American Society

This Dimon Doesn’t Have it Rough Enough

Jamie Dimon, CEO of JP Morgan Chase, is back in the news railing against those who bash the rich:

Dimon was responding Wednesday to a question at an investor conference about the hostile political environment towards banks.

“Acting like everyone who’s been successful is bad and that everyone who is rich is bad — I just don’t get it,” said Dimon at the conference, which was organized by Goldman Sachs Group Inc.

Dimon said he’s worked on Wall Street for much of his life and contributed his fair share.

“Most of us wage earners are paying 39.6 percent in taxes and add in another 12 percent in New York state and city taxes and we’re paying 50 percent of our income in taxes,” Dimon said in defense of his fellow Wall Street bankers. See Jamie Dimon Rails Against “Rich is Bad” Talk

Are We Bashing the Rich or the Well Connected?

America is a land of opportunity. Children of poor immigrants can grow up to be President, entrepreneurs, brilliant scientists or even CEOs of Fortune 500 companies. Thus, Americans venerate a Steve Jobs or a Bill Gates. Not that these individuals are without detractors, but they are admired for starting from scratch, innovating, and filling a market need. Often these individuals single-handedly create the market for their products and services. See All Millionaires are not Created Equal

Let’s examine why Jamie Dimon and other bankers are less admired and often vilified. Note the deft sleight of hand in Mr. Dimon’s answer to the question: the question posed concerned the hostile environment toward banks. Mr. Dimon’s response is that he does not understand why the public thinks that everyone who is successful is bad. He in fact never answered the question of why everyone hates banks.

At the core of the hatred of banks (and perhaps Mr. Dimon himself) is crony capitalism. Mr. Dimon’s “success” is owed largely to the unholy alliance between the Bush and Obama Administrations and the Too Big to Fail Banks. Let’s examine the blessings the government has bestowed on Mr. Dimon:

Bear Stearns – JP Morgan Chase and Mr. Dimon merged with the “failing” Bear Stearns, paying $10 per share for a company that had recently traded at $93 per share. The Federal Reserve then made a $29b non-recourse loan to JP Morgan secured only by the mortgage backed securities of Bear Stearns. Thus, the Federal Reserve could not seize JP Morgan Chase assets, if the Bear Stearns collateral proved insufficient to repay the loan. See Seeking Fast Deal, JP Morgan Quintuples Bear Stearns Bid, Wikipedia

Secret Loans from the Federal Reserve – From 2007-2009, the Federal Reserve made $7.7 trillion of secret loans to 190 financial institutions, resulting in profits of $13b. These loans were at below market rates, virtually free, ensuring profit for the banks. Bloomberg, which made the Freedom of Information Act request, estimated that JP Morgan profited in the amount of almost $458m. Mr. Dimon did not disclose these loans or the banks’ need to his shareholders:

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation. See Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress

Zero Interest Rates – The zero interest rate policy of the Federal Reserve continues to permit banks to borrow at below market rates, thus enhancing bank profits at the expense of savers.
Compensation – While being rescued by the Federal Reserve, JP Morgan Chase’s board awarded Mr. Dimon a $17m bonus for 2009. In 2010, Mr. Dimon made $20.8m. JP Morgan partisans will argue that this was modest compared to industry peers. Should US taxpayers, those of us who ultimately stand behind these loans, reward executives with large compensation packages? Unlike the situations of most of the rest of us, JP Morgan Chase makes available to its top executives tax advantageous programs such as the permitting tax deferral of compensation, 401k plans, a defined benefit pension plan and use of the company plane. If terminated without cause, Mr. Dimon would receive cash and stock awards valued at $16.7m. See Are CEOs Paid too Much: Not All of Them; JP Morgan Chase CEO Gets $17 Million N0-Cash Bonus; Elements of Executive Compensation (JPM); JP Morgan Chase 2010 proxy

Being Rich Isn’t the Problem

Yes, there is income inequality and we have heard endlessly about the elite 1% profiting at the expense of the 99% of ordinary Americans. But the real hostility goes deeper than just these income disparities. There is a good reason why Mr. Dimon chose not to discuss the hostile environment toward banks. He is well aware of why it exists: the American public has been treated to the spectacle of secret loans to banks; CEOs have been permitted to keep their jobs after nearly destroying their own banks and the US economy; too generous executive compensation practices and perquisites continue which ignore the fact that taxpayers needed to bail out these institutions (and will probably have to do so again); banks still fail to undertake serious loan modification programs for underwater homeowners; they hoard excess reserves at the Federal Reserve rather than make loans to stimulate the real economy; they attempt to impose fees on cash withdrawals from ATMs; and finally and disgracefully, these banks have not been prosecuted.

Mr. Dimon, the focus is on you and other bankers, not necessarily “the rich.” Perhaps we need more hard hitting articles like the Bloomberg piece on secret loans to banks, to focus the attention on the true issues, not bogus articles of class warfare. Unfortunately, neither the press nor the Administration has been rough enough on Mr. Dimon.

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American Society / Education / Ethics / law / Management / Political — 0 Comments
25
Nov 11

Cheating

An ongoing cheating scandal in the affluent suburbs of New York City now stains our headlines. Students in several outstanding academic high schools paid test takers to take their college entrance exams. Six students were arrested in September, and earlier this week an additional 19 students either surrendered to the police or were arrested. Students paid these test takers $500 to $3500. See More Arrests in SAT Cheating Investigation.

