Tuesday, March 24, 2009

The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit

The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit by Thomas J. Sugrue. Princeton University Press, New Jersey (c. 2005).

World War II gave American race relations an opportunity to choose a new path.  During the war, Detroit powered the American army, and stood atop the nation as the symbol of industrial ability.  Land, labor, capital, and entrepreneurship primed the pump that fueled Detroit.  Every player in the economic boom pursued his maximization of utility.  Status quo of the city provided this maximization of utility at the expense of African Americans.  Thomas Sugrue, in The Origins of the Urban Crisis, highlighted the city’s massive expansion, thirst for resources, and policies that fed its fall.  Detroit’s maintenance of the malfunctioning standard, instead of pursuing sustained innovation, led to the collapse of the city.

During the creation of Detroit’s industries and, more acutely, during World War II production, labor shortages brought higher wages for the city’s manufacturing jobs.  Well paid workers, in order to control wages, created an artificial labor shortage with discrimination and segregation.  Managers provided excuses for the segregation, saying they “feared that white workers would strike or lose morale if the color line were breached” (93).  Union leaders stated support for integration, but acted oppositely. At union shops, “disproportionately few blacks held union posts” (101), while “on the national level, the UAW was on the cutting edge of civil rights” (100).  In 1955, Michigan passed the Fair Employment Practices Law.  Employers exchanged explicit discrimination for disparate impact: “prospective workers found their way to the union through references from friends and relatives.  Here, housing segregation reinforced hiring discrimination” (107).  White control over wages was founded on control of labor supply. Once employees asserted groups of individuals were inferior, the labor supply was halved and wages forced upwards.  The system rewarded every white person with greater opportunities than half the population. Marginalizing African American maximized these rewards for white workers, and “patterns of discrimination fluctuated depending on the relative supply of black and white labor” (122).  As workers maintained artificially high wages, Detroit’s industrial costs soared and “employers left industrial centers with high labor costs for regions where they could exploit cheap, nonunion labor” (138).

Discrimination of African Americans in the workplace diffused into society.  Even segregating neighborhoods created shortages for white and black living spaces. Vultures of society maintained status quo because segregation provided a benefit.  For real estate agents, threat of integration created artificial turnover:

"Blockbusting" real estate brokers, as they came to be called, offered real opportunities for blacks, while sowing panic among whites.  Working both sides of the embattled racial frontier made a lot of real estate brokers rich. (195)

Real estate agents received higher compensation from protectionist neighborhoods assaulted by rumors of integration.  Shrewd landlords extorted black tenants living in dilapidated neighborhoods with excessive rent and destitute conditions.  Individuals maintained the dual systems because they maximized utility.  Two artificial markets, employment and housing, allowed deficient individuals to assert superiority over half the population with an easily distinguishable feature: skin color.  Using segregation, individuals scrambled for larger pieces of the flagging industrial complex, and, doing so, thwarted an innovative, entrepreneurial future.

Sugrue argues that Detroit’s economic foundation of and federal funding of segregation premised a collapse.  Companies received greater gain when they deserted the artificial markets of Detroit. The tone of Origins of the Urban Crisis exposed the author’s passion for examining urban blight.  Comprehensive sources included community council memorandums, FDR speeches, US social-political dissertations, newspapers, and time period surveys.  Surgue constructed the sources into a profound statement: Detroit’s fall was evitable.  Government, society, businesses, unions, and education failed to provide positive direction to establish the city as a reigning industrial powerhouse.  Each player acted as if the outcome was a zero-sum game.

After writing my review, I read about the Nash Equilibrium.  Asymmetrical information and violent defense of the status quo in the public sector created a stalemate for Detroit.  No group gave ground for the fear of being trampled.  These groups eventually made it inhospitable for business in the city.  In the end, the entire city was trampled.

Sunday, March 22, 2009

Citibank Indonesia

Written with Mahendra Madhavan for a case study in our Global Financial Management course.


