Failures – exposed, reflected upon, considered

The period between 1968 and 1973 was actually a very good one for the American auto sector. Yet difficulties emerged by the early 1970s. Detroit was far too dependent for profit on large cars and had not paid enough attention to safety or fuel-efficiency. The energy crisis (partly helped by ousting the Iranian Shah), regulatory demands, and a cyclical downturn in the market were instrumental in pushing Chrysler, the weakest of the “Big Three” automobile manufacturers, to the edge.

In July 1979, John Riccardo, the then Chrysler chairman, went public with the depth of Chrysler’s difficulties, admitting that Chrysler was bleeding red ink. Second-quarter losses reached $207 million. As summer turned to fall, the news from Chrysler was bleak. Chrysler’s 1979 $1.2 billion loss was the largest recorded in US corporate history. By the end of 1979, the company was teetering on the brink of bankruptcy. Chrysler owed $4 billion, nearly 10% of all US corporate debt. Eighty thousand unsold vehicles worth over $700 million sat on dealer lots. Riccardo called for immediate federal assistance: a $1 billion US tax holiday, a two-year postponement of federal exhaust emission standards (worth $600 million to the company), and concessions from the United Auto Workers. Otherwise, he warned, the company would fail.

Enter Lee Iacocca. By 1964, Iacocca, a Princeton graduate, had already cemented a place in automotive history by bringing out the revolutionary Ford Mustang, which was an immediate and enduring success. Iacocca became Ford president in 1970, until Henry Ford II fired him in 1978. He was hired as president of Chrysler in 1979, tasked with turning around the faltering company.

Iacocca echoed Riccardo warning that without some sort of federal aid, Chrysler would most certainly fail. Chrysler’s impending demise was potentially the largest in history, and for many the company’s crisis represented the end of American postwar economic hegemony and the deindustrialization of North America. As Congress and the Carter administration haggled over the final aspects of a bailout bill, Chrysler faced its darkest days. To avoid running out of money, the company simply stopped paying suppliers. Finally, to the relief of over 250,000 Chrysler workers, in January 1980, President Jimmy Carter signed the bill Chrysler Corporation Loan Guarantee Act of 1979. The plan provided $1.5 billion in loan guarantees, but required the company to secure another $1.43 billion in private financing, concessions from banks and suppliers.

The turnaround in Chrysler’s fortunes came swiftly and stunningly. In July 1981, just two years after Riccardo’s fateful admission of Chrysler’s dire financial straits, Iacocca announced that the company had turned a profit for the second quarter. Although it was a meager $11.6 million (compared to the company’s 1979-81 losses of $3 billion), these profits were followed by a tidal wave of income, and in 1983 Chrysler paid off its federally guaranteed loans seven years ahead of schedule. Chrysler’s amazing recovery did seem, indeed, to be a miracle, and there was no doubt who had been the miracle worker behind the turnaround.

By the 1980s, Iacocca was heralded as a possible presidential candidate; motivational speakers talked about “Lessons from the Great Leaders: From Hannibal to Iacocca.” He was a television celebrity appearing in Chrysler commercials and in an episode of Miami Vice; even a children’s play was written about his amazing story. In 1985, Iacocca wound up on the cover of Time magazine.

However, the popular version of the Chrysler story with its excessive emphasis in the role of the government is a myth, which clouds and distorts important issues involved in the larger question of business-government relationship. Confronting the Chrysler myth with Chrysler facts reveals Chrysler’s real financial condition and the real impact of those federal guarantees. It shows that if the bailout is indeed the model for an American industrial policy the consequences could be disastrous.

Myth 1: Government loan guarantees prevented the Chrysler Corporation from going bankrupt.

The truth is that the Chrysler has gone bankrupt by every normal definition of the word. Starting from 1979, Chrysler had renegotiated its debts and restructured its organization in a way that greatly resembles a company going through Chapter 11 bankruptcy. Its creditors, like those of bankrupt firms, were forced to swallow sizeable losses.
This was the result of a clause in the Chrysler Corporation Loan Guarantee Act of 1979 that required creditors to make certain “concessions” to Chrysler. With this clause to exploit and with Treasury Department officials pressuring its creditors, Chrysler was able to pay off more than $600 million in debts. In addition, the company was allowed to convert nearly $700 million in debts into a special class of preferred stock, worthless in the financial markets because the shares earned no dividends and were unredeemable for some time.
Chrysler’s creditors were not alone in being socked by the company’s quasi-bankruptcy. The firm’s workers had paid an even greater price. Despite the fact that the loan guarantees were approved by Congress mainly to protect jobs at Chrysler, the company has sent home nearly half of its employees, cutting its white collar work force by 20,000 and laying off 42,600 of its hourly workers since the loan guarantees were signed into law. Many observers complained that the number of employees laid off at Chrysler in this period is at least as large than the number of jobs that probably would have been lost had Chrysler actually been forced into bankruptcy.

Myth 2: Loan guarantees were justified because Chrysler’s financial problems were brought on by the federal government.

Although federal regulations have certainly played a part in the financial decline of the automobile industry, these rules apply to every firm in the industry, not just Chrysler. It was Chrysler’s management, rather, which put it on the road to bankruptcy. Throughout the late 1930s and into the early 1940s, Chrysler was the second largest car manufacturer in America, ahead of Ford. The company’s problems began shortly after WW2, when it decided to stick with prewar manufacturing and styling methods instead of retooling to meet the expectations of postwar automobile buyers. Ford and GM, in contrast, developed a sleek and streamlined design that sold well.
By the time Chrysler’s management admitted their mistake in the 1950s, the company had slipped to third place among the nation’s automakers. But because Chrysler’s new management reacted by emphasizing sales and production over engineering, the firm’s cars were little more than delayed copies of Ford and GM products. Regulations may have played a part in forcing Chrysler over the edge, but the stage had been set for Chrysler’s problems long before seat belts and bumper standards were a gleam in the regulators’ eyes.