It is too easy to blame this behavior on the decline in morality evinced by Wall Street scandals and the behavior of our political class. A deeper point needs to be addressed. We have become a society of numbers and meaningless symbols. How much do you make per year? What school did you attend? How much is your house worth?

Hiring by the Numbers

For much of my career, a significant part of my responsibility was the hiring and supervision of attorneys in a large legal department. At best, hiring is a crap shoot. Despite a glossy resume, one can never tell why someone is in the job market at any given time, or how that person will actually meet the standards and fit the profile of the job for which they are interviewing. Usually complicating the decision making process is the legal department’s need to hire experienced attorneys with a minimum ten years experience. In this environment a new hire was expected to perform at an extremely competent level with little or no training or supervision, the proverbial “hit the ground running” paradigm.

One of my peers hired strictly by the numbers. A candidate had to be a graduate of one of the top 41 law schools, and had to have more than a 700 LSAT. My colleague preferred a candidate to have a background as a prosecutor with US Attorneys’ Office or the Judge Advocate General.

After a while, I broke the code on my colleague’s idiosyncratic requirements. I discovered that he used the Gourman Report of Graduate Programs. Dr. Gourman does not reveal his exact methodology or statistics. Generally, the Gourman Report methodology asks university graduate departments to rate each other, and assess which they think are best in their field. By definition then, this questionable methodology yields a self-reinforcing cycle of the top programs continuing to nominate each other in a reciprocal and mutual admiration society. See Caveat Emptor: The Gourman Report for a critique of the report’s methodology. The same large prestigious universities continue to populate these lists. Page 1 of the Gourman Report list of law schools had exactly 41 names; my colleague’s law school alma mater happened to be number 41. Thus, I deciphered my colleague’s “scientific” method of hiring and the inherent folly of using numbers to find good people. (Soon thereafter, for amusement I confronted him and pointed out that to be really scientific he would have to find the Gourman report related to the year that the candidate graduated law school to really ascertain whether he was hiring a true “top 41” candidate.)

In another example of this folly, we later merged with a company which would only hire candidates who had combined SATs over 1500, LSATs over 700, a top 15 law school degree (thank goodness for Gourman) and experience in a prestigious law firm or prosecutor’s office.

I am still amazed that I was ever hired, promoted or retained after we completed several major mergers. I fit none of these criteria nor did many of the best attorneys in our legal department.

The Hard Work of Hiring; the Harder Work of Assessing Job Performance

The SATs are primarily predictors of how well one will perform on tests like the SAT’s. Since they were instituted as a method of evaluation, they have been repeatedly called into question as predictors of college success. Further, how well one performs in college and law school is not a total predictor of how well one performs in that first law job. At each step, real life intrudes, essential character and temperament inserts itself into the process, and a lawyer has either learned to practice law competently or not.

No short cuts or quantitative formulas exist in making hiring decisions. Generally, every candidate I interviewed had a good academic and work record. Intelligence, analytical prowess and certainly test numbers were merely table stakes to get in the door. Other more important factors determined whether or not an attorney would be successful in a corporate environment. In evaluating candidates, I tried to ferret out the following:

Can they work under pressure, or under attack?
Can they take on a project with minimal supervision?
Are they willing to put in long hours, including nights and weekends, to accomplish the job?
Are they patient and persistent; can they see a project to its conclusion?
Are they creative; have they ever displayed ingenuity? Can they work with and lead a team of lawyers and business people?
Do they communicate clearly in speech and writing?
Can they accept criticism?
Do they respect subordinates as well as superiors?
Do they display emotional intelligence; can they intuit the atmosphere as well as the facts of a situation?
Is integrity clearly a part of their makeup? Has it ever been tested?

The Education Testing Service and testing results cannot measure any of the above-listed factors. And in my 32-year corporate career I firmly believe that one cannot be successful on a long-term basis without meeting the above criteria.

Despite conducting rigorous interviews and extensive background checks, an honest hiring supervisor will admit that it is difficult to judge these non-numerical factors. Further, if a hiring supervisor is correct 50% of the time, he or she has beaten the odds. I was lucky and was able to hire many attorneys who rose through the corporate ranks and became senior corporate leaders. Some went to the “best” law schools, some did not. I was also required to ask some of my hires to leave. While difficult each time, that too is the nature of hiring and corporate management.

Looking for the Easy Way Out

This returns us full circle to the Long Island SAT/ACT cheating scandal. As a society we look for the easy way out in decision making. Perhaps those Long Island students were thinking: if I can just achieve a high enough test score, I can attend a prestigious university which will guarantee me access to a great job or graduate program, which in turn will assure my success in life. Success is more complicated than that.

We have deteriorated to a society of numbers and brands. The ideal political candidate goes to the right schools, has the right tickets punched on his or her resume, gets elected to the right office and now is the right candidate for higher office. We fail to delve into the more important factors of character, grace under pressure, emotional intelligence and integrity. The epiphany, long since necessary for all of us, is that we entrusted our money and our government to Wall Street and Washington charlatans who went to all the right schools, held all the right jobs and had all the right connections. And look what happened.

Given all of this, it is no surprise we now have a group of students on Long Island willing to sell their souls for $3500 or less.

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American Society — 0 Comments
4
Nov 11

Charity

As my friends have pointed out, I have not posted a new blog for a while. As they say, I can offer a reason, if not an excuse. I co-chaired a major fund raising effort for a charitable institution. During my employment years, I always avoided this kind of volunteer activity, as I had neither the time nor the energy. At that stage of my life, I preferred to write a personal check to a charity rather than ask friends, colleagues or family for any money, even if the cause was a worthy one.

