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How Heenan Blaikie’s stunning collapse started with a rogue African arms deal

It’s amazing how quickly Heenan Blaikie fell apart

The stunning collapse of Heenan Blaikie LLP, once one of Canada’s largest and most prestigious law firms, stemmed from a “loss of trust” in management over international business activities including dubious forays into Africa, where former partner Jacques Bouchard and former prime minister Jean Chrétien lobbied governments on behalf of clients, former Heenan partners and associates say.

Founded in Montreal in 1973, Heenan grew from 18 lawyers to more than 500, in offices across Canada and in Paris, where it established a beachhead in 2009. It was considered a rock-solid full-service firm — and a favourite of the Canadian establishment — until a crisis of confidence caused its foundations to crack. Lawyers began leaving, first in a trickle, then in droves, and the whole enterprise came crashing down this month.

Increasing financial pressures and friction between partners in Montreal and Toronto were key factors behind Heenan’s failure, the biggest ever for a law firm in Canada. “Montreal didn’t understand Toronto; Toronto felt the Montreal office was way overpaid and overpraised,” said one former partner.

But many also agree that Heenan’s excursions into Africa caused so much tension and tumult that partners began shaking their heads and taking their leave. “People like me said to themselves, ‘I want to work at a firm that values the practice of law in Canada, not international dictators,’” another former Heenan partner told the National Post. “It’s not what I signed up for.” He quit the firm last year.

There came “a point where confidence and faith started to disappear,” said Jean-Francois Mercadier, managing partner of the firm’s former group in Paris, Heenan Blaikie AARPI. “Partners started to lose any kind of faith in the management of the firm. There was a loss of trust in the partnership, and I think the origin is in the Jacques Bouchard story.”

Related: The End of Big Law: What Happens When the Money Dries Up

via @dlcrawford

King of the Hill?

While the story is about Wal-Mart, the interesting point is that failure comes very, very quickly in retail.

Wal-Mart recently reported that it will be laying off 2,300 workers at its Sam’s Club subsidiary, reportedly to cut the fat of middle management. Layoffs in and of themselves aren’t uncommon at any large company — competitor Target (NYSE: TGT ) also recently said it would lay off nearly 500 employees and keep hundreds more positions vacant — but such personnel reductions also aren’t something a growing company does very often.

What’s worth keeping an eye on is whether the Sam’s Club layoffs are a symptom of much larger problems at Wal-Mart. The company has been a giant of retail for decades, but there are signs that its reign is coming to an end.

Retail is a tough business to be in.

It doesn’t take long for a retailer to go from the top of the world to bankrupt. Kmart lost just $22 million in the second quarter of 2001, but was bankrupt by Jan. 22, 2002. In the four months leading up to bankruptcy, same-store sales fell 1.8%, 4.4%, 2.6%, and 1%, respectively, from a year earlier. You don’t need a big decline in sales to suck up all of your profits in retail.

Circuit City reported a 4.2% rise in same-store sales as late as December 2006, even raising its fiscal-year guidance to growth of 7%-8% in U.S. stores. But by December 2007, same-store sales were down 11% for the month and the company would be out of business by November 2008. From optimism to bust in less than two years.

The reason that retailers are sensitive to declines in sales is that there is a lot of overhead that goes into selling in brick-and-mortar stores. Wal-Mart spent $89.2 billion on overhead over the past year, and based on current margins and overhead spending, it would only take a 13.6% decline in sales to eat up all of Wal-Mart’s profits.

Amazon is Wal-Mart’s biggest competitor

What makes Amazon a bigger threat today is the company’s sheer size. It’s now bigger than Target, and every percentage point of growth takes growth away from Wal-Mart. In fact, Wal-Mart’s budget-conscious consumers are probably more likely to shop on Amazon than Target’s consumers.

Changing face of the United States

I read this and I can’t help but think that the United States is going through a massive societal reordering because of horrible economic decisions made because of globalization

Some improvement in the U.S. economy and declines in the jobless rate, plus gains in stock and home prices, are failing to resonate with many Americans whose incomes are struggling to catch up to where they were before the financial crisis.

But to many retail experts and economists there are other less cyclical factors at play. Consumers are spending more. Government figures show monthly personal consumption has risen for seven straight months, with November’s outlay marking the fastest increase in five months. But they just are not spending in the shopping malls like they used to.

And that means that, even if the economy picks up significantly, retailers of many products could still struggle.