Citibank must answer questions regarding its purpose within Indonesia. Bank headquarters has requested higher net incomes, augmenting a currently aggressive budget. Citibank’s quest for higher profits could negatively affect the bank’s long-term leadership in Southeast Asia.


Citibank expanded into Indonesia in 1968. By 1983, the local Citibank official in Indonesia, Mr. Mistri, maintained a profitable division which tracks the growth of the country. Attaining the profit growth correlation with the Indonesian economy was an original reason for expansion into Indonesia. The government of Indonesia had requested international banks to make the foreign direct investment to increase human and financial capital. In 1983, Citibank corporate managers increased the Indonesia’s after-tax profit goal by $500,000 to $1,000,000. In pursuit of these goals, the local Indonesia Bank officials based decisions on diverse risks, regulatory restrictions, local growth and competition, and personal compensation.

Investment Risk

Due to corporate business controls, local bank officials are allowed maximum exposure to a country, but may exercise an ability to stay lower than maximum. These controls are set by collaboration between corporate and local bank officials. While the acceptable sovereign risk derived with the budgets, the risk limits are available prior to the budget process. By fixing acceptable sovereign risk prior the budgets, the probably income can be setup dependant on risk, and risk independent of desired income. However, if the risk review was not complete prior to the budget, the company risked an adjustment game of tweaking budget and risk levels instead of making solid analysis.

In 1983, when corporate bank officials pushed down an increase in net income, they did not provide any guidance for increasing risk, nor make adjustments to the weighted average cost of capital. A CAP model states an increase of reward is accompanied by an increase in risk. When corporate officials increased budgeted income arbitrarily without respect to risk, they degraded the previously accepted budgeting process. Citibank corporate officials should provide a dialog for corporate and local officials with regards to the desired risk and return characteristics from the region.

Economic Risk

Citibank had achieved one of its major goals in Indonesia of sharing in the growth of the Indonesian economy. Between 1968 and 1983, nominal GDP averaged 27% growth. However, real GDP growth only achieved 7%. If purchasing power parity held with respect to translation rates, Citibank should have achieved 7% over the same period. Assuming the original, aggressive budget was in line with expected real GDP growth, any addition to the net income would defer from original business strategy in Indonesia.

Due to Indonesia’s natural resources, expectations were negative because of short-term, falling oil prices. The GDP of the country for the coming year was uncertain. An increase in sovereign exposure during uncertainty gives Citibank less certain outcomes, but could mean exceptional growth if the country does perform well. If Citibank presses increased profits from Indonesia, it will increase its risk in relation to the local economy, and may not achieve profits.

Competition & Conflict of Interests

Citibank has provided increased training for human capital within the banking sector. An increase in capabilities has increased the knowledge of the entire sector, and increased competition. Higher degree of banking sector knowledge and skill calls for higher compensation packages which decrease profits. Competition for staff with local banks also pushes up compensation. Furthermore, a cultural flight from being trained at Citibank to employment at a local bank creates a political dilemma for the transnational bank. The increased competition pushes costs higher, and revenues lower. All the while, the Indonesian government has very defined roles for the foreign bank.

Bank compensation and bonuses are derived from budget versus performance measures. Since local bank officials wish to maintain bonus levels and the future is uncertain, there is a propensity to set the budget bar low. Mr. Mistri set a slight increase in revenue and a drop in profits. He considered this budget “aggressive,” but other facts from the case would call his budget “soft.” Competition could cause higher costs and lower revenues, but not to an extent to lower profits. Citibank’s Indonesian income, which correlates with the GDP, should not be negative unless real GDP is negative. Mr. Mistri appears to have set a low watermark that is easy to achieve, and will maximize his bonus.

Regulatory Restrictions

Since Citibank is a foreign bank, it lacks ability lobby the government. Furthermore, since Indonesian banking is still developing, the government imposed strong restrictions on foreign banks to prevent them from creating a tilted balance of payments. These regulatory restrictions and expectations of foreign banks limits Citibank’s expansion. It must conform to the government’s expectation, and remain within the confines of Jakarta.