Retirement ended these excuses. In retirement I have embraced the notion that I’d like to try things outside of my comfort zone. What is anyone going to do, fire me? Not likely, and so what if they did. And after years of competitive corporate life, my mindset in this project was that I wanted to excel at raising money and do better than past campaigns for this organization. The short answer is I succeeded, but it was not easy.

Attitudes towards Charity

The Bible is clear that there is an obligation to tithe. Numbers 18:21; Deuteronomy 14:29. Mormon and Orthodox Jewish believers take upon themselves the obligation to tithe. But my guess is that this obligation is followed more in the breach.

We live in a society of self-indulgence and immediate gratification. During the boom period of the 1990’s onward, our peers built McMansions and bought luxury cars in record numbers. Any societal self-governor of modesty, self-restraint, and proportionality disappeared. The ethic became, I want it, I want it now and I deserve it, so why wait?

While pampering ourselves, how much did we think about charity? Charity is a mindset. A clergyman explained the sin of Joseph’s brothers who cast him into a pit. The brothers probably had cause to be angry at Joseph as he flaunted his new coat, told of self-aggrandizing dreams, and denigrated his brothers and parents. Nevertheless, after the brothers cast Joseph into the pit, they sat down to a feast. They ignored Joseph’s cries and continued to enjoy their meal.

Ignoring the Cries

It is easier to avert our eyes from the need to give charity than to focus squarely on the need to give. Before we began this charity campaign, I spoke to a professional fundraiser. He said I would soon learn that there are a thousand reasons not to give charity: “I have kids in college…I am supporting my mother-in-law in a nursing home…I don’t like how the charity allocates funds” and so on.

But the next time we take an expensive vacation, buy Stub Hub tickets at exorbitant prices to a “must see” concert or sporting event, go out to a lavish dinner or upgrade a 3-year old car to an even more expensive model, maybe we should think about whether or not we could do with less.

During the campaign, many people who did not have a lot of money made small contributions. I was more heartened by these small gifts than larger contributions from the rich. I knew that the rich person was making little or no sacrifice while the poor person’s smaller contribution was financially significant. Maybe the old adage is true: “give until it hurts.”

Every day I go out of my way to personally contribute a dollar or some change to a poor person. It obviously helps that poor person, but it also helps me to remember that I have had a blessed life: here but for the grace of the Almighty go I. So when each of us sits down to our Thanksgiving feasts, maybe we can stop for a moment and listen to the cries of whatever brother Joseph we encounter in our own lives.

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American Society / Financial / The Federal Reserve — 0 Comments
12
Oct 11

Potent Directors, Cargo Cults and Other Myths

Western economies are waiting to be saved. Every day we learn of another rumor of a large European Financial Stabilization Fund, issuance of a Eurobond, rescue of a country (Greece), or state-sponsored recapitalization of a failing bank. The US is not much different. Markets rise and fall on rumors of QE3 or a promise from the Obama Administration of more economic stimulus programs. In fact, today markets are rising on the hopes of another European bailout plan. Financial writers and investors fervently believe that if we can only find the right fiscal and monetary formula, economic growth and financial markets will soar. Unfortunately, little in recent history supports these beliefs.

The Potent Director Fallacy

Robert Prechter in Conquer the Crash coined the term the “potent directors” fallacy. The fallacy in a nutshell:

It’s nearly impossible to find a treatise on macroeconomics that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses immense power to manipulate the stock market. The very idea that it can do these things is false. It is what I call the ‘Potent Directors’ Fallacy.”

In reality — the Fed has no such power. See The Fed is Not in Control: Potent Directors Fallacy

Prechter catalogs the stop and start policies of the Fed which led to the internet stock boom and crash. The centerpiece of poor policy making was the post internet boom decision to slash the federal funds rate thirteen times from 2001-2003, which led to the housing boom and the subsequent seventeen increases from 2004-2006, which led to the housing bust.

Even the start of QE1 could not stop the 2008-2009 plunge in the stock market. The market did not bottom for several months until March 2009. QE2 petered out in June of this year, the economy slowed, and once again the market declined.

Perception Management

Charles Hugh Smith points out that we have stopped serious policy making. Instead policy makers have focused on managing the perceptions of stock market investors and consumers, and now deal in marketing. American and European central banks and politicians wish to project the illusion that they are still in control. In his critique of the endless reassurances from Angela Merkel and Nicholas Sarkozy that European banks can be recapitalized and the Euro saved, Smith exposes the vague programs of both of these leaders and our Federal Reserve Bank:

Merkel and Sarkozy’s dog and pony show is perception management ripped right from the Federal Reserve’s playbook. The ontological foundation of the Fed’s playbook is this: the problem is all perception. If the great unwashed populace of debt-serfs perceives that all is well and secure, and the Mommy State has tucked them safely into bed, then they will once again start borrowing and spending without a care for either reality or the future. See The Uncredible Dog and Pony Show: Merkel and Sarkozy

Fundamentally, the perception management approach is incorrect. Rather, we must look at the facts of our situation, the bottom line as it were, the areas of real inequities, incompetence and fraudulent policy. At some point, we must lift the fog of spin surrounding what is really happening:

The problems of the global economy are not based in perception, but in the reality of prices, balance sheets and income statements, vast concentrations of wealth and power, precarious systemic imbalances, ruthless exploitation, and command economies mismanaged by Central State/Bank policy and manipulation. See The Uncredible Dog and Pony Show: Merkel and Sarkozy

Cargo Cults, Deus Ex Machina and Other Delusions

On October 10, we had yet another monster rally based on vague bank rescue plans. Previously markets have rallied on yet another in the endless series of Greek bailouts or speeches from Ben Bernanke hinting at QE3. Each time investors are sucked into markets only to have their hopes dashed by reality.

