Saturday, December 31, 2011

Here a Fee, There a Fee, Everywhere a Fee, Fee

But (headline aside), sometimes a big enough outcry can get the fee to go away.

I'll admit it: I hate fees. I hate getting nickel-and-dimed for every last little thing. I hate 'em because they're sneaky, and I hate 'em because they're almost always deeply regressive.

So when I read about the outcry about Verizon Wireless's proposed $2 fee (30 December New York Times story by Ron Lieber and Brian X. Chen, here) , I was quite pleased -- even though the vitriol seemed a little excessive.

After all, as the article pointed out, the fee would only apply "to people who make a one-time credit or debit card payment of their monthly bill on the phone or online. Subscribers who write checks or have the company charge their credit or debit cards or deduct from their bank accounts each month will not have to pay the new fee."

Part of the outrage came from Verizon's stunningly-stupid naming of the charge as a... (drum roll, please) ... "convenience fee"! Part of the outrage came from the general lack of real news in the Christmas-to-New Year's week. Part of the outrage came from the sense of victory from getting Bank of America to roll back its $5 monthly fee to customers who used debit cards. But a huge part of the outrage undoubtedly comes from the you're-holding-me-hostage-with-a-two-year-contract feeling that cellphone customers feel.

This is especially true if you think about who is most likely to make a "one-time credit or debit card payment of their monthly bill on the phone or online."

Is it going to be someone who's got $50,000 in the checking account? Or is it more likely to be someone living paycheck to paycheck, and worried that if she writes the check today, that most recent paycheck won't have cleared and the Verizon check will bounce?
“They are punishing people who need to wait until the last second,” said David O’Neill, who recently lost his job at a Borders bookstore that closed. He is a former Verizon Wireless customer but took to Twitter anyway on Thursday to argue that the company’s move helps the 1 percent get richer, since it rewards Verizon shareholders.
Lieber and Chen quoted a market analyst who said that "it made sense that Verizon was charging for over-the-phone payments, because carriers typically must pay a third-party service to handle those transactions. But Internet payments do not require a third party, he said." But, hello, what is Verizon Wireless anyway? A phone and Internet provider, right? So if anyone can handle over-the-phone or over-the-Internet transactions, it ought to be Verizon.

I keep coming back to the feeling of being a hostage to a Verizon contract as the real motivator for the vitriol. Yes, I know: if you really hate the hostage feeling that much, you can always pay real money for your cellphone, instead of getting it "free" or at substantially reduced price in exchange for the contract. (Full disclosure: I'm one of those tied-by-the-contract Verizon Wireless customers.)

Remember what I said about hating fees for their essentially regressive character? This is another example of that. People who can afford to pay the full cost of a smartphone can avoid the fee; at the lower end of the economic scale, you probably don't have a choice. Perhaps you're a recent college graduate, trying to pay off student loans, minimally furnish your first real apartment, and eat regularly, all while proving to your boss that you're really committed to this job that -- itself amazing enough -- you managed to land in a horrible job market, and so you need to be reachable at all times. You need that new phone. And you definitely can't afford to pay $300 up front for it.

All that said, Verizon did a terrible job of introducing the fee. It didn't make it immediately clear who would, and who wouldn't, be affected. It didn't explain why a fee was necessary in the first place. Even members of Verizon's own "consumer advisory panel" weren't informed of the fee ahead of time.

I'm delighted that it took Verizon only a day to recant their fee. But the Internet and Twitter outrage may have only been part of the reason for that decision. Today's New York Times reports, in an article by Ron Lieber, that "the Federal Communications Commission put out word earlier Friday that it thought the company’s actions merited closer scrutiny."

I hate fees; I love sharp-eyed regulators.

Saturday, December 17, 2011

How "Fair" is "Fair Trade"?

What product is produced with the most forced or child labor in the world? If you said, "Gold"; you're right.

Number two? Cotton.

Because I believe that ethical business isn't just the responsibility of producers, but also of consumers, I look for the "fair trade" label on products I buy. Even if it makes that purchase a little more expensive, I'm happy to do that -- and to know that I'm blessed to be able to make that slightly more expensive purchase.

Fairtrade International, one of the groups that certifies products as "fair trade", points out that cotton prices worldwide have been in steady decline for several decades, falling this year to $0.92 per kilo, the lowest level in 30 years. Of how many other products can you say that? Significant government subsidies for cotton production in countries like the U.S. put extra downward pressure on the price (according to Fairtrade, US cotton producers receive $4.2 billion in government subsidies annually, which is equivalent to the value of their entire crop. Well over half of US cotton production is "dumped" on the world market, often priced below the costs of production, even though cotton production in Benin is less than half the cost in the US. Does anyone else have ethical problems with this?!?).

Cam Simpson at Bloomberg News reported Thursday on the exploitation of children in the production of organic and fair-trade cotton in Burkina Faso. The most depressing statement of all?
In Burkina Faso, where child labor is endemic to the production of its chief crop export, paying lucrative premiums for organic and fair-trade cotton has -- perversely -- created fresh incentives for exploitation. The program has attracted subsistence farmers who say they don’t have the resources to grow fair-trade cotton without forcing other people’s children into their fields -- violating a key principle of the movement.
Bloomberg's Simpson followed one young girl, 13-year-old Clarisse Kambire, who has been working in cotton fields for two years, digging rows by hand, and then harvesting the same way. Devastating photos and videos are available here.

Fairtrade International is reportedly starting a review of Burkina Faso policies, following the publication of the Bloomberg News article.

Until then, what's a responsible consumer to do? Unfortunately, there's no easy answer -- there's no way I can trace all the cotton in my favorite turtleneck back to its source to know whether children in West Africa planted and picked that cotton, or whether children in Sri Lanka or India spun the yarn, or operated the sewing machines in Indonesia that made the shirt.

That doesn't cut me loose from the responsibility of trying to find out, of pressuring the store from which I buy to provide that information, and to abide by the agreements that they sign.

A spokesperson for Victoria's Secret, the Columbus, OH-based lingerie company which purchased some cotton from Burkina Faso, told Bloomberg News, "Our standards specifically prohibit child labor. We are vigorously engaging with stakeholders to fully investigate this matter."

Those words are nice -- and important -- but the follow-up will be critical.

I will be keeping that in mind this week, as I rush around trying to find those perfect last-minute holiday gifts.

Wednesday, December 7, 2011

What's the Cost of Doing Business? What Should It Be?

A couple of stories in today's New York Times got me thinking about the "cost of doing business".

That's a phrase that gets tossed around a lot. Inventory "shrinkage" (a.k.a. theft, by shoplifters or employees) is often shrugged off as a "cost of doing business", whether the company is a mom-and-pop gift shop or a major retailer like Macy's.

A week ago, a federal judge blocked a proposed $285 million settlement between the SEC and Citigroup, terming the amount "pocket change" and noting that such a settlement was often viewed on Wall Street as a "cost of doing business" (click here for Edward Wyatt's 28 November New York Times article).