Myth 3: Loan guarantees cost nothing since Chrysler had not gone bankrupt.

Under the provisions of the Loan Guarantee Act, Chrysler was supposed to compensate the federal government for the risk that the government has taken in making the guarantees. The House Committee on Banking, Finance, and Urban Affairs defined this risk as “the difference between the rate that the guaranteed loans carry and the rate that Chrysler would be required to pay if the loans were obtained without the federal guarantees.”
Just how large is the difference between the two rates? In early 1980, Chrysler was able to issue government-guaranteed bonds at an interest rate of only 10.35%, while Ford was forced to pay about 14.5% for its unguaranteed bonds. If Chrysler did not have the loan guarantees, it would almost certainly have to pay a higher interest rate on its bonds than the more secure Ford. In addition, Chrysler paid only 1% government guarantee fee, amounting to $12 million a year. Chrysler attempted to make up the difference by giving the government 14.4 million “warrants,” which are certificates that give the government the right to purchase a share of Chrysler stock at $13 a share. In early 1983, Chrysler publicly demanded that the Treasury Department return the warrants to Chrysler, claiming that cashing in now-valuable warrants would amount to “usury.” Due to adverse public reaction, a Chrysler spokesman said that the company “would not press” the demand at this time. Moreover, Chrysler had petitioned the federal government to reduce the 1% loan guarantee fee to the statutorily mandated minimum of 0.5%.

Myth 4: Chrysler’s top management took deep salary cuts until Chrysler’s financial problems were resolved.

When Chrysler was petitioning the federal government for the financial assistance it wanted, in 1979, the company announced its Salary Reduction Program. Executive salaries were cut 2-10%; Lee Iacocca reduced his salary to one dollar a year (although it was made clear that, under the program, Iacocca would collect the balance of a recruitment bonus due to him in 1980). If Chrysler’s financial performance was adequate after two years, the executives would be eligible to receive retroactive salary payments to make up for these reductions.
Despite the fact that Chrysler lost nearly $500 million in 1981, the Salary Reduction Program ended that year, and executive salaries were restored to their 1979 level. Moreover, the company made retroactive payments to its executives for about two-thirds of the income they lost while the program was in effect, on the theory that its stock price in 1981 was about two-thirds of its 1979 price. Iacocca himself received over $360,000 in salary supplemental payments and director’s fees in 1981.

Myth 5: Chrysler’s profitability showed that it is on the road to financial recovery.

Chrysler’s supporters were elated when the company reported a net profit of over $170 million in the first quarter of 1983 — the largest quarterly profit in the company’s history. Chrysler claimed that cost cutting has been an important factor in the company’s success. At the time, Chrysler’s cost cutting program provided little optimism for long-term profitability.

• Chrysler’s massive losses in 1979, 1980, and 1981 have given the company large tax deductions to cut its tax bills almost to zero throughout the 1980s.

• Chrysler boosted R&D spending from $161 million in 1972 to $358 million in 1979 (or $207 million in 1972-equivalent dollars). But between 1979 and 1982, R&D spending was cut to $307 million (only $133 million in 1972 dollars).

• In January 1982, Chrysler reached an agreement with the UAW to defer $220 million in pension fund contributions.

• In January 1981, Chrysler negotiated special concessions from the UAW that saved the company more than $600 million in 1981 and 1982.

Summarizing…

After suffering a big decline in the period from 1978 to 1983, the industry experienced the benefits of resurgence in consumer confidence that, while not inevitable, was expected in the highly cyclical auto sector. The more general economic turnaround, accompanied by a decline in record-high interest rates that benefited car sales significantly, boosted this confidence. Chrysler’s new products (K-Car and the minivan) were also appealing to consumers. Trade policies helped fuel the Chrysler and Big Three rebound. The 1981 “voluntary export restraints” imposed by President Ronald Reagan’s administration on Japan provided some relief for American carmakers. On his part, Iacocca undertook four major strategic moves, (in addition to restructuring and cost cutting) which helped Chrysler to turnaround its fortunes and eventually go out of the red.

First, Iacocca used Chrysler’s dire situation to convince the vast number of individuals, groups, and interests affected by the crisis (as well as the public) that saving the company his way was the best and only option for Chrysler. Iacocca needed to keep the company afloat while emphasizing the organization’s precarious situation of being “on the brink” to achieve management goals.
Iacocca needed little help in publicizing Chrysler’s situation. Headlines screamed that an estimated 400,000 workers would lose their jobs if Chrysler failed, and that unemployment in Detroit would jump from 8.7% to 16%-19%. The American economy would lose $30 billion or 1.5% of America’s entire GDP. At a time when America’s trade balance was already in sharp deficit, a Chrysler failure would add a further $1.5 billion. These dire warnings became Iacocca’s talking points to the nation. Pragmatism with a dash of patriotism proved to be Iacocca’s most effective tool in convincing Americans of both the severity of the crisis and the need for aid.

Second, Iacocca asked the American government for aid. He had to persuade Americans that government aid through loan guarantees was not only necessary in this case, but also not un-American. Iacocca recalled that during the debate over Chrysler’s fate, “Everybody was beating on us. Everybody saying, ‘How dare you violate the altar of free enterprise and ask for a loan guarantee?’ . . . We did not take taxpayer money. We had a guarantee, but for fifty years they’ve guaranteed.” Unsurprisingly, many both within the auto industry and without saw this as anathema.

Third, Iacocca successfully managed and negotiated the myriad networks of management, unions, suppliers, and banks within the Chrysler constellation to position the company to take advantage of the government loan package. Among Chrysler employees, Iacocca had to fire thousands of managers and salaried staff. On the union side, the UAW leadership was mostly onside and agreed to concessions, though not without acrimony. Similarly, many suppliers initially balked at the concessions required by the company, though they all eventually agreed. Perhaps most difficult of the stars within the Chrysler constellation were the banks.