“We are in a something of an evolutionary process, said Bill Martin, founder of data firm ShopperTrak, which monitors foot traffic in about 60,000 retail stores. Americans are spending more online and becoming more careful about what they buy, he said.

Some of this has been unfolding over a long period, although the changes might be picking up pace.

For example, department stores have found themselves on the wrong end of trends for some time. According to data compiled by Reuters, they now capture just $3.37 (U.S.) of every $100 of U.S. retail spending, the lowest since records began in 1992, when the number was nearly $9.

Some of that is explained by the rise of Wal-Mart Stores Inc. and other big-box discount retailers. But the pace of decline has picked up, with department stores losing about 0.28 percentage points of market share at an annualized rate between 2002 and 2011, compared with 0.22 in the prior 10 years.

The problem is two-fold. The middle class consumers to whom the likes of J.C. Penney Co. Inc. and Kohl’s Corp. cater have struggled with stagnant wages and a payroll tax rise, prompting them to reduce spending on apparel, said Scott Tuhy, a retail analyst at Moody’s Investors Service in New York.

I am not sure if the payroll tax increase is that big of deal but you get the point that stagnate wages are hurting America’s middle class who are leaving behind middle class stores in favour of deals online and in retailers like Wal-Mart which in turn hurts them even more as more and more of their products are made elsewhere.  It’s a vicious cycle that could take decades to run its course.

The Night Oven Bakery

My friend Bryn Rawlyk is opening a bakery called the Night Oven Bakery at 629-b 1st Avenue North which I think will be an important part of the North Downtown revitalization.  It opens next month but I decided to link to the site now and also this great post showing the wood oven under construction.  I can’t wait until it is finished and open for business.

How Athletes Go Broke

Basically it is easy come, easy go.

What the hell happened here? Seven floors above the iced-over Dallas North Tollway, Raghib (Rocket) Ismail is revisiting the question. It’s December, and Ismail is sitting in the boardroom of Chapwood Investments, a wealth management firm, his white Notre Dame snow hat pulled down to his furrowed brow.

In 1991 Ismail, a junior wide receiver for the Fighting Irish, was the presumptive No. 1 pick in the NFL draft. Instead he signed with the CFL’s Toronto Argonauts for a guaranteed $18.2 million over four years, then the richest contract in football history. But today, at a private session on financial planning attended by eight other current or onetime pro athletes, Ismail, 39, indulges in a luxury he didn’t enjoy as a young VIP: hindsight.

“I once had a meeting with J.P. Morgan,” he tells the group, “and it was literally like listening to Charlie Brown’s teacher.” The men surrounding Ismail at the conference table include Angels outfielder Torii Hunter, Cowboys wideout Isaiah Stanback and six former pros: NFL cornerback Ray Mickens and fullback Jerald Sowell (both of whom retired in 2006), major league outfielder Ben Grieve and NBA guard Erick Strickland (’05), and linebackers Winfred Tubbs (’00) and Eugene Lockhart (’92). Ismail (’02) cackles ruefully. “I was so busy focusing on football that the first year was suddenly over,” he says. “I’d started with this $4 million base salary, but then I looked at my bank statement, and I just went, What the…?”

Before Ismail can elaborate on his bewilderment—over the complexity of that statement and the amount of money he had already lost—eight heads are nodding, eight faces smiling in sympathy. Hunter chimes in, “Once you get into the financial stuff, and it sounds like Japanese, guys are just like, ‘I ain’t going back.’ They’re lost.”

At the front of the room Ed Butowsky also does a bobblehead nod. Stout, besuited and silver-haired, Butowsky, 47, is a managing partner at Chapwood and a former senior vice president at Morgan Stanley. His bailiwick as a money manager has long been billionaires, hundred-millionaires and CEOs—a club that, the Steinbrenners’ pen be damned, still doesn’t include many athletes. But one afternoon six years ago Butowsky was chatting with Tubbs, his neighbor in the Dallas suburb of Plano, and the onetime Pro Bowl player casually described how money spills through athletes’ fingers. Tubbs explained how and when they begin earning income (often in school, through illicit payments from agents); how their pro salaries are invested (blindly); and when the millions evaporate (before they know it).

“The details were mind-boggling,” recalls Butowsky, who would later hire Tubbs to work in business development at Chapwood. “I couldn’t believe what I was hearing.”

What happens to many athletes and their money is indeed hard to believe. In this month alone Saints alltime leading rusher Deuce McAllister filed for bankruptcy protection for the Jackson, Miss., car dealership he owns; Panthers receiver Muhsin Muhammad put his mansion in Charlotte up for sale on eBay a month after news broke that his entertainment company was being sued by Wachovia Bank for overdue credit-card payments; and penniless former NFL running back Travis Henry was jailed for nonpayment of child support.

