law

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9
Aug 10

Following the Hurd

On Friday, the stock market shook with the news of the announced resignation of Mark Hurd, CEO of Hewlett Packard. The man credited with reinvigorating Hewlett Packard resigned as chief executive of the technology giant after an investigation of his relationship with a female contractor.  That investigation revealed that he violated the company’s business standards.

On Friday, HP expanded that Mr. Hurd, 53 years old, didn’t violate the company’s policy regarding sexual harassment.  He  had however, submitted inaccurate expense reports intended to conceal what the company said was a “close personal relationship” with a female consultant.  See H-P Chief Quits in Scandal

In a memo to all HP employees, acting CEO Cathie Lesjak provided more detail:

“Mark had failed to disclose a close personal relationship he had with the contractor that constituted a conflict of interest, failed to maintain accurate expense reports, and misused company assets.” See H-P’s Hurd Reaches Settlement with Contractor

The Wall Street Journal later learned that Mr. Hurd and the contractor reached a settlement on the sex harassment claim.

Some Thoughts on Corporate Culture

A mystique surrounds CEOs of large, publicly traded corporations.  The CEO of such a corporation is as close to a feudal lord as one can get in 21st century America.  A CEO is surrounded by a myth making machine.   A VP of Public Affairs burnishes the image of the CEO as powerful and successful, minimizes setbacks and trumpets the smallest of victories.  The CEO can access airplanes and limousines, play golf at the best clubs, dine and stay where he or she chooses with little or no oversight.   Backed by corporate political action committee contribution funds, he or she has instant access to Senators, Congressmen and even the White House.   A fawning and largely uncritical cadre of financial media pundits and Wall Street analysts clamor for opportunities to meet and interview a CEO.

Since corporations are a hierarchy and a CEO sits atop the organizational pyramid, subordinates are generally fawning.  Fearing unemployment, few want to tell the CEO (the emperor?) he or she is wearing no clothes, or should be staying clothed at critical moments.

Absolute Power Corrupts

“Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.”  Lord Acton

With few to hold up a critical mirror, CEOs eventually start to believe their own press clippings and may even succumb to believing in their own infallibility.   Forgetting that it is often the office and rank that is being saluted, not necessarily the occupant, the tendency is for the CEO to believe they can do no wrong.

Blind spots eventually develop.  As with CEO’s, we have seen it with our more notorious Congressmen who believe that the tax laws do not apply to them, it is alright to have sex with subordinates, or obtain below rate mortgages.  Eventually comes the belief that the “rules do not apply to me.”  To their dismay, they find out often publicly and harshly that rules do apply.

Some Final Thoughts

I am always amazed when stories like Mr. Hurd’s reach headline status:

-          Why do CEOs risk so much for so little?  Mr. Hurd made $24.2 million dollars in 2009 and was slated to make $100m over the next three years.   How much could the dinners and trips have cost Mr. Hurd if he had paid from his own pocket?

-          Companies have strict policies on sex harassment and expense reporting.  Numerous high level executives have been publicly disgraced and lost their positions for such violations.  Mr. Hurd is a very smart man. Why did he not learn from others’ experience?

-          I have lectured on the EEOC Sex Harassment Guidelines.  The best defense in the workplace is to avoid dating any subordinate or contractor.  Once any personal relationship develops and then breaks off, it is difficult to prove that no harassment occurred in this unequal power relationship.

-          Why did HP’s internal audit function not find the expense report abuses and report them? Why did it take the complaint of the contractor for the Board to order an investigation?

-          Why did Mr. Hurd receive over $12m in severance pay when the Board found expense reporting improprieties?  Isn’t that behavior a “for cause” termination? (Note –if Mr. Hurd had a contractual right to severance regardless of this behavior, that itself is problematic.)

Not all CEOs behave like Mr. Hurd.  Certainly, and in my experience, many are ethical and hardworking.  But unfortunately, Mr. Hurd’s tale occurs far too frequently in corporate America.

Outside corporate governance groups have mindlessly over focused on pay practices, staggered voting and other relatively minor issues.   Focus should be on close corporate Board of Director supervision of CEO and senior executive behavior.   Aside from all the logical and obvious reasons for eliminating this behavior is the other external one as well:  the market generally reacts swiftly to this chicanery.  On Friday, HP stock was down a significant 9.7 %.  Following the Hurd can be quite costly.

