Media

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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  Glass Stegall, which separated banking operations from trading operations, was repealed by Graham-Dodd.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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11
Apr 11

The Very Late News

“Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail, and that’s wrong.” Charles Ferguson 2011 Academy Award Acceptance Speech for Inside Job

I am very disturbed at how the media reports financial trends and crises.

First, they cheered speculative trends.  Remember 2004-2007 and how laudatory the reports of the housing boom and soaring stock market were?  The signs of disaster were all there, but nary a warning about the crisis to come.

Second, when the crisis was an undeniable reality, reporters seemed to lose the ability to think critically.  There was simplistic and naïve acceptance of government assurances, and belief that the crisis was well-contained and limited to only subprime mortgages.  Only when the situation became so blatant and ubiquitous did the media admit as much.

Third, by the time any coverage contained a measure of accuracy or alarm, events had deteriorated so much as to render the coverage irrelevant and useless to shape financial reform.

Fourth, this late and useless coverage still failed to “connect the dots” and reveal the obvious unethical and/or criminal behavior behind the crisis:  bank collusion on mortgages, no prosecutions, conversion of private debt to public tax obligation, zero interest rates, punishment of savers, dollar devaluation, and food and energy cost inflation.

Better Never than Late?

As we discussed in Rates are Low, Morals are Lower, even the revered Wall Street Journal is late reporting key financial trends.  Since December 2008, the Federal Reserve has maintained a zero interest rate policy, punishing savers in general and the elderly in particular.  Why has it take the Journal almost 2 1/2 years to report the plight of the elderly?  Moreover, the Journal does a mediocre job of explaining the interconnection between and among misdeeds of the banks, loose monetary policy, poverty among the elderly, high unemployment, inflation, and transferring obligations to taxpayers. See Fed’s Low Interest Rates Crack Retirees’ Nest Eggs

And unfortunately, the Journal’s late discussion is one among many instances of late and irrelevant reporting.  Let’s examine two more stories:

Last Sunday CBS’s Sixty Minutes focused on the mortgage foreclosure crisis.  In The Next Housing Shock, reporter Scott Pelley boils the housing crisis down to poor paperwork, major banks hiring irresponsible mortgage service companies hiring low skilled employees paid minimum wage to prepare and verify mortgage foreclosure papers.

Missing from this analysis is the entire cycle (2002-2008) of mortgage fraud perpetrated by banks and Wall Street investment firms on the entire US and world economies.  Mr. Pelley avoids the more troubling issues of writing mortgages for people who could not afford the mortgage payments, the packaging of these mortgages into mortgage-backed securities, marketing these securities to fiduciaries such as pension funds and American and foreign investors.  Rating agencies such as S&P and Moody’s placed their AAA imprimatur to reassure investors.  Does Mr. Pelley even mention how long this has been going on?  Now we find that many of these mortgage-backed securities may not have complied with NY trust law or IRS regulations.  See 60 Minutes on Mortgage Securitization Document Lapses and Foreclosure Fraud

Is Overseas Journalism Better?

In yet another dismal example of journalistic laziness, we can cite yet another major international financial newspaper, the Guardian.

During a 22-month investigation by agents from the US Drug Enforcement Administration, the Internal Revenue Service and others, it emerged that the cocaine smugglers had bought the plane with money they had laundered through one of the biggest banks in the United States….

The authorities uncovered billions of dollars in wire transfers, traveller’s cheques and cash shipments through Mexican exchanges into Wachovia accounts. Wachovia was put under immediate investigation for failing to maintain an effective anti-money laundering programme….

Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year’s “deferred prosecution” has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine. More shocking, and more important, the bank was sanctioned for failing to apply the proper anti-laundering strictures to the transfer of $378.4b – a sum equivalent to one-third of Mexico’s gross national product….

See How a Big US Bank Laundered Billions from Murderous Mexico’s Gangs

How reprehensible that the Guardian did not report the matter until April 3, 2011, days after the deferred prosecution agreement expired.  Karl Denninger in his Market Ticker blog reported on this matter almost nine months ago, in June of 2010. See How to Run Drug Money: Be a (Large) US Bank

What is Really Happening Here?