Reduce / Eliminate Prime Government & Corporate Loans Mr. Mistri could accept the budget changes and make changes to the investment allocation. By removing portions of the prime government and corporate loan portfolio, the bank could make riskier loans which should increase profits. Any move to reduce this portfolio would be outside the expectations of the Indonesian government, and could cause political backlash.

Increase Principal Invested / Value-at-risk in prime loans Citibank could increase the principal investments of prime loans and increase notional interest earned. Internal controls support this action because the bank currently invests less than the acceptable sovereign risk in Indonesia. These actions would lower target return on assets and return on equity for Citibank within the country, because prime loans would achieve less than 1.25% and 20% respectively. Political risks also accompany this decision: an increase of capital inflow would negatively affect the balance of payments, which Indonesian government had been working hard to stabilize.

Search for New Sources of Revenue Citibank could search for new sources of income. Developing a new market for current products would increase sovereign risk. Finding new ventures and establishing relationships would increase costs, and could provide limited results. Regulation has limited Citibank’s expansion possibilities, and any expansion would be limited to Jakarta proper. Since the bank has operated in Jakarta, it would have to take riskier loans to provide sources of revenue.

Change Nothing Mr. Mistri could make no changes to operating procedures. Such action would increase risk to Mr. Mistri within Citibank. By accepting changes to the budget, yet not making changes to the operating plan, his employment is tied to a recovery of the Indonesian economy.

Resist Changes to Budget Lastly, Mr. Mistri could resist changes to the budget. During his tenure at Citibank, he has established sweat equity and gained promotions. He has established himself as a leader, and has been rewarded for it. He could resist changes to the budget, and provide an insightful rebuttal outlining the flaws of the increased budget requirement: any increase in the net income expectations should be accompanied with a dialogue regarding expected risk.

Thursday, March 19, 2009

Follies of the AIG Tax

H.R. 1598: The AIG Key Executives Bonus Accountability and Capture (TAKE BACK) Act

To amend the Internal Revenue Code of 1986 to impose a higher rate of tax on bonuses paid by businesses receiving TARP funds.

Today, the House passed the bill enacting a 90% tax on all income from bonuses greater than $250,000 from a company that received greater than $5 billion in TARP funds. Such action assumes every person who received a bonus at AIG did not deserve the compensation.

A government should never have the ability to decide an individual is “unacceptable” for high compensation. If passed by the senate, I believe this tax will be tested in the court system and overruled. It’s a tax with punitive and vindictive motives, and targets a specified group of individuals. I consider a person’s right to earn a market wage is as strong as his right to speech.

Tuesday, March 17, 2009

Euro Disney or Euro Disaster

Written with Mahendra Madhavan for a case study in our Global Financial Management course.


For Walt Disney Company, Tokyo Disneyland failed. The arrangement for the Tokyo theme park capped profits for the Walt Disney Company. Blinded by the success of its first international theme park and failure of the profit, Walt Disney Company was focused more on declaring a profitable arrangement, than asking the marketing and financial questions that would lead to success.

Why Euro Disney did not succeed in Europe?

Euro Disney failed on many fronts. Walt Disney Company lacked understanding of the culture in Europe. Europeans, with 4-5 weeks of vacation, took destination trips, usually by airplane, on their work vacations. This cultural norm contrasted the easily accessible location Disney chose. Europeans did not consider Euro Disney a vacation spot; only, a place to spend a day. Location failure reduced the revenue generation inside the park, and the destination appeal of the park.

Modern imperialism consists of export the culture. American culture replaced prime French farm land with Euro Disney. French intellectuals considered the park a threat to future generations, who would lose their cultural identity and start speaking in English. Sensationalizing the cultural failure, some called it a “Cultural Chernobyl”.

Europe’s most severe recession since World War II, lead to an inopportune opening for Euro Disney. Furthermore, the strength of the French currency deterred Europeans from converting to the franc. The combination of the recession and currency exchange curbed spending by international travelers. During the 90s, currency situations in Europe created complexity for Disney. Either the park would manage desired exchange rates or settle on one currency.
Euro Disney and Walt Disney Company capital structure guaranteed profit for the Walt Disney Company, and drained the cash flow from Euro Disney. Walt Disney Company’s 49% equity stake, favorable royalty and management fees with scheduled increases was advantageous even if Euro Disney did not turn a profit.