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28
Jul 10

Age and Experience

Americans devalue age and experience.  We crave vigor, good looks, innovation, newness and energy.  Missing in our collective imagination is the elder statesman, the seasoned veteran and the battle scarred warrior.  If we translate the foregoing proposition to political or corporate settings, we see that most of these folks have been either booted out of elected office or given an early retirement package.  But right about now, their wise counsel would be invaluable.

Climbing the Corporate Ladder – Circa 1977

As a junior attorney in a large corporation, the presumption was that, like children, one should be seen and not heard.  Prove oneself worthy, and maybe one would be mentored, as older senior managers were expected to impart their wisdom to their younger and more promising charges.  A talented attorney or executive was “developed.” There were no instant promotions or large pay raises.  The expectation was to slowly work one’s way up and “pay dues.”  In my case, and I was typical, the dues were long nights of work, a   constant schedule of unanticipated crises and resolutions, and travel away from home 75% of the time.  If one demonstrated consistently good performance over an extended period, with luck one might be trusted to become a first level supervisor by age 40 or so.  No one succeeded overnight.

Youth and Experience – Mays and DiMaggio

Continuing legal education is usually deadly boring.  However, one of the best educators I ever came across was Irving Younger, who taught evidence and courtroom presentation.  Younger loved to use sports analogies to enliven his lectures.

To demonstrate the errors of youth, Younger related a story from his time as an inexperienced sportswriter at the now defunct NY Herald Tribune.  Returning from an afternoon game at the Polo Grounds he breathlessly described the Giants’ victory.  The older reporters asked who was a better outfielder: Mays or DiMaggio?   Younger replied that Mays had made the most amazing athletic catch, diving, tumbling head over heels, yet holding on to the ball.  The older reporters said DiMaggio was the superior ballplayer.  Younger was incredulous, again touting the superhuman athletic ability of Mays.  Younger said he saw the older DiMaggio play the previous night and he looked like he was hardly moving.  The reporters said, “kid, you don’t get it.  DiMaggio made it look effortless because he knew exactly where the ball was going to be hit and was able to glide to the ball.”  You can’t teach experience.

Youth has Outlived its Usefulness

In her Wall Street Journal article, Youth has Outlived its Usefulness, Peggy Noonan criticizes the Obama Administration for its failed economic policies and lack of bi-partisanship.  Her criticism centers on the over emphasis on youth in politics:

…what I think people miss when they look at Washington and our political leadership? They miss old and august. They miss wise and weathered. They miss the presence of bruised and battered veterans of life who’ve absorbed its facts and lived to tell the tale.

And the lack of elder statesmen is not confined to our country:

Mr. Obama is young, 48, as is British Prime Minister David Cameron (43), with whom he meets next week, and as were Bill Clinton (46 on Inauguration Day) and the somewhat older but still distressingly young George W. Bush, sworn in at 54. Mr. Cameron’s partner in governance, Nicholas Clegg, is also 43. Stephen Harper of Canada is 51, Nicolas Sarkozy of France a youthful 55.

Ms. Noonan lays out the problem of youth and her vision of the remedy:

Youth is supposed to bring vigor and vision. In general, however, I think we find in our modern political figures that what it really brings is need—for greatness, to be transformative, to leave a legacy. Such clamorous needs! How very boring they are, how puny and small, but how huge in their consequences.

What Mr. Obama needed the past 18 months was a wise man…to offer counsel and perspective, a guy who just by walking into the room brings historical context. See Youth has Outlived its Usefulness

Perhaps President Obama’s lack of experience is finally catching up with him.

Send in the Old Guys

Alas, many of the elder statesmen of politics and industry have resigned, been voted out of office or packaged off to early retirement.  When I was mid-career and actually designing some of these early out programs, I often wondered how much experience, perspective and corporate history were we letting walk out the door?  And to what end?  Would the corporation or government really run better without these older wiser voices?

 At the highest levels of government, problem solving requires a blend of both youth and experience.  The enthusiasm of youth needs to be tempered by caution and experience.   Looking at the last several tumultuous years, we could have used more Winston Churchills, Harold McMillans, Konrad Adenauers and Charles DeGaulles to guide the current group of novice leaders.