In a less public way, other athletes from the nation’s three biggest and most profitable leagues—the NBA, NFL and Major League Baseball—are suffering from a financial pandemic. Although salaries have risen steadily during the last three decades, reports from a host of sources (athletes, players’ associations, agents and financial advisers) indicate that:

• By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.

• Within five years of retirement, an estimated 60% of former NBA players are broke.

The Flying Banzini

Most long term residents of Saskatoon woke up listening to Rambling Dave Scharf on C95.  A lot of people came and went but there was always Rambling Dave.  Well one day he announced he was leaving to move with his wife Heather to Ottawa.  My mornings have never been the same.

For those of us who have followed Dave on Twitter, we were intrigued to see that he was opening a restaurant and he was going to document how it all went.  There has been some good times and some bad times and I have been struck by how honest he has been.  

This is from one of his recent posts.

With my consultants, I have just completed a careful review of our operations. Specifically, I am trying to figure out two things:

(1) What amount do we need to hit for weekly sales such that I no longer see bank accounts going down? I pay myself a modest salary so at this point I will be happy to see break even. We had very strong sales in September. October was OK. November has been weak. This is probably an annual reality. We will do very well in the spring summer and fall and not as well in the cold and dark. Presently, we are between $2K and $4K below where we need to be breaking even. We are still well financed so there is no worry but, of course, it’s not fun to be losing money. We planned to lose money for three months. And… well… three months is up next week. The biggest area of growth for us in takeout. I should have been working on the takeout part of the business a long time ago but some rather remarkable life circumstances had me out of the game for a couple of months. I am back. And, I am focused on growing the take out business. Online takeout ordering is now available (link at the top of the page). Please help me out and pass the word. Place your order and it’s ready for you at the time you choose.

(2) Food costs. We have been aggressively working on getting more efficient with labour. We have made remarkable progress in this area and our labour cost is WAY down from where it was with no noticeable change in customer service. In fact, I think our service is better than it was because we are each getting better at what we do. But, we do not have a good handle on food cost. We need to know what everything on our menu costs so that we can ensure that it is properly priced for our customers. We started out with a pretty clear picture, lost our focus, and now must get it back.

I have great confidence in The Flying Banzini. Every day I delight is seeing customers in my restaurant enjoying the vibe and the food. I great almost every customer at the door and I ask, “Have you been in before?” I think at least 50% have someone in their party who has been. In the long term, we are going to be just fine. Word will continue to spread and I am confident that my little restaurant will continue to grow. In the short term, though, we need to stop the slow bleed.

The food looks so good that I want to head to Ottawa to check it out but it is posts like this that are so cool and add to the story of the restaurant.  It’s a big risk opening any business and I am glad that Dave is letting us in on the ups and downs of the experiment.

Hands-On Bavarian Count Presides Over a Pencil-Making Empire

Count Anton-Wolfgang von Faber-Castell has been known to hurl wooden pencils from the tower of his castle to the stone courtyard below.

It is not a petty fit of pique by a mad Bavarian aristocrat. The 72-year-old count, the eighth in a long line of pencil makers, just wants to prove how durable the pencils that carry his family name are.

The Faber-Castell family has been making wooden pencils by the hundreds of millions here in a storybook setting, bisected by the swift Rednitz River, which was once the main source of power here. A torrent of brightly colored pencils flows from clattering machines in a century-old factory with a tile roof and windows framed in pastel hues.

Faber-Castell is the largest maker of wood-encased pencils in the world and also makes a broad range of pens, crayons and art and drawing supplies as well as accessories like erasers and sharpeners. About half the company’s German production is exported, mostly to other countries in the euro zone. That means that Faber-Castell contributes, at least in a small way, to Germany’s large and controversial trade surplus — which now rivals China’s for the world’s largest.

Faber-Castell illustrates how midsize companies — which account for about 60 percent of the country’s jobs — are able to stay competitive in the global marketplace. It has focused on design and engineering, developed a knack for turning everyday products into luxury goods, and stuck to a conviction that it still makes sense to keep some production in Germany.

“Why do we manufacture in Germany?” the count asked during an interview at the family castle near the factory. “Two reasons: One, to really make the best here in Germany and to keep the know-how in Germany. I don’t like to give the know-how for my best pencils away to China, for example.