Fourth, Iacocca made a conscious decision to become the very public face of the company and utilized his skills as a salesperson to create a marketing and communications strategy that made him the central actor in this Chrysler turnaround strategy. Along with communicating to the company’s workers, Iacocca took the step that was perhaps the most pivotal in the Chrysler turnaround story. He leveled with the American people. This effort started small, with Iacocca signing “open letters” to the American people, in the form of full-page newspaper and magazine articles placed at the height of the crisis. The ads attempted to debunk the “myth” of Chrysler’s “gas guzzlers” and clarify Chrysler’s situation. Then came the commercials, which utilized Iacocca’s marketing skills (“If you can find a better car, buy it”) and natural charisma, which helped saving the ailing Chrysler.

A brief but illuminating summary of recent blunders of Henry Paulson, an expert on the Great Depression.

Treasury Secretary Henry Paulson made some disastrous decisions that had major unintended consequences.

One of those was the decision to nationalize Fannie Mae and Freddie Mac. Once the government took over Fannie Mae and Freddie Mac, supposedly preemptively, shareholders of every other financial company that perhaps needed capital were left with no choice but to sell aggressively, fearing the government might decide to preemptively wipe them out also. This made it impossible for any company to raise the capital it needed or wanted.

About a week later Lehman Brothers filed for bankruptcy, Merrill Lynch was forced to sell to Bank of America, and AIG was extended a huge government loan, all completely or nearly wiping out shareholders.

Then Paulson forced nine major banks to receive capital infusions from treasury, effectively partly nationalizing them, and creating a huge American Sovereign Wealth fund.

The above referenced nationalizations created a bizarre situation where the government contended that financial institutions needed more capital, and that it should be private capital that will solve the problem. But the government also indicated that it stands ready to provide additional assistance in the future, thus destroying the equity stakes of those prospective capital providers. Why would private capital invest, if it believes it is the policy of the government to later intervene and dilute it?

Enter the pernicious crash of October-November 2008.

The smartest CEO, John Thain of Merrill, understood the new landscape before anyone else and quickly sold at the then still available price, albeit a fraction of his company’s value at its peak. In doing that he saved Merrill from the ignominious fate it was inevitably headed towards, the same fate that awaited Lehman Brothers.

And by letting Lehman Fail, the counterparty risk was unleashed on the economy of the world, as Lehman was involved in thousands of trades all over the globe and was much bigger than Bear Stearns. That brought to the forefront the systemic risk that is now looming above us like a dark cloud. All of a sudden even money market funds were losing principal. Secured bond holders are losing money (unlike the creditors of Bear Stearns, Fannie and Freddie, who emerged whole). Nobody knew who could be trusted, and short term credit markets ceased to function, severely impairing the economy further.I believe Secretary Paulson’s policies aggravated the crisis. At the moment, Citigroup and JP Morgan are struggling; locked out of the market for private capital and their shares are in free fall. Despite major capital infusions, most financial stocks are down sharply. The nine institutions that received the first cash infusion from Washington have seen their shares fall more than 40% since then. Goldman Sachs last week was trading at a value less than just the amount of money it raised recently. So many financial institutions are failing, making the federal government their built-in savior and enervating the Fed’s resources with their insatiable demand for fresh cash.All this is making it palpably clear that the Treasury’s policy did nothing to build confidence or stabilize the markets. The sickening, precipitous drop of the equity markets in October and November are the market’s judgment on the merit of Treasury’s policies.

Here is the original article from the Huffington Post.

He accepted his errors by saying, “We’re not proud of all the mistakes that were made by many different people, different parties, failures of our regulatory system, failures of market discipline that got us here.” His solution was then and now to “buy bad assets and the administration has allocated $US100 billion for that portion of the program,” referring to the $700 billion bailout program.

His approach however looks more like a band-aid, which will postpone but by no means prevent a near certainly future problems in the financial markets. As one shrewd expert admits, “The government cannot repeal the law of gravity and stop markets from falling. Nor can it turn back the clock to reverse our financial blunders.”

The currently prevalent and rather dogmatic approach of avoiding filing for the Chapter 11 is mostly due to a misconception. It is commonly thought that a company or an organization filing for the bankruptcy (immediately) ceases its activities and (virtually) its existence. This is wrong. Usually the causes (especially in high-tech cases) to file for Chapter 11 include overwhelming debt, defensive maneuver against temporary legal liabilities and need for reducing labor problems. For the duration of being under the Chapter 11 protection, the company/organization continuous its operations. The difference mainly comes in guise of added supervision and control. The debtor usually remains in possession of the company’s assets, and operates the businesses under the supervision and control of the court and for the benefit of creditors. The debtor in possession is a fiduciary for the creditors. The objective and desired result of the Chapter 11 protection is make the company cut costs, re-orient itself and streamline in resources in efficient manner in order to return to profitability. Although admittedly the rate of successful Chapter 11 reorganizations is low (estimated at 10% or less), it is still a better solution, and is not only considered by small and medium but by large multinational corporations such as GM (which follows the same path of peering into the public money instead of doing an internal restructuring, refocusing and cost cutting as was done to save IBM in a similar case in 1993). In addition to other benefits, for the GM case, Marketing expert Seth Godin goes to the extreme of proposing, “Use the bankruptcy to wipe out the hated, legacy marketing portion of the industry: the dealers.” And then adding, “We’d end up with a rational number of “car stores” in every city that sold lots of brands. We’d have super cheap cars and super efficient cars and super weird cars. There’d be an orgy of innovation, and from that, a whole new energy and approach would evolve.” I agree.

Companies coming out of the Chapter 11 (usually few years after the initial filing) are leaner, healthier and better positioned. The most famous case in point is WorldCom.

One way or another, financial policies so far espoused by the US Treasury and Fed not only come short of calming markets and inducing confidence in money-needing banks, but also continue wasting tons of taxpayer dollars, imposing a heavy financial burden on younger generations.