Now Bank of America's Merrill Lynch unit has come to an agreement to pay $315 million to settle claims that they misled investors about mortgage-backed securities (click here for the Times article, from the Associated Press). This is only the most recent claim settlement for BoA; the AP reported that "in the first half of the year alone, the bank put up $12.7 billion to settle similar claims from different groups of investors." Only potential roadblock here? The settlement must be approved by the same federal judge, Jed S. Rakoff, who struck down the Citigroup deal last week.

Also in today's paper, Sabrina Tavernise and Clifford Krauss reported that Alpha Natural Resources, now owners of Massey Energy, agreed to pay $209 million in civil and criminal penalties and restitution for charges stemming from the Upper Big Branch mine disaster last year that resulted in the death of 29 men. While some of the money (approximately $46.5 million) is earmarked for the families of the men who died, Alpha executives are protected from prosecution by the deal. Massey Energy executives, however, are not.

The problem is, "Under the federal mine act, safety violations, with the exception of falsifying records, are categorized as misdemeanors. That limitation could make it hard to build a case against senior [Massey] managers..."

I've written before about the inadequacy of mine safety protection; this is just further proof that some people view losing lives as merely "a cost of doing business".

Meanwhile, over at Olympus (previous blog posts on that debacle here, here, and here), it becomes clearer that "Olympus had persuaded several banks, including Société Générale of France, to submit incomplete financial statements to auditors, apparently in an effort to conceal financial maneuvers that the report says involved at least $1.7 billion and were meant to hide failed investments during the 1990s." (Full story by Hiroko Tabuchi and Keith Bradsher, here) While an independent report called Olympus management "rotten to the core", it found no evidence of organized crime involvment -- which could have led the stock to be delisted by the Tokyo Stock Exchange. So again ... just a "cost of doing business"?

Yes, accidents happen in every industry, and prudent corporate managers should build allowances for disasters and settlements into their budgets. But that's doesn't mean that people's lives should be destroyed -- financially or actually -- and that the only reaction is, "That's the cost of doing business."

I'm listening for the outpouring of outrage. Why aren't I hearing it?

Friday, November 11, 2011

Want to Make Your Employees Feel Truly Valued? Don't Do This.

Zynga, the maker of great time-wasters like FarmVille, is obviously brilliant when it comes to motivating customers. Motivating employees? Not so much.

The Wall Street Journal's Justin Scheck and Sayndi Raice yesterday broke a story on an unusual move for a self-described "meritocracy"(note: subscription required for full article). While details and public statements have been few, thanks to the pre-IPO "quiet period", the basic issue is this: As CEO Mark Pincus was preparing for Zynga's public offering, he decided that too many shares had been handed out to too many employees, and asked at least some employees to give at least some of those (unvested) shares back. Or risk being fired (fired workers lose all rights to unvested stock).

Zynga now has about 3,000 employees. The heart of the controversy apparently lies with some early employees who were handed large numbers of shares (rather than paying large salaries, a common move with start-ups), but who are now deemed to have contributed less than later hires (who received fewer shares).

While it's not clear that Zynga has done anything illegal, I would argue with Mr. Pincus' statement of pride in the "ethical and fair way that we've built this company" (entire statement can be found here in a New York Times DealBook piece by Evelyn Rusli).

If I were trying to develop a system to set my employees against each other -- and drive down productivity while everyone sniped at everyone else -- I don't think I could have come up with a better system than this one. As Business Insider's Tom Johansmeyer put it, Mr. Pincus is essentially saying to his employees: "You don't deserve to be rich." (full BI article here)

I don't think this is going to help Zynga's future employee recruiting, either....

Tuesday, November 8, 2011

Olympus Continues its Fall

The Olympus debacle, as I noted last month (see original posts here and here), seemed at first like an interesting culture clash between its former chief executive (a Briton with 30 years' experience with Olympus) and a nearly 100-year-old Japanese company.

Now it's starting to look like "one of the biggest accounting fraud cases in corporate history," according to a Hiroko Tabuchi article in today's New York Times.

The evolving story had centered on one particular acquisition -- of British medical equipment manufacturer Gyrus in 2008 -- and specifically on shockingly high fees ($687 million on a $1.9 billion deal) that were paid to two heretofore-obscure Japanese bankers for "advising" Olympus on the deal. Olympus denied that anything improper had been done.

In a stunning reversal, the company yesterday admitted that "money for mergers had in fact been used to mask heavy losses on investments racked up since about 1990." (emphasis added)

Olympus' current chairman, Shuichi Takayama, acknowledged "inappropriate dealings" but would not admit to outright fraud.

Thursday, November 3, 2011

Just How Trustworthy is that Trustworthy Guy in the Corner Office?

You know how, when someone is arrested for a truly heinous crime, there's always a neighbor interviewed who says something along the lines of, "But he was always so nice. Just a nice, quiet, ordinary guy."

A nice, quiet, ordinary guy with thirty-two bodies in the basement.

And then, bit by bit, the background stories emerge: the torturing of animals as a small child, the sociopathic behavior as an adolescent, the inability to control rage.

With heinous corporate crimes, it's the same. Enron gets extolled as a model ... until it isn't. Madoff's investment advice is utterly brilliant ... until it isn't. The headlines are shocking, but in the weeks and months that follow, more information comes out and the surprise ends up being that the shenanigans went on as long as they did. (Many people, for example, had tried to bring Madoff to the SEC's attention?)

Two days ago, I wrote a post about the fall of MF Global. As I noted then, it had seemed at first like a simple too-many-big-bets-that-turned-out-badly failure. And then the little matter of $600 million plus in missing customer funds turned up.

And today's New York Times carries a DealBook article by Susanne Craig, Ben Protess, and Michael J. De La Merced, that claims that while the firm fell apart astonishingly fast, "the collapse came after regulators raised warning flags for more than four months." Not exactly an overnight disaster. Jon Corzine, former Goldman partner, former US Senator from New Jersey, former Governor of New Jersey, had been chairman and chief executive officer of MF Global for less than two years.

The Times reporters note drily that "even when the watchdogs sound the alarm, it is not necessarily enough to save a firm." Regulatory agencies and the FBI are now looking into the matter, although no charges have been filed. So far.

And the authors also note that the resistance to regulators' insistence that the firm should raise more capital and provide more information about some risky transactions shows that "three years after the financial crisis, Wall Street executives are still fighting regulators' demands."

Over the course of the next several months, I expect to read reports of new banking bonuses, all in the name of "we have to keep the very best people." Me, I think these guys may be some of the very worst with whom to trust our hardly-earned cash.

Tuesday, November 1, 2011

Is the Goldman Halo Slipping? (Please Tell Me It Is)

"But -- he was at Goldman."

For a long time now there's been a halo around Goldman Sachs, despite the occasional outrageous mis-step (Remember banking as "God's work"? Read my 2009 post about that here). But spend a few years at Goldman, better yet make partner at Goldman, and you could pretty much write your ticket. Those Goldman guys: they had the Midas touch.

Well, for those of you who don't remember your Greek mythology, the whole "turning everything you touch into gold" thing was one of those sneaky "be careful what you wish for" ways that the Greek gods would play "Gotcha" with mere mortals. It's great to be able to turn a piece of wood into a block of gold -- hey, running a kingdom costs money! -- but not so much fun when the juicy steak you were looking forward to eating turns into something that will break a tooth.