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20
Jul 10

Team Play: How to Lose the Game

Corporations and politicians love to emphasize “team play.”  A whole mythology surrounds the concept.  There are 1,800,000 Google search results under ‘team play.” Websites are devoted to “team building,” “effective team work” and “team play.”  Corporate and political entities adopt sports analogies and metaphors for success: teams that play together as a unit win.  Thus, if we convince independent and sometime maverick executives to sublimate their needs to the “team,” the team will be more successful, that is, win more.

By extension, we obviously must isolate and demonize the non-team players.  Those who have not embraced team play are mavericks, lone wolves, naysayers, whistleblowers or worse.  If we round up these “stray camels” and get them all under the corporate tent, how much better off will we be?

Team Play Sounds Great, Right?

Superficially, ‘team play” sounds like a great concept: everyone on “the same page,” effectively communicating, sublimating individual ego and producing outstanding results.  But there is a more insidious inner lining to team play.  ‘Team play” is a way of quashing independent thought and dissent.  What upper management or senior government officials really want is an employee who will carry out directives from above blindly, without assessing the wisdom or integrity of a particular strategy or project.  This paradigm values adherence to “the program” and loyalty over competence.  Even when some thoughtful criticism can produce a much better result, the team will value mediocre results.

Unfortunately, “team players” get promoted disproportionately, perpetuating the “team play” cycle.  Those not promoted learn an important corporate lesson:  “go along” and “get along” or look for other opportunities elsewhere.

I am not privy to BP succession planning, but I would guess the lead management representative on the Deepwater Horizon rig was the consummate team player.  One has to wonder if common sense came in second place to “team play.”

The Strange Case of Elizabeth Warren

Elizabeth Warren, a Harvard law professor, was named chair of the Congressional Oversight Panel looking into the bank bailout program (“TARP”).   Unfortunately, Prof. Warren had the temerity to grill Secretary Geithner on the AIG bailout and backdoor assistance to Goldman and other banks.  Indeed, by doing this she was questioning the wisdom and integrity of a measure that would ensure that these banks would be paid in full on credit derivative positions with the failed AIG.

Ms. Warren is the champion of establishing a consumer financial protection agency.  The new bill establishes a new Consumer Financial Protection Bureau.  Knowledgeable financial commentators such as Yves Smith and Simon Johnson believe that Prof. Warren would be the right person to head the new bureau.

Warren is the obvious choice to head the otherwise-guaranteed-to-be-a-joke consumer financial services agency due to set up its shingle at the Fed. She has been a tireless consumer advocate, is trusted and well liked by the public at large, an effective communicator and a respected legal scholar, and is willing to stare down political opponents. All those qualities make her hugely threatening. Banksters and their lobbyist allies have been saying loudly and clearly that they are firmly opposed to having Warren head the new consumer agency. So, predictably, Geithner acts as their water-carrier. See Elizabeth Warren in Treasury Crosshairs Again

Mr. Geithner has proved to be a toady for the big banks and Wall Street firms. Of course, he would like to block  Ms. Warren’s appointment.  He instead wishes to install a “team player” such as his pro-bank rubber stamp lieutenant, Michael Barr, Assistant Treasury Secretary.  Mr. Barr’s bona fides are set forth:

This Administration has acted quickly and aggressively to confront the economic challenges facing our economy and the housing market. See Elizabeth Warren or Bust, I’m Drawing the Line

No comment is required.

Afflicting the Comfortable

Humans are tribal. We are comfortable with our own tribe and team.  Along comes an individual of integrity, conviction and unquestioned competence like Elizabeth Warren.  Those individuals attack “group think,” upset the powers that be and make some  a little uneasy.  Suddenly, the name calling comes out and Prof. Warren is called a “commie” or a “weirdo” because she questioned the overly cozy relationship between the Administration and the banks.   Moreover, perhaps hidden in the discomfort is the fact that she is a female in the largely male world of banking and the Treasury.

Undercutting the maverick in a corporation is a little more subtle:  is the person sound, can we rely on him in a pinch, or isn’t he a little different from us?

For the sake of the country, we need more more mavericks like Prof. Warren.   Sometimes it is good to afflict the comfortable.