A bit of historical perspective is here.

Year 1993, a once-mighty behemoth IBM, a former pacesetter in its field with a sterling reputation that was slowly fading into history, was considered a “state in a state” with 300,000 employees, billions dollar budget and its unique culture and myriad of rules and regulations.

However, IBM was then losing ground and money to likes of Apple, Intel and Microsoft. IBM offered early-retirement buyouts to employees shortly before Mr. Gerstner arrived. The company expected 25,000 people to take the offer, but about twice as many did. As employees headed for the exits, predictions of IBM’s demise were commonplace in magazine articles and books. The mainframe computer, IBM.’s lifeblood, was said to be dead. The future belonged to the fleet-footed leaders of the personal computer industry, Microsoft and Intel. To compete, IBM was pursuing a plan to break up the company into a collection of smaller ones.

Enter Louis V. Gerstner Jr., an outsider to the technology industry with a reputation as a leader and strategist, a management gun-for-hire whose résumé included RJR Nabisco, American Express, McKinsey & Company and Harvard Business School (graduated in 1965).

The IBM he saw he later described (in his book and subsequent seminars) in evocative metaphors and equally astounding ways. He likened the company to an elephant, the late Roman Empire, the Kremlin, the Titanic and an animal raised in captivity that is suddenly returned to the jungle. Still, most persuasive is IBM as the sick patient. When Gerstner arrived, the company was sclerotic, senile and hemorrhaging. It lost $5 billion in 1992 and $8 billion in 1993. Its market share had dropped 50%; 45,000 employees had just been laid off.

A few weeks after Mr. Gerstner joined IBM, a chauffeured car, as usual, arrived at his Connecticut home one morning to pick him up. As the car drove up, he was surprised to see someone already in the back seat. It was Thomas J. Watson Jr., the then 79-year-old former chief executive and son of the company’s founder. He told Mr. Gerstner that he was angry about what had happened to ”my company” and urged Mr. Gerstner to shake it ”from top to bottom.”

Mr. Gerstner, no stranger to big companies and bureaucracy, was stunned by what he calls ”the extraordinary insularity of IBM” That resulted in a pathological focus on internal process at IBM instead of on customers and the marketplace. Three weeks into his job as the newly installed chairman and CEO in 1993, Gerstner was presiding over his first meeting at the company on the topic of strategy. Everyone in the room was actively sharing ideas. “After eight hours I didn’t understand a thing,” Gerstner recalled. Too much terminology, too many abbreviations, too many insider-oriented information pieces and references.

At one of his first meetings, Gerstner was the only attendee not in a white shirt (he wore blue); the next time he faced a sea of colors, and he soon rescinded IBM’s famously rigid dress code.  Discussion at that IBM meeting, he said, seemed to be conducted in almost a private company code, like another language. Gerstner was not hearing the dispassionate, cost-driven analysis that he had been hoping for. The meeting, however, was a pivotal one for him at IBM, because it made him realize what he was up against in his charge to restore the once-great company to health.

The corporate culture could be described only as feudal. As one example, Mr. Gerstner reprints what he terms ”one of the most remarkable documents I have ever seen”: a 60-page memo from a human resources director to an aide of a senior IBM executive. It told the aide, among other things, to reset the three clocks in the executive’s office each day and included detailed instructions on how and when to buy and resupply the executive with his preferred chewing gum (Carefree Spearmint sugarless). Mr. Gerstner cited this as an instance of the ‘’suffocating extremes one could find all too easily in the IBM culture,” and he named the executive, who voluntarily retired just after Mr. Gerstner took over.

Within the first 100 days, he made the important decisions to keep the company together, reduce costs sharply and change the way IBM did business, overhauling sales, marketing, procurement and internal systems. He didn’t break up the company, as many were advising in response to his smaller, nimbler competition. He didn’t try to divert attention by acquiring new revenue streams, as many investment bankers were urging. Instead, he slashed prices to get badly needed cash and regain market share. He held a fire sale of unproductive assets. And he laid off 35,000 more employees (but he put so much human touch in this difficult decision: compassion and care).

He writes that the choice to keep the company together, reversing the course set by his predecessor and endorsed by the board, was ”the most important decision I ever made – not just at IBM, but in my entire career.” He based it on strategic analysis and instinct – and listening to customers. His bet was that IBM’s competitive advantage would be as the ”foremost integrator of technologies” to solve business problems for corporate customers. So much of what IBM did since then flowed from the one-company decision – the changes in sales, marketing, organization and compensation.

Before long, Mr. Gerstner also realized that trying to recapture control of the personal computer business from Microsoft was quixotic – costly, time-consuming and yesterday’s war. By the mid-1990’s, IBM’s technical leadership had noticed the Internet, and took the view that the coming ”networked world” would lead the way to the post-PC era, undermining Microsoft’s grip on the industry. ”Desktop leadership might have been nice to have,” Mr. Gerstner writes, ”but it was no longer strategically vital.”

Perhaps most important, though, Gerstner, the nontechie generalist, listened to those who anticipated that the PC revolution was entering a new stage. Few in the business then foresaw the big-system foundations of today’s networked world, in which corporate customers need soup-to-nuts services provided by a global information technologist. The now common phrase ”e-business” was coined by IBM.

He kept the company together, cut payroll and other costs, reduced IBM’s dependence on hardware and built up the services business. Under his leadership, IBM deftly caught the Internet wave, grasping its significance and translating it for baffled corporate customers. Such nimble exploitation of a fast-moving market opportunity was foreign to the old IBM.

After ten years into his job, in 2002, Gerstner left IBM with 65,000 more employees than when he arrived. The 2001 profit of nearly $8 billion marked the eighth straight year of black ink (though the company is carrying heavy debt). IBM was again an industry leader. Its culture and management were completely overhauled and put again onto the cutting edge.

