The Wondering Mind

There’s been lots of press over the Chrysler and GM bankruptcies. Only time will tell how they will work out.

My personal view is that buying Chrysler is a mistake for Fiat. Chrysler has done much over the years to destroy the brands it owns. So much so that Jeep is about the only brand with any kind of goodwill of value left. (I realise that there are undoubtedly fans of various Chrysler brands still out there, but I suspect the benefits they bring to owning the company is easily outweighed by the negatives.)

And for that prize, Fiat is taking on a company whose problems are legion. As many commentators have pointed out already, Fiat has pulled off a remarkable turnout of its own in the past few years, but it still has a long way to go to finish the job. There are arguments to made that if Fiat really wanted to enter the U.S. market for the sales volume, they may have been better off purchasing Saturn for the dealership in the U.S. They could have supplied the excellent and relatively new dealership network (probably much better than Chrysler’s), with vehicles from existing factories, or from greenfield sites which do not suffer all the issues of legacy, both good and bad, that come with Chrysler plants.

As for GM, being unburdened of some of its debt will help, but it needs to start producing better products or it will fail. The reason not enough customers bought GM cars wasn’t because they didn’t like the fact that GM workers supposedly got better pay than those in a Toyota plant (why does the customer care, as long as the price is right?); it was because they did not design and build sufficiently attractive cars.

What I really hope GM does in bankruptcy though, is to treat its dealers better than Chrysler has. While they did need to shed dealers, and they did need to do it far more drastically than the dealers would have liked, many of the tactics smacked of callous opportunism. Pressuring dealers to take on excess inventory, with promises that they would then survive the coming dealer cull, literally days and weeks before they were axed was clearly cynical and dealing in bad faith. Refusing to take back inventory while hiding behind bankruptcy is just pathetic.

What I didn’t know, and what many people probably don’t, is that the axed dealers only have a short time to sell their inventory of new vehicles. After a deadline, it is illegal for them to sell those vehicles!

This only adds to my opinion that those running Chrysler are scum and bad enough things cannot happen to them. And just to confirm the righteousness of that stance, I noted this in the last paragraph of the article referenced above.

Chrysler points out that since it hasn’t produced vehicles since May 1, many dealers are hungry for inventory, and they’ve been buying vehicles from the soon to be closing retail stores.

What a load of crap! The reason Chrysler hasn’t been producing vehicles since May 1 is that it’s been months (actually, more like years) since they’ve been able to find enough people crazy enough to buy their horrendous products! They still have inventory built only God-knows-when, sitting on their lots waiting for a buyer. The only reason anyone seems to be buying Chrysler these days is the dealers who were canned by Chrysler are practically giving them away to get rid of them.

If these vehicles really were in demand, there is no reason why the company could not take them back from the closing dealers and simply send them to the dealers who are still open.

The other possibility is that the vehicles are in demand, but this way Chrysler can give a bonus to the remaining dealers of bargain-basement deals on their inventory. It’s at the expense of the closing dealers, but Chrysler has already demonstrated they don’t actually care about those dealers.

I used to find Frank Rich’s columns a bit too ranty for my tastes. So it worries me that I seem to find them more and more reasonable and in agreement with my own views. Either Rich is getting “better” in his columns, or I’m starting to lose it. Probably a bit of both.

So I was a little cheered to read his latest column and find that I didn’t agree with everything he said. I generally agreed with the bits which were for tarring and feathering the CEO-class. It was this little bit of aside in the middle of the piece I didn’t agree with. The question he asks us, and himself, is,

But even as that unanswered question hangs in the air, a more revealing inquiry might be this: Why is there any sympathy whatsoever for a Detroit C.E.O. who helped wreck his company, ruined investors and cost thousands of hard-working underlings their jobs, when there is no mercy for those who did the same on Wall Street? Might we, too, have a double standard? Could we still be in denial of the reality that greed and irresponsibility were not an exclusive Wall Street franchise during our national bender?

