Dangerous for ownership and regulatory authority to commingle

By DAVID MOON, Moon Capital Management, LLC
June 14, 2009

Several years ago, I served as Treasurer of the Knoxville/Knox County Public Building Authority. There was some discussion at the time about whether or not the agency should offer construction and contract management services in areas outside of Knox County, thereby placing this taxpayer funded entity in direct competition with private businesses that provided the same services.

Many of these private businesses were located in Knox County. They paid substantial local taxes – a portion of which would have been used to subsidize a new competitor in its marketplace.

Additionally, the two “shareholders” of the Public Building Authority (the city and county governments) were in a position of authority and regulatory responsibility over many of the aspects of private businesses operations in the construction management industry.

It was a terrible plan, and I argued against it. It diminished the rights of a few (the wealthy and evil construction managers) in order to benefit the many (the taxpayers.)

It was morally wrong. It was bad economics.

How would you like to be Ford Motor Company right now?

Ford eschewed crawling up to the Federal teat for bailout money, although it certainly could have. GM and Chrysler have (or will) received $62 billion in direct taxpayer investment. GMAC converted itself to a bank holding company in order to qualify for more funds.

Ford’s shareholders and bondholders expect a return on their investment. As a result, Ford has to price its cars and trucks accordingly.

It also has to continue to fulfill its prior contractual obligations. That is, since Ford is not going through bankruptcy, it doesn’t get to reduce its cost structure by defaulting or renegotiating the terms of billions of dollars in debt.

More importantly, however, Ford executives don’t get to make the laws governing the future of the automobile industry.

Don’t you think Ford President and CEO, Alan Mulally, would love to have a law that requires 40 percent of all vehicles on the road to be 76.2 inches tall, 211.1 inches long, have a 4.6 liter V8 engine and be called a F150 pickup?

Some observers believe that’s the only way to sell a huge pickup truck in the U.S. Those observers are wrong. Ford’s pickup remained the most popular automobile in 2008, despite exorbitant gasoline prices during much of the year.

Who will decide what cars GM manufactures? Its customers or its regulators?

With whom is Ford now competing? Other automobile companies or its regulator/shareholder?

This past week, Citigroup announced that it will delay its plan to convert billions of dollars of existing preferred stock into common shares. The result is that the federal government is about to become the bank’s largest shareholder, owning 34% of the company.

Citi’s new owner will now also be its regulator. That’s dangerous.

Even more dangerous, however, is that Citi’s new owner also regulates Citi’s competitors.

That’s not a rosy competitive landscape for the non-government companies, but it should work out pretty well for the government. It always does in Venezuela.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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