He then wrote a memoir where he documente his years at IBM. ”Who Says Elephants Can’t Dance?” is not about IBM’s Lou Gerstner; it’s about Lou Gerstner’s IBM – and, by extension, that of his predecessors, since that is what he inherited in 1993. The book can seemingly serve a good case in point for current crisis-stricken GM, which is also predicted to file Chapter 11 if not rescued by the American government.

The book has no photographs, and its first sentence is, ”This is not my autobiography.”

Continuing from the previous post about failures of Republican party during recent years, here is a brief (and not exhaustive) account of “wrongs” done by Republicans in matters related to homeland security,  civil rights and environmental issues.

Homeland Security

• Assault Weapons Ban (Clinton Gun Ban of 1994): Startng in 2004, Republicans refused to extend the ban on purchasing assault weapons (supposedly for reasons, including the fact that federal, state and local law enforcement agency studies showed that guns affected by the ban had been used in only a small percentage of crime, before and after the ban was imposed).  From 2005 on, Senate Democrats attempted to pass legislation that would have reauthorized the ban; however, the Republican-controlled Senate refused to allow the measure to come to the floor for a vote; only in June 2008, Assault Weapons Ban Reauthorization Act of 2008 was re-introduced and has since been referred to the Subcommittee on Crime, Terrorism, and Homeland Security, pending further action;

• COPS: Community Oriented Policing Services (COPS) is allegedly one of the most successful law enforcement programs in American history.  However, since the Republicans assumed the majority, since 2006, President Bush and the Republican-controlled Congress have opposed it, with Bush proposing cutting its funding to about $32 million in 2007 from the roughly $500 million in 2006. And yet another similar streak in community-oriented services came as Bush reduced Violence Against Women budget funding by $105 million for 2008;

• National Guard: The National Guard have seen their role dramatically increase since the terrorist attacks of September 11, 2001, and now play key roles in homeland security efforts in addition to their state and US military responsibilities (key duties include flying combat air patrols, guard ports and waterways, and respond to chemical, biological, and nuclear incidents). Bush administration however failed firstly to recognize this additional strain and refused to provide adequate funding and equipment for it;

• First Responders:  Republicans refused to restore full funding to a number of local law enforcement programs Bush’s budget has cut, including the Byrne Memorial Grant Program, Local Law Enforcement Block Grant (LLEBG), Community Oriented Policing Services (COPS), Staffing for Adequate Fire and Emergency Response (SAFER), and Firefighter Investment and Response Enhancement (FIRE) Act.  First responders are the first line of defense against terrorist attacks, and the first on the scene after an incident.  The failure to restore full funding for these programs means that first responders remain understaffed, under-equipped, and under-trained for their terrorism prevention and response roles;

• Chemical Security:  Republicans failed to pass legislation on chemical security of America enhancing security against terrorist attacks on plants and factories dealing with and storing chemically hazardous materials.  There are mroe than 100 chemical plants in America that, if attacked, could cause death and injury of more than one million people;

• Nuclear Security: Republicans have consistently failed to pass adequate legislation that would increase training and security to protect against terrorist attacks on American nuclear power plants.  Republican policies on nuclear security were vague at best and fictional in wost cases. In 2005, a study of Rep. nuclear-related policies (“Maintaining Nuclear Deterrence in the 21st Century”) conducted by Federation of American Scientists found that Republican policies either exaggerate needs or underestimate threats on a score of nuclear defense and security issues. In 2006, Government Accountability Office (GAO) found that 65 nuclear plants are not adequately protected from terrorists attacks;

• Interoperable Communications: Republicans blocked attempts at making critical investments in interoperable communications for first responders, despite the fact that the 9/11 Commission identified communications interoperability as a key priority for homeland security, noting that “the inability to communicate was a critical element at the World Trade Center, Pentagon, and Somerset County, Pennsylvania, crash sites, where multiple agencies and multiple jurisdictions responded.  The occurrence of this problem at three very different sites, is strong evidence that compatible and adequate communications among public safety organizations at the local, state, and federal levels remains an important problem.”

Civil Rights

• Hate Crimes: Republicans have consistently rejected addition of gender and sexual orientation to federally protected categories under hate crimes law. According to the survey conducted by the Department of Justice,  approximately 84% of hate crimes and only 23% of non-hate crimes were violent offenses. In 38% of hate crimes, victims were raped, robbed, injured, or threatened with a weapon. Only 12%  of crimes not based on hate of the victim reached this level of seriousness. ;

• Immigration Reform: Republicans failed to pass comprehensive immigration reform, despite widespread acknowledgement that American immigration system in broken. Reps had simply kept on putting away the immigration issue by pointing at border security problems.

Energy and Environment

• Environmental Protection: Notwithstanding the existence of Republicans for Environmental Protection (REP),  Republicans failed to stop Bush Administration efforts to continue weakening current environmental laws (“cap and trade” rule for power plants) and have failed to provide critical funding for environmental protection and natural resources programs, including clean air, clean water (stopping Clean Water Act protections), land acquisition, and urban parks. Bush now tries to rush its own environmental changes, which do not even include cuts on climate-warming greenhouse gas emissions;

• Environmental Law Enforcement: Republicans have refused to conduct constructive oversight of the severely weakened environmental enforcement programs at the Department of the Interior and the Environmental Protection Agency (EPA).  In 2004 alone, Bush administration agencies made more than 150 actions that weakened our environmental laws. Over the course of his first term, this administration led the most thorough and destructive campaign against America’s environmental safeguards in the past 40 years. And just in a month time, Bush plans to make a Christmas Gift to oil companies;

• Roadless Areas: The Bush administration’s proposal replaced the scientifically supported rule proposed by the Clinton to protect remaining roadless areas that drew a record 2.5 million public comments in its favor. And again, just before the end of his term, Bush is pushing a similar action for Colorado’s wide swaths of relatively unscathed national forest to be accessible to motorized vehicles, allowing incursion by logging companies, oil and gas drilling, etc.;