Mainstream media is providing late and lazy coverage of critical financial stories.  Why?  Some possibilities:

  • Financially strapped print media and network news organizations can no longer afford the expense of hard hitting investigative journalism.
  • In an era of reduced advertising, main stream media are less willing to offend banks and other financial companies who are major advertisers.
  • Financial journalism is not the glamour assignment. Perhaps less able journalists are assigned to these stories.
  • Financial investigations are long and tedious; not as sexy or dramatic as a war, an earthquake or an election campaign.  (Perhaps a corollary here is the lack, so far, of criminal prosecution: we have yet to see even one major prosecution against a large operating bank.)
  • Since banks are the politically anointed agents of economic recovery (TARP, zero interest rates, etc), perhaps the media are afraid to be accused of demonizing the banks and derailing the economic recovery.
  • Even worse, is the Administration colluding with the media to under report financial chicanery?

The truth may be all or none of the above.  But for sure we, the people, and our political leaders remain uninformed.   Serious financial investigative journalism needs to make a comeback.  Right now, only blogs like Market Ticker and Naked Capitalism continue to challenge the status quo.

CBS, The Wall Street Journal and even The Guardian should be embarrassed.  One of my early mentors used to say, and it applies most pitifully to our current major media:

“You have an excellent grasp of the obvious.”  Even the obvious would be better if it was timely.

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16
Sep 10

Chivas and Chivalry

Even before Mad Men became so popular, advertising was always fascinating.  Embedded in a glossy print ad or an imaginative television or radio ad is a commentary about us, our hidden aspirations and how we see ourselves.

One such ad has caught my attention.  Chivas Regal has a new worldwide campaign to promote its scotch whiskies.  The ad is aptly called “The Movement, Living with Chivalry.” It is beautifully filmed and supported by haunting, inspirational  music from The Cinematic Orchestra: “How to Build a Home.”

Ads cannot convey the aroma, taste or quality of an alcoholic beverage, so Chivas had to create an image.  The viewer must believe that the beverage is part of an exclusive lifestyle.  Chivas brands its new campaign a “movement,” a return to chivalry.  Part of the genius is the play on the words “Chivas” and “chivalry.”

Chivalry is defined as the medieval institution of knighthood which emphasizes individual training to hone skills and give service to others. Chivalrous virtues are honor, loyalty and courtly love.  Let’s look at Chivas’ idea of modern chivalry from its Live with Chivalry website:

Here’s to doing things the right way.
To giving a damn about others.
Here’s to giving your word… and keeping it.
Here’s to honour,
And it’s simple extension… the handshake.
Here’s to style, exuberance and charisma.
Here’s to gallantry… long may it live.
To the man rich… in experience.
Here’s to chasing wealth… in all its forms,
And here’s to sharing it.
Here’s to straight talking or, as it used to be known… honesty.
Here’s to having some front… and watching someone’s back.
Here’s to knowing that life’s real luxuries are time and friendships.
Here’s to optimism and leaps of faith.
And while we’re at it… here’s to freedom.
And having the audacity to go out and get it.
Here’s to knowing that you are not alone.
That together we’re better, stronger, smarter.
Here’s to the brave and the enlightened.
To a shared way of behaving that sets certain men apart from all others.
Here’s to those who Live with Chivalry… here’s to us!

“The Movement” video-mercial starts with a well dressed young man in a tailored conservative business suit walking in a financial district of a large un-named city amidst a crowd of faceless business people.  Passersby jostle the actor; he looks dejected.  Then a voiceover: “Millions of people…everyone out for themselves. Can this be the only way? No.”

