Coyote Blog

I thought this was pretty illuminating, from Tim Carney via Hit and Run.  He is writing about lobbying efforts for and against an extension of cash for clunkers:

One lobbyist for this bill was Nucor Steel. In Cayuga County, N.Y., Nucor turns scrap steel into sheet metal and other steel products. The clunkers are now becoming a subsidized feedstock for Nucor, which helps explain why Sen. Chuck Schumer, D-N.Y., has led the push for $2 billion extra in clunker cash.

Then there's Enterprise Rent-a-Car also backing the bill, supposedly out of solidarity with automakers. But Enterprise sells its rental cars after a few years. As a rental firm that buys its cars new, Enterprise benefits every time someone else scraps a used car.

On the other side of the lobbying debate were non-dealer auto-repair shops, whose businesses depend on used or older cars, which the owners don't take to the dealer for repair. Also, the Automotive Aftermarket Industry Association opposed the bill.

These are the guys who can sell you the headlight for your 1998 Ford Taurus, or who rebuild an engine out of a junked car.

Shredding old cars saps both their clientele and their supply of old transmissions to rebuild.

Once I entered management-type jobs in corporate America, my life was dominated by making powerpoint charts.  That made some sense - I was a staff planner, and that's what they do.  Ten years later I was Senior VP of Marketing for the $23 billion commercial aerospace division of a Fortune 50 company, and I was still spending a huge portion of my time making powerpoint slides.

I am sure other people have lots of sophisticated life goals for themselves, but two of my biggest goals in leaving large corporations were:

• Never touch powerpoint again
• Never wear a tie again

I have been succesful 100% on #2.  Powerpoint is still a useful tool, so I not totally fulfilled goal #1, but my use is scaled way back, to about 4 presentations in 6 years  (and one of these was for my climate work, not my real job).

It turns out the military has the same problem.

I had a question the other day:  Why is closing dealerships a cost savings for Chrysler?  My understanding is that dealers were independently-owned businesses that bought inventory from the manufacturer, and then sold and serviced the cars.

I came up with only two answers:

1. Auto makers finance dealer inventory in some way (either as financing or putting the inventory on consignment) such that cutting back on dealers cuts back on financing needs.  Yes, with fewer dealers, the others are likely to need more inventory, but basic inventory theory says the total in the system will still be less with fewer outlets.  Also, they might preferentially cut weaker dealers more likely to need financing in favor of larger dealers who can self-finance
2. Having too many dealers competing against each other with the same product undermines pricing in the market.  Dealers cut pricing to the bone in order to get the servicing income stream after the sale.  While this should not directly affect the pricing to the manufacturer, it might be argued that retail discounting is a negative for the brand over time  (electronics manufacturers have debated this point for years, and there is certainly no consensus on this).

Megan McArdle provides her own answers to this question, some similar and some different:

A number of readers have asked a simple, obvious question:  why do the dealers cost Chrysler so much money that they want to shut them down?  I don't have a complete answer to it, but here's what I understand:

• Inventory:  Chrysler often has to take back unsold inventory.  A lot of dealers selling a little inventory is costly, because you have to ship a minimum number of cars to each dealer
• Financing:  Chrysler helps many dealers float their purchases (though to be fair, those dealers also tap their own credit for things like advertising, expanding the company's effective spending)
• Brand costs:  Shabby, run-down dealerships don't improve the image of the firm, and if they are the only game in town, drive users to other cars.

She follows with a good analysis of why independent dealers exist in the first place.

It will be interesting to see how this goes down.  Frequent readers will know that I often have said that the power base of many small-medium size towns is made up of 1) the auto dealers, 2) the beverage wholesalers and 3) the owners of the local TV stations and newspapers.  Auto dealers wield a lot of local political power - they are often the largest single financial supporter of local politicians and even some Congressional reps.  They also wield power as typically the largest single advertiser in local media, so they get sympathetic coverage.  Over the years, they have translated this into a lot of legislative help (such as limitations on Internet competition).

I couldn't believe this when I read it:

General Motors is open to considering moving its headquarters from Detroit, selling off U.S. plants and even renegotiating parts of its restructuring plan with its major union, the new chief executive said Monday....

A move by GM to leave Detroit would represent another blow for the economy of a region already reeling from the bankruptcy of Chrysler and the sharp downturn in auto manufacturing.

GM purchased its glass-towered headquarter building known as Detroit's Renaissance Center last year for $625 million.

The article moves on to other topics, but I was struck by this:  A year ago, when bankruptcy was only months away (delayed only by injections of taxpayer money), with the real estate market teetering at its peak and just starting to fall off, with GM hemorraging cash, GM decides to ... spend $625 million on Detroit commercial real estate.

This is outrageous.  All the more so because GM's fortunes and the value of downtown Detroit real estate have a beta coefficient that is probably well above 1.  In other words, if GM decides it wants to sell the building, Detroit commercial real estate is going to tank on the news that GM is leaving Detroit, making the real estate virtually worthless.  It is very dangerous to buy an asset for which you are the only possible buyer if there is any possibility you might want to sell it some day.

I understand that companies that have losing business models often find it more profitable to invest outside of their business**, but GM seems to have found the only investment on the planet worse than their own stock.