“Second, ‘Made in Germany’ still is important.”

Not all its factories are in Germany. But when Faber-Castell, which is privately held and had sales of 590 million euros, or about $800 million, in its last fiscal year, manufactures in places like Indonesia and Brazil, it is at its own factories.

In contrast to many American companies, like Apple, that have outsourced nearly all production to Asia, Faber-Castell and many other German companies make a point of keeping a critical mass of manufacturing in Germany. They see it as central to preserving the link between design, engineering and the factory floor.

Trader Joe Has a Brother. He’s Even Better

Separated in 1960, the two brother set out to create two very different business empires

Chances are that you have never set foot inside the best grocery store in America: Aldi. And even if you are lucky enough to be in one of the 32 states where Aldi is, perhaps you were put-off by the cardboard boxes in lieu of shelves, or the row upon row of suspicious-looking off-brands. What is this place? Why do I have to put down a deposit to check out a cart? What is the weird giant shelf by the exit? And what do you mean, I have to pay for a bag?

Calm your hormones, meine Schatzis: Aldi, which is short for Albrecht Discount, is the American incarnation of a German grocery chain that is so ubiquitous in the Vaterland that almost 90 percent of Germans shop there. (Not all German imports are luxury cars, beer, and super-cool glasses.)

Aldi is part of a charming subset of Teutonic trade: the brother-run company that cleaves in twain. Shoe aficionados already know the story of the Dassler brothers, Adolf and Rudolf, whose bitter feud resulted in the creation of Adidas and Puma. (Germans pronounce Adidas differently—some might say correctly—AH-dee-das, from Adi Dassler.) But outside Germany, few know about grocery-store kingpins Karl and Theo Albrecht (who was kidnapped in 1971!)—even though Karl, with a reported net worth of more than 17 billion euros, is the richest man in Germany (Theo’s descendants are a close second).

The Brüder founded their discount-store empire together. A disagreement in 1960 over selling cigarettes hastened a partition, and an epic game of grocery-store Risk: Theo would rename his business Aldi Nord, and would control territories north of the Rhine, plus a healthy chunk of Europe. Karl would head up Aldi Süd, and get southern Germany, more of Europe, plus the U.K. and Ireland. But both companies operate stores in the United States—Aldi Süd operates as Aldi, and Aldi Nord as the now ubiquitous Trader Joe’s.

But whereas Trader Joe’s employs just one major cost-saving device—private labeling—everything else about it is Americanized. The place is swarming with upbeat employees; cashiers stand at the till and bag your products for you; you just grab a cart willy-nilly and they trust you to put it back. Aldi also private-labels (those $1.99 “Millville” Rice Squares are Chex, you guys!), but what makes it a more exciting venture—and even cheaper than Trader Joe’s—is that it has imported the entire German grocery experience (aside, alas, from employees yelling at you if you do something wrong).

The struggle of people in Russia’s ‘Rust Belt’

Tension rises as the Kremlin tries to force thousands to leave their homes

A tide of discontent is sweeping across Russia’s “rust belt” as the Kremlin tries to convince tens of thousands to relocate from their homes.

Authorities are offering up to $25,000 in state support for people willing to leave 142 struggling so-called “monotowns,” communities depending on a single industry.

Many Russians are unhappy about being asked to leave places that several generations of their families have called home. Critics also allege the level of compensation isn’t enough and say it will create dozens of “ghost towns.”

“I honestly earned pennies, but still income,” he said. “I am struggling to sell my house for $2,000 — nobody wants it. If I move to a big town, I will have to spend at least $60,000 to buy myself a place.”

By Dec. 28, the final 800 mill workers will lose their jobs — another significant blow to the Siberian town of 14,000 people.

The fate of 700 other people still employed at a different part of the mill which provides heat to all of Baikalsk will be decided by the spring.

Russian Prime Minister Dmitry Medvedev last year pledged $1 billion to transform the town on the edge of Lake Baikal into a tourist hotspot. Lake Baikal is a natural treasure that contains more water than all of the Great Lakes combined.

But there has been little sign of investment in the wake of Medvedev’s visit. The town’s central square remains unpaved, hotels and cafes struggle and local newspapers publish pages of advertisements placed by residents looking to sell their apartments in Baikalsk and move closer to Moscow or St. Petersburg.

The lack of action has resulted in angry protests by fired workers in the regional center of Irkutsk.

