Dodd-Frank Effects Are Already Being Felt

Dear Reader,

I'm back from a trip to New Orleans to attend a Mises Institute event. It was a great time, and I was happy to meet several readers there. This was one of my first extended trips back to the city since graduating from Loyola University, and the experience led me to reflect on many subjects – one of them being the importance of people in companies and organizations.

Often when I mention my college degree from a New Orleans university, someone will say, "Wow, attending college in New Orleans must have been a crazy time." I can't say that it wasn't, but the city isn't to blame. Sure, there are bars everywhere – and the French Quarter and Bourbon Street are a special class of temptation – but that's not what makes the college "party central." Rather, it is the people – a large part of the student body attends Loyola simply due to its location. They're attracted by the party lifestyle and the reputation of New Orleans. You could have thrown the same group into the middle of Kansas, and it would still go wild and get in trouble.

The same sort of thing keeps the entire city going. New Orleans is not a destination for career ambitions – unless those ambitions are of the culinary sort. Decent college-degree jobs were practically nonexistent even prior to the recession. The city has always attracted miscreants and outcasts, from the South as well as the whole country. The previous residents of the city attracted others like them… and the process keeps repeating itself. As a result, New Orleans remains "the Big Easy," where the music never stops and neither does the party.

Beyond cities, the same thing happens in organizations. In one of my previous jobs, I noticed right from the start that things weren't going to work out for me. To make a long story short, my superiors were basically clueless on economics. Their backgrounds were more focused toward communications and political science. Despite their lack of an economics background, they were responsible for assigning various research projects on the subject.

One assignment best illustrates the problem: I was told to use a particular model from an academic journal to prove one of our talking points. After struggling with this model all night, I finally realized that it was incorrect. It had been published in an academic journal and was authored by two economics professors; it had been peer reviewed by other academics… yet somehow, there was still a mistake in it.

I was pretty happy with myself for finding the mistake. It was definitely a notch on my belt. So, the next day, I presented the results to the boss. He thought I was wrong and in fact was angry that I didn't make the model work. He wasn't even interested in my explanation. The company culture didn't value any sort of intellectual effort; understanding a model was considered a waste of time.

As a last resort, I sent my work to one of our contractors, a Ph.D. economist. About a month later, he wrote to my boss explaining that I was in fact correct and that my findings were amazing. And what was my superior's reaction? Rather than being happy to have an employee able to correct Ph.D.-level economists, he was angry and pissed off at being proven wrong.

Needless to say, I quickly began searching for a new job. It became apparent why the company was so quirky. Actual skills or knowledge were not valued at all. The folks at the top came from lobbying backgrounds and hustled their ways to their positions. They weren't the best nor brightest on practically everything – but they knew their way around D.C. politics. Not surprisingly, with this lobbying mentality, the entire company had a culture of backstabbing, blaming others, and the most complex office politics that I've ever witnessed to date.

It was no wonder that the average employee lasted less than a year at that company. The ones who remained longer were the most cutthroat of them all. The management's culture defined the working environment throughout the firm and removed anyone who didn't fit the mold.

In Doug Casey's eight Ps of resource investing, he lists people as a key component. Often, we think of this element as some genius leading the company; however, the CEO isn't the only person responsible for a company's success. Bill Gates and Steve Jobs aren't the sole reasons for Microsoft's and Apple's many accomplishments. There are other vitally important employees as well. However, the CEO does often set the culture for the rest of the company, as well as attract other important team members.

In physics, we're told that opposites attract. In the corporate world, the opposite is true: likes attract. If the guy at the top is an extremely intelligent and competent person, the whole organization will attract others of the same type. If the head of the company is full of it, the rest of the team will be too. One of the best examples of this is Jack Welch of GE. Sure, he's known for his success, but consider that 39 former GE executives became CEOs of other Fortune 500 companies. Great talent attracts yet more great talent. It's not just the CEO who’s important; it's his ability to attract other great employees to the company.

Next up David Galland shares an email from a reader on the Dodd-Frank Act's effects on the shipping industry. Most people don't realize how many sectors of the economy will be affected by Dodd-Frank. This isn't just about the financial industry – any company utilizing derivative hedges will be impacted, from dairy farmers to shipping to natural resources companies.


Beware Dodd-Frankenstein

By David Galland

As I was recently up to my ears in the Discover Cafayate event at La Estancia de Cafayate, Argentina, I can only manage a quick drive-by today. But I did want to share the email that follows. It's from a friend in the shipping industry, who will remain anonymous out of business considerations.

As you will read, he is experiencing firsthand the unintended consequences of the massive new body of legislation cobbled together following the 2008 crash by two of the meddling morons who were instrumental in bringing about that crisis – Christopher Dodd and Barney Frank.