Sometimes, great literature uses a plot device known as deus ex machina. An inextricable problem is solved through a contrived, unexpected or implausible intervention. In Lord of the Flies, a naval officer suddenly appears to rescue the wayward boys stranded on an island. Similarly, “cargo cults” appeared during World War II, wherein primitive societies observed Japanese and American soldiers unloading manufactured goods from airplanes. After the war, the natives would establish elaborate religious rituals, such as building landing strips or copies of radios emulating the Japanese and Americans, hoping that “cargo” would soon land.

Financial media watch every move of the Federal Reserve, and European central bankers and politicians hope to divine when the recovery will appear. Each time the “solutions” deliver less than promised and the economy and markets sink. Why does anyone continue to believe the central bankers and politicians? Why is there so little independent thinking and critical analysis? How far have we progressed from belonging to our own version of a cargo cult?

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American Society / Banking / Business / Economics / The Federal Reserve — 0 Comments
13
Sep 11

Re-Arranging the Furniture

Rarely do I look at the myriad sale flyers that seem to be staples of our mail these days. However, my wife called my attention to a going out of business sale. Bograd’s Fine Furniture, a store with deep roots in Paterson, N.J., sent out an unusual closing announcement. It was not the usual notice trumpeting the final days of the company (for the umpteenth time) and hawking goods at deep discounts for a final selling splash. Rather, the announcement seemed from the heart of the owner and his family. Its message encapsulated what is wrong with our economy and the burdens government puts on small business.

History

On August 1, 1930, two immigrant brothers opened a furniture store in Paterson, NJ. Five years later they built a bigger store on Main Street in that city. The store remained there for over sixty years.

In 1975, I began my clerkship for a Superior Court Judge sitting in Paterson. I walked by Bograd’s every day on the way to the government parking lot. At that point, my wife and I were married for three years, but we had always lived in student housing. We had our first rental apartment, which needed furnishing, at that same time. Bograd’s carried quality brands that we could only dream about but could not afford. Even then, our belief was that we should save and buy quality goods rather than settle for inferior goods. Bograd’s represented quality, albeit at higher than department store prices. We window shopped a lot more often than we bought.

At about the same time, Paterson was becoming a dangerous city, where once had been a prosperous town. The population declined nearly 5% in the 1970’s. White residents fled to nearby suburbs and now make up only 13% of the population. Poverty is rampant, with 29% of families below the poverty line. As in many urban areas, quality stores abandoned Paterson for the suburbs of Bergen and Passaic counties. Bograd’s, however, held out until 1996 when it moved to a warehouse showroom in a suburban area near major highways.

The End of an Era

Instead of the traditional “going out of business sale,” the Bograd family calls their closing event “Bograd’s Last and Best Sale.” Even though the store will no longer be operating, Mr. Bograd and his company will “be around after the sale is over operating out of our warehouse until every order is delivered, every customer satisfied.”

Below is a summary of the company’s decision to close. It is a microcosm of what ails small American businesses. I will provide commentary on each item:

We cannot and will not compete with stores who have lowered their standards by selling low quality merchandise. We have always sold high end American-made furniture, often pieces signed by the craftsman while our competitors are bringing in low quality pieces from Indonesia and China. Comment – US free trade policy has permitted the importation of low quality, often shoddy, low price furniture. How can a high quality US manufacturer expect to compete with near slave labor, foreign work conditions? One cannot compare beautifully finished high end domestically made furniture and imports from China.
We will not employ a low quality, low paid sales force that cannot provide outstanding customer service. Comment – Customers view items like furniture as disposable, so quality service is no longer factored into the price. Only low price matters. The US educational system produces employees without the educational background or mindset to invest years in developing expertise in high-quality furniture manufacturing or sales.
Given the state of the mortgage market we cannot refinance our store which we own or obtain favorable financing terms from our supplier. Mentioning that we are in the furniture industry ends discussions with lenders. Comment – The failure to resolve our banking crisis and forcing the banks to write off bad loans has tightened credit markets. Tight credit has had the most impact on small businesses. Banks would rather hold excess reserves with the Federal Reserve than take on more risky lending.
As a small business we receive no support from any level of government. Comment – Complex business regulations coupled with the uncertainty of Obamacare make it almost impossible for a small business to succeed. Government policy openly favors large enterprises, who also happen to be major campaign contributors, at the expense of the small business person.
Decline in trust between and among retailers, banks, and suppliers. Comment – Government policies which created the housing bubble and other speculative bubbles inevitably lead to an economic bust. Stop-and-start economic policies destroy trust between economic parties. See Bograd’s Fine Furniture Latest Victim of Tough Economy, Eight Decades of Selling Furniture Coming to a Close, Bograd’s Historic Closing Sale – The End of an Era

Left unsaid is a major change in our culture and values. As young adults we understood that to buy quality furniture we would need to save and defer our major purchases. When we bought a house, rooms remained empty until we could afford quality furnishings. In a culture of instant consumer credit and shoddy goods, that ethic of saving and deferring gratification has eroded, placing a firm like Bograd’s at a disadvantage.