The background music intensifies.  “Here’s to honor and gallantry, long may it live…” highlights scenes of men in formal wear with their hands together in the center of a circle and an attractive formally dressed young man carrying a pretty young woman (damsel in distress?) on his back across a rain soaked field.  “Here’s to doing the right thing and those who give a damn” shows us men in formal wear in unison pushing a friend’s stuck Mercedes (what? No Honda in this ad?) out of the mud.  “Here’s to the straight talkers who give their word and mean it” accompanies scenes of older, gray haired elders in suits looking like they just sealed a deal. “Here’s to freedom and the true meaning of wealth and men who keep their word” shows men about to sky dive and signaling each other, followed by other young men on horseback riding along the seashore.  “Here’s to the brave among us” accompanies sooty fire fighters near an extinguished blaze.   “Here’s to a code of behavior that sets certain men apart from others” (what else?) lauds a triumphant sports team clasping a trophy and celebrating by jumping into the water.   Finally, “here’s to us” shows us another formally attired young knight entering a ballroom with his similarly attired friends and handsome proud parents.  And Bingo!  They all raise a crystal tumbler and enjoy a Chivas.

What is the Ad Saying?

It is no accident that the commercial starts out in the financial district of London or New York.  The pushy, faceless automatons bumping into our hero are not random.  The scene symbolizes all that is wrong with our financial era, with faceless, greedy, well dressed, smooth talking bankers dehumanized by the mercantile process.  A sense of honor and acting for the common good are absent in the canyons of finance.

Chivas has imagined an alternative world: the medieval code of knighthood brought into the bright light of good looking youthful privilege and adventure.  Alexander Dumas in literature and Hollywood in movies gave us the chivalry of the Musketeers:  one for all and all for one; this ad simply updates the context.   Knights are gallant, rescuing damsels in distress.  Young men have a code of honor; their word can be trusted and they confront real danger, not the faux combat of an electronic trading floor.  Plus, these modern knights are not afraid to get their hands dirty while doing the right thing.  They clean up well, put their tuxedos back on, and get the girl.  Bottom line:  they earn their Chivas.

The Knights of Today and Tomorrow?

Thank goodness there are still people of honor who walk the earth.  Given the behavior of our politicians, business and financial leaders, we can only hope there is a cadre of good men and women somewhere who can lead us forward.

It is ironic and disturbing that a whisky company needs to clarify these values for us.  As in the ad, I wish we could rely on people’s personal honor and need only a handshake to seal a deal.   In addition, I wish that we could say not only “drink responsibly” but also “lend or govern responsibly.”

I would be the first to raise my crystal tumbler to these honorable lads and their exploits.  However, as I mentioned in previous blogs, I would be toasting with Lagavulin.

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13
Sep 10

One Year of Blogging

After one year of blogging on economic, corporate, social and political issues, I thought I would try to make sense out of trends:

  • The rule of law has taken a major hit in the United States.  Some examples of this phenomenon are the unlimited guarantees to Fannie Mae and Freddie Mac, guarantees to banks and favored companies, and Federal Reserve purchases of mortgage backed securities. See Shredding the Social Fabric
  • We have exposed monetarist and Keynesian economic solutions as intellectually bankrupt.   Amazingly, the decision makers who believe in these theories have not been fired.   More amazingly, with all the evidence that we are still mired in a deep recession, we keep trying the same tired strategies.
  • Obama’s economic acumen and performance has been disappointing.  His monomaniacal focus on a health care bill that the country cannot afford hampers new hiring.  Worse, it enriches the insurers and big pharmaceutical companies.  And worst, he has wasted important political capital.   Further, with his tepid financial reform bill he missed a real opportunity to address citizens’ concerns about the excessive power of Wall Street.
  • Congress should be tried for malpractice.   Members of Congress did not read the financial reform or the health care bill.  Nancy Pelosi had the temerity to implore Congress to pass these bills so she and the public could find out what is inside.
  • The Executive Branch and Congress appear to be for sale to the highest corporate bidder.  Industry lobbyists essentially control Congress and the executive branch.
  • Where has leadership gone?  Congress used to produce real leaders: Everett Dirksen, Hubert Humphrey, Robert Taft, William Fulbright, Sam Nunn, Henry Jackson and others.  We may not have agreed with their views, but they were serious, well-respected, independent minded individuals.   We never doubted that these leaders put the country’s interests first.  The Executive Branch also produced great leaders.  Compare past Secretaries of the Treasury– Andrew Mellon, Douglas Dillon and Lloyd Bentsen– to the flawed and unworthy Timothy Geithner.
  • Political clout, not reason and merit, determine current policy.   GM, GE, the banks, municipalities and others were saved from extinction because of campaign contributions and union ties.  Picking winners and losers based on political considerations generates cynicism and undermines the guarantee of equal protection under our laws.
  • Zero interest rate policies encapsulate everything that is wrong with our current system.  We have impoverished the thrifty and the prudent and rewarded the profligate and the incompetent.   On the backs of savers, we have bailed out the banks.  This is particularly heinous because the victims of this policy are the retired and elderly who have watched their savings dwindle and their retirement lifestyles vanish.  An economic policy which encourages savers to speculate in the stock market or buy junk bonds is unconscionable.
  • Promises of better corporate behavior after passage of Sarbanes-Oxley have been false.  Congressional pressure on the Financial Accounting Standards Board to suspend mark to market accounting has created the “extend and pretend” economy.  We no longer properly recognize losses; banks know this and refuse to lend knowing they can obfuscate the true state of their balance sheets.  More damaging, the true financial condition of the banks leads investors to purchase equities essentially under false pretenses.  Many of the bank stocks have declined significantly from their peaks.
  • Culturally, extend and pretend has permeated beyond our financial culture.  BP and the government hid many facts about the Gulf oil spill.     Even now we probably do not know the full extent of the damage and independent researchers have been denied access to information.
  • Corporate Boards of Directors are still not paying attention. In the case of Mark Hurd the violation of corporate financial policies was rewarded with a generous severance package.  (Trust in a corporation is predicated on the integrity of their financial policies.)   His unemployment did not last very long, as Oracle recently named him co-president.  Did character matter to Oracle or its Board?  Does anyone have any shame anymore? Was the HP Board afraid to fire Hurd for cause?
  • We are becoming a divided country.  The government protects the rich and the poor.  The middle class is being economically squeezed by inflation in basic goods, unemployment or the threat of it, rising health care and education costs and diminished retirement savings.   All these things plant the seeds of political upheaval.
  • Finally, blogging serves an important purpose in presenting an alternative viewpoint to mainstream media.  Blogging is the antidote to endless economic cheerleading by paid media and government officials. Blogging has become the new millennium’s populist forum. For example, bloggers steadfastly maintained that we have not emerged from the recession/depression and there were never any “green shoots” of recovery.  The mainstream media now feigns surprise at reports of economic weakness and prognostications of a double dip recession.

Watching the passing parade of economic and political folly is both depressing and exhilarating.  Depressing because we believed there would be a change in business-as-usual Washington.  Exhilarating because the public is awakening to the fact that they have been misled.  And that augers a change in the status quo and perhaps a better tomorrow.

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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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29
Jul 10

Silence and Mystery

I don’t usually read the Sunday New York Times Styles section.  This headline, however, caught my attention: Whatever Happened to Mystery? Author Ben Brantley’s thesis is that we live in an age of media over exposure.  He rhapsodizes about a simpler time when media constituted film, radio and television, and the occasional paparazzo in vain stalked Jackie Kennedy or Princess Diana.  With personal websites, Facebook, YouTube, Twitter, MySpace and other social media, we and celebrities are exposed to one another 24/7.  In a 2010 media world, Greta Garbo could not have burnished her mysterious, sphinx-like image.

Why do we even care about this issue?  Mr. Brantley hits on an important point:

“The problem is that, people being people, 24-hour visibility will ultimately breed if not contempt, then weary familiarity. That’s why the tabloids need a new generation of cover girls and boys every year or so, a breeding process facilitated by reality television.”