** Postscript: I am not a huge Roger Smith fan, but this was essentially his strategy -- GM sucks as an investment, so I am going to invest outside of the auto industry.  Though he caught a lot of grief for it, most of his investments outside of GM turned out to have a substantially higher return for shareholders than his (or his successors') investments inside of GM.   Wikipedia writes:

Smith's purchases of EDS and Hughes were criticized as unwise diversions of resources at a time when GM could have invested more in its core automotive divisions.

But what if investments in your core business are even more unwise?

Over the years, I have developed a term "arrogant ignorance" to describe certain people we deal with from time to time.

We often get young and inexperienced contract managers assigned to one of our relationships.   These folks will struggle, due to lack of experience and fragmentary training, to perform their duties, because they really don't know what to do in many circumstances.  We accept the fact that we often know more about our contract manager's job than she knows herself, and try to help them get up to speed.

However, occasionally these folks, despite very obviously not knowing what they are doing, get hugely arrogant and refuse to admit they don't know what they are doing.  They fire off orders and decisions that not only are wrong, but simply make no sense, and then yell at us within seconds for not complying with their bizarre requirements.   I have always scratched my head over this syndrome, and have assumed that it resulted from a combination of:

• a young person with absolutely no education and experience in how to work in a high-performing organization.  (think about the organizations a 20-something has seen -- public schools, college faculty, maybe a non-profit over the summer, fake businesses on TV -- nothing that would give them any clue how a high-performing organization works).
• really bad incentives.  Typically, the worst examples have non-existent formal performance management systems where the informal metrics therefore reign.  These informal metrics often default to things like "always look busy" or "always look like you know what you are doing" or "never do anything that will cause your boss to yell at you" or "never get caught making a bureaucratic process error.

Well, I was thrilled today to find that the syndrome I call "arrogant ignorance" actually has a name.  It was mentioned in this article by Simple Justice and is called the Dunning Kruger effect.   Here is the first line from Wikipedia:

The Dunning"“Kruger effect is an example of cognitive bias in which "people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it"^[1]. They therefore suffer an illusory superiority, rating their own ability as above average.

This also helps to explain another phenomenon we tend to see -- that the absolute worst, most incompetant, most clueless employees tend to be the first (and often only) ones who call me and threaten me with lawsuits over false termination.  The article goes on:

1. Incompetent individuals tend to overestimate their own level of skill.
2. Incompetent individuals fail to recognize genuine skill in others.
3. Incompetent individuals fail to recognize the extremity of their inadequacy.

But at least there is this ray of hope:

4.  If they can be trained to substantially improve their own skill level, these individuals can recognize and acknowledge their own previous lack of skill.

Despite years and hundreds of millions of dollars of effort on electric vehicles, competitors are coming out of the woodwork to beat it to market with an all-electric sedan -- and, from the specs, seem to be beating it on price and features as well.

Miles Electric has confirmed that it's working on a family sedan-sized all electric car for release in North America sometime next year. The car -- which will be released under a different, unknown brandname -- will be a first for the company, which specializes in neighborhood cars that only go up to about 25 miles per hour. The sedan will have a top speed of around 80 miles per hour, and a 100 mile range. It will also require 8-12 hours to fully recharge its dead lithium-ion battery. Miles is currently running the vehicle though crash tests, and expects to see about 300 of them on the road in California sometime next year. The going rate for one of these? About $45,000.

Radical shifts in technology often obsolete first mover and scale advantages.  The winners in the market for diesel electric locomotives (GM and GE) were totally different players from those who dominated the steam locomotive market (Alco, Baldwin, Lima and others).  It will be interesting to see if such a change occurs in the auto market.

Megan McArdle outlines some of the latest terms of a GM creditor settlment.  The interesting facts for me were:

• Creditors get 10% of equity in exchange for $27 billion in concessions  ($2.7B per percentage point)
• Employees get 39% of equity in exchange for $10 billion in concessions ($0.26B per percentage point)

McArdle argues that there are good reasons bankruptcy courts tend to give labor a good deal, and having argued all along to allow bankrupcy courts to sort this mess out following the usual rules, I am not going to reverse myself.

But is it really the case that, push come to shove, bondholders get a deal 10 times worse than employees?  If this is the case, I am surprised people ever buy bonds in a company with a large employee retirement overhang.

Russel Roberts deconstructs Obama's auto speech.  Well worth the read.

I have worked with folks in the government for years.  One of the common syndromes I see in government officials of all levels is something I call "arrogant ignorance."  I see a lot of it in this administration.

It is becoming increasingly clear that Obama has made an enormous blunder, driven in part by his best-and-the-brightest-style hubris, in taking personal ownership of GM.  Not because it will be an enormous waste of taxpayer money, because I don't think he cares about a few tens of billions of our money.  It is a blunder because GM may not be fixable, and if it is salvageable in some smaller format, it will require painful compromises by politically powerful groups Obama really does not want to square off with.

Obama's stepping forward and claiming ownership for GM's success strikes me as roughly equivalent to someone stepping forward in March of 1945 to take ownership of the German war effort.   The decision is all the dumber because there was a perfectly good alternative -- ie the bankrupcy courts -- with far more experience (not to mention authority and legislative mandate) to handle these type of situations.

Megan McArdle has a good roundup of what challenges face GM and the Obamacrats.

Update: Obama seems to be hinting that a bankruptcy may still be in the cards.  The key challenge for him will be to deal with the obvious accusation of why he didn't allow this before spending $20 billion or so of taxpayer money.  Expect the administration to be focus-grouping and trial-ballooning various euphamisms for chapter 11 to disguise this problem.