The answer he suggest is “yes”.

Perhaps we’re tempted to give Detroit a pass because it still summons nostalgic memories of “American Graffiti,” “Little Deuce Coupe” and certain things we used to do in the back seat of a Chevy. Wall Street and bankers are the un-aphrodisiac: “Bonfire of the Vanities,” Old Man Potter of “It’s a Wonderful Life” and, of course, Gordon Gekko of Oliver Stone’s “Wall Street.”

Though Gekko’s most famous line is “Greed is good,” even more emblematic is his defiant summation of his brand of capitalism: “I create nothing. I own.” At least Wagoner, unlike the sultans of finance, created cars, clunkers though they often were. The politically conservative Nashville star John Rich draws this moral distinction in his powerful new hit single “Shuttin’ Detroit Down.” Motor City is “the real world,” he sings, unlike those big shots “living it up on Wall Street in that New York City town.”

I’m not sure that’s entirely correct. I’m sure there is a certain level of class-ism in a country which loves to see itself as classless (a self-delusion which has always made for good PR, not so much as penetrating political and social analysis). This is helped quite a bit by the fact that GM and Chrysler factory workers did not get into their careers to get rich by not giving a damn about anyone else but themselves. (Well, they might have, but in that case they are very stupid and made a very poor choice of careers.) I think any apparent “sympathy” for Rick Wagoner et al. is only collateral sympathy which is held for the workers. (Firing Wagoner is not a vote of confidence for GM, which is bad for the GM workers.)

No matter how much the banking cabal bleat on about their their (non-existent) innocence and decency, most sane people recognise that anyone who thinks they deserve, because they own, so much more than others who work is possessed of gargantuan arrogance and some level of misanthropy. To varying degrees, these are people who are culpable in any sticky end they come to, and they got very (in some cases obscenely) rich in the process. Why do they need, never mind deserve, our sympathies?

And yes, there are and were plenty of people in finance who did not get rich who essentially got done in by “friendly fire”, but in most cases these people did not fail to get rich for want of trying. I’m not sure you deserve sympathy when you wanted to be one of the “masters of the universe”, but never got there because you just weren’t good enough.

Personally, I don’t think GM should be bailed out. Not because I don’t have sympathy for the workers. I do, and I think the government needs to do much more for them, and for the millions of others who have been made redundant. But the size of the failing business should not justify propping up a company which would be allowed to fail if it was only smaller and less politically sensitive.

But by the same token, I think the government should have, and should now be, scything through the ranks of the finance sector. (I refuse to call finance an “industry”. That’s just insulting for people who do actually work in industry.) They should be allowing many, many more financial institutions to fail and firing a lot more “executives”.

The failure to root out the cancer that these institutions and individuals represent to the rest of society has huge costs, both financial and social. The insistence on trying to repair a rotten system speaks volumes of the lack of imagination and courage on the part of the people involved. (We can start with Larry Summers and Geithner, but it’s a long list.)

More to the point, it won’t work. Even before the current crisis is over, news papers are writing about how executive pay is still not seriously curtailed, or the fact that many expect any reversal in fortunes to be temporary at best. (Not really surprising when you think of the sorts of “heroes” who make up the highly paid boards at many companies.)

And it’s this double-standard the people are railing against. Between those who are at the top who don’t think they should be held accountable for anything, and the rest of us who are always held accountable for everything. Wall Streets is in the cross-hairs more than Detroit because the hypocrisy is on a larger scale and so much more obvious.

The on-going saga at AIG is a drama in the ridiculous, the outrageous, and (for the taxpayers) the tragic. The public outrage that came about from the news of the “retention” bonuses did not have long on the news cycle before the media outlets and the Obama administration started a concerted campaign to convince us that it was over the top and misdirected, so that the masses would not get in the way of the continuing bailout.

I’ve blogged before about why I don’t believe the public anger is misplaced or over the top. I’ve also written about what many believe is an arrogant sense of entitlement among these Wall Street types.