“The Kremlin simply lied to us; they promised to first create jobs and then close the mill in 2015,” said Yuri Nabokov, the leader of the mill’s professional union. “The mill is closed and hundreds of workers have no chance to live their normal lives in their hometown with their families; authorities tell us to go to far north and work on shifts at oil fields – that makes us even angrier.”

The article also points out the Sochi are costing $50 billion.  How messed up is that?  Vancouver by comparison cost around $1.84 billion and generated about $2.5 billion in GDP.  What is Russia doing?

Unaccountable

Because of its persistent inability to tally its accounts, the Pentagon is the only federal agency that has not complied with a law that requires annual audits of all government departments. That means that the $8.5 trillion in taxpayer money doled out by Congress to the Pentagon since 1996, the first year it was supposed to be audited, has never been accounted for. That sum exceeds the value of China’s economic output last year.

Reuters journalist Scot J. Paltrow investigates how the US military’s bad accounting not only wastes taxpayers money, but helps ruin the life of ordinary soldiers and veterans.

Aiken, then 30 years old, was in his second month of physical and psychological reconstruction at Fort Bliss in El Paso, Texas, after two tours of combat duty had left him shattered. His war-related afflictions included traumatic brain injury, severe post-traumatic stress disorder (PTSD), abnormal eye movements due to nerve damage, chronic pain, and a hip injury.

But the problem that loomed largest that holiday season was different. Aiken had no money. The Defense Department was withholding big chunks of his pay. It had started that October, when he received $2,337.56, instead of his normal monthly take-home pay of about $3,300. He quickly raised the issue with staff. It only got worse. For all of December, his pay came to $117.99.

All Aiken knew was that the Defense Department was taking back money it claimed he owed. Beyond that, “they couldn’t even tell me what the debts were from,” he says.

At the time, Aiken was living off base with his fiancee, Monica, and her toddler daughter, while sharing custody of his two children with his ex-wife. As their money dwindled, the couple began hitting church-run food pantries. Aiken took out an Army Emergency Relief Loan to cover expenses of their December move into a new apartment. At Christmas, Operation Santa Claus provided the family with presents – one for each child, per the charity’s rules.

Eventually, they began pawning their possessions – jewelry, games, an iPhone, and even the medic bag Aiken used when saving lives in Afghanistan. The couple was desperate from “just not knowing where food’s going to come from,” he says. “They just hit one button and they take your whole paycheck away. And then you have to fight to get the money back.”

Aiken’s injuries made that fight more difficult. He limped from office to office to press his case to an unyielding bureaucracy. With short-term and long-term memory loss, he struggled to keep appointments and remember key dates and events. His PTSD symptoms alienated some staff. “He would have an outburst … (and) they would treat him as if he was like a bad soldier,” says Monica. “They weren’t compassionate.”

They were also wrong. The money the military took back from Aiken resulted from accounting and other errors, and it should have been his to keep. Further, even after Aiken complained, the Defense Department didn’t return the bulk of the money to Aiken until after Reuters inquired about his case.

The Pentagon agency that identified the overpayments, clawed them back and resisted Aiken’s pleas for explanation and redress is the Defense Finance and Accounting Service, or DFAS (pronounced “DEE-fass”). This agency, with headquarters in Indianapolis, Indiana, has roughly 12,000 employees and, after cuts under the federal sequester, a $1.36 billion budget. It is responsible for accurately paying America’s 2.7 million active-duty and Reserve soldiers, sailors, airmen and Marines.

It often fails at that task, a Reuters investigation finds.

A review of individuals’ military pay records, government reports and other documents, along with interviews with dozens of current and former soldiers and other military personnel, confirms Aiken’s case is hardly isolated. Pay errors in the military are widespread. And as Aiken and many other soldiers have found, once mistakes are detected, getting them corrected – or just explained – can test even the most persistent soldiers (see related story).

“Too often, a soldier who has a problem with his or her pay can wait days, weeks or even months to get things sorted out,” Democratic Senator Thomas Carper of Delaware, chairman of the Homeland Security and Governmental Affairs Committee, wrote in an email. “This is simply unacceptable.”

It’s a pretty widespread problem

A review of multiple reports from oversight agencies in recent years shows that the Pentagon also has systematically ignored warnings about its accounting practices. “These types of adjustments, made without supporting documentation … can mask much larger problems in the original accounting data,” the Government Accountability Office, the investigative arm of Congress, said in a December 2011 report.

Plugs also are symptomatic of one very large problem: the Pentagon’s chronic failure to keep track of its money – how much it has, how much it pays out and how much is wasted or stolen.