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30
Jun 10

He Who is Wise Does Not Work for the Fed

Who is wise? He who learns from all men, as it is written (Psalm 119:99) “I have gained understanding from all my teachers.” Chapter 3 (Ethics of the Fathers)

Kartik Athreya, an economist with a PhD from the University of Iowa, published a paper on the Richmond Virginia Federal Reserve’s website: Economics is Hard.  Don’t Let Bloggers Tell You Otherwise.  The gist of the paper is that bloggers with little formal economics training are performing a disservice to the public with their uneducated commentaries.  I will let some of Dr. Athreya’s comments speak for themselves (thanks to zerohedge.com, Fed Economist: Bloggers are Stupid):

The general public are (sic) simply being had by the bulk of the economic blogging crowd. In this essay, I argue that neither non-economist bloggers, nor economists who portray economics — especially macroeconomic policy — as a simple enterprise with clear conclusions, are likely to contribute (sic) any insight to discussion of economics….

Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.

The response of the untrained to the crisis has been even more startling. I listen to Elizabeth Warren on the radio fearlessly speculating about the nature of credit market dysfunction, and so on.

The general public are (sic) simply being had by the bulk of the economic blogging crowd.

There has been much excellent commentary on this clearly offensive piece.  I would like to make some additional observations.

Credentials are the Last Bastion of the Incompetent and Insecure

Dr. Athreya invokes his University of Iowa PhD to squelch economic criticism from the uncredentialed.   The credential game is always dangerous.  What is an Iowa PhD compared to other economic faculty powerhouses like MIT, Harvard, Chicago, Stanford or Princeton?  Comparing one’s credentials is an endless and fruitless game.  Why not focus on competence, judgment, creativity and insight?

Competent professionals do not have to wave around credentials.  A moment of non-traditional wisdom from the movie Cool Runnings: “…a gold medal is a wonderful thing. But if you’re not enough without one, you’ll never be enough with one.”  If you are not confident in your own opinions and views, no fancy credential or set of professional initials, e.g. MD, JD, or PhD, is going to impress a patient or client.

My experience has always been that when attorneys start with their law school bona fides, law review membership or fancy clerkship, the legal advice that follows will be less than stellar.   Just as “patriotism is the last refuge of the scoundrel,” fancy credentials are the last bastion of the incompetent and the insecure.

PhD’s Got Us Into This Mess

Two of the most prominent PhD economists, Alan Greenspan and Ben Bernanke, never predicted the current great financial crisis.  They never warned us about the low interest rate policies, easy money, ill-conceived tax cuts, loose fiscal policy and dangerous lending practices that led us to this economic quagmire.  Dr. Bernanke assured Congress and the American public that the subprime crisis was well contained.  See Bernanke: I was Wrong About Subprime Crisis. Dr. Greenspan encouraged Americans to avoid fixed rate mortgages and take out adjustable rate mortgages (“ARMs”).  And lo and behold, ARMs were a major culprit in the slide toward too much unaffordable homeowner debt.   When these ARMs reset from their initial low “teaser rates” to higher market rates these unsuspecting homeowners simply lost their homes. See Don’t Take Mortgage Advice from Alan Greenspan.

The Pseudoscience of Economics

Economics is as much art as science.  In the Organic Economy, I wrote about the fallacy of econometric mathematical modeling.   The use of mathematics disguises the fact that economies are often too complex for modeling, as money collides with unpredictable human behavior.   It is pure hubris to believe that professionally trained economists have a monopoly on economic forecasting.

The Decline of the Free Press

The First Amendment ethos to support a vigorous press is integral to a well functioning American society. Starting with Ben Franklin’s musings on independence to the (originally anonymous) Federalist Papers, and continuing with today’s investigative journalism, an adversarial and aggressive press keeps government and other powerful interests in check.

But now great newspapers have either gone out of business or have pared their staffs. A recent report detailed the dearth and dying gasps of investigative journalism:

Thirty-seven percent of newspapers had no full-time investigative or projects reporter on their staffs. The majority had two or fewer, and only 10 newspapers had four or more investigative or projects reporters working for them.

In addition, 61 percent of the newspapers had no investigative or projects team. Of those, 16 percent had teams in the past, but they have been disbanded. Sixty-two percent of the newspapers surveyed did not have a single editor specifically charged with working on investigations. See Today’s Investigative Reporters Lack Resources.

Television news is now more “infotainment” than hard-hitting reporting.  We are left with a neutered corporate media, and a compromised press.  Rather than independence, they are more interested in not offending their sponsors.  They eschew the expensive, risky and controversial path of investigative journalism and criticism, whether it be print, visual or virtual.