• Wildlife/Sensitive Areas: While failing to protect federal lands set aside as wildlife refuges, Republicans sell/lease increasingly wildlife or otherwise environmentally sensitive and protected areas for business initiatives or oil and natural gas exploration, like the recent proposal for Utah;

• Toxic Waste Cleanup and Pollution: Republicans have failed to provide necessary funding to clean up toxic waste sites.  One in four Americans lives within four miles of a toxic waste site.  In 2004 and 2005, the EPA requested $150 million increases in the Superfund budget, but “Congress did not have any interest in increasing the funding,” says Betsy Sutherland, Superfund’s director of assessment and remediation.;

• Science: Republicans have consistently manipulated and suppressed scientific analysis to support their ideological/dogmatic goals. Many of the details – Barry Goldwater’s anti-intellectualism, through Ronald Reagan’s sympathy for creationism and Newt Gingrich’s passion for science “skeptics,” on through the present day, Republicans have shown a marked preference for politically inspired fringe theories over the findings of long-established and world-renowned scientific bodies – can be found in Chris Mooney’s book;

• Climate Change: Republicans refused to act to reduce greenhouse emissions (one of major recent attempts being Lieberman-Warner bill).  Carbon dioxide emissions from energy use rose by 1.6% in 2007, according to preliminary estimates by  Energy Information Administration (EIA). Electricity generation increased by 2.5%, and carbon dioxide emissions from the power sector increased even more, at 3%, indicating that US utilities shifted towards energy sources that emitted more carbon. NASA’s analysis of global temperature records found that surface temperatures have been increasing by an average of 0.2 °C every decade for the past 30 years. “Further global warming of 1 °C defines a critical threshold. Beyond that we will likely see changes that make Earth a different planet than the one we know,” said one of the authors of the analysis;

• Sustainable and Secure Energy: Republicans have been opposing a renewable portfolio standard and any legislation to save substantial amounts of imported oil.  They also failed to ensure that energy speculators are not manipulating prices and that consumers are not being gouged at the pump.

Finally, I have to write another blog solely devoted to American foreign policy exploits under Republicans including Iraq and Afghanistan.

America’s most critical priorities – emergency preparedness, economic security, access to affordable health care, quality education, and energy independence – have become an afterthought in the wake of recent years of Republican culture and domestic as well as foreign politics.

Let’s take a 360-degree look at it in two parts (part one tackling economic issues, health care and education while part two will cover civil rights, homeland security and environmental policies of Republicans).

Economic Security

• Budget Deficit: Republicans have run up historic budget deficits, minimum government, and low interest rates.  The annual US budget deficit declined from $318 billion in 2005 to $162 billion in 2007, but increased to $455 billion in 2008;

• Overtime Pay: Bush administration changed the rules that decide who is eligible for overtime pay. The changes affected some eight million workers. Millions of working people now face unpredictable work schedules and reduced pay because their employers may not have to pay a premium for demanding that they work more than 40 hours a week. Wages have declined, even as the cost of health care, child care, and other essential expenses has continued to climb;

• Minimum Wage: For the eighth year in a row, Republicans have failed to raise the minimum wage.  Minimum wage employees working 40 hours a week, 52 weeks a year, earn $10,700 a year, $5,000 below the poverty line for a family of three.  It is practically impossible for minimum wage workers to afford adequate housing in any area of the country;

• Tax Credits For Employers of Reservists: Republican policies render employers reluctant to take military reservists (who can be called for 24 months at a time) on the payroll by having blocked attempts to introduce policies of rewarding businesses that continue to pay salaries to their employees serving oversees.

Health Care

• Health Care: Health care costs have had unprecedented increases during recent years; premium and prescription drugs chief among those.  Premiums for employer-sponsored health insurance rose an average of 6.1% in 2007, less than the 7.7% increase reported last year but still higher than the increase in workers’ wages (3.7%) or the overall inflation rate (2.6%), according to the 2007 Employer Health Benefits Survey;

• Covering the Uninsured: The number of uninsured Americans dipped slightly last year – from 47 million to 45.7 million – but many experts say the number still signals a crisis in America;

• Stem Cell Research: Funding restrictions, imposed by President Bush (who used his veto), are impeding promising research by preventing the use of federal funds on the best available stem cell lines;

• Mental Health Parity: Republicans blocked yet another bill requiring health insurers to cover mental illnesses at the same level as physical ailments.  This could have serious financial implications for nearly half of Americans suffer from a mental disorder at some point;

• Immigrant Children’s Health Care: Republicans have failed to enact the Immigrant Children’s Health Improvement Act (ICHIA), which would allow states to cover legal immigrant children and pregnant women under Medicaid and the State Children’s Health Insurance Program (SCHIP).  The current prohibition on covering these people unfairly singles them out for restricted access to public health coverage programs;

Education

• No Child Left Behind Funding: Republicans failed to fund No Child Left Behind (NCLB) education reforms.  Even though school districts are facing increasingly rigorous academic standards and new requirements for highly qualified teachers, Bush’s proposed funding for NCLB program in 2007 was $15.4 billion below the authorized level;

• Higher Education Act: Republicans partially reauthorized the Higher Education Act as part of budget reconciliation.  While the bill included some additional financial aid for students eligible for Pell Grants, the new aid fails to prioritize the neediest students and imposes new hurdles.  Republicans passed up on an enormous opportunity to make college more affordable, instead using saving from greater efficiency in the student loan program to partially offset the budget deficit and other expenses;

• Native American School Construction Funding: Republicans failed to address the $1.3 billion backlog in repairs for schools funded by the Bureau of Indian Affairs (BIA).  The consequence of this is that native American Indian and Alaskan students continue to attend classes in dilapidated and unsafe schools;

• Development, Relief, and Education for Alien Minors Dream Act: Republicans did not allow the Development, Relief, and Education for Alien Minors Dream (DREAM) Act to pass, which would allow states to offer in-state tuition to immigrant students and also allow long-time immigrants who grow up in the United States, graduate from high school, and demonstrate strong moral character, the opportunity to adjust their immigrant status.  Although the DREAM Act enjoys broad bipartisan support, Republicans failed to bring the bill to the Senate floor.