American Jobs Act

The much awaited announcement of President Obama’s American Jobs Act does little for the small business person. Small business is the lynchpin for both creating new jobs and for economic recovery in general. Like Bograd’s, there are thousands of small businesses hanging on by their economic finger tips. A large labor union (teacher, police or fire) or a large financial business (banks, insurance companies) gets the government’s attention and fiscal favor, but if one is a small business, I guess one might just fade into economic history, like the 81-year old Bograd’s.

Gresham’s Law says that bad money drives out good money. In the case of Bograd’s Fine Furniture, bad furniture drove out quality furniture. We have flawed government policy to thank, and a consequent culture which would rather spend today than invest in the future.

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American Society / Corporate Behavior / Executive Compensatio / Political / The Federal Reserve — 0 Comments
5
Sep 11

Insanity

“Insanity: doing the same thing over and over again and expecting different results.”
Albert Einstein

When we examine the headlines, this oft-quoted phrase becomes increasingly relevant. We accept public policy errors with barely a whimper. We are either too comfortable with the status quo or paralyzed by fear of the unknown. Worse, perhaps we have lost our ability to question critically. Maybe all the aforementioned are true at once. Let’s examine some of the current insanity.

Living on Flood Plains

Our family was raised near the Passaic River in New Jersey. In high school in 1970, my brother did an in-depth study of flooding in the Passaic River Valley. Even then, after relatively modest storms, flooding of the towns of Lincoln Park and Wayne, NJ, was all too common. My brother interviewed then State Senator (later Governor) Thomas Kean. Kean was well aware of the problem and had worked with the Army Corps of Engineers to devise a plan to stop the flooding. A new dam was needed, but the project withered from political opposition. Now, more than forty years later, the area routinely floods in these and other Passaic River towns. No dam has been built. Worse, overbuilding since the seventies has intensified, leaving more families in harm’s way. Now, with full media drama, we are treated to heroic emergency rescues, and heart rending scenes of home evacuations and lost possessions.

My guess is that many of these homeowners will receive sizeable checks from federal flood insurance programs. We the taxpayers are subsidizing the choices of individuals to build homes on flood plains. Although I believe there is a role for a federal emergency response, Ron Paul was right to question the need for a federal response to Hurricane Irene. Even the liberal Huffington Post recognized the insanity in some of these programs.

Federal disaster relief programs have their faults. The National Flood Insurance Program, originally designed to force homeowners to take financial responsibility for living in flood plains, has encouraged development in unsafe areas. So too have federal levee and flood control programs. See A Natural Disasters History Lesson for Ron Paul

Insanity is to encourage overbuilding in flood plains, watch hurricanes and lesser storms destroy houses, and then having taxpayers reward reckless builders and homeowners with monies from the Treasury. We need to at least begin the process of requiring our citizens to acknowledge the risks they take in their choices. Financial responsibility should reside with the homeowner not the taxpayer.

Boards and CEOs

Much hoopla surrounds the naming of a new CEO for a major American company. Too often, we find out later that the Board of Directors never fully investigated the candidate to explore the “soft issues” such as management style. And then comes the consequences for the company and its shareholders. We have two recent cases of high profile executive terminations: Jeffrey Kindler at Pfizer and Robert Kelly at Bank of New York Mellon.

In both instances the Board discovered after the CEO was ensconced that his abrasive management style was alienating other key senior managers. The result was dysfunctional management decision making.

This woeful tale occurs quite often. The Board becomes enamored of a brilliant, seemingly charismatic executive. But if the Board did its homework, it would discover that sometimes an executive is a brilliant individual contributor, but a mediocre or too often a terrible manager. Given the hierarchical nature of corporations and the fear of losing one’s job, subordinates do not speak out about their bosses. Or if the rare employee has the courage to speak out, the Board rationalizes complaints: such employees are disaffected complainers, or sore losers in the climb to the top.

When corporate performance inevitably founders, the mass exodus of senior talent or the disclosure of a scandal catapults the Board into action. Horrors! All those complainers may have been correct. Secret sessions occur, the Board develops some backbone and fires the executive, but tells the world that the executive is retiring or resigning to spend more time with their family. Worse, Boards do not deal harshly enough with a mistake in hiring: they reward the offending executive with a large severance package and a proclamation of gratitude for taking the company to a new, higher level. The end result: a cynical group of employees and shareholders.

See Inside Pfizer’s Palace Coup, Robert Kelly: Bank Fired Him Because of His ‘Abrasive’ Management Style Lowered Morale

QE3

Wall Street continues to beat the drums for a third round of quantitative easing from the Federal Reserve. Peter Tchir of TF Market Advisors debunks the effectiveness of QE2. The stock market may have gone higher but that may have been related to the problems in Europe that lowered the value of the dollar or the lower stock price levels then (1050 S&P 500) versus now (1215 S&P 500). The “wealth effect” related to rising stock prices did little to improve the lot of the average American. Unemployment remained high, house prices did not recover and wages stagnated. Finally, there were dramatic increases in commodity prices raising the cost of key items such as food and energy. Yet, the Federal Reserve continues to hint at QE3 and major investment banks view it as a given. See QE3, What’s not to Like?

Repeating Insanity

What has happened to critical questioning of key institutions: Congress, the Executive Branch, the Federal Reserve and even corporate boards of directors? Policy initiatives are floated every day in the press, one crazier than the next, and few pundits ask why? As crises seem to occur without respite, my guess is that this obtuseness will not serve us well.