Bloggers and alternative media like Rolling Stone (see e.g. Wall Street’s Bailout Hustle) have filled this investigative void.  Often for free or very little compensation, bloggers have taken on the powers that be.  Bloggers expose and criticize dangerous and often wrong economic policies.

Trust Me; I am a PhD Economist

The economics profession has a long way to go to earn the trust of the American public.  Attacking bloggers reveals a “weak hand.”  Instead of spending public money writing a paper with a ridiculous premise (note the paper has been removed from the Richmond Fed’s website), perhaps some of the bloggers have it right.

And so, to Dr. Athreya (and other Fed academicians) from a non-PhD blogger:  it is time to step down from that academic pedestal, display some humility and learn from all men and women (even the blogging ones).

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9
Apr 10

Above the Law: Too Big to Jail

By and large compliance with the law is voluntary.  Every crime cannot be prosecuted.  In an ethical business culture companies and individuals believe compliance is the right thing to do.  For those who lack a moral compass, the fear factor of imprisonment, fines and social obloquy do the trick.  But now companies display a disturbing cynicism toward legal compliance.

The notion of “Too Big to Fail” is no longer new.  Unfortunately, we are creating a new concept: “Too Big to Jail.”

Pfizer

  • CNN reports in Feds Find Pfizer too Big to Nail that Pfizer illegally marketed Bextra, a painkiller. The FBI conducted a criminal investigation and with much fanfare announced the appropriateness of a Pfizer indictment; i.e., fully prosecuting Pfizer would send a clear directive for tough law enforcement.  But the government did not try Pfizer, and instead settled.  The company agreed to pay a large fine, $1.2 billion dollars, and entered into a special reporting and compliance program.  The government did not seek the ultimate penalty of prohibiting (debarring) Pfizer from participating in Medicare and Medicaid programs.  Prosecutors reasoned:

that excluding Pfizer would most likely lead to Pfizer’s collapse, with collateral consequences: disrupting the flow of Pfizer products to Medicare and Medicaid recipients, causing the loss of jobs including those of Pfizer employees who were not involved in the fraud, and causing significant losses for Pfizer shareholders.

Thus, to avoid debarment, an agreement was reached between a shell subsidiary of Pfizer, which was created for the sole purpose of paying fines and the government.  One federal prosecutor questioned whether even a $1.2b penalty was enough to punish Pfizer.

JP Morgan Chase

To finance a sewer upgrade project Jefferson County (Birmingham), Alabama, entered into a series of financial transactions with a division of JP Morgan Chase.  JP Morgan advised the county to move from a fixed rate mortgage to a variable rate mortgage. JPMC then created complex synthetic derivative rate swaps to match cash flows between payments to bondholders and payments it was to receive from the bank for the interest rate swaps.  In 2008, these deals blew up. The county was then required to pay a major part of the project in 4 years instead of 40 years, and a $647m one time penalty fee. The county’s annual payments jumped from $53m to $636m.

In addition to the poor financial advice which has nearly bankrupted the county, federal bribery convictions were obtained against twenty officials and businessmen.  However, so far, JP Morgan Chase has not been indicted. Rather, it has faced an SEC action and been required to forgo collecting the $647m one time penalty. See Mike Taibbi’s excellent article and chronology Looting Main Street.

As with Pfizer, JPMC avoided indictment for reasons that are clearly expedient rather than ethical.  Karl Denninger on Market Ticker explains:

JP Morgan is the firm that handles the Federal Government’s food stamp program – by creating debit accounts so that there is no “stigma” associated with public assistance.  They issue what look like generic debit cards and of course collect a fee when they’re used, as well as a maintenance charge….

JP Morgan would have a hell of a time justifying the retention of their lucrative food stamp business were they to be charged and convicted of criminal fraud in the Jefferson County case.  See Greenspan’s Delusions Deepen

Reeling in the Small Fish

The government seems to be allergic to indicting and fully prosecuting the worst perpetrators of financial fraud.  For over two years Angelo Mozilo of Countrywide, the ground zero of shoddy mortgage practices, has been investigated without an indictment.

Instead we have been treated to insider trading cases involving Martha Stewart and Samuel Waksal in the Imclone insider trading case and Robert Moffat, an ex-IBM executive who fed inside information to the Galleon Group hedge fund.  Bernie Madoff was convicted only because he confessed to the crimes.  The SEC ignored evidence of his criminal fraud and indeed has been embarrassed by the revelations brought to light in the case.