Critics of high executive pay on the soft-core / moderate left (as opposed to the hard-core socialist left) often argue that they are not against large incomes per se.  However, they argue that high executive pay is often the result of a failure in the structure of corporate governance, where a group of cozy insiders on the board and management hand each other compensation packages to which the rank and file of shareholders would be opposed  (a subset of the agency cost problem).

I am somewhat sympathetic to this argument, as I have personally observed instances where I thought boards and management were too cozy by far.  However, no one has really succeeded at proving this hypothesis on executive pay, and in fact shareholders when they have had a chance to vote on such packages have never really made a meaningful dent in them, and one can find a number of private companies where such governance issues presumably don't exist but high executive compensation packages can exist.

Just as an aside, a classic example of this can be found in the fabulous book "Barbarians at the Gate" about the RJR Nabisco takeover fight.  The book does a great job of portraying a company with horrible corporate governance issues that seemed to be used to enrich managers with both salaries and perks, but then observed that the new private owners of the company gave their new CEO a compensation package that might have made the previous executives blush.

Anyway, I am yet again off the point.  My point was to observe that the mainstream left seems to believe that there are corporate governance issues at large corporations that disenfranchise the majority of shareholders vis a vis key decisions involving the company executives.  So I have to ask myself, if this is a real fear, then how does one justify having the President of the United States effectively fire the GM CEO, without any vote or substantial input from shareholders?

Postscript: It is all well and good to be cognizant of agency costs.  Everyone should understand when an employee (or contractor or whatever) has different incentives than they themselves possess.  For example, on my recent backyard renovation, I always kept in mind that my architect wanted to create a showplace that would advance his business and possible get into a magazine.  In general, this alligns our interests, but there were times he pressed for things I did not value and I had to be insistent we were not going to do those things.

However, many folks seem to want to run off to government to do something about agency costs whenever or wherever they are found.  This is hugely dangerous, as Congress tends to have the highest agency costs one will ever be likely to find.

It has become an increasingly common practice for companies that are making calls, say from a customer service center or the accounts receivables department, to use a computer auto-dialer.  If the customer picks up, they give the customer a recorded message to hold for a real person with an important message.  Sometimes the holds can last a while.  The idea is that the company is not paying people to waste time waiting for people to pick up, or worse, not to pick up.

I despise this practice.  The implicit assumption is that the time of the folks in their call center is more valuable than mine, such that it is better that I hold rather than their employees waste one second of time.  Well, all you companies who do this (Do you hear me Frito-Lay?  Coca-Cola?) are never going to get me, because I hang up the microsecond I get a recorded message.  I would do this even if I was sure it was a real business call, because I find the implicit assumptions insulting, but I am even faster to hang up now that telemarketers have latched onto this practice.

I am an early-adopter of the Amazon Kindle and must say that I have been thrilled with it, despite a number of design flaws I hope to see fixed in the new version.  Most of my complaints have to do with industrial design, not with the feature set  (from an industrial design scale where iPod=10 and the original MS Vista packaging =0, the Kindle and its case were about a 4.)

I was perusing a number of "reviews" of the Kindle 2 today.  Pre-release reviews can have a really wide spread, as they tend to be populated either by insiders who are trying to promote the product, or by folks who haven't used the product but have some problem with its basic concept (or manufacturer) they want to vent on.  Which makes pre-release reviews worthless.

One such person in the second category is "Bohemian," who seems to want to vent on Kindle because it is not open source, DRM-free, etc.  He is also upset that it does not have built-in solar power, lol.  But the line that really caught my eye is this one:

Overpriced - should be around $100

That is hilarious to me.  The Kindle has been absolutely sold out (at the current price of $300-$400) for months and months.  There is a waiting list, particularly since Oprah recommend it.  So how is the price too high?  My take on it would be the price is too low, since even at $359 demand is exceeding supply.

This is a common mistake by people across the political spectrum -- mistaking one's own personal assessment of value with what a price "should" be.  The correct statement for this review would have been "I would not pay more than $100 for this product."  And in a free society, he doesn't have to buy it.  But obviously there are a lot of people, in fact more people than Amazon can currently satisfy, who think the Kindle is worth at least $359.

By the way, one other note on DRM and proprietary platforms.  I am the last one to spend much time defending DRM, but proprietary platforms are totally normal for new technologies.  The thing that is often ignored about the Kindle is that ... it just works.  You log on, download the books you want, and they are there in seconds and display correctly and reliably.  I lost my first Kindle, and when the second one showed up, all my books from my first Kindle where already on my second.  No crashes, no need for tech support.

People give Microsoft loads of well-deserved cr*p for problems in its software and for playing too many proprietary tricks, but the real reason PC's can be a pain and can be tech support nightmares is because PC's are not very proprietary -- they are really a wide open platform, and try to integrate a hodge podge of components and software from a variety of sources, and sometimes things inevitably go wrong.  People tend to forget that the reason the Mac and the iPod are so compelling in the user-friendliness and stability is that they are proprietary, tightly controlled platforms.

I personally prefer the PC, because I like the flexibility and am not scared off by the occasional integration challenge.  Over time, I have realized that I am in the minority.  Most people want their electronic devices to freaking work, and don't care if they don't have access to the 100-item micro-configuration menu and probably will never have a desire to transfer the book file on their Kindle to be read on the LCD on their refrigerator.

Radley Balko demonstrates it.  Thank them for the opportunity, express sorrow for the passing of a good relationship, look for the next new thing.