Enormous interest charges on US$ 3.56 billion in debt arose from the highly leveraged capital structure with various creditors, including: syndicate of 60 international banks and, the French government. Adding to the weight of debt, construction was over budget by 30%. In the end, Euro Disney reported a $900 million loss in the first operating year. Debt restructuring two years after completion of Euro Disney, lead executives to admit original business plans have “weaknesses”. The royalty and management fees and debt service sapped the life out of Euro Disney.

Why Tokyo Disneyland succeeded?

Tokyo Disneyland was the first international theme park by Walt Disney Company outside of the United States. Built on a reclamated land east of Tokyo Bay, unlike Euro Disney, it was a phenomenal success.

Opening of the park coincided with the introduction of five-day work week in Japan and a strong, growing economy. Culturally, the Japanese were spending more time on leisure activities. Tokyo Disneyland became the symbol of a new a Japanese lifestyle – enjoying free time with friends and family rather than constantly working.

Disney cartoons and films were extremely popular in Japan and 200,000 Japanese visited Disneyland each year. Tokyo Disneyland made it possible for Japanese to visit the park without traveling to California. In addition, the fortunate location was accessible for 35 million Japanese within 90 minutes of driving distance. Contrary to Europeans, Japanese vacations were short, which made Tokyo Disneyland a successful tourist destination.

Tokyo Disneyland was designed for adults, particularly young couples. Prices were steep ($40 for adults), but the families sacrificed other activities. Enormous revenue generation paid off the debt in three years. Through the first ten years of operation, Tokyo Disneyland’s sales and attendance figures rose steadily.

What can be done to make Euro Disney a more profitable park?

Sales and Marketing. A growth strategy for the park would only be successful if it provides substantial increases in revenue. Pro forma statements from 1995 to 1999 (see attached) show the park must double revenue to approach profitability.

To do this, Euro Disney should modify the sales strategy to suit Europeans. At the time, individuals relied on travel agents and tour operators, which Disney had largely neglected. The company must actively cultivate relationships with tour operators to increase sales. In addition, marketing strategies must encourage tourists from neighboring countries to visit Euro Disney. Recent surveys indicate the German market accounts for 8% of visitors, 40% from France, 18% from Benelux (Belgium, Netherlands, and Luxembourg) countries and 15% from Britain (Ref. 1). The increase in visitors does not translate into profits; however, more foreign visitors will lengthen the average stay. Increasing length of on-site stay does translate into more auxiliary revenue: meals, rooms and Mickey Mouse ears. Profit doesn't come from the theme parks but from high-margin businesses such as hotels, restaurants and shops.

Increasing marketing and sales is a highly risky strategy. Recent gross margin is about 30% (see Normalized Income Statement), and the most recent figures show the net loss to be greater than the total revenue. Any impact on the top line carries greater costs in sales, general, and administrative, and will reduce gross margin.

Capital infusion / Walk away. Walt Disney could provide a capital infusion for Euro Disney. This action will not find approval from the shareholders of the Walt Disney Company; which essentially would prop up a separate legal entity, Euro Disney. Walt Disney Company’s cultural norm is a shareholder approach, but Euro Disney exists in a stakeholder environment. The French government, a syndicate of European banks, the French economy, and among others are stakeholders. This stakeholder approach eliminates Walt Disney’s ability to allow the park to go into receivership.

Coasting. A third alternative is allowing the park to generate a breakeven revenue. We termed this approach “coasting.” It saves face for the Walt Disney Company; hence, preventing the image of “Walt Disney” from being hurt internationally. To default on the park or continued failed expansions will damage the reliability of the company, and prevent future international endeavors in the BRIC (Brazil, India China) economies.