This is the second installment in a series in which Reuters delves into the Defense Department’s inability to account for itself. The first article examined how the Pentagon’s record-keeping dysfunction results in widespread pay errors that inflict financial hardship on soldiers and sap morale. This account is based on interviews with scores of current and former Defense Department officials, as well as Reuters analyses of Pentagon logistics practices, bookkeeping methods, court cases and reports by federal agencies.

As the use of plugs indicates, pay errors are only a small part of the sums that annually disappear into the vast bureaucracy that manages more than half of all annual government outlays approved by Congress. The Defense Department’s 2012 budget totaled $565.8 billion, more than the annual defense budgets of the 10 next largest military spenders combined, including Russia and China. How much of that money is spent as intended is impossible to determine.

In its investigation, Reuters has found that the Pentagon is largely incapable of keeping track of its vast stores of weapons, ammunition and other supplies; thus it continues to spend money on new supplies it doesn’t need and on storing others long out of date. It has amassed a backlog of more than half a trillion dollars in unaudited contracts with outside vendors; how much of that money paid for actual goods and services delivered isn’t known. And it repeatedly falls prey to fraud and theft that can go undiscovered for years, often eventually detected by external law enforcement agencies.

The consequences aren’t only financial; bad bookkeeping can affect the nation’s defense. In one example of many, the Army lost track of $5.8 billion of supplies between 2003 and 2011 as it shuffled equipment between reserve and regular units. Affected units “may experience equipment shortages that could hinder their ability to train soldiers and respond to emergencies,” the Pentagon inspector general said in a September 2012 report.

The American military has about 5,000 different accounting programs in use.  Most of them are incompatible.

In a May 2011 speech, then-Secretary of Defense Robert Gates described the Pentagon’s business operations as “an amalgam of fiefdoms without centralized mechanisms to allocate resources, track expenditures, and measure results. … My staff and I learned that it was nearly impossible to get accurate information and answers to questions such as ‘How much money did you spend’ and ‘How many people do you have?’ ”

It gets better

The practical impact of the Pentagon’s accounting dysfunction is evident at the Defense Logistics Agency, which buys, stores and ships much of the Defense Department’s supplies – everything from airplane parts to zippers for uniforms.

It has way too much stuff.

“We have about $14 billion of inventory for lots of reasons, and probably half of that is excess to what we need,” Navy Vice Admiral Mark Harnitchek, the director of the DLA, said at an August 7, 2013, meeting with aviation industry executives, as reported on the agency’s web site.

And the DLA keeps buying more of what it already has too much of. A document the Pentagon supplied to Congress shows that as of Sept. 30, 2012, the DLA and the military services had $733 million worth of supplies and equipment on order that was already stocked in excess amounts on warehouse shelves. That figure was up 21% from $609 million a year earlier. The Defense Department defines “excess inventory” as anything more than a three-year supply.

Consider the “vehicular control arm,” part of the front suspension on the military’s ubiquitous High Mobility Multipurpose Vehicles, or Humvees. As of November 2008, the DLA had 15,000 of the parts in stock, equal to a 14-year supply, according to an April 2013 Pentagon inspector general’s report.

And yet, from 2010 through 2012, the agency bought 7,437 more of them – at prices considerably higher than it paid for the thousands sitting on its shelves. The DLA was making the new purchases as demand plunged by nearly half with the winding down of the Iraq and Afghanistan wars. The inspector general’s report said the DLA’s buyers hadn’t checked current inventory when they signed a contract to acquire more. 

Mind boggling stuff.

Seattle tries to figure out what it wants to be when it grows up

A conversation every city needs to have

Does Seattle know how to grow?

You’d think so, with all those construction cranes back and so many mega-projects underway. We’re about to get expanded light rail, a new waterfront, a massive downtown tunnel, a super-sized 520 bridge, and a Mercer Mess that has been tidied up after 50 years of complaining. Growth would seem to be the least of our problems.

But there are some who think these endeavors are not enough. We could do more, do it bigger, do it better and, they believe, we had better get to it because we’re facing big economic challenges. Boeing, for example, has become a constant worry. The company is doing a slow retreat from Puget Sound, and keeping key parts of Boeing’s work here is getting increasingly expensive for taxpayers. Some $9 billion in new tax breaks have been offered to keep 777X work here. Even so, without a major transportation package and with major union concessions just voted down, Boeing is looking for a better deal elsewhere.