Oh and when you're thinking about how smart those Goldman guys are ... Would you please also remember that we taxpayers had to bail 'em out? (Yes, they did repay that TARP money, but still....)

When I first read that MF Global was filing for bankruptcy (New York Times DealBook article by Azam Ahmed, here), it didn't seem so startling. Unfortunate, perhaps, but not startling. Jon Corzine, MF Global's chairman and chief executive officer (and former New Jersey governor, and former US Senator from New Jersey, and, oh yes, former Goldman partner), had bet heavily on European debt -- that Europe would come to the rescue of its smaller, more troubled economies. While he may yet prove right in the long run, he'd bet that way for the short term, and after trying frantically to find a buyer for MF Global over the weekend, the firm filed for bankruptcy protection on Monday.

Times financial columnist Joe Nocera was not feeling particularly forgiving about the MF Global debacle this morning, however. Of Mr. Corzine, he wrote, "you would think that as a former Wall Street titan, he would have noticed that taking giant bets on shaky, long-term bonds while financing your operations with overnight loans that can be pulled at any second is not exactly a recipe for success."

But it's not just the relative stupidity of the strategy that made Mr. Nocera angry. It's the (as he put it) "heads-I-win-tails-you-lose" mentality. If Mr. Corzine had been able to find a buyer for the firm last weekend, Mr. Nocera noted, he would have been in a position to walk away from a company that he had effectively destroyed (stock price less than two years ago when Mr. Corzine took over: $7; stock price before bankruptcy filing: about $1.20), with a "severance package" of $12.1 million.

Now that I think about it, Mr. Nocera, I'm angry too.

Adding insult to the injury: Mr. Corzine apparently came thisclose to selling the firm to Interactive Brokers, when it was revealed that "hundreds of millions of dollars" were "missing" from MF Global customer accounts. According to another Times DealBook article by Ben Protess, Michael J. De La Merced, and Susanne Craig, the sum was originally estimated at $950 million, but is now thought to be "less than $700 million".

As the reporters noted, this might be simply a matter of "sloppy internal controls". But:
In any case, what led to the unaccounted-for cash could violate a tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.
At this time, neither the firm nor Mr. Corzine have been accused of any wrongdoing.

But really -- was 2008 that long ago? With the "loss" of something more than $600 million (per this afternoon's DealBook article by Messrs. Protess and De La Merced), you're talking gross mismanagement, or theft, or both. There really aren't any other possible explanations.

As one Times reader commented: "Sure, you can leave a ten spot in your pants pocket and bring your pants to the cleaners, but $600 million?"

Thursday, October 27, 2011

A Footnote re Culture Clashes

Just two days ago, I posted some comments on the debacle at Olympus. Several days had already passed since the first stories broke about the firing of Olympus' British CEO. At that time, as I noted, it looked like a classic culture-clash story. And then things got muddier, as the ousted executive, Michael Woodford, accused the company of firing him for presenting evidence of fraud in the 2008 acquisition of a British medical equipment manufacturer, Gyrus.

The story is still unreeling slowly, but today's New York Times carries another Hiroko Tabuchi article that's worth noting. On Wednesday, Olympus' chairman -- to whom Mr. Woodford had presented his evidence of fraud -- resigned. He regretted "causing concern" to the shareholders (Olympus' share price has fallen by half), and continued to insist that there was "no corruption" in the deal to acquire Gyrus.

Tsuyoshi Kikukawa, who resigned yesterday, had been with Olympus for nearly 50 years, and its chairman for ten. He has been replaced by Shuichi Takayama, a managing director who has been with Olympus for 30 years.

As the Times article notes, the current debacle can be seen "as evidence of still-frequent lapses of corporate governance in a country where truly independent board members are still rare, although there’s a requirement that one director or auditor be independent. And still in force, experts say, is a deep-rooted Japanese business culture in which personal relationships can sometimes seem to take priority over generally accepted accounting practices."

So, is it culture? Or is it ethics? And will it look more like one to us, in the West, and more like the other, to those in Japan?

Wednesday, October 26, 2011

Make Haste Slowly, Please

Let's say you've developed a nifty new medical device, and -- best yet! -- you've gotten some venture-capital financing to help you bring this product to market. How many regulatory hoops should you have to jump through to start selling it to the patients who need it?

What if you're one of those patients? More hoops, or fewer?

Or if your nifty device doesn't work? Or has side effects you hadn't been aware of?

Different answers, maybe?

Today's New York Times carries an article by Barry Meier and Janet Roberts on the expensive lobbying efforts by venture capital firms to reduce the regulation required to bring new devices to market.

According to the Times article, venture capitalists and device manufacturers "argue that the FDA suffers from high personnel turnover, an unwieldy bureaucracy and a regiment that forces start-up device companies to run new and costly tests constantly, often duplicating past efforts."

But that's only one side of the story, isn't it?

The reporters quote the editor of Archives of Internal Medicine, who said that venture capitalists operate under "this unwritten assumption that every new device is innovative." But the reality, she added, is that some devices "are killing people or causing significant harm."

I've written about more than one of those devices in the past -- the cone-beam CR scanner that may be exposing children and adolescents to excessive radiation (post, here) and the DePuy hip replacements whose metal-on-metal design is failing early far too often, requiring painful and extensive additional surgery (post, here).

The House seems more interested in the manufacturers' and investors' concerns, however:
Since February, four House panels have held hearings on the impact of FDA procedures on device approval. At those sessions, 19 of the 26 listed witnesses were investors, entrepreneurs, industry consultants, trade group officials or patients who said that agency delays in approving a device had harmed them or a loved one. The list included no patients injured by a flawed device; one hearing the Senate had a more varied witness list. [emphasis added]
One investment fund manager is quoted as saying, "This is about survival... We are deeply concerned about the future."

Shouldn't they be "deeply concerned" about the "survival" of their patients?

Tuesday, October 25, 2011

Culture Clash, or Egregious Ethics?

When the news broke about ten days ago that Olympus -- the Japanese company best know for its digital cameras, although its medical equipment business is far more profitable -- was firing its British CEO, it seemed like a classic culture-clash story.

Indeed, that's how it was presented. As the New York Times' Hiroko Tabuchi reported (full story, here), Olympus' chairman said, "We hoped that he could do tings that would be difficult for a Japanese executive to do... But he was unable to understand that we need to reflect a management style we have built up in our 92 years as a company, as well as Japanese culture."

Isn't that a fascinating comment? In other words, Olympus wanted a CEO who was un-Japanese, but not too un-Japanese. How's that for a recipe for failure? (Michael Woodford, the ousted CEO, was British, but had spent 30 years with Olympus, so you'd think he would have a pretty good handle on Japanese culture.)

Share prices in Olympus dropped dramatically on the news of the CEO's demotion.

They declined further two days later, when Mr. Woodford claimed that he was forced out because he had presented the Olympus chairman with evidence of fraud. (Article by Hiroko Tabuchi here)

As further explained a few days later by the Times' Wayne Arnold and John Foley (full story, here), Mr. Woodford said that "he was forced out after pointing out governance problems surrounding overseas acquisitions, in particular a $1.9 billion deal for Gyrus, a British medical equipment firm. He accuses [sic] the board of violating British law against paying a buyer for an acquisition, false accounting and breach of fiduciary duties."

