyed by people all over the country.
According to history, Mr. Dewar noticed one day that the Hostess shortcake pans were hardly being used during the short strawberry season. Instead of having the pans sit idly in the dust of the factory, Mr. Dewar began to inject smooth banana and vanilla creme filling into the cakes. These non-strawberry filled treats would later be named, "Twinkies." And this beloved snack would later contribute to the increased size of America's belly.
Today, the bankruptcy court judge presiding over the Hostess proceeding approved the winding down and liquidation of the company. The management at Hostess quickly placed blame, even before the judge made a decision. It was those greedy unions and their ridiculous demands for decent wages.
It is true that the union strikes made it difficult for the company to reorganize under Chapter 11, but the death of Hostess was long ago determined because of a number of non-union factors.
Hostess had already filed bankruptcy in 2004 and 2009, employed seven different CEOs in ten years, before private equity began to load the company with debt. Hostess had over $600 million of debt on the books before the unions were able to write on their picket signs. The total amount of debt was two-thirds of the complete asset value of Hostess.
Add the problems of consumer trends favoring healthier snacks, management's refusal to adapt to the market rate of labor, and leadership's failure to retool the business model; and you get the demise of a bakery company that has been around for over 70 years.
It is always easy to blame the workers, the unions, the blue-collar employees who are content in being a small part of the larger process in making a delectable product. But in blaming them, the Hostess executives associate themselves with the "severe" conservative agenda which holds working people in contempt.
The Republican House Majority leader Eric Cantor is a perfect example of an individual who disdains the working class. He issued a statement on Labor day 2012 stating, "we celebrate those who...built a business and earned their own success." I have nothing against business owners, but praising just them on labor day shows great disrespect to the labor class.
There is a wide-held belief that businesses would do better without unions. Let's examine whether this belief is backed by evidence.
Since 1970, union membership has gone from 1/3 of the workforce to less than 14 percent. What is the result of this decline? The top one percent of incomes increased 275% while middle class incomes went up just under 40%. This income inequality has had an effect on the whole economy. Because of the weak purchasing power of consumers, overall aggregate demand declined tremendously. If families cannot afford to purchase Twinkies, how is Hostess or an equivalent company supposed to sell its products?
Companies need to stop playing the blame game and realize that if the middle class does well, so does the whole country.
I am sure that James Dewar, once a delivery boy for a pastries company, would be disgusted with the turn of events regarding the Hostess bankruptcy. He could not have anticipated that the bakers would be the "ones responsible" for the end of Hostess. Although the Twinkies brand will live on, the respect for the people who made the Twinkies, Hostess bakers, will be discarded. Someone give me a sugary treat.
Thursday, November 22, 2012
Sunday, November 11, 2012
All on Red: How Wall Street Gambled Big and Lost
Most people go to Las Vegas to gamble. Surrounded by flashing lights and luxurious casinos, there is something alluring about sitting at a blackjack table for hours on end. I am sure that the free drinks might have something to do with it too.
But when I looked at a recent Reuters article, I read facts that reaffirmed my belief that people on Wall Street are different. They are not like most people. Instead of rolling the dice, they would rather "gamble" on complicated financial instruments or presidential elections. And with the results of this election over, it was clear. Wall Street crapped out.
In late July 2010, President Obama signed Dodd-Frank, a financial regulation law, named after the two Democrat legislators who sponsored the bill. It became immediately clear that the banks on Wall Street were not happy. One paper stated that, "within minutes of the bill signing, several Wall Street groups were leveling criticism at the new regulations, reflecting Mr. Obama’s increasingly fractious relations with corporate America."
Their criticism did not end with harsh words. In the presidential election, Wall Street gave over $150 million to Romney, or Super PACs whom supported Romney. Wall Street put it all on red and the ball ended up on blue.
What caused the animosity between the financial services industry and the White House? Was it only because of the monumental financial reform bill?
You may have read that the financial crisis was brought on by the housing bubble. However, you may have missed the fact that the banks on Wall Street were the ones putting the batteries in the bubble machine. In creating collateralized mortgage obligations, or the securities that were later known as "toxic," the banks accomplished what they always do best - make sure that someone else bears the risk.
The main idea behind these securities was that it would be less risky. The banks would bundle up a bunch of mortgages, label them as high-risk or low-risk, and put them in their respective tranches. Investors would buy them according to how risk-averse they were. It was the perfect way to lend to prospective home buyers because it was supposed to spread the risk among a number of parties. Or so they thought.
With the help of rating agencies listing most of the securities as triple-A, the prices of these "toxic" instruments went up as demand increased. The banks sold them faster than a casino sells drinks. Instead of having the borrowers pay the banks directly, the banks sold the complex securities to investors, whom were to be paid from the borrowers. The banks shifted the risk of default and foreclosure to the investors.
It didn't end there. Before the fall of Lehman Brothers, some banks began to purchase credit default swaps. These instruments acted as insurance. The banks would pay a premium, and in the event of a mortgage default, the issuer of the swap would have to pay the bank. They were betting against the very securities that they were selling.
The bubble eventually burst when people realized that the values of homes across the country were inflated. More homeowners began to default on their loans and the securities bought by investors lost their face value. The consequence of these events led to the Great Recession, in which millions of Americans would become unemployed or underemployed.