The Unbalanced Criminal Justice System

A standard not written into the law is the preservation of a corporation deemed systemically important to the society as a whole.  As a result, the criminal justice system has treated the large corporate offender with kid gloves.  However, we now know that fraud was part and parcel of the current financial crisis.  And as Karl Denninger has opined, the system will not recover until we clear it of corporate corruption.  So, how to approach this ethical Catch 22 that may keep us in crisis for the foreseeable future?

President Obama is an attorney who is well aware of the disproportionate sentences meted out to accused and convicted minorities.  He was also a constitutional law professor who understood the need for equality under the law.  Yet more than two years into the financial crisis we have yet to indict, try and convict any “too big to jail” institutions.  Continuing this inequity will only convince Americans that there are two sets of laws, one for favored institutions and individuals and another for the rest of us.

No one should be above the law.

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1
Apr 10

Flirting with Economic and Political Breakdown

Yes, I have hammered away at the current Administration’s subservience to the interests of Wall Street and the large banks. See for example Is the Administration Determined to Make the Elderly Poor? The bailouts themselves have had a clear perverse economic effect, and certainly have not been the economic solution we have been led to believe.  But now banks have “recovered” and bank executives have large bonuses to show for their self-serving efforts.   However, what the Administration has not, and perhaps cannot, calculate is the long term non-financial effect of its bailout policy: in negative motivational change, declining belief in our system of government, and higher levels of cynicism among beleaguered American middle class workers.

Why Keep Paying Your Mortgage

Bruce Krasting, a contributor on Zero Hedge (zerohedge.com), chronicled his assistance to a young couple who bought an apartment with a low down payment and a large mortgage.  To continue making payments on the mortgage, the couple took a second mortgage.  Despite their ever growing debt burden, the couple tried to remain up to date on payments but fell behind.  Mr. Krasting advised them to stop paying their mortgage bill.  To obtain any mortgage relief or assistance they needed to be behind in their mortgage payments, so reluctantly the couple gave up and stopped making payments.  This article was appropriately named “A New Wave of Defaults?”

Stoking the Anger of the Middle Class

Other commentators have written about walking away from one’s mortgage. See “Strategic Defaults” a Mortgage Broker Comments on Fear and Shame Tactics. Mr. Krasting’s post was published on the day when the Obama Administration unveiled another “bold” program to assist homeowners:

March 25 (Bloomberg) — The Obama administration plans to announce programs to help homeowners avoid foreclosure, including subsidies for borrowers who owe more than their home is worth. See US to Widen Homeowner Aid, Subsidize Mortgage Reductions.

Angry reader comments are more interesting than Mr. Krasting’s article itself:

-          I have done everything right, played by the book, been responsible, and I get nothing while those who behaved like idiots get bailed out all around me, with my tax dollars! [I want a mortgage reduction too]

-          I think this is the trend that actually brings down the country, and it ain’t that far away. Seriously, I can see your point. It is a good one. Why should you be treated LESSER than someone who acted LESS responsibly? You shouldn’t, simple.

-          Now all these irresponsible people … want, no, expect me to bail them out of their speculation. Yeah, their speculation. They decided to go shopping for a house. Now it’s the banks fault for lending them the money, and the appraiser’s fault and the real estate agent’s fault, and everyone’s fault but their own that they bought more than they could afford, with no plans for down times, and the ones that really get me are the ones who took money out to buy soft consumables and put their jet skis on their mortgage. Now they want to stick their grubby hands into my pocket book and yank out my hard earned money…It infuriates me.

-          While wearing out the mortgage, we also wore out seven or eight vehicles.  I didn’t buy them to make money on either.

With those obligations also came the full costs of the tuition bills for the children.  If you are up to date on a modest home, you don’t qualify for any discount coupons on that either.  I can promise that I’ve paid for a whole lot of tweed, just didn’t get to wear it myself.  Health insurance, oh yeah, I paid that too and got to pick up the tab for those with the pre-existing condition of lazy.  And all with those after tax dollars.

-          Now these dumb butts age getting to make their tuition payments.  Who knew that doing a refi to pay for ski trips, fine wines, boats, and nice jewelery could be such a good deal.  Spend after tax money for everything, then get the debt forgiven with no tax on that either.  How sweet. sweet. The government steals money from me and literally gives it to bankrupt banks so they can pay out bonuses for performance.  Now they steal more money from me and give it to banks to bail out people who bought as much house as they could afford based on better-than-perfect economic conditions, but who can’t make payments when the economy goes in the tank (who’d've thunk it?).