Media over-exposure leads to boredom, contempt and ultimately disengagement. While Mr. Brantley concentrates on celebrity culture, I worry less about that world and more about our overexposed political and economic culture. Whatever Happened to Mystery?

No Sense of Place

In 1986, Joshua Meyrowitz, now a Professor of Communication at the University of New Hampshire, wrote a profound book, No Sense of Place.  Observing the societal effects of television, he looked first at its effect upon children.  Television had the ability to expose children to the adult world of secrets.  The average soap opera offered a daily peek into sex, adultery, homosexuality, lying and other “secrets” sheltered from children of earlier generations. Second, television broke down gender barriers as women were exposed to sports, war, medicine and other male bastions, and men were exposed to the emotional, private sides of life generally associated with women.

Television, Mystery and Politics

Importantly, Meyrowitz discusses the de-mystification or our political leaders:

…prior to the saturation of television, our political leaders were treated as a “mystified presence,”  a status above the common citizen, as it was easier to control the flow of information that represented who they were and what they did.  Although television is a useful tool for our politicians in creating this status, it “tends to mute differences between levels of social class.” Meyrowitz terms this “a double-edge sword,” as over exposure of a political leader diminishes his power, with a continuous presence rendering the person more ordinary, with less mystique. Granted, over exposure is difficult to balance with under exposure:  without media presence a leader has minimal power, yet with exceeding presence he or she loses power.  See Wikipedia entry.

Because of the immediacy of information to all common citizens about all issues, we are now able to closely inspect our leaders’ images, demystifying them as we go.

The white hot intensity of television or film allowed for the presidential victory of a former actor, Ronald Reagan, and probably would have prevented the election of a wheel chair bound Franklin Roosevelt.  And who can forget the election of Arnold Schwarzenegger as governor of our most populous, most media-saturated state?  In his case, can we even separate political power as metaphor or physical reality?

Conversely, television has the power to destroy, as we come to devalue what is overly familiar. The country was ready for Reagan to depart the White House well before the end of his eight years in office.

Obama and the Media

My subjective view is that Obama over communicates.  Using a teleprompter, which lessens both spontaneity and credibility, Obama seems to be on television every morning opining about the economy, Afghanistan, the Gulf oil spill, unemployment or some other topic.  I also find in his speeches more heat than light, meaning we are getting a lot of verbiage, but not much insight.  That I think is the failing of this Administration, the inability to succinctly and candidly educate the public on the need for economic stimulus, health care or financial reform. When one has a torrent of communication from the White House, it is impossible to differentiate the mundane from the meaningful.  The public becomes either apathetic or cynical.

Silence is Golden and Effective Too

My father was a war veteran and a quiet man.  He always seemed to have many thoughts behind his enigmatic smile.  And when he had something to say those around him tended to listen.  In matters of discourse, he taught me that less is more.

Meyrowitz pointed out how today a celebrity, even one as beloved as Bill Cosby, could actually last only a short time on television.  Perhaps Obama and other celebrities should start ratcheting back their media exposure.  Would Roosevelt have discussed the New Deal on ABC’s “The View”?

I don’t need to hear about the latest adventures of the First Dog or the schedule of the First Family’s Acadian vacation, but I do need to know why we are spending trillions of dollars that we do not have,  and why the economy is headed for another recession.

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4
Jan 10

What Went Wrong? Disconnecting Effort and Reward

A decade of financial frustration has just ended with US equity returns negative for the entire period.  This is the first time this has occurred, and that includes the 1930’s America’s Great Depression.  A grim statistic indeed; what went wrong?

The United States began and thrived as a nation of ideas, imagination, hard work and grit.  Its hallmark has been a population that saved and produced.  Contrary to these admirable national character traits, Alan Greenspan and his protégé Ben Bernanke utilized low interest rates and a “fire hose” of liquidity to solve financial crises. From this folly, we now suffer negative consequences detrimental to the very fabric of American Society. See Shredding the Social Fabric.