When things began to settle, laissez-faire "fiscal conservatives" already had their fingers pointed to the ones responsible - the government and the indigent. Their main theory, the one you've probably heard from your conservative friend, is that Fannie Mae and Freddie Mac ("GSEs") encouraged subprime lending to people who couldn't afford it. It's these irresponsible borrowers and government enablers who shoulder the blame.
The problem with this conservative theory is that it doesn't have evidence or facts to support it. The primary holders of the "toxic" assets were the private banks. Moreover, many economists and authors pointed out that, "the GSEs’ overall purchases and guarantees were much less risky than Wall Street’s... their default rates were one fourth to one fifth those of Wall Street and other private financial firms." So, in effect, the banks ran wild, but somehow still found a way to persuade some Americans that it was the fault of poor people.
President Obama didn't buy it and he explained his position on financial services and the need for regulation. At times, he even called the Wall Street bankers "fat cats." The bankers must have had some self-image issues because they were deeply hurt. One Wall Street exec said it wasn't so much what the President did, but the "vibe they get."
Dodd-Frank was historic in its ambition and scope. It created the Consumer Financial Protection Bureau, the "Volcker rule," which will limit proprietary trading by the banks, credit default swaps regulations, and a number of other safeguards to protect financial stability. The legislation put Main Street back as America's number one priority, much to the dismay of Wall Street.
The gamble to oust President Obama may not have gone in Wall Street's favor. But I know they aren't done. They can spend just as much on challenging the law in the courts. I bet money that they'll try.
But when I looked at a recent Reuters article, I read facts that reaffirmed my belief that people on Wall Street are different. They are not like most people. Instead of rolling the dice, they would rather "gamble" on complicated financial instruments or presidential elections. And with the results of this election over, it was clear. Wall Street crapped out.
In late July 2010, President Obama signed Dodd-Frank, a financial regulation law, named after the two Democrat legislators who sponsored the bill. It became immediately clear that the banks on Wall Street were not happy. One paper stated that, "within minutes of the bill signing, several Wall Street groups were leveling criticism at the new regulations, reflecting Mr. Obama’s increasingly fractious relations with corporate America."
Their criticism did not end with harsh words. In the presidential election, Wall Street gave over $150 million to Romney, or Super PACs whom supported Romney. Wall Street put it all on red and the ball ended up on blue.
What caused the animosity between the financial services industry and the White House? Was it only because of the monumental financial reform bill?
You may have read that the financial crisis was brought on by the housing bubble. However, you may have missed the fact that the banks on Wall Street were the ones putting the batteries in the bubble machine. In creating collateralized mortgage obligations, or the securities that were later known as "toxic," the banks accomplished what they always do best - make sure that someone else bears the risk.
The main idea behind these securities was that it would be less risky. The banks would bundle up a bunch of mortgages, label them as high-risk or low-risk, and put them in their respective tranches. Investors would buy them according to how risk-averse they were. It was the perfect way to lend to prospective home buyers because it was supposed to spread the risk among a number of parties. Or so they thought.
With the help of rating agencies listing most of the securities as triple-A, the prices of these "toxic" instruments went up as demand increased. The banks sold them faster than a casino sells drinks. Instead of having the borrowers pay the banks directly, the banks sold the complex securities to investors, whom were to be paid from the borrowers. The banks shifted the risk of default and foreclosure to the investors.
It didn't end there. Before the fall of Lehman Brothers, some banks began to purchase credit default swaps. These instruments acted as insurance. The banks would pay a premium, and in the event of a mortgage default, the issuer of the swap would have to pay the bank. They were betting against the very securities that they were selling.
The bubble eventually burst when people realized that the values of homes across the country were inflated. More homeowners began to default on their loans and the securities bought by investors lost their face value. The consequence of these events led to the Great Recession, in which millions of Americans would become unemployed or underemployed.
When things began to settle, laissez-faire "fiscal conservatives" already had their fingers pointed to the ones responsible - the government and the indigent. Their main theory, the one you've probably heard from your conservative friend, is that Fannie Mae and Freddie Mac ("GSEs") encouraged subprime lending to people who couldn't afford it. It's these irresponsible borrowers and government enablers who shoulder the blame.
The problem with this conservative theory is that it doesn't have evidence or facts to support it. The primary holders of the "toxic" assets were the private banks. Moreover, many economists and authors pointed out that, "the GSEs’ overall purchases and guarantees were much less risky than Wall Street’s... their default rates were one fourth to one fifth those of Wall Street and other private financial firms." So, in effect, the banks ran wild, but somehow still found a way to persuade some Americans that it was the fault of poor people.
President Obama didn't buy it and he explained his position on financial services and the need for regulation. At times, he even called the Wall Street bankers "fat cats." The bankers must have had some self-image issues because they were deeply hurt. One Wall Street exec said it wasn't so much what the President did, but the "vibe they get."
Dodd-Frank was historic in its ambition and scope. It created the Consumer Financial Protection Bureau, the "Volcker rule," which will limit proprietary trading by the banks, credit default swaps regulations, and a number of other safeguards to protect financial stability. The legislation put Main Street back as America's number one priority, much to the dismay of Wall Street.
The gamble to oust President Obama may not have gone in Wall Street's favor. But I know they aren't done. They can spend just as much on challenging the law in the courts. I bet money that they'll try.
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