Well, just to  make my point for me even more clearly, this idiot wrote an op-ed in the NY Times. You can read some of the reasons why at least one of my friends hoped the author would get hit by a bus.

The letter is so outrageously self-righteous, self-satisfied, and self-entitled, that it literally took my breath away. I also could not believe someone would be quite so stupid as to publicise the biggest “kick me” sign on his back I have ever seen.

The amazing thing is that this fool is not alone. Just read here and here for more whining from the gilded set.

It’s not surprising that these people may feel put-upon. And that, seen in isolation, their treatment in the last year or so by various parties has been harsh, if not outright unfair. But they can’t be that stupid.

You can’t see the treatment of these people in isolation from what they did for years. The anonymous author of the supposed letter from within AIG rightly holds the system and the politicians responsible. But there is absolutely no recognition of the fact that he/she, and others like them at AIG, played within that system. Played by that system’s rules, played with the politicians, for profit which was completely dissociated from any benefit they may have conferred on society at large. If you participate in what you yourself describe as a corrupt system, why would be expect a happy ending for yourself?

There is also a complete lack of solidarity with the millions of others who have been victims of the financial crisis. They too worked hard and they had even less, if any, involvement with creating, running, and perpetuating the system which caused the current crisis. And yet they find themselves in straits even more dire than many at AIG. Why are those at AIG owed more than the rest of us?

You really have to look to the Middle Ages, or the Dark Ages, for this sort of sense of entitlement. When people were taught that kings and lords were somehow entitled because God must have ordained it. Maybe DeSantis and others believe that God ordained their bonuses.

For the rest of us who don’t believe that kind of rubbish, we need to let our politicians know that it is now beyond time they threw out the corrupt system of finance and the crooked actors who have profited from it once and for all. If they want to put a failed system on life-support with our hard-earned money so that this self-appointed new class of gentry can live in $10,000 a month flats, then we need new politicians.

I was given links by a friend showing pictorial depictions of the current Armageddon we are calling a recession.

The first struck up a more optimistic note, pointing out that compared to the Great Depression all the statistics show a much less apocalyptic trend. I think it is useful for reminding us to keep things in perspective, and not to panic. That’s not a bad advice in the current climate.

It also illustrates a key weakness of many economists; this is no consolation to the millions of people who have lost their jobs. Their loss is only compounded by the fact that while the recession may not be as dire as it was in the 1920’s and 1930’s, it is still bad enough there is a distinct shortage of jobs. That means those who have and who do lose their jobs now are probably in for a long period of hardship and unemployment. The fact that there is not as high a proportion of people in such a predicament is hardly a consolation to anyone.

The second article illustrates this point. If you look at the interactive map, you will see that almost no area of the country has been spared. 

We can only hope that reminders such as this one of the human loss, a loss shared by the entire country, might spur the business leaders and politicians to behave better than they have.

I doubt it, but we can hope.

What speaks volumes about why people are so angry right now is Jamie Dimon, the CEO of JP Morgan, in this article.

You could make a case for why the business is better off with these jets. About why it might actually be more efficient and cheaper for them to use these jets rather than having to tackle the gauntlet that is the modern commercial travel.

Instead, you get a breathtaking sense of entitlement and arrogance. A condescending dismissal of those who have a hard time reconciling the luxury of private jets and hangars at a time people are losing their homes.

You might think these “masters of the universe” believe that what is good for them is good for the country, a rather ironic paraphrase of the GM saying. But you’d be wrong. These people believe they are the country. The rest of us are a burden on their gilded lives.

And then these people wonder why the mobs want to string them up in the streets.

Well pretty much everyone not in cryogenic stasis has heard of the farce at AIG by now. There are so many things I want to shout about this, I barely know where to begin. So I thought I would rant about one thing that bothered me about this from the start. And it’s the idea that AIG needed to offer retention bonuses to these people.

Really?