Another foundation of our economy is showing signs of change, and age. Microsoft has reached maturity and experienced enough marketplace failures (Vista, Zune, Surface) that a major management shift is underway. We’ve grown accustomed to Redmond being a perennial powerhouse and millionaire-generator in the Gates-Ballmer era, but will that roll continue?

Seattle sees itself as a special incubator of the next big commercial success — and the new Bezos family-funded “Center for Innovation” at the Museum of History and Industry that opened this fall is a shrine to this self-image. We’ve scored with Starbucks, Nordstrom, Costco and Amazon, for example. But in the tech sector there’s some thought that we haven’t reached our silicon potential, that we’re over-due for a new major success a la Google or Facebook.

Sure, we’re a pretty good place for start-ups, but Seattle tech booster Chris DeVore recently wrotethat while Seattle is pretty good at launching companies, “It’s been a long time since a new Seattle-based company produced a huge windfall.” He means a company, like Microsoft or Amazon, that lifted employees and investors by generating lots of wealth. “If I had to put my finger on the one thing we could do to improve our weak ‘startup rate,’ it would be to produce more explosive wins in Seattle…” he wrote. That would benefit start-ups and companies all up and down the food chain and generate money to invest in new ventures. Apparently, the tech sector needs a new blockbuster.

Another voice encouraging Seattle and Washington to take it to the next level is Microsoft executive vice president and general counsel Brad Smith. In October, he addressed the Greater Seattle Chamber of Commerce’s annual Leadership Conference, an appropriate place for business leaders to inspire the team with a growth-oriented Gipper speech. I also had a chance to talk with him afterwards. In his speech, he said “[I]f there is a moment in time when we can come together and focus on raising our ambition, I think that moment is now.” With the state recovering economically, with greater global competition ahead (China, Brazil, South Carolina…), and with so much potential here, we need to get going, and set our sights higher.

To that end, his Gipper — or maybe "Skipper" — speech cited a nautical example. It was inspirational achievement of the University of Washington rowing crew who beat the odds to win a gold medal in 1936. These were local boys who had to raise their own money during the Depression to go to Germany, who had to race under rules that favored Hitler’s rowing team, and who took on the task of making America proud at the Nazi’s infamous Olympic Games. “It’s a reminder of what nine young men from humble background could achieve when they reached beyond themselves and worked as a team,” he said.

Research shows CEOs who live frugally make better leaders

The flashier they are, the more open they are to fraud.

But according to research to be published in the Journal of Financial Economics, bosses who enjoy the finer things in life can be bad for their companies. The researchers hired private investigators to uncover the personal assets of a sample of American chief executives. They then compared those who own trinkets such as a yacht, a $75,000 car or a super-expensive house against a list of companies cited for fraudulent accounting by the Securities and Exchanges Commission. After controlling for things such as its size, the probability that a firm with a flashy CEO will commit fraud, they found, increases by 6% a year for every year that he is at the helm. At firms run by more frugal heads, on the other hand, the likelihood of fraud decreases by 61% every year.

Interestingly, this is not because ostentatious bosses feel pressure to maintain their lifestyles. Indeed, such CEOs are no more likely to be fraudulent than their parsimonious peers. Rather it is underlings who cook the books. This might be because such CEOs tend to hire executives with a similar mindset to their own. The study found, for example, that a chief financial officer is more likely to own a yacht if his boss does. They also tend to socialise more with directors at the firm—at country clubs and the like. Being part of such a pally clique means they are less likely to monitor what the others are up to, thinks Aiyesha Dey of the University of Minnesota, one of the authors.

Bosses with expensive lifestyles are also more likely to introduce equity-based incentive schemes, the report finds. Closely linking remuneration to the share price may encourage staff to caress the figures. Furthermore, says Ms Dey, such CEOs tend to run businesses the way they do their personal lives, prone to showy acquisitions and less regard for the long-term consequences.

A new vision for cities

As the global economies change, so will the roles of civic leaders if we want to stay competitive

In his presentation (and in our Metro North America report), Bruce Katz outlined a three-part playbook for how sub-national leaders are acting to further trade, investment, and economic growth in our three countries:

Set a vision. City and metropolitan leaders are setting bold visions for the future of their economies that can focus public, private, and civic sector actors on shared goals for growth. Mayor Smith outlined his city’s new mantra: Educate, Innovate, Facilitate, Elevate. His economic development agenda is focused around strengthening Mesa’s assets in healthcare, education, aerospace, and tourism (HEAT), and working together with partners in the Maricopa Association of Governments and the Greater Phoenix Economic Council to create and execute a metropolitan business plan . Taking greater advantage of the region’s already strong ties with cities and states in Mexico is an important part of those visions.