So now it appears not to be a cultural issue at all, but an ethical and legal one. Were Japanese laws allegedly violated as well? Or only British laws?

The heart of the conflict, as reported yesterday by the Times' DealBook reporter, Ben Protess, is "a mysterious $687 million payout" made by Olympus to two formerly-unknown Japanese bankers (full story, here). That payout was originally described as a "fee" for advising Olympus on the 2008 Gyrus takeover. But, as Protess notes, that payout is "more than 30 times the norm on Wall Street" -- and Wall Street is not generally known for underpaying itself.

Protess also reported that "the FBI is now investigating the $687 million payment... The focus of the investigation is not yet clear, and a spokesman for the FBI ...declined to comment."

So now there are American laws that may have been broken, too?

Protess quotes Jeffrey Manns, an associate professor at George Washington University Law School: "This is such an extraordinary deviation from normal fees.... No one would have entered into this transaction if they were showing good business judgment."

Olympus, of course, insists that the payment was "appropriate".

It's far too early to know whether this is primarily a cultural clash or an ethical (and legal) breach; the mess may well end up having elements of both, and those elements may be closely intertwined. Either way, there's an ugly smell hanging over a once-admired firm.

Monday, October 17, 2011

If You Check In, Can You Still Check Out?

Two unrelated, but weirdly related, articles in the New York Times caught my eye yesterday:

"Online Banking Keeps Patrons Tangled in Fees" wrote Nelson Schwartz in the first. In the second, "The Haggler" (columnist David Segal) investigated the questionable practices of Synapse Group, a magazine subscription firm that "is skilled at signing up subscribers but miserable at alerting them later that their subscriptions are being renewed. So bad that a plaintiff’s lawyer, Gary Graifman, filed a class-action lawsuit against it, contending that it purposely tries to make its renewal notices look like junk mail."

At first glance, these don't seem related, do they? But consider one example from Schwartz's story:
Tedd Speck, a 49-year-old market researcher in Kent, Conn., was furious about Bank of America’s planned $5 monthly fee for debit card use.

But he is staying put after being overwhelmed by the inconvenience of moving dozens of online bill paying arrangements to another bank.

“I’m really annoyed,” he said, “but someone at Bank of America made that calculation and they made it right.”

In other words, the bank has made it as difficult as possible to "unsubscribe". Meanwhile, what did the plaintiff's lawyer say about Synapse's practices?

“You subscribe to, say, Sports Illustrated, but you get a notice from a company called Synapse, which no one has ever heard of,” says Mr. Graifman, of the New York law firm Kantrowitz, Goldhamer & Graifman. “The whole game is to discourage as many people as possible from canceling, and these guys are very sophisticated about how they do that.”

He sent a copy of the renewal notice that Synapse sends to customers. The front reads: “Less time at the newsstand means more time enjoying your favorite magazines.” Next to that is: “Subscriber rate enclosed. Up to 40 percent off newsstand prices.”

If that doesn’t say “Toss me, I’m junk mail,” what does?

If you do toss that piece of "junk mail", you will shortly discover that by not replying, you have "permitted" Synapse to bill your credit card automatically for renewals. In other words, they've made it as difficult as possible to unsubscribe. The original complainer to The Haggler had forwarded the company phone number that had been listed on her credit-card bill; if you do call the number, what you get is "only an automated voice routine, not a human being."

In neither of these cases does the company care about customer satisfaction. They define loyalty as "gotcha".

Meanwhile, on Synapse's website, the home page extols the company's "values" and "social responsibility". Synapse, of course, doesn't really care about you, the magazine reader who can't get out of your subscription. It cares about the magazine, which has hired it to keep you on the hook (Synapse is a wholly-owned subsidiary of Time Inc.). Synapse is particularly proud of its patented "magazine subscription model, Continuous Service." And what is Continuous Service? It's a model that

eliminates the inefficiencies and inconveniences of the traditional model, and replaces it with a solution that meets the needs of today's harried consumer. Today, tens of millions of subscribers enjoy the simplicity and superior experience of continuous service.

Sounds exactly like what the plaintiff's attorney was describing, doesn't it?

The banks, meanwhile, will trill away about how much easier it is for you to have all your accounts at one bank, and to pay your bills online. They will not tell you that "using the Internet to pay bills, do automatic deductions and send electronic checks reduced customer turnover for banks by up to 95 percent in some cases." Even if you're deeply dissatisfied, the thought of having to change all those accounts is daunting.

Every business wants to hold onto its customers, of course. The question is, Are you being truthful and transparent about how you're holding on to them?

Friday, September 30, 2011

When is a Promise Not a Promise?

If you grew up in the '50s and '60s, like me, you remember a world where dads (and a handful of moms) went off to work every morning, and stayed with the same employer for years and years. After 30 or 40 years, those dads retired with a company pension, usually enough to keep them comfortable, if not wealthy, through their remaining years.

Sounds like a fairy-tale today, doesn't it? Who still stays with the same company for 40 years? As for company pension plans, what are they? If you're lucky, you have a 401(k) that you've been lugging around with you from job to job, and which -- given the vagaries of the market -- is probably worth a whole lot less than you thought it was going to be worth in late 2011.

Some of us even bought the line that companies fed us: that they needed to get rid of massive pension-plan schemes to remain competitive with international firms that had no such obligations.

But the truth is a little different.

According to Ellen Schultz, Wall Street Journal reporter and author of a new book, Retirement Heist, "When companies began cutting benefits it wasn’t to remain competitive because the plans had a huge surplus and there was no cost to the company. What they were doing is taking the plan and finding a way to convert some of the assets into a benefit for the company and also to boost their profits." (Click here for a transcript of an interview with Ellen Schultz on NPR's Morning Edition on 29 September)

From being significantly overfunded in the '90s, the remaining corporate pension plans are now significantly underfunded. As an example, in the late '90s, Schultz reports, GE's pension plan had a $20 billion surplus -- even though it had not made any contribution to the fund since the mid-1980s. Today, GE's plan is underfunded by $5 billion. What happened?

When companies started looking for ways to get rid of older (read: more expensive) employees in the early '90s, Schultz writes, they could have offered those who were laid off a generous severance package. But "the cost-effective way was to instead promise them a bit more pension money in lieu of severance." In the end, "you've just laid off somebody who's expensive and it has cost you nothing." The problem is that you have just added a person to the eventual pension pool ... without having increased the pool's funds.

"Cutting the benefits actually gives companies a boost to profits. It’s an accounting effect. If you promise to pay $100 million to retirees, that’s a debt on the books. If you cancel that debt, then you get to keep the profit," says Schultz. So pension dollars were used to finance downsizings, and to sell assets in merger deals.

Meanwhile, of course, senior executive pay and pensions continue to rise dramatically. Today's New York Times carries an article by Eric Dash, who writes drily that "the golden goodbye has not gone away."

It's one thing to reward a retiring CEO for a brilliant tenure, but consider these examples that Dash cites:
  • $13.2 million in cash and stock severance, in addition to a sign-on package worth about $10 million, for Leo Apotheker, just ousted from Hewlett-Packard after 11 months;
  • $17.2 million in cash and stock in August to Robert P. Kelley, ousted from Bank of New York Mellon;
  • Nearly $10 million to Carol Bartz after her ouster from Yahoo
Meanwhile, how many people are unemployed? How many have seen their unemployment benefits end? How many are underemployed?