We are now in an economy where talented people are getting laid off all over the place. It is far from clear for anyone except the politicians and the bankers, including the ones at Treasury, why we couldn’t get equally “competent” people without any incentive beyond something called a “paycheck”.

If we really, really need to hold onto the existing employees, as Liddy and Geithner have claimed, I still see no reason for a bonus. These are the scumbag idiots who brought down AIG; who the hell is going to hire these toxic bankers? Anyone fool enough to hire these clowns, well, you’re welcome to them. Unless it’s a bank with government TARP money, in which case the government should promptly close that bank down.

The whole idea of incentive pay like retention bonuses and golden parachutes, etc. have never made any sense to me. The whole premise for such schemes were so transparently fraudulent it’s a disgrace that supposedly intelligent and ethical adults buy that rubbish, especially at a time like this.

The people at AIG were either fools who did not know what they were doing, or they were reckless and arrogant in their self-esteem. If the former, no one will hire them. If the latter, Wall Street will probably welcome them with open arms. But in the current climate, it is hard to see what other employer will have an opening for them. They’re busy laying off their own bankers; why would they hire ones so tainted?

Similar slight of hand has been used by bankers, executives, and the like arguing for their bonuses in the past. “If you don’t pay, they’ll go some where else.” But where?

“Oh well, China would hire them.” Or “Dubai or Singapore would love these guys.” Really?

If you’re some Anglo-Saxon in your 40’s, or so, then there is a high transaction costs involved with going to China, Dubai, or Singapore because they will pay that much. (And it’s never clear that such high pay is available abroad.) Your family who may not want to move to some place with no family or friends, for a start.

There’s a price to pay for living in places where the air quality is so bad scientists believe it shortens your life expectancy, or living in a place where you are fined for chewing gum.

And then there’s the cost of the move, there and back. Not only the financial costs involved, but also the disruption to life, the adjustments needed, etc. I’ve lived in several countries and many more cities, so I can say from experience that it is not an easy adjustment, especially moving to a place where they speak another language.

There are some people who love that kind of stuff, but most people don’t. And even among people who do like it, they like it much less as they grow older and have more ties and commitments.

So why do so many companies apparently buy this fairy tale? Because the people who are in charge have a stake in the game themselves. They are the same coterie who populate all the boards of each other’s companies. Or they’re “HR consultants” who are hired by the very people whose pay they advise on.

Which is why it is so sad to see the Obama administration toe the line on this. For an administration which is supposed to break away from the cronyism of the Bush era, they seem far too ready to buy into the established traditions of corruption.

This is the primary danger for the administration. It is not so much that they are squandering goodwill, although they are. It is that the people will lose faith in the idea of change. When you pass up such obvious opportunities for much needed change, people are going to wonder if you have the competence or the will to make truly meaningful change.

There is a desperate need for change in health care and education, to name only two areas. And these changes will require painful compromises and sacrifices. They will also be opposed by powerful vested interests. The only way these changes happen will be with the broad and unstinting support of the people. But you will not have such support if the people doubt your competence or your motives.

Among the latest articles chronicling the end of the financial world as we know it, there was an article detailing some of the difficulties now faced by state universities in the U.S. 

It’s pretty much run of the mill for this kind of story, and we’ll be hearing more about it again, I am quite sure. What I do think bears more discussion is the content of the following passage.

Mr. Crow’s record for improving quality is impressive, too. He has hired more than 600 tenured or tenure-track faculty members, and last year, for the first time, won a spot on the National Science Foundation’s list of the top 20 research universities without a medical school, along with powerhouses like M.I.T. and the University of California, Berkeley.

But not every university can be in the top 20. And in a time of shrinking state budgets, undergraduates at public universities will most likely pay the price in higher tuition, larger classes and less interaction with tenured professors. So it is a real question how many public research universities the nation can afford, and what share of resources should go to less expensive forms of education, like community colleges.

The first point to make is that as the article mentions later on, being a cutting-edge research university is not the same thing as being an excellent teaching school for undergraduate students. Most of us know that just because you’re a genius who understands all the ins-and-outs of a particular subject does not make you the best teacher of that subject.