Invest in what matters. The factors that drive city and regional growth are innovation, human capital, and infrastructure. The quality of those assets, regardless of the sector in which they are applied, account for long-run economic success. Windsor, Ontario Mayor Eddie Francis described how the downturn in the auto industry in the late 2000s threatened tens of thousands of workers in his city, a major North American auto hub just across the border from Detroit. Recognizing this, the city and region invested in helping auto suppliers transition into the aerospace industry, taking advantage of workers with widely applicable manufacturing skills and excess plant capacity to diversify the economy towards a sector with growing opportunities. Working with the University of Windsor to develop a new aerospace engineering program, the region has succeeded in attracting thousands of new aircraft maintenance, repair, and operations (MRO) jobs. Even the university’s automotive research programAUTO21 has become a key partner in bolstering the region’s emerging aerospace cluster.

Network globally. The capstone of the GCI-Mexico forum was the signing of a new agreement by mayors Miguel Ángel Mancera of Mexico City and Rahm Emanuel of Chicago to partner together on strategies to grow the economies of both cities. While “sister cities” agreements have existed for some time—and Chicago alone has 28 of them, focused mainly on cultural exchange—the new agreement aims to take the cities’ already-strong relationship in an explicitly economic direction, exploring joint opportunities for foreign direct investment, export promotion, and increased tourism. As Mayor Emanuel described during a discussion with Mayor Mancera moderated by JPMorgan Chase Executive Vice President Peter Scher, Chicago is acting boldly because the city cannot be held hostage to the functioning (or dysfunction) of its state and national governments. And Mayor Mancera noted that even given the progress being achieved today at the national level in Mexico, mayors are ultimately co-responsible for generating local and regional growth and prosperity.

Poverty meet Suburbia

Suburbia, this is poverty.

Poverty has often been considered an inner city problem or a small town and rural problem, but the face of poverty is shifting in America. Communities that were once economically solid are now experiencing rising rates of economic distress.

Alan Berube, senior fellow and deputy director of Brooking’s Metropolitan Program and Peter Edelman, faculty director, Center on Poverty, Inequality, and Public Policy, Georgetown Law School, discussed suburban poverty at APA’s recent Federal Policy & Program Briefing.

Together with coauthor Elizabeth Kneebone, Berube has examined the phenomenon in Confronting Suburban Poverty in America (Brookings Press, 2013).

Peter Edelman has worked in anti-poverty programs and researched this subject for many years. According to Edelman, suburban poverty has been growing gradually, but has accelerated in the early 21st century: “People who once did all right are not doing all right now.”

What makes poverty in the suburbs especially challenging? The concentration of poverty exacerbates the problem and the trend is toward more concentration.

Overall, Edelman said, 15 percent of Americans live in poverty but the in counties south of Washington, D.C., the rate is as much as 28 percent. In addition, the options for commuting to jobs are fewer in many suburbs than in urban areas. Further, the social services to assist people in need may not be well established in suburban communities.

The problem is becoming more complex, therefore the solution has to be to think in terms of a regional economy.

Part of the complexity is that “we have become a nation of low-wage economy” said Edelman. The median income for Americans has been stuck at around $34,000 for 40 years. Many, many Americans are not moving up the ladder and obtaining better pay. And, it is becoming increasingly difficult to sustain a family on this income.

Single mothers with children — the most vulnerable — make up 42 percent of the poor.

Argentina’s Central Bank is in Trouble

It’s losing more than $1 billion a month

There are a couple reasons Argentina hasn’t been able to keep its central bank account in check.

For one, an artificially strong currency has made foreign goods more attractive, and led the country to become more reliant on imports. While Argentina still enjoys a trade surplus, it has been shrinking because of growing energy imports. Argentina has had trouble borrowing money from abroad since defaulting on its debt in 2001, so it has to finance the bulk of its growing imports with its reserves.

Then there’s Argentina’s high inflation, which has coerced Argentines into holding on to US dollars rather than spending them, and using any pesos they have on hand to buy more US dollars. Those dollars, however, aren’t making their way to the central bank. Argentines are using their foreign cash to buy goods abroad or keeping it as collateral in case the country’s monetary system collapses again.

Argentina plans to spend another $8 billion of its reserves to pay off debts through the end of this year, which will leave very little wiggle room for its central bank to finance the country’s fiscal affairs. Soon the country could find itself incapable of paying its creditors and financing its imports—a recipe for another economic crisis.