-          But Jim Sinclair has it right today, “When the Devils are in charge, virtue become a crime.”

-          The problem our government and the banksters keep changing the rules.  Concepts like “good faith”, “rule of law”, “honest exchange”, etc… have been tossed out the window.

-          Another vote of someone who bought only what they could afford even if they had a financial setback, and is current on it, and is getting raped from all directions by being honest and responsible.  Course I also paid nearly 50% in cash so walking away doesn’t seem like a good idea at the moment.  I want my bailout.  I want my “entitlements”.

-          This is something different.  A bigger trend is emerging, where the silent majority of responsible, fairly conservative middle Americans are making a business decision.

The above quotes excerpt comments and delete expletives.

Pushing Into the Danger Zone

A societal breakdown does not occur only because of war or famine.  Our society was founded on concepts of fairness and the rule of law.  Rule of law requires certainty and consistency.  Through “bailout nation” tactics both the Obama and Bush administrations have changed both rules and ideas of law and fairness.  As a result, America is rapidly becoming two classes: those who played by the rules, worked hard and met their obligations and those who acted recklessly (whether banks or individuals) and now feel entitled to a bailout.

Worse, we have now given moral license to hardworking people in the former category to walk away from their obligations.  As Mr. Krasting concludes about this new default phenomenon, a rising trend is about to become a rogue wave.

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1
Mar 10

Labor and Employment Laws: The Hidden Job Killer

When we ignore government sleight of hand, the real number of unemployed Americans is a staggering 26.9 million.  In For 15 Million Unemployed any Job is a Good Job; Questions for Pollyannas; Wishes Aren’t Fishes, Michael Shedlock (“Mish”) continues his excellent analysis of the unemployment situation.  Contrary to Bernanke and Obama Administration rosy projections, Mish predicts that official unemployment will remain greater than 9 % through 2015.  In a quote from Allen Sinai, chief global economist for Decision Economics, Mish describes corporate hiring behavior:

American business is about maximizing shareholder value…You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.

Workers are expensive. Federal, state and local employment laws make them more so.

New Deal Labor Legislation

In the late 19th and early 20th century, rapid industrialization resulted in powerful owner/capitalists, virtually powerless workers, and deplorable working conditions.   Upton Sinclair’s The Jungle dramatized the deplorable state of affairs in the meatpacking industry.  In reaction, in 1935, Congress passed the Wagner Act to permit union organizing. Then it enacted the Fair Labor Standards Act to establish minimum pay, limitations on hours and pay for overtime work.  Perhaps labor legislation should have stopped at that point.

Nothing Succeeds Like Excess

New Deal labor legislation was just a springboard for greater federal control over the workplace.   Since 1964, there has been a flood of labor and employment legislation and Executive Orders.

  • The Civil Rights Act prohibits race, color, religion, sex or national origin and pregnancy discrimination.
  • The Age Discrimination in Employment Act prohibits age discrimination.
  • One Executive Order prohibits all forms of discrimination and requires affirmative action.  This includes training and outreach programs and other positive steps which must be incorporated in written personnel policies and a plan which must be updated annually.
  • The Equal Pay Act requires that men and women in the same workplace be given equal pay for equal work.
  • The Americans with Disabilities Act prohibits disability discrimination. The Rehabilitation Act requires most federal contractors and subcontractors to take extra measures to hire and promote qualified disabled individuals.
  • The Occupational Safety and Health Act requires employers to meet legal health and safety standards.
  • The Employment Retirement and Income Security Act (“ERISA”) sets uniform minimum standards to assure that employee benefit plans are established and maintained in a fair and financially sound manner.
  • The Workers Adjustment and Retraining Notification Act requires that covered employers provide notification sixty days before a plant closing or a mass layoff.
  • The Family and Medical Leave Act provides covered employees with entitlement to up to 12 weeks of job-protected, unpaid leave during any 12 months for the following reasons:

-Birth and care of the employee’s newborn or adoption or foster care of a child

-Care of an immediate family member (spouse, child, parent) who has a serious health condition

- The employee’s own serious health condition

These are the major pieces of federal labor and employment legislation, but there are additional enactments regulating the employment relationship.