Nothing makes purity more interesting than temptation.  This applies to ideological purity just as much as the physical sort.  As a libertarian, my greatest temptation to call for government action comes when I deal, as a retailer, with Visa and Mastercard (V/MC).

This post is not a call for government action, so I guess I am resisting temptation.  But I at least need to vent, sort of like a monk pounding his head on the wall after getting the Victoria's Secret catalog in the mail.  So here is my rant.

First, let's start with how credit card companies make their money.  I will confess that I do not know how the card companies (V/MC) and the card processors (often large banks) split the take, so this is how they make money together.  V/MC and the processors charge fees to merchants.  Typically this is a fixed fee per transaction plus a percentage.  On average, a merchant might be paying 2.5-3.5% of a transaction.  The card companies also make money from card holders, charging annual fees, interest fees, etc.

You will have seen of late that most credit cards offer various loyalty programs, from airline miles to cash rebates.  You might have thought those were marketing expenses paid by the credit card companies.  Wrong.  The card companies simply charge merchants a higher fee for processing transactions using these cards.  In a sense, the card companies have organized with card users to use their power to extract extra value from merchants.

All of this I can generally live with.   Visa and MasterCard, through both their credit facility and their implicit standardization, bring enormous value to retailers and customers.  Its a big circular game anyway -- customers get 1% back and think they are getting a deal, merchants pay this extra 1% in fees, and then add it into the price of what they are selling.  It's a wash, except to the extent that customers with reward cards in the end extract a bit of value from customers who pay cash (for reasons explained below).

For this value one must accept the typically arrogant and indifferent customer service provided by any monopoly  (American Express is particularly awful to deal with as a retailer).   But they are no worse to deal with than the government, so its unclear how the government could make the service any better.

What tends to tick me off, though, are rules and restrictions.  Like the creeping work rules in the UAW contract, these are in many ways more insidious than the service and pricing.  Here is what set me off today, from one of my card processors  (in this case Bank of America, which, to be fair, is someone I would recommend for merchant account processing).  Click to enlarge.

So, why are businesses breaking these rules so often?  Let's take a look:

• No minimum transaction. Remember that V/MC charges a minimum fee, from 10-40 cents or so, per transaction.  So if someone buys a pack of gum in our store, likely 100% of the sales price is going to V/MC.  Typically it takes at least a one dollar total sale for there to be any money left over beyond paying cost of goods sold and the credit card folks.  So merchants logically want to set a minimum.   V/MC hates this practice, but it is rampant.  I plead the fifth on our own practices.
• Surcharging. Credit card customers cost more than cash customers.  Sure, we get some non-sufficient funds checks, but the eventual cost of these is nowhere near 2.5% of sales.  Merchants logically don't like having their cash customers having to subsidize the frequent flyer rewards of their credit customers.  However, unlike transaction minimums, card processors have mostly been able to drive out cash discounts.
• Requiring ID and Fraudulent Transactions. I will take these two together, since they are so ironic one after the other.  V/MC is telling merchants that they can't check ID, which is the only reasonable approach to limiting fraud, but that they can't submit fraudulent transactions.  You say that the text says "known fraudulent?"  Well, read on --

To the latter point, I think most people assume that the credit card companies are absorbing the fraud, which is how they justify the fees they charge.  Wrong again.  Credit card companies only absorb credit risk.  Over the last 10+ years, they have pushed fraud back on the retailer.  If a consumer claims fraud on his card with some transaction, then the credit card company refunds the customer and takes the money from the merchant unless the retailer can absolutely prove he made delivery to the consumer personally (which he can't prove because he can't check identification) .  Merchants bear the cost of fraud, not card companies.  Which I could accept (since I have more ability than the card companies to control fraud) expect the card companies ban me from controlling fraud.  So I have to take financial responsibility for something I am not allowed to prevent.  And that really ticks me off.

Anyway, maybe someday we can organize a large merchant boycott, where, even for a day, we all refuse to accept Visa and Mastercard.  Of course we would be breaking the rules, because that is not allowed by our V/MC agreement.

Postscript: I suspect that a few retailers with some power are starting to crack this, at least for themselves.  Costco only takes American Express.  Sams Club only take one card (MC, I think).  My guess is that both, with their large size, bargained for exclusivity in exchange for concessions on fees and/or terms.

Postscript #2: I expect comments like, "Well so-and-so always makes me show an ID."  I don't doubt you.  I am merely saying that by doing so, they have either negotiated an exception to the V/MC agreement (very unlikely, as V/MC holds to these rules like the Maginot Line) or the retailer is breaking the rules.

You know you are in trouble when a guy who made his fortune in the early Internet boom (which featured companies like Pets.com using the last of their cash to put put sock puppets on the Superbowl) has to lecture you on making a profit.  From the always quotable Mark Cuban via TJIC:

For those in Detroit who have never operated a lemonade stand, or any other business, the way profits are generated is by making products at a price people want to buy them for, and then producing them, with all costs allocated, for less than you are selling them for. It's not apparent that this is a principle that Detroit understands....

You Know Chrysler is Toast Because the CEO takes out a fullpage ad in the Wall Street Journal today to thank the American Public for "investing" in Chrysler.

Lets see, is there anything more idiotic than spending more than 100k dollars on a full page ad "thanks for letting me waste your money " ad ? Does it make it worse that its a business publication where the readers might just recognize the stupidity of wasting money on ad dollars that doesn't even try to sell the product ? How does it make the next unemployed Chrysler worker feel that their entire year's salary just went for a single, ridiculous ad ?