None of the moves that Schultz and Dash describe appear to be illegal. But grossly unethical? Oh yeah.

Saturday, September 24, 2011


A week ago, I quoted FT associate editor John Gapper, asking whether it was a rogue trader or a rogue bank that was behind UBS' "rogue trading" loss of $2.3 billion.

It looks more and more like the latter. Columnist James B. Stewart, writing in today's New York Times, reviews the sadly-long history of, um, questionable behavior at UBS and notes,
The problem the [UBS] board faces is whether the UBS culture ... was one of personal greed. UBS should ruthlessly and visibly weed out not just executives with dubious ethical and legal standards, but anyone who puts their personal interests ahead of clients -- which, when you think about it, should be the litmus test for anyone who claims to be a professional.
The current chairman, Oswald Grunwald, was brought out of retirement (from Credit Suisse) specifically to bring a new ethics focus; it is now rumored that the trading loss will cost him his job -- just as substantive legal and ethical lapses brought an end to the prior chief executives (Peter Wuffli, in 2007, and Marcel Rohner, in 2009).

No one has suggested that the current chief was in any way involved in the "rogue trades" -- but then, it's not even clear that the trader involved, Kweku Adoboli, profited directly from his trades (the "profit", for Mr. Adoboli, would be that a dramatic success would have propelled his career upwards).

Friday, September 23, 2011

Are You a Slave Owner?

A recurring request in this blog has been for all of us to be more thoughtful consumers -- to think about the repercussions of the purchases we make. It's not enough to score a better deal (though that feels great!): we need to think about how the purchases we make affect the world we live in.

For example, for several years we have been asked to consider the size of our "carbon footprints", measuring our individual and household effects on the greenhouse gas emissions that are causing climate change.

And we've learned about "blood diamonds" (diamonds whose sales are used to finance insurgencies, warlord activities, and other conflicts).

An article by Andrew Martin in yesterday's New York Times introduced me to a new concept: the slavery footprint.

You may think that slavery is a thing of the past, but the creators of a new website want us all to understand that "anyone who is forced to work without pay, being economically exploited and is unable to walk away" is a slave, and that the State Department estimates that there are 27 million slaves globally.

If you want to know how many slaves work for you, take the survey, here. Along the way, you'll get depressing little bits of information, like: "Bonded labor is used for much of Southeast Asia's shrimping industry, which supplies more shrimp to the U.S. than any other country. Laborers work up to 20-hour days to peel 40 pounds of shrimp. Those who attempt to escape are under constant threat of violence or sexual assault."

The site and survey were created by the Fair Trade Fund, a nonprofit group that focuses primarily on human slavery; funding was provided by a State Department grant.

As Martin writes, the purpose of the survey is "to get consumers engaged enough in the issue to do something about it, primarily hoping people demand that companies carefully audit supply chains to ensure, as best as they can determine, that no 'slave labor' was used to manufacture its products."

What do you know about who made the stuff that surrounds you? I know that my answer now has to be, Not enough.

(PS: if you're curious about the size of your carbon footprint, a couple of free calculators can be found here, from the Nature Conservancy, and here, from the Cool Climate Network at the University of California, Berkeley.)

Wednesday, September 21, 2011

Physician, Heal Thyself

No, this isn't going to be another gripe about Big Pharma.

Instead, it's going to be a request to the Securities and Exchange Commission to go to the nearest health-care facility and get itself a spine.

Or at least a manual on what is and is not ethical behavior.

Anyone who has read this blog more than once knows that I'm a "trust, but regulate" person. But that requires that the regulators at the very least regulate themselves (to quote one of those dead white guys, the Latin poet and satirist, Juvenal, "Who watches the watchmen?").

Today's New York Times carries a story by Louise Story and Gretchen Morgenson reporting that
After Bernard Madoff's giant Ponzi scheme was revealed, the Securities and Exchange Commission went to great lengths to make sure that none of its employees working on the case posed a conflict of interest, barring anyone who had accepted gifts or attended a Madoff wedding.
Which makes complete sense. Except that the SEC made one giant exception: its general counsel, David M. Becker, "who went on to recommend how the scheme's victims would be compensated, despite his family's $2 million inheritance from a Madoff account." Mary L. Schapiro, SEC chairwoman, was the lone commissioner aware of Mr. Becker's conflict of interest.

Excuse me?

The reporters dryly note that this "provides fresh details about the weakness of the agency's ethics office".

Ya think?

According to Mr. Becker's lawyer, Mr. Becker had notified senior SEC officials about the inheritance. Among those informed was William Lenox, at that time the agency's designated ethics officer (Mr. Lenox left the SEC earlier this year).

Mr. Becker's financial interest in the Madoff matter was revealed when he and his brothers (who shared in the inheritance) were among those sued by Irving H. Picard, the Madoff trustee, who is suing many Madoff clients to redistribute money.

This is yet another black eye for the SEC, which has by now had so many that it is starting to look punch-drunk. The Madoff matter alone has generated several, starting with why the SEC never investigated Madoff properly in the first place, despite being warned several times that his investing "genius" seemed more like grifting.

According to the article, "Two House subcommittees have called a hearing for Thursday about the incident with Mr. Becker." Stay tuned...

Friday, September 16, 2011

Does the blame lie with the individual or with the organization?

Some of each, don’t you think?

UBS, the Swiss banking giant, is back in the news today, with the arrest of a European equities trader, whose unauthorized trading has reportedly cost the bank $2 billion.

UBS has been in the news for too many years, for everything from wildly underestimating the subprime mortgage crisis (to the tune of some $37 billion in write-offs in 2007 and 2008) to significant fines ($780 million in 2009) for helping American clients evade taxes. In exchange for turning over more than 4,000 names of clients to the authorities, U.S. prosecutors finally dropped charges against UBS last year (click here for a previous blogpost on ethics at UBS). I could go back even a little further to mention the near-collapse of the bank in 1998 following the actual collapse of the hedge fund Long-Term Capital Management.

As Matthew Saltmarsh writes in the The New York Times "DealBook", “The incident raises questions about the bank’s management and risk policies…” Well, yeah.

He also notes, “The case could also bolster the efforts of regulators who have been pushing in some countries to separate trading from private banking and other less risky businesses.” Well, hurrah! Some of us still think that repealing Glass-Steagall a dozen years ago, thereby permitting commercial banks to operate investment banks, was one of the key factors leading to the financial crises of the last few years.

(What does it say about our society that when one rogue trader costs his employer billions of dollars, he gets arrested and carted off to jail, but when a whole Street-ful of traders cost their government – that is to say, Us – billions, if not trillions, of dollars, no one gets arrested, and their employers get bailed out. By Us.)

But back to UBS, specifically.

Financial Times associate editor John Gapper asks whether “Kweku Adoboli is a rogue trader or his employer is a rogue bank” (click here for his complete blogpost).