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American Society — 0 Comments
2
Sep 11

Hurricane Irene

We live in the Northeast and made it through Hurricane Irene virtually unscathed. We did lose power for nearly thirty hours. The experience made me think about politics, emergency preparation and modern society. I will present some thoughts in no particular order:

Unplugging from Civilization – When you have no power you are virtually unplugged from civilization. You lose internet, lights, land line telephone service if you use any type of phone requiring a plug to operate, refrigeration, television and other modern conveniences. You still have limited use of a cell phone, but the battery only has a limited charge. The same problem occurs with a laptop. It is kind of refreshing. We are way too dependent on electronic gizmos controlling our lives. Yes, there is a downside with spoiled food and not being able to watch the Yankees. However, there is an upside, some quiet time to read and think. Natural light is rediscovered as I moved around from rooms facing east to those facing west in order to read during the day.
Rediscovering Community – Suddenly, neighbors you barely know or speak to are providing information on tree damage, road closures and the state of power repairs. More people are on the street, just walking. Neighbors are happy to share food, water and help with tree limb removal.
Not Underestimating the Power of Nature – When the storm passed through on Sunday morning everyone breathed a sigh of relief. There was much scorn heaped on The Weather Channel and news outlets for “hyping” the storm because the winds fell short of hurricane force. The jubilation and finger pointing was short lived. Power failures started 12 hours after the storm hit. Tree damage and flooding were constant dangers for 3 days after the storm. As I write this blog five days after the storm, many local roads are still not open and many in my state still have no power.
Paying a Price for Deregulation – Local utilities (electricity, natural gas, telephone and water companies) are deregulated in my state. When these utilities were heavily regulated they were well-staffed. One could argue they were over-staffed, but there were always sufficient emergency crews to respond to a natural disaster. Starting my career with a regulated utility, I always thought we were at our best in the face of a hurricane or flood. In a deregulated world, with no ability to pass costs through in a “cost plus” regulatory model, staffing for such emergencies is a by-gone luxury and we the public now pay the price. Ask folks at the Jersey Shore or Westchester if they would like those bad old, regulated utilities back.
Feeling Vulnerable – There is nothing like a power blackout to heighten one’s sense of vulnerability. Sitting in a suburban home with no working alarm, fire detection equipment or street lights outside is a reminder that the house can be robbed and the occupants injured. Our small city did not change its policing of darkened areas. Few if any police patrols passed our home during the blackout. Suddenly, our quiet, peaceful neighborhood seemed a lot scarier and threatening. Further, who could be sure of a police response in the event we still were able to use a cell phone to call for help?
Relying On Our Government – The governor of my state and nearby states issued evacuation orders. These officials were later ridiculed for overreacting. As a corporate executive I learned the lesson that one can only operate on the best information available at any time. After the fact, one will always look either prescient or foolish. But, in matters of safety, it is better to be prudent. These governors should be commended for taking bold action. In the end, the flooding and power outages more than justified the evacuation decisions they made.

It is the current political fashion to bash government. I will leave you with a final thought drawn from a Biblical source, the Ethics of the Fathers: “Pray for the welfare of the government, for without fear of governmental authorities people would swallow each other alive.”

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American Society / law / Political — 0 Comments
24
Aug 11

Storytelling, Narratives, and Truth versus Fiction

Early on I heard lectures on trial presentation from Irving Younger and Judge Herbert Stern. Their approaches and strategies were similar to winning trials. Present a clear and concise story. Maintain constant credibility with jury and judge. Highlight the “bad facts” presented by one’s opponent. Defuse these bad facts. In essence then, trial presentation is a form of advanced storytelling, and a coherent narrative is crucial. Whoever assembles and presents the best and most credible story at trial wins.

I found these techniques equally valuable in speeches to employees or senior management. Importantly, the speaker must connect with the audience, be credible, coherent and passionate about his subject.

This brings us to the current plight of President Obama, who addresses the country on almost a daily basis. The public, however, appears to be tuning him out. His speeches are articulate and fact filled, but he is not connecting with his audience, the citizenry.

One Man’s Theory

Drew Westen, Professor of Psychology at Emory University, analyzes President Obama’s leadership and speechmaking. In a recent lead article in the Sunday NY Times, he asks, “What Happened to Obama?”

…watching…his inaugural address, I had a feeling of unease. It wasn’t just that the man who could be so eloquent had seemingly chosen not to be on this auspicious occasion… It was that there was a story the American people were waiting to hear — and needed to hear — but he didn’t tell it. What Happened to Obama?

Stories matter. They orient and inform us, transmit knowledge and impart values. The public was primed for a compelling story from President Obama on how we got into the financial crisis and, even more importantly, how he intended to get us out. Millions had lost their jobs and many more their savings. Westen continues with the story he wishes Obama had told:

“I know you’re scared and angry. Many of you have lost your jobs, your homes, your hope. This was a disaster, but it was not a natural disaster. It was made by Wall Street gamblers who speculated with your lives and futures. It was made by conservative extremists who told us that if we just eliminated regulations and rewarded greed and recklessness, it would all work out. But it didn’t work out. And it didn’t work out 80 years ago, when the same people sold our grandparents the same bill of goods, with the same results. But we learned something from our grandparents about how to fix it, and we will draw on their wisdom. We will restore business confidence the old-fashioned way: by putting money back in the pockets of working Americans by putting them back to work, and by restoring integrity to our financial markets and demanding it of those who want to run them. I can’t promise that we won’t make mistakes along the way. But I can promise you that they will be honest mistakes, and that your government has your back again.” What Happened to Obama?