Just one more example of how poorly run the car companies are. Note to the Big 3, spend money to make money. These types of ads have as much value as a Bernie Madoff account statement.

I have mixed feelings about the Republican basing of automotive unions.  On the one hand, I see no reason why individuals in a free society shouldn't be able to organize and bargain as a group on wages.  However, this is not a free society, and the union organizing process is one of the most regulated in the country, with numerous state and federal laws that artificially tilt the bargaining and financial power towards unions.  Unions, for example, are the only private organization that I know of in this country that have taxation power, ie the ability to apply non-voluntary financial assessments on a population with the full force of government behind their collection.

But it may be that so much attention has been applied to wages and health care that this issue has been under-reported.  Below is apparently the Ford-UAW 2,215 page contract. Eeek.

How can it be possible to run a company where even the smallest operational improvement idea has to be screened against this document?

In a post on letting GM fail, I discussed what I called "corporate DNA"

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot. You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA.  And DNA is very hard to change. ...

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation....Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you. When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

This seems to match the take of many insiders.

To John Shook, a former Toyota manager who worked at a joint-venture plant run by the Japanese company and GM in Fremont, California, that explains why the two automakers are in such different shape today. When it comes to engineering and manufacturing, Shook says, Toyota and GM are about equal. Where they differ is in their corporate cultures.

"Toyota is built on trial and error, on admitting you don't know the future and that you have to experiment," Shook said. "At GM, they say, "˜I'm senior management. There's a right answer, and I'm supposed to know it.' This makes it harder to try things."

The whole Bloomberg article this comes from is quite good.  Its pretty clear that GM had every reason to anticipate the current mess 3-4 years ago, and basically fiddled while the cash burned.  My strongest reaction from the article was, please let me have an epitaph better than this one:

Wagoner, a 31-year GM veteran, was the embodiment of its culture, an apostle of incremental change. Exciting as a Saturn, quotable as an owner's manual....

David Yermack has an awesome essay in the WSJ this weekend, encouraging Congress to just say no to spending $25-$50 billion bailing out Ford and GM.  Why?  Well, beyond the obvious moral hazard, these companies are value destruction machines of epic proportions.

Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.

This is a reprise of a much older post, but it struck me as fairly timely.

I had a conversation the other day with a person I can best describe as a well-meaning technocrat.  Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses.  He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets.  Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart.  Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one.

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall.  In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls.  I am pretty sure the store went bust a while back.

I think the incentives issue has been beaten to death pretty well, but there is another problem with bailout:  They leave the productive assets of the failed company in essentially the same hands that failed to make good use of them previously.  Sure, the management has changed, but a few guys at the top of these large companies don't really mean squat.  To this point:

A corporation has physical plant (like factories) and workers of
various skill levels who have productive potential.  These physical and
human assets are overlaid with what we generally shortcut as
"management" but which includes not just the actual humans currently
managing the company but the organization approach, the culture, the
management processes, its systems, the traditions, its contracts, its
unions, the intellectual property, etc. etc.  In fact, by calling all
this summed together "management", we falsely create the impression
that it can easily be changed out, by firing the overpaid bums and
getting new smarter guys.  This is not the case - Just ask Ross Perot.
You could fire the top 20 guys at GM and replace them all with the
consensus all-brilliant team and I still am not sure they could fix
it. 

All these management factors, from the managers themselves to
process to history to culture could better be called the corporate
DNA*.  And DNA is very hard to change.  Walmart may be freaking
brilliant at what they do, but demand that they change tomorrow to an
upscale retailer marketing fashion products to teenage girls, and I
don't think they would ever get there.  Its just too much change in the
DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you
still have a culture aimed at big box low prices, a logistics system
and infrastructure aimed at doing same, absolutely no history or
knowledge of fashion, etc. etc.  I would bet you any amount of money I
could get to the GAP faster starting from scratch than starting from
Walmart.  For example, many folks (like me) greatly prefer Target over
Walmart because Target is a slightly nicer, more relaxing place to
shop.  And even this small difference may ultimately confound Walmart.
Even this very incremental need to add some aesthetics to their
experience may overtax their DNA.

David Leonhart (via Carpe Diem) argues that this was exactly the long-term downside of the Chrysler bailout:

Barry Ritholtz "” who runs an equity research firm in New York and writes The Big Picture,
one of the best-read economics blogs "” is going to publish a book soon
making the case that the bailout actually helped cause the decline. The
book is called, "Bailout Nation." In it, Mr. Ritholtz sketches out an
intriguing alternative history of Chrysler and Detroit.

If
Chrysler had collapsed, he argues, vulture investors might have swooped
in and reconstituted the company as a smaller automaker less tied to
the failed strategies of Detroit's Big Three and their unions. "If
Chrysler goes belly up," he says, "it also might have forced some deep
introspection at Ford and G.M. and might have changed their attitude
toward fuel efficiency and manufacturing quality." Some of the
bailout's opponents "” from free-market conservatives to Senator Gary
Hart, then a rising Democrat "” were making similar arguments three
decades ago.

Instead, the bailout and import quotas fooled the
automakers into thinking they could keep doing business as usual. In
1980, Detroit sold about 80% of all new vehicles in this country.
Today, it sells just 45%.