Gapper points to resemblances between Adoboli and Nick Leeson, whose unauthorized trades brought down the venerable Barings Bank in 1995, and Jerôme Kerviel of the 2008 Société Générale disaster: Adoboli, like those others, is “young, fairly junior and works on a desk that combined proprietary position-taking with ‘flow trading’ in customer orders.”

But, he adds, there’s more to the situation, as “we know plenty about the proclivity of UBS for getting involved in fiascos in which the bank believed it was taking relatively little risk but ended up losing large amounts of money.”

Finally, Gapper quotes a report UBS commissioned following the 2008 crisis. Written by Tobias Straussman of the University of Zurich, the report concluded:

Top management was too complacent, wrongly believing that everything was under control, given that numerous risk reports, internal audits and external reviews almost always ended in a positive conclusion. The bank did not lack risk consciousness; it lacked healthy mistrust, independent judgement and strength of leadership.

Or, to quote Forbes contributor Robert A. Green, “How can we trust bank accounting and reporting when their internal controls don’t even work?”

After the 2008 crisis, I spoke to a UBS employee, who assured me that all these “ethical lapses” were behind the bank. The new chairman, Oswald Grübel, had brought a new sense of stability and ethics to the organization. “It has to come from the top,” she said, confidently.

I don’t disagree. But I do have to wonder what exactly has come down from the top.

UBS will undoubtedly insist that this is “just one bad apple”, and that, with Adoboli’s arrest, all will once again be right in the world.

But the complete saying is that one bad apple spoils the whole barrel. You can’t just pick the rotten one out and think that everything else is fine. You need to take all the apples out, and look them over carefully, and remove all the other blemished apples, and scrub out the barrel before you can put more apples back in.

Monday, August 22, 2011

What Price the "Free" Market?

What will it take to get us all to agree that "The Market" can't do everything? To admit that there are some things that the government is uniquely qualified to do?

We can agree on national defense -- and even there, well, don't get me started on private military contractors -- but after that?

Saturday's New York Times gave an excellent example.

Gardiner Harris reported that there are currently "critical shortages of drugs to treat a number of life-threatening illnesses, including bacterial infection and several forms of cancer."

These are not new drugs, but nearly 200 reliable, generally inexpensive, standards for the treatment of a wide range of diseases. As one oncologist quoted said, "These drugs save lives, and it's unconscionable that medicines that cost a couple of bucks a vial are unavailable."

When they are available at all, prices have risen dramatically (in some cases as much as twentyfold). And while the shortages are all of older drugs, they are affecting new-drug trials, as "some experimental cures have been delayed because the studies must also offer older medicines that cannot be reliably provided."

What is behind these shortages? In a majority of the cases, supplies have been disrupted because inspectors (internal or government) found contamination problems. Note that more and more of the production of these types of older drugs has shifted to a handful of generic-drug companies, many of whom manufacture overseas where they are never inspected by the FDA. In other cases, shortages "have occurred because of capacity problems at drug plants or lack of interest because of low profits, according to the FDA." (emphasis added)

These issues might all be important, but they don't help patients dying of childhood leukemia, colon or breast cancer, or bacterial infections.

As Harris wrote,
A crucial problem is disconnection between the free market and required government regulation. Prices for many older medicines are low until the drugs are in short supply; then prices soar. But these higher prices do little to encourage more supply, because it can be difficult and expensive to overcome the technical and regulatory hurdles. And if supplies return to normal, prices plunge.
...Some wholesalers buy certain drugs in large quantities because they are betting there will be a shortage. The excessive buying can help make their predictions come true.
I'm sure that some would say that the solution to the "disconnection" is less government regulation rather than more. But you know me -- while it's really tempting to rant about despicable war profiteers, that's not where I'm going to go with this.

The federal government, lawmakers, representatives of the pharmaceutical industry and doctors' groups are working on possible solutions, "which include a national stockpile of cancer medicines and a nonprofit company that will import drugs and eventually make them," that are still only in the planning stages.

Absent the national health-care system that I believe we have a moral responsibility to provide, we must at the very least not make it harder for Americans to obtain necessary care. A cancer diagnosis is always deeply stressful, no matter how treatable the particular form. We owe it to our fellow citizens not to make it more stressful by guaranteeing adequate supplies at uninflated prices.

Sunday, August 21, 2011

It's Amazing What $5 Can Buy You

Is a five-star review really better than a four-star one? What does "excellent" service (as opposed to "very good") mean anyway? And by how much does a rave review on Yelp affect your restaurant choices?

I wrote recently about "anonymous" Amazon reviewers, and about the gifts some receive for positive reviews. If you found that troubling, as I did, you'll find an article in yesterday's New York Times by David Streitfeld even more troubling. It appears that "[as] online retailers increasingly depend on reviews as a sales tool, an industry of fibbers and promoters has sprung up to buy and sell raves for a pittance."

Reviewers-for-hire may receive as little as $5 or $10 for a positive review, a "pittance" indeed, but if you churn out enough of them you can make enough to get by -- without wasting the time, effort, and money of actually reading the book or staying at the hotel.

Streitfeld continues,
The boundless demand for positive reviews has made the review system an arms race of sorts. As more five-star reviews are handed out, even more five-star reviews are needed. Few want to risk being left behind.
Does this sound familiar? We are all experiencing this "arms race", every day. I take my car for a regular service call and am told that the service team needs an "excellent" rating on my "anonymous" customer satisfaction survey call, or they will all be at risk of losing key bonuses. A friend, at the end of a cruise-ship vacation, is told that anything less than an "excellent" rating will ruin the careers of crew members. And, most egregiously, schoolteachers in Atlanta (and elsewhere) are encouraged to correct their students' standardized test scores in order to meet and exceed the No Child Left Behind goals.

Most anything can be measured. Some things should be measured. But before you go crazy on the measurement side, you might want to think about the unintended consequences. The more importance you place on a test, the more likely that you will see this kind of behavior. I am not excusing cheating, but I am explaining it. We should not be surprised by it. And maybe there are other ways of measuring that might provide more useful data -- but no doubt they'd be more expensive.

Consider book reviews, for example. Fewer and fewer newspapers and magazines these days have reviewers on staff, but I value those reviewers' comments. Over time, I get to know their idiosyncrasies ("Oh, no wonder it's a negative review -- she hates hard science fiction."), and so know how to weight a positive or negative review. And I know that the critic's newspaper or magazine has paid for the book, not the reviewer herself. But with Amazon reviewers -- it could be the author in disguise, the author's best friend, the editor's husband, the publisher's enemy, or, in fact, a disinterested reader. But I don't have enough information to make a value judgment of the worth of the review. I don't even know if the reviewer has, in fact, read the book in question (I don't know it about the newspaper or magazine reviewer either, but I consider it far more likely).

"The whole system falls apart if made-up reviews are given the same weight as honest ones," says a Cornell University reviewer that Streitfeld quotes, who is part of a team working on an algorithm to detect fake reviews.

All those "personal" reviews give us a false sense of community. A book recommendation from a friend who knows me well is qualitatively different from a book recommendation in the New York Review of Books. A book recommendation from Amazon purports to be more like a friend's review... but in fact, it's not. Maybe "the whole system" should fall apart.

Friday, August 12, 2011

Ooooommmm. Trust. Ooooommmm. Transparency.