Mr. Crow’s objective of creating an institution which excels both in research and teaching is a fine one and those objectives do not necessarily conflict with each other. Those objectives are not, however, the same. More importantly, in an environment with limited resources, directing resources toward one objective means less resources available for the other objective.

While it may be unpalatable, universities and policy makers should acknowledge that these different objectives are coupled through choice, not because they are inseparable.

Which brings me onto my second point: not everyone can be number one.

In fact, the idea that every state can have a leading research university is simply a non-starter. As the article points out, simple arithmetic dictates that to be a “leading” research university in such a scenario means being in something like the top 20 such institutions. But if every state had such ambitions, then the majority will be bitterly disappointed. And all the states are likely to spend increasing amounts of money chasing their ambitions, most for little to no reward.

This observation extends to teaching as well. With hundreds (I think) of tertiary teaching institutions in this country, only 20 schools can be in the “top 20″ for anything, including teaching. Rankings are only a useful metric in so far as they tell us something about the difference in quality.

First, they should tell us that there is an ordinal difference in quality. That is, there should be a measurable superiority in quality in the school ranked number one versus the second ranked school. As many, many people opine, this is rarely the case, with most rankings being criticised on this very point.

Second, rankings imply a certain degree of cardinality in the difference in quality. For example, as a student, you would much prefer going to a top 20 school than the one ranked 100th, and there is much more prestige associated with the top 20 than the top 100. But a top 20 school may not be significantly better than a top 100 school.

Ultimately, it is probably more important that a school achieve a certain threshold of excellence rather than worry about how it compares in ranking. In a cash-strapped environment, this is especially important since the additional resources necessary to improve in rankings will likely experience severe diminishing of returns.

All things the taxpayers, if not the policians, will care about in the current environment.

Every time we have some minor, or major, financial economic meltdown, accountants seem to be involved. With Enron, it was Arthur Andersen. In the Madoff scandal, we find that the multi-billion dollar scheme was audited by a two-person outfit, and nobody thought that odd. Now there is report that one of India’s major corporations has been struck by fraud.

First of all, it demonstrates the pathetic lack of oversight by just about any and every “regulator” of any consequence out there.

In addition to India, Satyam has been listed on the New York Stock Exchange since 2001, and on Euronext since January of 2008.

You would think that at least one of the countless regulators overseeing the three exchanged would have done its job, but no.

But what I really want to vent on is the auditors.

The company has been audited by PricewaterhouseCoopers since its listing on the New York Stock exchange.

And how badly did PwC do their job?

Mr. Raju said Wednesday that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed as assets for its second quarter, which ended in September, were nonexistent.

Revenue for the quarter was 20 percent lower than the 27 billion rupees reported, and the company’s operating margin was a fraction of what it declared, he said Wednesday in a letter to directors that was distributed by the Bombay Stock Exchange.

Let me expand on that with a quote from another article.

The Indian affiliate of PricewaterhouseCoopers was the company’s auditor. It appears to have certified the company had $1.1 billion in cash when the real number was $78 million.

In other words, PwC thought the company had 14 times the cash they actually had. Or to put it yet another way, the company actually had just $0.07 for every dollar they claimed to have.

As a former auditor, I know that it can be extremely difficult to uncover a fraud being perpetrated at the highest levels of management. They have a great deal of control over the company and its operations, as well as having the ability and opportunity to recruit collaborators, through inducements or pressure. But it’s hard to see how how you mistake $78 million for $1.1 billion without someone at PwC not doing their job.

Thing is, anyone who has worked in public accounting can tell you exactly how something like this could have happened. I might have ranted about it in previous posts, so I won’t detail them here. But the fact of the matter is that many, if not most, large audit accounts (as well as the smaller ones) are performed in a manner that just begs fraud and malfeasance to go undetected. Most auditors know, if they’re truly being honest with themselves, that something like this could easily happen to them on any number of clients, but for the Grace of God.