Very few people are focusing on the potential damage this ill-conceived and hastily assembled homage to the ability of bureaucrats to conceive of all manner of problems where problems don't exist then apply solutions to those problems that only create new problems without solving the original problems at all will bring to many sectors.

I suspect that by the time this crisis runs its course, historians will find Dodd-Frank to be highly analogous to Smoot-Hawley or the New Deal legislation, both of which ultimately served no other purpose than to make a bad situation much worse.

Don't forget to duck. And with that, I will duck out for some important business... trying to beat Stefan in a round of golf.

Hi Dave,

Thanks for the latest diatribe, enjoyed your take on godvernment.

FYI, we are getting the effects of Dodd-Frank in the shorts already (literally and figuratively).

As you know, we trade in the shipping world and use derivatives to hedge some of our physical forward ship and cargo positions because there isn't any other way do so. Our business requires us to take physical positions of ships and cargos for up to two or three years ahead, and it is very difficult if not impossible to back those up with counterbalancing physical positions, wherefore an active derivatives market sprang up about 25 years ago.

We clear the derivatives trade through one of the largest Scandinavian banks, with which we have dealt for a number of years quite successfully.

Just this week we were told that this bank can no longer trade with us on shipping derivatives because of Dodd-Frank; indeed, it cannot trade any longer with any entity controlled or beneficially owned by American interests. Furthermore, we have first and secondhand evidence that many of the largest international banks in Euroland and elsewhere around the world are refusing to open (legal, not secret) accounts for American citizens or companies controlled by same because of the raft of documentation and legal quagmire they are now required to comply with.

Yes, and indeed they are closing existing accounts with such entities to avoid having to deal with the US Godvernment!

This cannot be good for our recovery, our economy, or our international relationships, and is going to get much worse. The halls of Congress are littered with economic charlatans indeed! A little follow-up to our discussion: seems that there are two immediate problems faced by the foreign banks vis-à-vis "Doodie-Frankenstein": The 2,500-odd pages of regs are written so vaguely that the foreign banks cannot determine their liability nor their position as to whether they are coming under US regulation per D-F or not, and must await decisions and clarification on many aspects thereof; and the Volcker Rule with its 300 pages of footnotes – if it applies to the foreign banks, actually precludes them from trading as principals in any derivative transactions with American- or US-based entities. Thus the foreign banks for the moment choose to avoid making any deals with any such entities in order to prevent themselves from becoming liable if all the legal wrangles end up making them so.

Furthermore, we are aware first- and secondhand that many are even refusing to open simple bank accounts for Americans for fear of falling afoul of D-F and exposing themselves to US regulation. As for our clients, they are for the moment shut out of hedging opportunities on the paper side, but will have to find either far less satisfactory or liquid physical hedges, or remain exposed on their existing and prospective physical positions… not a comfortable place to be in these volatile times.

This really is a huge problem. Not a minor annoyance at all. Likely to extend to trade financing and anything to do with banking, and will make USA more of a pariah than ever.

[Selecting a good investment requires more than knowing a business or market sector: you need to have a feel for the political and economic climate, and much more. Knowing when to enter and when to exit a position can make the difference between modest gains and life-changing profits. Learn why now is the time to get in on junior resource stocks, according to Doug Casey's legendary and highly successful contrarian approach.]


Additional Links and Reads

Groupon IPO: Shares Debut with a Bang, but Questions Remain (Breakout)

Groupon's IPO soared 50% on the first day of trading. While the company has a lot of interesting things happening, I have a few concerns. The first is its competitors: Groupon's offering isn't particularly difficult to replicate, and some competitors are already out there.

Second, I've heard rumors of horrible management at Groupon.  The employer-review websites don't speak too highly of the company. And it isn't necessarily just top management, but all throughout the company. Sometimes having young people run everything in a new startup is a brilliant idea and sometimes it's gambling important decisions on inexperience. These sorts of rumors are hard to verify, but they certainly make me hesitant to invest or be enthusiastic about Groupon's chances.

Why Ideas Are Unprofitable (Bloomberg Businessweek)

This article makes some good points about innovation and entrepreneurship. It's really not so much the innovative technology that creates successful companies, it's the guys who can take innovate ideas and execute them. Simply creating a new product does not make a successful company.

New Fast Food Products Get Tested First in Columbus, Ohio (Daily Ticker)

Are you thinking of creating a new product? If so, you should probably ask yourself, "Would people in Columbus, Ohio enjoy it?" Apparently, that's what fast-food companies have been asking for some time. The demographics of the city are fairly representative of the nation as whole.

That's it for today. Thank for reading and subscribing to Casey Daily Dispatch.

Vedran Vuk
Casey Daily Dispatch Editor

Nov 07, 2011