As I wrote about GM:

Changing your DNA is tough.  It is sometimes possible, with the
right managers and a crisis mentality, to evolve DNA over a period of
20-30 years.  One could argue that GE did this, avoiding becoming an
old-industry dinosaur.  GM has had a 30 year window (dating from the
mid-seventies oil price rise and influx of imported cars) to make a
change, and it has not been enough.  GM's DNA was programmed to make
big, ugly (IMO) cars, and that is what it has continued to do.  If its
leaders were not able or willing to change its DNA over the last 30
years, no one, no matter how brilliant, is going to do it in the next
2-3.

So what if GM dies?  Letting the GM's of the world die is one of the
best possible things we can do for our economy and the wealth of our
nation.  Assuming GM's DNA has a less than one multiplier, then
releasing GM's assets from GM's control actually increases value.
Talented engineers, after some admittedly painful personal dislocation,
find jobs designing things people want and value.  Their output has
more value, which in the long run helps everyone, including themselves.

I know that most non-financial folks, including myself, have their head spinning after this past few weeks' doings on Wall Street.  Doug Diamond and Anil Kashyap have a pretty good layman's roundup on Fannie/Freddie, Lehman, and AIG.  My sense is that their Lehman explanation also applies to Bear Stearns as well.  Here is just one small piece of a much longer article:

The Fannie and Freddie situation was a result of their unique roles
in the economy. They had been set up to support the housing market.
They helped guarantee mortgages (provided they met certain standards),
and were able to fund these guarantees by issuing their own debt, which
was in turn tacitly backed by the government. The government guarantees
allowed Fannie and Freddie to take on far more debt than a normal
company. In principle, they were also supposed to use the government
guarantee to reduce the mortgage cost to the homeowners, but the Fed
and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits
and squeeze the private sector out of the "conforming" mortgage market.
Regardless, many firms and foreign governments considered the debt of
Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly. 

Fannie and Freddie were weakly supervised and strayed from the core
mission. They began using their subsidized financing to buy
mortgage-backed securities which were backed by pools of mortgages that
did not meet their usual standards. Over the last year, it became clear
that their thin capital was not enough to cover the losses on these subprime
mortgages. The massive amount of diffusely held debt would have caused
collapses everywhere if it was defaulted upon; so the Treasury
announced that it would explicitly guarantee the debt.

But once the debt was guaranteed to be secure (and the government
would wipe out shareholders if it carried through with the guarantee),
no self-interested investor was willing to supply more equity to help
buffer the losses. Hence, the Treasury ended up taking them over.

Lehman's demise came when it could not even keep borrowing. Lehman
was rolling over at least $100 billion a month to finance its
investments in real estate, bonds, stocks, and financial assets. When
it is hard for lenders to monitor their investments and borrowers can
rapidly change the risk on their balance sheets, lenders opt for short-term lending. Compared to legal or other channels, their threat to refuse to roll over funding is the most effective option to keep the borrower in line.

This was especially relevant for Lehman, because as an investment
bank, it could transform its risk characteristics very easily by using
derivatives and by churning its trading portfolio. So for Lehman (and
all investment banks), the short-term financing is not an accident; it
is inevitable.

Why did the financing dry up? For months, short-sellers were
convinced that Lehman's real-estate losses were bigger than it had
acknowledged. As more bad news about the real estate market emerged,
including the losses at Freddie Mac and Fannie Mae, this view spread.

Lehman's costs of borrowing rose and its share price fell. With an
impending downgrade to its credit rating looming, legal restrictions
were going to prevent certain firms from continuing to lend to Lehman.
Other counterparties
that might have been able to lend, even if Lehman's credit rating was
impaired, simply decided that the chance of default in the near future
was too high, partly because they feared that future credit conditions
would get even tighter and force Lehman and others to default at that
time.

A.I.G. had to raise money because it had written $57 billion of insurance contracts whose payouts depended on the losses incurred on subprime real-estate related investments.
While its core insurance businesses and other subsidiaries (such as its
large aircraft-leasing operation) were doing fine, these contracts,
called credit default swaps (C.D.S.'s), were hemorrhaging.   

Furthermore, the possibility of further losses loomed if the housing
market continued to deteriorate. The credit-rating agencies looking at
the potential losses downgraded A.I.G.'s debt on Monday. With its lower
credit ratings, A.I.G.'s insurance contracts required A.I.G. to
demonstrate that it had collateral to service the contracts; estimates
suggested that it needed roughly $15 billion in immediate collateral.

A second problem A.I.G. faced is that if it failed to post the
collateral, it would be considered to have defaulted on the C.D.S.'s.
Were A.I.G. to default on C.D.S.'s, some other A.I.G. contracts (tied
to losses on other financial securities) contain clauses saying that
its other contractual partners could insist on prepayment of their
claims. These cross-default clauses are present so that resources from
one part of the business do not get diverted to plug a hole in another
part. A.I.G. had another $380 billion of these other insurance
contracts outstanding. No private investors were willing to step into
this situation and loan A.I.G. the money it needed to post the
collateral.

In the scramble to make good on the C.D.S.'s, A.I.G.'s ability to
service its own debt would come into question. A.I.G. had $160 billion
in bonds that were held all over the world: nowhere near as widely as
the Fannie and Freddie bonds, but still dispersed widely.

In addition, other large financial firms "” including Pacific
Investment Management Company (Pimco), the largest bond-investment fund
in the world "” had guaranteed A.I.G.'s bonds by writing C.D.S.
contracts.