To be continued…

Continuing from the previous post on dotcom failures, below is the list of top 20 venture capital investment failures. Unsurprisingly, names such as Pets.com, Webvan and Kozmo.com appear in this list as well as among the biggest dotcom failures.

1. Amp’d Mobile: Amp’d Mobile takes the crown for money-burning, with $360 million that ended in bankruptcy. The company’s major problem was its customers’ ability to pay. While other mobile providers check for an ability to pay bills within 30 days, Amp’d let it go to 90 days and marketed to these risky customers. It has been reported that 80,000 of the company’s 175,000 customers were unable to pay their bills.

2. Procket: Networking company Procket was once one of the most highly valued telecom startups in the U.S. It had $272 million in venture-capital funding and a valuation of $1.55 billion but was ultimately sold to industry behemoth Cisco Systems Inc. for a disappointing $89 million.

3. Webvan: Webvan was a grocery-delivery business that served nine metropolitan areas. Once valued at $1.2 billion with plans to expand to 26 cities, the company went bankrupt in 2001. Despite millions in sales, the company’s demise was brought on by a money-burn that exceeded sales growth. Major purchases included $1 billion for warehouses, enterprise servers and more than 100 Aeron chairs. Additionally, it acquired HomeGrocer just a few months before going under. This fast expansion proved to be too much for Webvan. This company that once had about $800 million in venture capital ended up with $830 million in losses, with about $40 million on hand.

4. Caspian Networks: Caspian Networks, orgiginally founded as Packetcom Inc., had a number of ups and downs, including a washout in 2002; the company finally shut down in 2006. Caspian Networks fluctuated from more than $300 million in funding and 323 employees to less than 100 employees and closed doors.

5. Pets.com: This icon of the dot-com bubble died out in November of 2000, going from a listing in NASDAQ to liquidation in just nine short months. The site sold pet supplies and accessories online. Once backed with $50 million by Hummer Winblad Venture Partners, Bowman Capital, and Amazon.com Inc., Pets.com had promise and even bought out competitor Petstore.com. But in the end, its stock bottomed out at 19 cents per share. Remembered for its sock-puppet ads, the expense of its $1.2 million Super Bowl ad, as well as large infrastructure investments, proved to be too much. Pets.com’s sock puppet lives on as the icon of BarNone Inc.

6. Optiva: Optiva, a nanotech company that laminated flat-screen TV sets, had to shut down after it failed to continue to raise funding. It initially raised and ran through $41.5 million in venture capital. The problem was that it took too long to release its product, which was obsolete by the time it came to market.

7. Kozmo.com: Kozmo.com’s small-goods delivery service, while a recipient of around $250 million in investment, and popular with students and young professionals, ultimately met its end and liquidated in 2001. Its business model was criticized as unprofitable because it didn’t charge for deliveries. Kozmo.com’s demise is profiled in the documentary film e-Dreams.

8. CueCat: This much-mocked pen-sized bar-code scanner was designed to make finding information about ads easier. Instead, Digital Convergence Corp., CueCat’s creator, burned through $185 million from investors like The Coca-Cola Co. and General Electric Co. The device simply failed to catch on, and it was plagued with security problems.

9. DeNovis Inc.: DeNovis software once attempted to change the medical-claims world but ended up shutting down instead. It raised $125 million in venture capital and had 110 employees. Unfortunately, that wasn’t enough, and this promising solution simply didn’t have the cash to hang on until the software could be launched.

10. PointCast Inc.: After tens of millions of dollars in venture capital and a $400 million buy offer, PointCast was finally sold for $7 million. It was originally touted as the next big thing, but failed to live up to its hype when its software and downloads irritated customers.

The remaining ten are here.

Loads of money poured in; results – catastrophic. With less capital available, startups and entrepreneurs must still carefully consider money sources. There is sometimes more headache and problems coming with money than one would anticipate or would like to have. As an unavoidable consequence, the current economic and financial crisis makes angel investors and venture capitalists more careful and vigilant in what they invest and pushes them to introduce tighter controls and additional transparency, having in mind the final objective of (an even more rapid) sell or IPO for a startup.

The list was compiled in 2007 and will certainly get new entrants by the end of this or the beginning of next year.

Starting from year 1995, the world got an extra doze of anxiety. All approaches to millennia are debates between “the roosters and the owls.” Conspiracy theories started to flourish. Anticipation peaked. Some even predicted an inevitable doom and came up with end of the world theories. At the same time though many venture capitalists and investors started zealously investing large amounts of money in all kinds of startups and pouring dollars into pockets of geeeky college grads with barely decent business plans and fairytale ideas. This era (1995-2001) marked the rise and fall of many startups, followed by colossal losses whereby an estimated $5 trillion in paper wealth on Nasdaq were wiped out.

Below is the list of most spectacular and significant of those startups (and their brief stories), which are singled out for the accompanying hype, large sums of burnt money or for manner of their failure.

Webvan (1999-2001)

A core lesson from the dot-com boom is that even if you have a good idea, it’s best not to grow too fast too soon. But online grocer Webvan was the poster child for doing just that, making the celebrated company our number one dot-com flop. In a mere 18 months, it raised $375 million in an IPO, expanded from the San Francisco Bay Area to eight U.S. cities, and built a gigantic infrastructure from the ground up (including a $1 billion order for a group of high-tech warehouses). Webvan came to be worth $1.2 billion (or $30 per share at its peak), and it touted a 26-city expansion plan. But considering that the grocery business has razor-thin margins to begin with, it was never able to attract enough customers to justify its spending spree. The company closed in July 2001, putting 2,000 out of work and leaving San Francisco’s new ballpark with a Webvan cup holder at every seat.