The failure to identify the malefactors who created the crisis and the inability to create policies that correct those errors plagues the Obama Administration:

A story isn’t a policy. But that simple narrative — and the policies that would naturally have flowed from it — would have inoculated against much of what was to come in the intervening two and a half years of failed government, idled factories and idled hands. What Happened to Obama?

To paraphrase Professor Westen, a psychologist and not a politician, we needed to know that the new President Obama could “fix the mess.” Here was an untested politician with little leadership experience and no significant accomplishments, also a person of tremendous political charisma. So far, he has chosen to politicize, compromise and negotiate, but not to lead. Damningly, Professor Westen concludes:

….Barack Obama stared into the eyes of history and chose to avert his gaze. Instead of indicting the people whose recklessness wrecked the economy, he put them in charge of it. He never explained that decision to the public — a failure in storytelling as extraordinary as the failure in judgment behind it. … He would have offered them a counternarrative of how to fix the problem other than the politics of appeasement, one that emphasized creating economic demand and consumer confidence by putting consumers back to work. He would have had to stare down those who had wrecked the economy, and he would have had to tolerate their hatred if not welcome it. What Happened to Obama?

Leadership vs. Politics

Whether leading the United States or a corporation, sincere and forceful communication is vital. President Obama’s speeches feel like the lectures of a learned academic: an academic who is eloquent, but has taught the course too many times and has lost his passion and interest. He is reading his script, but we cannot tell if he believes it.

Americans thirst for a leader who can bridge the gap between government and their personal needs. Unfortunately, President Obama is more interested in being a smart politician than a good leader. In the movie The American President, an emotional aide beautifully describes the public’s need for strong leadership: “They want leadership. They’re so thirsty for it they’ll crawl through the desert toward a mirage, and when they discover there’s no water, they’ll drink the sand.” The fictional President replies, “…we’ve had presidents who were beloved, who couldn’t find a coherent sentence with two hands and a flashlight. People don’t drink the sand because they’re thirsty. They drink the sand because they don’t know the difference.”

A recent Gallup poll measuring Obama’s approval rating has dropped to a new low. The American public is catching on to the idea that something has gone terribly wrong. We are starting to understand the difference between the water and the sand. The basic structure of society is at risk. Will we continue to abide platitudes and mediocrity? I think we are better than that! We should be creating and defining and sharing our narrative, and then forcing it on a President and government who do not seem to know what is wrong.

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American Society / Business / Ethics / Financial / Political — 0 Comments
9
Aug 11

“My Word is My Bond”

A phrase I heard often from adults when I was growing up was: “my word is my bond.” I return to it often now, as it indicates to me not just a promise in a particular circumstance or business transaction, but rather a belief system. If we heard someone utter that phrase today would we believe it? Sadly these days, most likely we would believe that we were about to be defrauded or worse.

In my professional life, I have witnessed the steady decline in the bonds of interpersonal trust. The financial crisis of 2008, which has never really ended, demonstrated that trust between people has deeply eroded. It was not only the outright frauds of Madoff and other Ponzi schemers, but more mundane misbehavior as well: borrowers lying about their incomes and assets to obtain loans, and lenders deceiving borrowers, government regulators and their shareholders.

It is time to reflect on some biblical wisdom.

The Bible and Truth

Sir Jonathan Sacks, Chief Rabbi of the United Kingdom, in his weekly blog “Keeping Our Word,” examines the Bible’s attitude toward vows and oaths, and the interconnection of trust with freedom. As background he first examines adherence to the law. People obey laws for two reasons: (1) because of they are fearful of power and punishment or (2) it is to their self-interested advantage to do so. However, both power and self-interest frequently corrupt those who pursue them. And corrupt power will lead to loss of freedom. And corrupt self interest will lead to loss of social cohesion.

The Bible offers a third, more positive, reason for obeying the law:

… people obey the law because they have voluntarily undertaken to do so. This is a society based not on power or the pursuit of self-interest but on freely embraced moral obligation. Keeping our Word

We use words, performative utterances, to bind our future behavior, thus creating “an orderly future out of the chaos of human instincts and desires.” The Bible is telling us that words create:

…because words are holy: that is to say, they bind. When words bind, they generate trust. Trust is to society what predictability is to nature: the basis of order as opposed to chaos.

Social institutions in a free society depend on trust, and trust means that we keep our word. We do what we say we are going to do. If we make a vow, an oath, a promise, a verbal undertaking, then we hold ourselves bound by it. This means that we will actually fulfil our commitment unless we can establish that, due to circumstances unforeseeable at the time, we are simply unable to do so.

If trust breaks down, social relationships break down, and then society depends on law enforcement agencies or some other use of force. When force is widely used, society is no longer free. Keeping our Word

Stated simply, words, vows, oaths, promises and freedom are all intertwined. When trust breaks down, freedom is lost.

The Current Crisis in Trust

At the core of our current sad state of affairs is a lack of trust. We cannot count on our leaders to keep their word. Government statistics are constantly “massaged” and restated. When can we remember a business leader or politician telling us the truth? Truth rarely emerges until we reach the crisis stage.

A memory and observation from my working life: when I first started practicing law more than 35 years ago, I was routinely involved in corporate acquisitions and divestitures. A contract to sell a business with several hundred million in sales (a large transaction at the time) would run less than 100 hand-typed, double spaced pages. By the time I retired, a similar transaction would require massive teams of specialized lawyers: corporate, tax, employment, environmental, and more. The documents would run into the thousands of pages. At the end of such a transaction, I might receive several embossed, hard bound books for my library shelf (the size of a small encyclopedia). Why? I do not think we became more sophisticated. I believe we trust each other less. The same phenomenon occurs in federal regulations, with the Code of Federal Regulations filling an entire library wall. Do all these laws, regulations and words create more or less trust?