Given the huge size of the contracts and the number of parties
intertwined, the Federal Reserve decided that a default by A.I.G. would
wreak havoc on the financial system and cause contagious failures.
There was an immediate need to get A.I.G. the collateral to honor its
contracts, so the Fed loaned A.I.G. $85 billion.

Update:  Travis has an awesome post with his own FAQ about what is going on.  Here is a taste:

Lots of financially naive folks think that we can remove all risk,
inflation, etc. by only ever trading apples for chickens on the barrel
head, and doing away with paper money (so that all money is gold) and
doing away fractional reserve banking, so that when I deposit one gold
coin in the bank, the bank can then take that actual physical gold coin
and loan it to someone else. It turns out that the friction involved in
doing things this way is so huge that the effect would make The Road
Warrior look like a children's bedtime story. You want to borrow money
to buy a car? The bank can't just loan money that's been deposited in
someone else's checking account - the bank has to get that person to
sign a note saying "yes, I understand that this money is on deposit
until that dude buying the card pays the bank back IN FULL". And the
lender, if he wants his money out ahead of time, is SOL. And even then,
there can be a flood, and your car gets totaled, and you get
Legionaire's disease, and you can't make the payments.

or this:

Now, for the next complication, let's also imagine that there are
300 million other people watching all of this, thinking "How bad is
this? Should I go down to the gun store, stock up on .223 and 12 gauge
shells, then stop by the veterinarians to see how much antibiotics I
can cadge before heading to the hills" ?

And the Feds really don't want 300 million armed folks heading
for the national forests, so they first try to tell everyone who owns a
bicycle "Hey, the value of your bike didn't really drop! It's still
worth $9!".

But no one wants to believe that.

So then they go to the guy who's writing insurance policies on
the value of bikes and they say "if you got $100 million, would that
calm things down a bit?".

I was thinking a bit about Jeff Skilling (former Enron CEO) today.  What must he be thinking as a series of large firms that were supposedly far more stable than Enron go down one after the other to liquidity crises much like that of Enron?  Bear Stearns and Lehman, two firms that should have been rock solid, go down in the blink of an eye in a credit crunch, and all we hear from the media is how the firms fell victim to larger forces beyond their control.  At least at Enron they were up-front with the market about their taking on large risks.  Now, the government is running around in the background trying to match-make these failing companies and helping to save at least a squidge of shareholder equity.  The only thing the government did in the Enron collapse was hound Skilling and others into jail.   

Sure, Skilling may have made some overly optimistic statements about his company as he was trying to stave off the crunch, but no more so that the happy-face statements issuing from Bear or Lehman in their final days.  Executives who find themselves in a credit crunch are in a nearly impossible position.  The best way they can serve equity holders is to downplay or even bury bad news to head off the looming crisis of confidence.  But if they do so, they face presecution for making false statements about the company, ironically under laws meant to protect equity holders.

Megan McArdle writes:

Let's be honest, coastal folks:  when you meet someone with a thick
southern accent who likes NASCAR and attends a bible church, do you
think, "hey, maybe this is a cool person"?  And when you encounter
someone who went to Eastern Iowa State, do you accord them the same
respect you give your friends from Williams?  It's okay--there's no one
here but us chickens.  You don't.

Maybe you don't know you're
doing it.  But I have quite brilliant friends who grew up in rural
areas and went to state schools--not Michigan or UT, but ordinary state
schools--who say that, indeed, when they mention where they went to
school, there's often a droop in the eyelids, a certain forced quality
to the smile.  Oh, Arizona State.  Great weather out there.  Don't I need a drink or something? This person couldn't possibly interest me.

People
from a handful of schools, most of them hailing from a handful of major
metropolitan areas, dominate academia, journalism, and the
entertainment industry.  Our subtle (or not-so-subtle) distaste for
everything from their entertainment to their decorating choices to the
vast swathes of the country in which they choose to live permeate
almost everything they read, watch, or hear.  Of course we don't hear
it--to us, that's simply the way the world is. 

I have written before that I go out of my way not to mention my
double-Ivy pedigree within my business dealings because it tends to cause my
employees (who often have no degree at all) to clam up.  I absolutely
depend on their feedback and ideas, and those dry up if my employees
somehow think that I'm smarter than they are and they start to be afraid to "look stupid."

But McArdle's post causes me to think of another reason not to be snobbish about my eastern degrees.  I meet a lot of rich and succesful people out here in the Phoenix area, and I can't remember the last one that had an Ivy League degree.  I am thinking through a few of them right now -- ASU, ASU, Arizona, Kansas State, Tulane, no college, San Diego State....  Getting uppity about my Harvard MBA around here only leaves me vulnerable to the charge of "Person X went to Montana State and is worth $10 million now -- what the hell have you been doing with that Harvard MBA?"  Here in flyover country, college degrees and family pedigree are not really strong predictors of business success.

This is a reprise of a much older post, but since I have limited time for blogging, I thought it might be timely to reprise it:

I had a conversation the other day with a person I can best describe
as a well-meaning technocrat.  Though I am not sure he would put it
this baldly, he tends to support a government by smart people imposing
superior solutions on the sub-optimizing masses.  He was lamenting that
allowing a company like GM to die is dumb, and that a little bit of
intelligent management would save all those GM jobs and assets.  Though
we did not discuss specifics, I presume in his model the government
would have some role in this new intelligent design (I guess like it
had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of
various skill levels who have productive potential.  These physical and
human assets are overlaid with what we generally shortcut as
"management" but which includes not just the actual humans currently
managing the company but the organization approach, the culture, the
management processes, its systems, the traditions, its contracts, its
unions, the intellectual property, etc. etc.  In fact, by calling all
this summed together "management", we falsely create the impression
that it can easily be changed out, by firing the overpaid bums and
getting new smarter guys.  This is not the case - Just ask Ross Perot.
You could fire the top 20 guys at GM and replace them all with the
consensus all-brilliant team and I still am not sure they could fix
it. 