The Age of Get Rich Quick Schemes

America has always had a history of “get rich quick schemes:” the California Gold Rush, the Florida land boom and the “roaring”1920’s stock market.  These booms and inevitable busts were damaging, but did not change America’s basic character.  Even the Great Depression did not change our basic values of thrift and hard work.  But the toxic combination of Greenspan’s easy money, and ubiquitous information and spin disseminated via the internet and financial television elevated “get rich quick schemes” to national obsessions.

  • The Internet Boom – A poster child and pitiful example for the boom and bust was MicroStrategy.  From its initial offering in June 1998 it rose to a market cap of $26b.  The founder was found guilty of numerous SEC violations.  Still in business 11 years later the company has a market cap of $1.1b.See Search for Redemption.
  • Day Trading – Closely allied to the internet boom was the wave of day traders who quit their jobs to spend full time trading stocks.  Many achieved temporary riches only to suffer huge losses after the internet boom turned to bust. See Downfall of a Day Trader.
  • House Flipping – To offset the internet stock market crash, the Fed adopted a policy of ultra low interest rates.  In the ensuing housing frenzy from 2002-2007, speculators flipped houses and even raw land.  The disastrous results are now obvious.
  • Credit Derivatives – Experts from Myron Scholes, the Nobel Prize winner for his work on valuing credit derivatives (Black-Scholes model) to Warren Buffet view credit derivatives as financial weapons of mass destruction. These esoteric instruments were key factors in the recent financial crisis and many believe the problem has not been fixed. Indeed derivatives became a source of large profits for Wall Street firms, often at the expense of their own clients.  See Banks Bundled Debt, Bet Against It and Won.
  • Ponzi Schemes – Disregarding obvious warning signs, sophisticated investors lured by consistent above market returns were ultimately defrauded by Ponzi schemers like Bernie Madoff, Allen Stanford and others.
  • Wall Street Bonuses – Instead of holding capital in reserve in anticipation of the next financial crisis, Wall Street firms are paying record bonuses this year equal to fifty percent or more of revenue.  This easy money is even more galling as we used taxpayer money to stave off bankruptcy in these same firms.  The lure of easy money trumped prudent financial strategy. See Wall Street on Track to Award Record Pay.

Disconnecting Effort and Reward

The last decade has made fools out of the average working person.  Why work at a $50,000 a year job, stay out of debt and try to save 10% of your income while others reap outsized rewards with seemingly little effort?   Low cost, virtually unlimited lending enticed many to “day trade”, “house flip” and engage in a consumer orgy.

I have chronicled the obvious problems of too much debt.  We will take a long time, if ever, to work our way out of this morass.  More damaging was the disconnect between effort and reward.  Financial schemes replaced production.  We invested scarce societal savings in these get rich schemes which make economic recovery even more difficult.

And too, our precious human capital has been compromised, as resources were diverted from teaching, engineering and management programs into MBA’s in finance.  A prestigious job on Wall Street became way more attractive than teaching, engineering, entry into a manufacturing company or even law or medicine.  This was not just a financial crisis, but a crisis of American character.  I hope it does not take ten years to return to fundamentals and our core national values.

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27
Dec 09

Seven Black Swans a-Swimming

The holiday spirit lingers. With all due respect to the Twelve Days of Christmas, let’s see if we can predict seven potential black swan events for 2010.  But we have a conundrum. According to Nassim Taleb (author: The Black Swan: The Impact of the Highly Improbable), “black swan events” are high-impact, hard-to-predict and rare events that are beyond the realm of normal expectations, that is, statistical outliers. Thus, if we are able to predict them, they may not be true “black swan events.”

I will leave that issue for philosophers.  Let’s focus on possible “disturbances in the Force” which can render useless the carefully orchestrated Obama, Geithner, Bernanke engineered recovery.

Black Swan Event Gestation

The government and mainstream media have been extremely helpful in identifying “black swan events.”  These even have usually been hidden in plain sight and then reported by main stream media.  Then we have a noted academician or high government official contextualizing the event to make the public believe that the occurrence of the event is improbable or lunacy. Examples: Ben Bernanke reassures the public that sub-prime losses were well contained and no threat to the economy. Tim Geithner proclaims that the largest banks were well capitalized.