Perhaps if we had a little more trust, we would need fewer words. And when we uttered or wrote those words we would really mean them.

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American Society / Banking / Business / Executive Compensatio / Financial / Media / Political / The Federal Reserve — 0 Comments
5
Aug 11

The Meal Was Great…Part II

Dinner with friends included lots of discussion points that resonated and reminded us of our corporate working lives. While these points were clear to us as working persons, our perspectives from the outside render these points just as important. The revealing fact that hits home so closely is: Americans are being impacted by flawed policies and assumptions whether employed or not, or impoverished or not.

Financial Sector Dominance – Government policy encouraged the growth of the financial sector at the expense of the “real economy.” Glass Stegall, which separated banking operations from trading operations, was repealed by Graham-Dodd. Devilishly complex financial instruments became Wall Street fee generating devices at the expense of traditional lending. These firms became employers of choice for talented university graduates.
The Short Cut Society – Instead of saving for a house, a vacation or a new appliance we were happy to use credit cards or second mortgage lines for instant gratification. Instead of a boring career in manufacturing, better a Wall Street trader or hedge fund manager. CEOs expected huge compensation packages regardless of performance quality.
Spin vs. Truth – Shading of the truth became a national obsession. Instead of honest reporting of inflation statistics, hedonic adjustments lowered the consumer price index, depriving social security recipients and federal pensioners of earned cost of living adjustments. CEOs spun disappointing earnings results taking write offs, obfuscating the accounting or lowering earnings guidance so that when earnings were finally announced “they beat expectations.” Congress is no better, promising “smoke and mirrors” debt reduction plans with little, if any, real deficit reduction.
Lack of Political Leadership – The debt reduction exercise is one more example of the lack of leadership at the Chief Executive and Congressional levels. Politicians are more concerned about preening before cameras than serious statesmanship. Bipartisanship seems like a quaint relic of a bygone era.
Congress for Sale – Given the enormous cost of congressional races, representatives are in a constant search for dollars from corporations and other large contributors. Thus, we have Congress captured by special interests. Congress has long forgotten the middle class voter. The appearance is that Congress is totally beholden to the corporate sector and that corporations appear entitled to special relief any time they are in need.
Complexity – Complexity pervades every part of our political and economic system. Complexity is used to muddy rather than clarify. The tax code, Obamacare and financial reform are the latest examples of overly complex legislation and accompanying regulation. Only an army of lawyers can navigate through these legal minefields. Conveniently, citizens are kept in the dark and small businesses cannot afford to compete with larger enterprises.
Rise of the Nanny State – We recently had New York’s ridiculous attempt to regulate kickball, dodge ball, waffle ball and Red Rover as dangerous activities needing state oversight and a permit. See Classic Kid Games Like Kickball Deemed Unsafe by State to Increase Summer Camp Regulation. This is emblematic of a society which demands a legislative or regulatory solution to every problem. Businesses must be protected against failing (GM, Chrysler, Citicorp, AIG), employees must be permitted leaves for such mundane diseases as chronic sinus infections (Family and Medical Leave Act), and the public must be protected against carcinogens such as the sun and salt. Every aggrieved person must have a day in court. Spill hot coffee on oneself, bring a lawsuit against McDonalds. Play football and suffer an injury, sue the helmet manufacturer. Somebody is always to blame and our legislative bodies are all too willing to protect us against life’s vicissitudes.
Free Trade– Say it fast and free trade sounds like a great idea. Cheap foreign goods enrich our lives. Thus, Ross Perot was ridiculed for saying that NAFTA’s giant sucking sound was American jobs heading for Mexico. Mr. Perot sold American ingenuity short: American jobs are heading for China, India, Vietnam and a host of other low wage countries. These countries have few, if any, labor, anti- discrimination, family and medical leave, unemployment, child labor, environmental or safety laws. American workers are being asked to compete against workers who are paid subsistence wages and afforded no protections. Our politicians are only too willing to serve corporate interests at the expense of the American worker.
Immigration – Immigration is probably the purest example of selective enforcement of our laws. It is difficult for American workers to compete against Chinese or Indian workers. The problem is even greater as regards undocumented residents in our country. Further, the cost of medical, education and municipal services is underwritten by the American taxpayer. In places like Texas, Arizona and California this puts enormous strains on state and local budgets when education and medical services must be extended to undocumented residents.
Structural Unemployment – Technology and job outsourcing has added to shockingly high unemployment rates. It is not clear whether any of these jobs will ever return. As we pointed out, zero interest rates lead to use of more labor saving capital equipment at the expense of hiring workers. See The New York Times Finally Discovers Structural Unemployment. Hence, our employment problems may not be temporary but a permanent feature of the economic landscape.

All of the factors are intertwined. In fact, they are negatively synergistic. For example, a Congress that supports failed banks condemns savers and pensioners to miniscule return on savings, further compromising any incipient economic recovery. A below trend economic recovery only encourages the exile of more jobs overseas so that corporations can retain profitability.

Believe it or not, dinner was pleasant and more. But our conversational substance and concern for what is happening with our country and what is wrong with America indeed cast a cloud over all our thinking. Along with other “ways that we were,” optimistic was also one of them, and that is much diminished.

After all this postulating about what is wrong, clearly what should come next are some hypotheses about solutions that can work. A discussion for another blog.

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Prophet Without ProfitThinking Non-Linear