Just as many sensible people are calling for the reform of the ratings systems, where agencies like Moody’s and S&P are paid by the bond issuers, regulatory agencies need to seriously consider changing the entire system of “independent” audits. How independent is an audit when the management of companies pick their own auditors and pay them to tell the public that their books are straight? How successful in business do you think will be the auditor that keeps finding problems with clients’ accounts?

The current system of regulations is designed to regulate on the cheap. And like most cheap things, it only works when the planets are perfectly aligned and it has wind behind its back. In this particular case, auditors only ever catch mistakes, rarely frauds or other criminal acts. And they often miss the mistakes too.

If regulators were serious about audits, they would make auditors agents of the regulators and send them in with investigative powers, backed by powers of criminal sanction. Sure, that system would be onerous. And it would be expensive. But here’s the thing:

You have enough Enrons, Madoffs, and Satyams, and even the slowest person will realise that investors have no real protection in the market. At some point, their fear of being ripped off will outweigh their greed. And then the companies will be praying that they can entice investors back into the market with just the measures I’ve mentioned.

More likely, they will have to accept even more draconian measures at that point to attract investors, and then only the very few and the very best companies will be able to attract money. And as every good capitalist should know, that isn’t good for the market, the economy, or society at large.

P.S. – If you’re still not convinced, I present my final exhibit for the prosecution. This kind of fraud can be extraordinarily hard for audits to uncover. But then an audit, as it stands today, doesn’t seem to have too much utility now, does it?

The NY Times is running an excellent series of investigative articles related to the financial crisis (as opposed to the now economic crisis). The latest article hints at why the bank bailout was a terrible idea, and why Wall Street keeps ripping us off.

You’ll notice there are quite a few people interviewed or quoted in the article whose performance at Washington Mutual could be described as less than stellar. A surprising number of those people are also now working at other banks.

I’ve worked in the financial industry, and it’s not a pretty picture. Far too many jobs are akin to white-collar sweatshops and business ethics is a term regarded with less disdain than communism. In far too many financial professions and companies, “getting the job done” is far more important than doing the job right.

This is not surprising when one realises that the incentive structure encourages such behaviour. It is not just banks whose compensation structure rewards the sort of behaviour at WaMu. Such structures exist in pretty much every industry. As I’ve mentioned in a previous post, those who profit from these transactions do so without incurring any risk for them. Unless their actions were criminal, they can take a share of the “profits” as they occur, but when they prove illusory, or are found to have come with liabilities which wipe out these profits, they are under no obligation to take a share of the losses.

As this article shows, people doing business this way can go on to find jobs within the industry, unless they engage in common criminal activities, like burglary and drug use. If the industry was going to reform, such people would be fired or not hired at all, especially at a time of high unemployment, when there should be plenty of honest people out there with good ethics who could take that job.

These people get the jobs because they “get the job done”, without regard to how. Managers don’t want people who are going to ask questions and create problems. When businessmen talk of “problem solvers”, they aren’t talking about people who find problems and fixing them; they are talking about people who can successfully hide and obfuscate problems and shield the company and managers from liability.

Business schools and human interest articles love to mention ethics classes at times like this. And such classes probably help. But as economists at these business schools should be able to tell you, if the incentive structure is set up to reward unethical behaviour and does not reward, or even penalises, ethical behaviour, then no amount of ethics classes will help.

The three classic factors required in cases of fraud are: need, opportunity, and rationalisation. An incentive structure which rewards dubious behaviour creates all three. Which is not to say you necessarily get an increase in fraud, but that fraud is simply one form of unethical behaviour, which would increase.

None of this should be news to politicians who have more than a passing familiarity with business, and with the financial industry in particular. So when they decided to throw the banking industry a $700 billion lifeline, they could and should have attached conditions. Unfortunately, this won’t be the last time that politicians who worship capitalism socialise private losses, all the while keeping profits very, very private.