Pets.com (1998-2000)

Another important dot-com lesson was that advertising, no matter how clever, cannot save you. Take online pet-supply store Pets.com. Its talking sock puppet mascot became so popular that it appeared in a multimillion-dollar Super Bowl commercial and as a balloon in the Macy’s Thanksgiving Day Parade. But as cute–or possibly annoying–as the sock puppet was, Pets.com was never able to give pet owners a compelling reason to buy supplies online. After they ordered kitty litter, a customer had to wait a few days to actually get it. And let’s face it, when you need kitty litter, you need kitty litter. Moreover, because the company had to undercharge for shipping costs to attract customers, it actually lost money on most of the items it sold. Amazon.com-backed Pets.com raised $82.5 million in an IPO in February 2000 before collapsing nine months later.

Kozmo.com (1998-2001)

The shining example of a good idea gone bad, online store and delivery service Kozmo.com made it on our list of the top 10 tech we miss. For urbanites, Kozmo.com was cool and convenient. You could order a wide variety of products, from movies to snack food, and get them delivered to your door for free within an hour. It was the perfect antidote to a rainy night, but Kozmo learned too late that its primary attraction of free delivery was also its undoing. After expanding to seven cities, it was clear that it cost too much to deliver a DVD and a pack of gum. Kozmo eventually initiated a $10 minimum charge, but that didn’t stop it from closing in March 2001 and laying off 1,100 employees. Though it never had an IPO (one was planned), Kozmo raised about $280 million and even secured a $150 million promotion deal with Starbucks.

Flooz.com (1998-2001)

For every good dot-com idea, there are a handful of really terrible ideas. Flooz.com was a perfect example of a “what the heck were they thinking?” business. Pushed by Jumping Jack Flash star and perennial Hollywood Squares center square Whoopi Goldberg, Flooz was meant to be online currency that would serve as an alternative to credit cards. After buying a certain amount of Flooz, you could then use it at a number of retail partners. While the concept is similar to a merchant’s gift card, at least gift cards are tangible items that are backed by the merchant and not a third party. It boggles the mind why anyone would rather use an “online currency” than an actual credit card, but that didn’t stop Flooz from raising a staggering $35 million from investors and signing up retail giants such as Tower Records, Barnes & Noble, and Restoration Hardware. Flooz went bankrupt in August 2001 along with its competitor Beenz.com.

eToys.com (1997-2001)

eToys is now back in business, yet its original incarnation is another classic boom-to-bust story. The company raised $166 million in a May 1999 IPO, but in the course of 16 months, its stock went from a high of $84 per share in October 1999 to a low of just 9 cents per share in February 2001. Much like Pets.com, eToys spent millions on advertising, marketing, and technology and battled a host of competitors. And like many of its failed brethren, all that spending outweighed the company’s income, and investors quickly jumped ship. eToys closed in March 2001, but after being owned for a period by KayBee Toys, it’s now back for a second run.

The rest of the five remaining flops can be found here (among which boo.com, the biggest European dotcom failure, about which there is a longer account here). Let us not forget that the huge losses of the dotcom bust must not make us loose sight of the fact that two US corporations (Enron $80+ billion and WorldCom $74+ billion in 2000/2001 alone) probably account for more direct losses than all the dotcom spending.

Let us also remember that not every startup was a looser. Indeed few companies such as Google and Amazon were also created during that period and came out of it healthier and stronger than they or the industry experts could have anticipated.

Both Google and Amazon are still going strong, notwithstanding the recent economic and financial crisis.

It’s rather unusual for a founder to review, analyze and publicly write on the failure of his company. Roger Ehrenberg – the co-founder of Monitor110 – which went down in July 2008, turned to be an exceptional entrepreneur and investor who wrote a candid and objective account about his own company’s failure. He concluded with seven deadly sins which Monitor110 committed and which ultimate brought it down. These sins, presented in the post-mortem analysis, are:

1. The lack of a single, “the buck stops here” leader until too late in the game
2. No separation between the technology organization and the product organization
3. Too much PR, too early
4. Too much money
5. Not close enough to the customer
6. Slow to adapt to market reality
7. Disagreement on strategy both within the Company and with the Board

One or combination of these “sins” are characteristically contribute, directly or indirectly, on slowdown, shrinking or eventual failure of businesses. A little later, Roger posted again, this time more elaborating and digging deep in search of underlying issues and their interconnections. His The Good, The Bad, and The Really Bad provides practical advise and warning against possible pitfalls. The “good” part of his advise to all entrepreneurs concerns especially the idea articulation and fund-raising – two essential pillars any businessman and entrepreneur must give a serious thought to early on:

1. Believe deeply in the mission and vision of the company; otherwise, no one else will.
2. Use few words, many pictures and be brutally clear. If the audience doesn’t get it within 60 seconds, it’s tough sledding.
3. Think of lots and lots of use cases and be ready to share them at will. This isn’t just for pitching; you’ll need this to understand the market opportunity as well.
4. Pitch early and often. We learned so much from speaking to dozens of smart, insightful people. I think we would have failed faster and better and/or increased our chances of success if we had listened more.
5. Hone the pitch on lower-likelihood prospects early and ramp up to the real targets after polishing the presentation and the delivery. The first bunch of times you will suck. After sucking for 5-10 times you’ll tend to get much, much better. There is no way to short-circuit the process; there is simply no substitute for experience.

After thorough and clear-headed analysis of what went wrong and after connecting the dots, he realized that Monitor110 essentially mis-performed in following aspects:

1. Great team, wrong team
2. Inadequate metrics
3. Resources spread too thin
4. Poor cash burn management

Self-analysis and open-mindedness in critical times are essential not only individually but even more so for our business and entrepreneurial undertakings.