All these management factors, from the managers themselves to
process to history to culture could better be called the corporate
DNA*.  And DNA is very hard to change.  Walmart may be freaking
brilliant at what they do, but demand that they change tomorrow to an
upscale retailer marketing fashion products to teenage girls, and I
don't think they would ever get there.  Its just too much change in the
DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you
still have a culture aimed at big box low prices, a logistics system
and infrastructure aimed at doing same, absolutely no history or
knowledge of fashion, etc. etc.  I would bet you any amount of money I
could get to the GAP faster starting from scratch than starting from
Walmart.  For example, many folks (like me) greatly prefer Target over
Walmart because Target is a slightly nicer, more relaxing place to
shop.  And even this small difference may ultimately confound Walmart.
Even this very incremental need to add some aesthetics to their
experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA
has a multiplier greater than one, meaning that it increases the value
of the people and physical assets in the corporation.  When I was at a
company called Emerson Electric (an industrial conglomerate, not the
consumer electronics guys) they were famous in the business world for
having a corporate DNA that added value to certain types of industrial
companies through cost reduction and intelligent investment.  Emerson's
management, though, was always aware of the limits of their DNA, and
paid careful attention to where their DNA would have a multiplier
effect and where it would not.  Every company that has ever grown
rapidly has had a DNA that provided a multiplier greater than one...
for a while.

But things change.  Sometimes that change is slow, like a creeping
climate change, or sometimes it is rapid, like the dinosaur-killing
comet.  DNA that was robust no longer matches what the market needs, or
some other entity with better DNA comes along and out-competes you.
When this happens, when a corporation becomes senescent, when its DNA
is out of date, then its multiplier slips below one.  The corporation
is killing the value of its assets.  Smart people are made stupid by a
bad organization and systems and culture.  In the case of GM, hordes of
brilliant engineers teamed with highly-skilled production workers and
modern robotic manufacturing plants are turning out cars no one wants,
at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the
right managers and a crisis mentality, to evolve DNA over a period of
20-30 years.  One could argue that GE did this, avoiding becoming an
old-industry dinosaur.  GM has had a 30 year window (dating from the
mid-seventies oil price rise and influx of imported cars) to make a
change, and it has not been enough.  GM's DNA was programmed to make
big, ugly (IMO) cars, and that is what it has continued to do.  If its
leaders were not able or willing to change its DNA over the last 30
years, no one, no matter how brilliant, is going to do it in the next
2-3.

So what if GM dies?  Letting the GM's of the world die is one of the
best possible things we can do for our economy and the wealth of our
nation.  Assuming GM's DNA has a less than one multiplier, then
releasing GM's assets from GM's control actually increases value.
Talented engineers, after some admittedly painful personal dislocation,
find jobs designing things people want and value.  Their output has
more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).
A LOT of Europe's productive assets are locked up in a few very large
corporations with close ties to the state which are not allowed to
fail, which are subsidized, protected from competition, etc.  In
conjunction with European laws that limit labor mobility, protecting
corporate dinosaurs has locked all of Europe's most productive human
and physical assets into organizations with DNA multipliers less than
one. 

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
**
Gratuitous reference aimed at forty-somethings who used to hang out at
the mall.  In my town, Merry-go-round was the place teenage girls went
if they wanted to dress like, uh, teenage girls.  I am pretty sure the
store went bust a while back.

US Airways has chosen to try to cover rising fuel prices by unbundling their ticket price and charging for services that were here-to-fore free, or built into the base ticket price.  They now charge $15 for the first piece of checked baggage ($25 for the second), and charge for most in-cabin services, including for soft drinks.

I'm not going to argue with them about this.  Airline pricing is a wickedly complex topic, and folks who know more than I do think this is the best way to get incremental revenue.  Really, these charges don't affect me (I almost never check bags, except when on vacation with my family).  In fact, as I write this, it strikes me that the baggage charge is really a price hike mostly on non-business travelers, which is interesting as it bucks the trend of having increasing price spreads over the years between business/last-minute and tourist pricing.

Anyway, the net effect has been to absolutely jam the security screening station this morning.  Every passenger seems to be carrying every bag he or she can on board to avoid the $15 charge.  What a mess.  I can't wait to see what the boarding process is going to be like.  Glad I don't have any bags today.

By the way, a few weeks ago I shipped a 60 pound trunk to my kids' camp for about $16 via UPS.  If these airline bag charges stick, it might be time for UPS to start soliciting the send-your-luggage-ahead business in earnest.  Next time we go skiing or some such place, I am going to seriously consider sending a couple of duffle bags ahead by UPS.

Update: The luggage bins were completely full before the fourth group out of six were called.  There was a fairly long line down the jetway of people gate-checking their bags.  Apparently, the airline is not set up to charge the $15 when they gate-check the bags, so everyone is hauling all of their bags to the gate and either bringing them on the plane or checking them at the gate for free.