Anyone who's read more than two posts on this blog (maybe even more than one) knows my twin mantras: Trust & Transparency.

I don't believe in them just because they're the right way to behave -- although of course, given the title of this blog, I do think the ethics of such behavior is important -- but also because they're the smart way to behave.

As a result, I believe in strong regulation ("Trust, but verify", if you like). I believe in prosecutors' pursuing those who violate that essential market trust (which is why I keep wondering why we haven't seen a steady stream of go-to-jail-go-directly-to-jail following the 2008 market collapse).

Today's New York Times has a great article by Julie Creswell that illuminates the importance of trust and transparency.

"Small investors provide the bedrock for the United States stock market through their mutual funds, 401(k) plans and other company-sponsored retirement programs," she notes. In the current roller-coaster environment, what's a small investor to do?

Some will stay the course, because that's what their investment counselors have told them to do (or because they don't know what else to do). Some will pull out, because they've been spooked.

But some are heading for the exits because they no longer trust the markets' essential fairness:
Some investors fear that the markets have become dominated by high-frequency traders blitzing in and out of stocks, or by sophisticated hedge funds running mind-bending algorithmic trading programs that can outsmart the ordinary investor.

These people said they feel that the game is rigged and they are the fool.
Creswell quotes one retiree who sold out completely in the fall of 2008 to buy Treasuries: "I simply have no confidence at all that the markets are fair...."

In other words, Fool me once, shame on you; fool me twice, shame on me.

Investment professionals at all levels should be worried about that sentiment. The comments posted by readers reflect similar concerns. The very first comment reads,
I was a small investor and I am totally out of the market. There's no way for the little guy to respond fast enough to the computer programs that are set to kick in at various levels. Between that and the Hedge Funds, market manipulations and insider traders (yes, I know you are out there) there is no way I'm going to make any money in the stock market. There are going to have to be new rules and new ways of doing business before I will even consider it.
And there are many more in the same vein.

But if small investors get really spooked, there's no way that the stock market, which has indeed been an engine of wealth creation for many, will be able to sustain the draining downward pressure.

If the investment community is smart, and in it for the long term (as they always tell us small investors to be), they will get out in front of this and press Congress for tougher rules and greater transparency, to prove that the market can be trusted, that a small investor has a fair chance.

Do I think that will happen?

I'm not that naive.

Thursday, August 11, 2011

Wolves in Sheep's Clothing

At the best of times, I'm not a great fan of con artists. When they target the merely greedy, I can sometimes pause to admire the artistry of a con. But when they target the desperate, I go crazy.

Which is why I was so happy today, listening to Leonard Lopate's show on WNYC, to hear that the New York City Department of Consumer Affairs has issued subpoenas to 15 debt settlement companies (all chosen as a result of complaints by New Yorkers).

You know the companies I mean -- their advertisements are everywhere, promising to "cut your debt in half", and "negotiate" so that you end up paying pennies on the dollar.

It's easy for those of us who are fortunate enough not to be sinking under a rising tide of debt to wag a metaphoric finger, and say, "If it sounds too good to be true...." But when you're in that situation, and panicking, it's virtually impossible to think clearly. Someone offers to throw you a rope, you'll grab for it. Only to find out later that it's a noose.

“These so-called ‘debt settlement’ companies bombard New Yorkers with ads that fraudulently offer false hope, but instead deliver nothing but added fees and long-lasting financial ruin,” said [DCA] Commissioner Jonathan Mintz, in a press release issued today.

Speaking on the Lopate show, the commissioner went on to say that the best these companies do is take more of the indebted person's money, demanding an upfront fee, usually in the hundreds of dollars. The worst they do? Crater credit ratings, vastly increase penalties and fees, and push someone teetering on the edge right over the financial cliff.

The companies' "advice" is generally: Stop paying your debts. Wait 'em out. Eventually they'll be so exhausted, they'll let you off the hook, or nearly so. We'll talk to you for them.

That's not just bad advice; it's almost criminally bad. The creditor will sell the debt to a collection agency, and add fees and penalties. Monies that an indebted person puts into escrow with the settlement company are nearly impossible to retrieve, in part because the companies change names frequently. And there's little indication that these companies actually do contact the creditors.

This isn't a new story. The New York Times, as part of its "New Poor" series, ran an article by Peter Goodman more than a year ago about this nationwide scourge, preying on the vulnerable:

In the Kansas City area, Linda Robertson, 58, rues the day she bought the pitch from a debt settlement company advertising on the radio, promising to spare her from bankruptcy and eliminate her debts. She wound up sending nearly $4,000 into a special account established under the company’s guidance before a credit card company sued her, prompting her to drop out of the program.

By then, her account had only $1,470 remaining: The debt settlement company had collected the rest in fees. She is now filing for bankruptcy.

A number of state attorneys general have been investigating these companies (now represented by their own trade association, the genteelly-named United States Organizations for Bankruptcy Alternatives), but I have yet to hear of significant criminal proceedings.

Commissioner Mintz said that about 18% of New York City households are carrying credit-card balances in excess of $10,000 (compared to about 13% nationwide). With an economy that continues to sputter, and jobs few and far between, it's easy to understand how that kind of debt could lead someone to jump for a proffered out. It's much harder to understand how people could choose to defraud the desperate.

Monday, August 8, 2011

Would the Hens Hire a Fox to Value their Eggs?

Let's say that you're in the business of rating products and services. Investors rely on your ratings to decide whether to buy a product, or whether to demand more return for greater risk. Now imagine that you're paid for this work by the companies whose products and services you rate. Can you say, "conflict of interest"? Sure you can.

Remember all those junk-quality mortgages that got split up and repackaged and sold as AAA-rated bonds? Sure you do.

That explains why, when Standard and Poor's downgraded US debt to AA+ (from AAA) status on Friday, I was less than impressed. As Paul Krugman wrote in today's New York Times, Standard & Poor's is "the last place anyone should turn for judgments about our nation’s prospects". (Full opinion piece, here)

S&P is, after all, the company that "gave Lehman Brothers, whose collapse triggered a global panic, an A rating right up to the month of its demise. And how did the rating agency react after this A-rated firm went bankrupt? By issuing a report denying that it had done anything wrong."

It didn't help S&P's case that the administration immediately pointed out a $2 trillion error in S&P's math. The rating firm argued briefly, conceded the error, and went ahead with the downgrade.

Just how good at their jobs are the rating agencies? In his Times "FiveThirtyEight" blog, Nate Silver calls S&P country ratings "substandard and porous", noting that, for example, their egregious $2 trillion error in the US downgrade came from "their lack of understanding of the way that bills are scored by the Congressional Budget Office". Not a way to engender trust in their acumen, wouldn't you say?

I'm not suggesting that we aren't facing serious financial and economic difficulties in this country; of course we are. But this blog isn't about economics -- it's about ethics.

I find it ethically troubling that S&P (and Moody's and Fitch) are primarily paid by the very companies whose products they are reviewing.

There isn't any question that a great deal of, um, questionable behavior was going on, at the banks, at the ratings agencies, and no doubt at the accounting and law firms that served the banks as well. Much of it is coming out in private suits. An article by Louise Story and Gretchen Morgenson in today's Times, for example, reports:
One case against Bear Stearns indicates that its employees put troubled mortgages into securitization trusts that it sold to customers, while simultaneously receiving reimbursement — known as apology payments — from the companies that originated the loans.