1. http://www.time.com/time/magazine/article/0,9171,901020325-218398,00.html

Arc of Justice

Arc of Justice: A Saga of Race, Civil Rights, and Murder in the Jazz Age by Kevin Boyle. Kevin Boyle (c. 2004).

Racial storylines cut through time and geography of American history. Kevin Boyle’s Arc of Justice traced segregation from the destination to the source. The author’s construction of characters and segregation defined a solitary outcome that ensued in the streets, and then in the courtroom.

Boyle structured the narrative of the 1925 fight against real estate segregation as a culmination of events. The narrative centered on a house with African American owner-occupiers in a white neighborhood of Detroit. A mob, which contained experienced segregationists, surrounded and assaulted the house. The mob hurled rocks at windows and bricks at the walls. To halt the mob, African American tenants fired shots and struck two white men, killing one. After loading the house’s occupants into a police vehicle, the author filled in the back story.

First, Boyle described Ossian Sweet. He was an African American doctor, who purchased and began to move into the house on Detroit’s Gardland Avenue. Armed with the arsenal of men and weapons, Sweet prepared to be assaulted. Sweet’s preparation derived from his childhood experiences, college doctrine, and events of the previous summer. Sweet’s grandparents lived through the bonds of slavery and the hope of reconstruction. His parents battled with the constitution of segregation. Sweet’s own life challenged the opaque ceiling of segregation. As a child in South Florida, he witnessed barbarous acts against his race. At college and medical school, W.E.B. Dubois encouraged African Americans to violently fight for their place. After graduation from Howard University medical school, he setup a profitable practice, and traveled the world. By the summer of 1925, Sweet established himself as an elite member in Detroit society. The same summer saw violent ejections of African Americans from their homes in whit
e neighborhoods. When Sweet moved to a white neighborhood, he prepared to defend his house. However, Sweet’s goal was not to shoulder the race; to him, “it was partly the way that discrimination struck at the professional pride that he was so eagerly embracing” (93). Antecedents built his stoic character with a yearning to be admired.

As a character is introduced, the author told the background of the individual. Lawyers, NAACP leaders, blue-collar workers, and police officers became caricatures of the author. Each had abnormal traits expanded to the point of predictability. As a rhetorical, flirtatious lawyer, Clarence Darrow wound his six hour closing argument, and discovering his wife was not in the audience, moved closer to his newest mistress. Working class Caucasians were stereotyped as a powerful mob composed of weak units. The white mayor and judge were characterized as politically savvy, yet gutless. Each man skirted the edge of defending Sweet. No matter the outcome of the trial, the positions taken by the mayor and judge allowed them to side with the victor.

Arc of Justice’s greatest strengths were the stories behind the creation, maintenance, and vulnerabilities of segregation. After of the Civil War, Reconstruction took on a feverish quest for reconciliation. Commercial interests of the Republican Party encouraged justice to unfold for African Americans. Freed slaves benefitted from actions of “political opportunists more interested in bringing northern business interests to Florida—and fattening their wallets” (53). From the south, hot on the tails of African American migration, segregation spread northward. Powerful individuals ensured their commercial and power structure through segregation. Real estate agents, blue-collar workers, and politicians created dual marketplaces to maximize their commercial gain. Everyone who profited from segregation “knew how to be cruel. But they had to create a social system premised on cruelty” (55). Ossian Sweet journeyed the path prescribed by the African Methodist Episcopal Church: “by their accomplishments, they would force whites to acknowledge their equality” (51). Sweet challenged the institution as an honest man clearing more hurtles and achieving more than the violent offenders sustaining segregation. His achievement was his brick to the window of segregation.

Boyle’s writing had a varied pace, and indulged in speculation. When writing of assaults, concise phrases conveyed quickness. When writing the history of Darrow, longer sentences slowed the message. To move quickly, he cited headlines, and memoirs to move slowly. In order to delight the story, narrative license seeped into the authors writing. To discuss tactics the legal defense may use, Boyle riddled a paragraph with no citations and the indefinite terms “could” and “might.” Speculation confused the history, but excited the story.