In the former Soviet Union the joke was that nothing was true until it was officially denied.

2010 Candidates for Black Swan Event of the Year

And now for an Academy Award moment, the nominees please:

  • The Dubai World default – We are again receiving governmental reassurance that the Dubai World is well contained. Hearing this has eerie echoes of the sub-prime crisis being well contained. Why? We live in a highly interdependent worldwide financial system: if a butterfly flaps its wings in Beijing… you know the rest.
  • The US defaults on its sovereign debt – The Obama administration provided financial guarantees to everyone from American Express to GE to money market funds to Citicorp.  More than 2 trillion dollars of new US Treasury debt will need to be financed in 2010.  Is there enough money in the world to fund these deficits? What if a Treasury auction fails; that is, there are not enough bids to cover the amount offered?  That is like having a garage sale and nobody coming by.
  • The FDIC runs out of money – One commentator believes that the FDIC ran out of money in October 2009.   The FDIC is trying to muddle through by not aggressively closing problem banks.  Yes, the Treasury could step in and loan the FDIC money, but review the second bullet above on the potential for sovereign debt default.  Also, modern day bank runs occur via the internet rather than through heartwarming scenes a la It’s a Wonderful Life.  There is no George Bailey and no honeymoon money to bail out the money center banks.
  • Commercial real estate implosion – Commercial real estate – office buildings, hotels, regional and strip malls and multi- family dwellings have had a price decline of 41% since 2007. Rents have declined in all categories. Commercial real estate heavily utilizes short-term financing which require frequent re-financing at three, five and seven year intervals.  Re-financing needs will double from 2009 to 2010. Already stressed regional banks financed much of the growth in commercial real estate. Next year could be the perfect storm as both public and private sectors tap a limited pool of capital.
  • State, county or municipal insolvency – Multiple states are nearly insolvent. The same problems exist at the county and city levels.  States cannot declare bankruptcy, but counties and municipalities can.  A cascade of these bankruptcies would tax state treasuries.  A series of state defaults would put pressure on the Federal government for another set of bailouts.  Municipal defaults would send shockwaves through all financial markets.
  • Pension Fund Failure – Public and private pension funds are massively underfunded.  See Underfunded Pension Plans: The Next Shoe to Drop. Next year could be the year of recognition.  PBGC has limited resources to bailout the private sector funds and there is no PBGC coverage for public pension funds.  Multiple pension fund failures loom on the horizon.
  • War in the Middle East – Iran has shown contempt for international efforts to stop its nuclear development program.  Israel or the United States may be forced to take military action.  Iran has threatened to retaliate by closing the Straits of Hormuz, the international oil shipment passage way for Gulf oil.  Oil prices could soar crippling the world economy.

The Sky is Clouded with Black Swans

Given the nature of black swan events, I cannot predict that any will land. It is even more difficult to determine whether or not they are even black swan events at all.  Other worthy candidates: dollar collapse, earthquakes and volcanoes, sovereign debt default in Portugal, Spain, Italy, Ireland, Greece, the United Kingdom (or all these countries), Euro collapse, depression in China, constitutional crisis in the United States.  The list is long and fraught with possibility.  Or the black swan event could be that nothing happens at all.

Still hope spring eternal, keep checking the skies and Happy New Year.