Since we live in a federal system, state and even municipalities impose additional employment, benefit and labor obligations.  Moreover, the courts have intervened to create doctrines such as wrongful discharge to limit an employer’s right to dismiss an employee at will.

Real World Consequences

Much of the above legislation is grounded in noble sentiment: workplace fairness and employee protection.  But there are real world consequences: a loose definition of “serious health condition” allows employees to take large unpredictable amounts of time off, harming production schedules.  Affirmative action programs require lots of staff and recordkeeping, extra recruitment and training, and slower hiring.  ERISA imposes fiduciary liability on plan sponsors. With virtually every workplace sector protected, firing an employee is difficult, with the ever present danger of a discrimination or retaliation charge. And so the American workplace is now one of the most regulated areas of our economy.

Laws are often a hidden tax. See Ask Your Congressional Representative to Do Nothing.   Allen Sinai has reached the correct conclusion: why hire expensive workers who have a host of protections and entitlements when you can substitute cheaper capital (automated machinery, robots, computers, etc)?  In a globalized economy where a highly motivated, well-trained Chinese worker makes about $1 per hour, the over protected American worker may have priced himself out.

If the Obama Administration is serious about reducing the unemployment rate, it should be thinking about shelving expensive health care initiatives and the Employee Free Choice Act.  More employer cost will equal less American employment.

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American Society / Political / Regulation / law — 0 Comments
9
Feb 10

Ask Your Congressional Representative to Do Nothing

Every 12-step program has an initial confession, a moment of recognition.  Here’s one: I am a lawyer and I do not know the law.  I have practiced law for more than 35 years, fulfilled continuing legal education requirements and kept up with the daily reporters.  Yet I do not know the law and would venture there is no lawyer who completely knows the law.  Shocking!

Why No One Knows the Law

The law has made itself unknowable.  How did we get to such a place?  There are 50 titles in the United States Code, the official compilation of federal law.  Each title has coordinate regulations compiled in the Code of Federal Regulations.  The tax laws are in Title 26:

If you go to the US Government Printing Office (www.gpo.gov ), you can order a complete set of Title 26 of the US Code of Federal Regulations (that’s the part written by the IRS), all twenty volumes of it, at the bargain price of $974, shipping included.

According to the US Government Printing Office, it’s 13,458 pages in total. The full text of Title 26 of the United States Code (the part written by Congress–available for an additional $179) is a mere 3,387 printed pages, bringing the adjusted gross page count to 16,845. [Statistics as of 2006].

Remember this is one title among 49 others.

An attorney can master small sections or even subsections of the law, but never all the law. Since we live in a federal system, such an aspiring attorney would have to master not only federal law, but also state statutes and regulations.

From day one of law school, a basic principle is hammered home: ignorance of the law is not a defense to a criminal offense.  Thus, we live with the ultimate paradox:  the least schooled of our citizens are charged with complete knowledge of the law, a task that is unattainable even by the most skilled legal practitioners.

Where Laws Come From

Laws emanate from the talented quills of our elected representatives.  Taft and Hartley (labor laws), Sarbanes and Oxley (corporate governance), Glass and Steagall (banking), Smoot and Hawley (tariffs) were all elected representatives.  Congressional representatives demonstrate their worth by identifying a societal wrong that cries for redress. Then they form a coalition to pass legislation.  Often campaign contributions from interested parties find their way to the sponsoring legislator. Immortality awaits these legislators.

Once a law is passed, administrative agencies create regulations to interpret.   Regulations can run many times the length of the law.  Moreover, they have the force of law and in some instances carry criminal penalties for an infraction.

Laws Have a Cost

A law is a hidden tax.  When passed, the simplest of laws require legal analysis, interpretive regulations and a compliance program.  These functions are performed by highly paid professionals. Following the momentary drama and satisfaction of bill passage, these long term costs begin.  Newly passed laws may conflict with existing laws, leading to uncertainty and then an inevitable clarifying court challenge.  Ultimately, these costs are passed along to the consuming citizenry.

What to Do

A modest proposal: we should elect Congressional representatives who promise NOT to pass laws.  Even better would be elected representatives who promise to repeal the most harmful ones.

More seriously, we need   to overhaul and simplify our legal codes.  Society needs basic safeguards, but we have far exceeded that standard. Every problem in society does not require the passage of a law.  Perhaps what we really need is greater trust and a renewed sense of shared responsibility and sacrifice.   Then we would need fewer laws.

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