And a recent case against Morgan Stanley cited a witness saying that the bank would receive mortgages with documentation of a buyer’s income and then shred that documentation so that it could call it a “no doc” loan and pay less for it. Those banks dispute the accusations.

If these allegations are true, then I'm glad that lawsuits are uncovering it.

But can we pause for a moment here and wonder why the Justice Department hasn't gone after these firms? Or Moody's? Or, for that matter, Bank of America, which is likely to be sued by still-largely-taxpayer-owner AIG? (Story and Morgenson's article in the Times reports that AIG will claim that BoA "misrepresented the quality of the mortgages placed in securities and sold to investors.")

Perhaps AIG has the wrong target in mind for its suit. If they bought BoA mortgage bonds in part because they were AAA rated... maybe the rating agencies should be held accountable, too. The agencies would no doubt claim that BoA and its subsidiaries provided falsified data, and that they're just victims here too. I'm not buying it. What about you?

Tuesday, July 26, 2011

Where is Dickens When We Need Him?

Dickens' novels all seem to turn around the questions of the "deserving poor" versus the "undeserving poor". While the theory of Social Darwinism -- which Dickens argued against -- has been widely discredited in academia, it keeps popping up in business circles. And today's New York Times has a particularly depressing example.

According to an article by Catherine Rampell, "A recent review of job vacancy postings on popular sites like, CareerBuilder and Craigslist revealed hundreds that said employers would consider (or at least "strongly prefer") only people currently employed or just recently laid off."

In other words, if you're looking for a job, you need to have a job. This, despite an unemployment rate of 9.2%, according to the government's Bureau of Labor Statistics.

Refusing to consider someone who's currently unemployed for a job "probably does not violate discrimination laws because unemployment is not a protected status, like age or race," Rampell writes. New Jersey has recently passed a law outlawing the practice, and other states (and Congress) are considering similar action.

But such legislation may not help much: if proving age- or race-discrimination is hard, proving that you didn't get hired because you were unemployed at the time is going to be that much more difficult. Moreover, in a few occupations -- like technology -- it may be legitimately important to stay on top of the ever-changing field. This does not explain the ads that the Times found for concierges, orthopedics device salesmen, air-conditioning technicians, and others that required current employment.

A related, and equally distasteful, practice is that of companies using job-applicants' credit scores to decide whether to hire them. While there may be a handful of cases where such scrutiny is valid (where there is clear opportunity for embezzlement, say), in most cases it is just another obstacle for people who have been laid off and have fallen behind on their bills. And how are they supposed to raise their scores back to prior levels if they don't have a paycheck to cover those bills?

Both techniques are easy shortcuts for companies inundated with hundreds of resumes for every posted position. I understand the problem. I understand the frustration of dealing with resumes that are completely wrong for the position. I understand that even HR departments are short-staffed these days. But short cuts are rarely the ethical choice, and they certainly aren't in this case.

In fact, they may be exacerbating this country's racial divide. In another article in today's Times, Sabrina Tavernise reports that "Hispanic families accounted for the largest single decline in wealth of any ethnic and racial group in the country during the recession, according to a study published Tuesday by the Pew Foundation." In the period from 2005 to 2009, median wealth for white households declined by 16 percent, for African-American households, by 53 percent; for Asians, by 54 percent; and for Hispanics, by 66 percent, meaning that the wealth gap between white households and others is "the largest since since the government began publishing such data a quarter century ago". (The full Pew Foundation report is available on the Times website, here, or on the Pew site, here)

So maybe it isn't Dickens we need, but Joseph Heller. How else can you describe this but Catch-22?

Wednesday, July 13, 2011

News Corp Dodges Taxes, Too

Shortly before Tax Day, I wrote a post about how General Electric was managing to rack up ginormous profits and a teeny-tiny tax bill. Lots of people, from the left and the right, complained about the unfairness of this. There was relatively calm reporting about it (e.g., The New York Times, here), and there was shrill reporting about it ("scandalous tax breaks", according to CBS's interactive business network, BNET, here; and from Fox News' Bill O'Reilly, here).

Why am I bringing this up now? Because there's a lovely new twist on the News Corp scandal.

Reuters columnist David Cay Johnston did a little extra digging, and discovered that Fox News' parent (News Corp) has not only not paid U.S. taxes in the last four years, it has made money from taxes. According to Johnston (full story, here, and at Salon, here):
Over the past four years Murdoch's U.S.-based News Corp. has made money on income taxes. Having earned $10.4 billion in profits, News Corp. would have been expected to pay $3.6 billion at the 35 percent corporate tax rate. Instead, it actually collected $4.8 billion in income tax refunds, all or nearly all from the U.S. government.
There's even a really lovely little chart, here.

OK, so Johnston might have been exaggerating a bit -- I wouldn't have "expected" News Corp to pay $3.6 billion, because virtually no company actually pays the 35% rate. But collecting $4.8 billion? Really?

Do you think that Bill O'Reilly will be as shrill in castigating his uber-boss as he was in castigating GE?

No, I don't think so either.

By the way, News Corp has now dropped its plans to buy the rest of satellite company BSkyB. Explained News Corp COO Chase Carey, the deal was simply "too difficult to progress in this climate" (full Guardian story, here). By "this climate", I think he means "this disastrous scandal", don't you?

Tuesday, July 12, 2011

The "News of the World" May be Gone, but the Story isn't Going Away

I wasn't going to add anything to my previous post, and then I got forwarded this story by Sam Gustin at PaidContent: a suit filed by Amalgamated Bank and other funds against News Corp in March alleging nepotism (in the purchase of a company run by one of Rupert Murdoch's daughters) has been amended to reflect the phone-hacking and police-payoff scandal. The revised suit states that the scandal indicates "a culture run amuck" and that the current board of directors "provides no effective review or oversight."

PaidContent also reports that a non-profit group, Citizens for Responsibility and Ethics in Washington (CREW) has called for a Congressional investigation (press release here) into whether News Corp journalists have hacked American voicemail accounts.

Murdoch closed the 168-year-old News of the World last week, essentially claiming that this would take care of the rotten apples. But it appears the other News Corp papers, including the Sun and the Sunday Times have engaged in similarly questionable behavior (click here for a Financial Times update; note that free registration is required to access the FT site).

CREW executive director Melanie Sloan said, "It is becoming increasingly clear this scandal was not perpetrated by a few rogue reporters, but was systematically orchestrated at the highest levels of News Corp.... If Mr. Murdoch's employees can be so brazen as to target the British prime minister, then it is not unreasonable to believe they also might hack into the voicemails of American politicians and citizens."

The Wall Street Journal, the New York Post, and Fox News are among News Corp's American properties.

While the News Corp scandal may represent a new low, let's not forget that American journalists have been guilty of questionable ethical behavior themselves, including phone-hacking. As Howard Kurtz wrote in Sunday's Washington Post, "Back in 1998, the Cincinnati Enquirer paid $10 million and apologized to Chiquita Brands after a reporter obtained voice-mail messages from a company executive 'in violation of the law,' the paper acknowledged."