On Chrysler, Private Equity and Bailouts

The auto industry’s recent troubles have shoved normally secretive private equity firm Cerberus Capital into the spotlight, as its portfolio company, Chrysler, heads to Washington to ask for a bailout. Much has been written decrying Chrysler’s audacity, claiming Chrysler is less deserving than Ford or GM because it is privately held, or with headlines like “If Cerberus will not invest further in Chrysler, why should the taxpayers?”

I strongly disagree with this argument, and the general one that just because Chrysler is not public, it is less deserving of a bailout than Ford and GM. You may be surprised at the actual ownership of Ford and GM - the majority of their shares are held by investment houses similar to Cerberus. 71% of Ford’s outstanding equity is institutionally owned, and in addition, 40% of its voting rights are controlled by the Ford family. GM is 78% institutionally owned.

Also, why is the public not aghast that Ford and GM cannot raise additional equity from their existing shareholders? If Ford and GM cannot float additional equity on the public market, why should the taxpayer invest? The answer is that none of the Big 3 can raise additional equity because their market cost of capital is astronomical. This is why the government has to step in - neither the private nor public markets are willing to make any sort of further bet on these companies.

In addition, Cerberus has agreed to forfeit any profit it may make on its Chrysler investment if it receives government money. Ford and GM’s public shareholders have clearly made no such promise.

To be clear - I am in no way in favor of a bailout for any of the Big 3. These are sick companies, and they need to die. However, discriminating against Chrysler because they are privately held is really inappropriate.

 

The Magic of Facebook Ads

I had an amazing experience tonight on Facebook that I thought I would share.

Barack Obama is coming to Wake Forest tomorrow. Limited tickets were available for free on a first come, first serve basis to the student body. Unfortunately, I wasn’t quick enough, and didn’t get a ticket, and neither did my two roommates. After four years at Wake, I’ve missed the chance to see a number of big name political speakers, and I wanted to make sure I got to see at least one before graduation.

I tried emailing my fraternity’s listserv to see if anyone had any extra tickets they weren’t using - no luck. I emailed the president of the campus College Democrats - no tickets left, the event is sold out. However, I was determined to get a ticket, so I turned to the best medium I knew to contact as many college students as possible - Facebook.

At 11pm tonight, approximately 10 hours before the doors were scheduled to open for Obama’s speech, I created a Facebook ad offering $25 to anyone with extra tickets. I was easily able to target it to all students at Wake Forest (though I could have customized it further - by interests, class year, major, and many other criteria). I chose to pay per click, and set a maximum budget of $5. After I pressed “Create my ad”, it was a matter of minutes before Facebook had shown my ad over 6,000 times. Within the hour, I received messages from 4 separate people offering to sell me their tickets. The entire thing cost me $4.97 - that’s only about 8/100ths of a cent per impression. (As a side note - this is incredibly low as far as online advertising goes - a problem for Facebook that has been mentioned before as one of their biggest weaknesses)

Tomorrow morning both of my roommates and I will see Barack Obama speak in a sold out coliseum that I didn’t even have tickets to until less than 10 hours before the event.

Now that’s the power of the internet and social networks - and it’s those kinds of results and precise targeting that make Facebook worth $15 billion (though I do think that’s a bit high, considering their monetization difficulties).

 

Barstool Economics (on Taxes)

As the presidential elections approach, we’re hearing more and more (especially from the Democrats) about raising or eliminating wage caps for social security taxes (as a side note - this would represent the largest tax hike in American history), repealing President Bush’s tax cuts for the rich, or other various plans that would further increase taxes on the top 25% of American wage earners.

I was forwarded the following parable, written by David R. Kamerschen, Ph.D. Professor of Economics at the University of Georgia entitled “Barstool Economics”. I think that while it is a bit simplistic, it is definitely timely and interesting.

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