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20
Nov 09

The Macroeconomic Picture or Connecting the Dots

In our current world of finance and economics specialization is rampant to the point of being emblematic of our age.  There are specialists in credit derivatives, traders of all stripes, equities, bonds, distressed debt, emerging markets, private equities, municipal bonds, high yield bonds, repos and a host of other financial vehicles.  Since each of these specialists operate in their own “silo” there are few big picture specialists who can look at the entire macroeconomic environment and connect the dots.   Listening to Bloomberg Radio yesterday morning, noted bank analyst Meredith Whitney returned to her bearish stance on both bank stocks and the stock market in general. Ms.Whitney said she examines all economic data.  Unfortunately, Ms Whitney is a rarity on Wall Street and in Washington.   The mantra has been “green shoots and recovery” but coverage has ignored reality.   Examine recent financial headlines which rarely make the mainstream media:

Connecting the Dots

To stem a financial collapse after the bursting of the internet bubble, the Federal Reserve dropped interest rates to near zero.  This sparked the boom in real estate and the “FIRE” economy: finance, insurance and real estate.  As a nation we exported our productive capacity off shore and we embraced a real estate, retail and service economy.  This bubble burst in 2008. The cycle of ever rising asset prices and credit prices ended.

The above headlines suggest an economy seriously unbalanced with collapsing commercial and residential real estate prices, already high and increasing unemployment, contracting bank and consumer credit, trade imbalances, deficits at the federal and state level, collapsing personal finances and falling tax collections.

Too Much Debt and Too Little Income

The hangover from a decade of financial excess is too much debt and too little income to support that debt.  The rest is mere commentary.  Trying to re-inflate the FIRE economy bubble will ultimately prove to be costly and futile.  The country needs more people like Meredith Whitney who recognize that the emperor has no clothes and realize that there will be continuing tough times ahead.

As they used to say on Hill Street Blues:  “Hey let’s be careful out there.”

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11
Nov 09

Thinking More and Reacting Less

I began working for a large corporation as a junior attorney.  Wanting to be successful, at meetings I watched my bosses, mostly senior managers as well as my peers.  The skill that seemed to be most prized was the ability to contribute a quick, confident answer to questions posed by senior executives.  My boss was a master at the quick, confident answer.  In many cases, however, his answers were dead wrong.  But, amazingly, after these oracular statements no one questioned his answer and more curiously, co-workers accepted his responses as gospel.  Bold confident statements led me to believe that the way to success was to be: “often wrong, but never in doubt.”

Media and the Digital Age

Media and the digital age have only further validated and intensified this syndrome: a shooting occurs on a military base, the stock market soars, the dollar declines, the President of Iran threatens to unleash nuclear weapons against Israel or the House passes a health care bill.  Apparently instant analysis is required.  Fox, MSBC, Bloomberg and other media outlets each have a gaggle of experts always on call to provide instant commentary and analysis.  Moments after the tragic shootings at Ft. Hood, the networks had former generals, and psychiatrists, and professors specializing in terrorism and Islam on the air providing instant analysis.  The government cautioned that a full investigation was necessary and that the public should not jump to conclusions, but there was the media “jumping” away.

Email, BlackBerries and Instant Messaging

Once upon a time when clients and managers communicated via letters, one would wait for an assistant to open the mail, prioritize the most important matters, and place mail neatly in folders in an “in-box.”  A day might consist of reading incoming letters and pleadings, research, drafting a response, reviewing the response with colleagues and superiors and sending a well thought out coherent response.  If one was ambitious, one might answer three to four letters and pleadings per day.

Computers, email and BlackBerries have radically changed workplace communication.  Now managers and lawyers each day are bombarded with a hundred or more emails, text messages and instant messages.  Like an insistent child, each of these inquiries “demands” an immediate response.  Gone are thoughtful, well reasoned, literate responses.  Depending on dexterity and a thumb free of tendinitis, responses are produced at the speed of light.  Unanswered emails are a badge of shame.  Responses can run from “thx,” “ttyl,” to more eloquent two sentence responses.  There is no pause for mature reflection, conferences with colleagues or re-draft of thoughts or writing. The new mantra is ready, aim, respond.

Think More React Less

Clearly, as a society we would get better answers and make better decisions regarding our most pressing problems if we were more thoughtful.  Instant analysis and immediate answers in meetings should be questioned.   Bring back thoughtfulness, modesty and the ability to begin one’s response with “I don’t know” or “let me give this more thought and get back to you.”  A little modesty and humility would go a long way. In short, we should think more and react less.

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