Friday, July 26, 2013

Does a Traffic Ticket Mean You're More Inclined to Fraud? Maybe....

I'll be the first to admit that I have been known to exceed posted limits on the highway. By how much? Hmmm. Maybe I'd better lay claim to the Fifth on that.

Oh and I can justify my speeding, of course: I'm just keeping up with traffic! Statistics have shown that being an outlier on either end of the bell curve (driving significantly more slowly than traffic or driving significantly faster) is much more dangerous than flowing along with the rest of the vehicles on the road.

So it's not really that I want to go fast: I want to be safe.

Yeah, and I've got a bridge to sell you.

But now I may have to rethink my vehicular behavior.

The New York Times' Floyd Norris has a fascinating article in today's paper, based on an academic report written and recently published by Robert Davidson (Georgetown University), Aiyesha Dey (University of Minnesota), and Abbie Smith (University of Chicago), that suggests that "off-work" behavior can give a strong clue about "at-work" behavior. An abstract of the paper, which is to appear in the Journal of Financial Economics,  is available here; a .pdf of the full paper is also available there.

The authors explored whether two forms of "off-work" behavior by senior corporate executives -- living "high on the hog", and having any kind of criminal record (including traffic violations) -- were correlated to misfeasance or malfeasance on the job:
We predict and find that CEOs and CFOs with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. 

First of all, I wasn't aware that people with criminal records could even be CEOs or CFOs. Norris reports that
Of the 109 chief executives of companies found to have committed fraud, 12 had previous encounters with the law that were more serious than a speeding ticket. The academics counted eight felony drug charges, four case of domestic violence and four traffic violations so serious that they were lumped under the heading of reckless endangerment. (Some of the bosses had more than one item on their record.)

The professors had turned to SEC fraud cases dating from 1992 to 2004, and then looked for companies as similar to those, but with fraud filings, as possible: similar in size, in the same industries, similar (pre-fraud filing) stock market performance, etc.

So, what kind of legal record had the CEOs and CFOs of the non-fraud companies have? None of them had anything more serious than "an ordinary traffic violation." And even there, the differences were compelling. Norris notes:
Of the 109 chief executives from nonfraudulent companies, just five had traffic tickets. Sixteen of the fraud company chief executives had such tickets. Some of them had more serious violations. Altogether, 22 of the 109 had some previous violation.

As the paper's authors state,
we interpret an executive’s prior legal infractions, including driving under the influence of alcohol, other drug-related charges, domestic violence, reckless behavior, disturbing the peace, and traffic violations, as symptoms of a relatively high disregard for laws and lack of self-control. We predict and find a direct, positive relation between CEOs’ and CFOs’ prior records and their propensity to perpetrate fraud....
Or, as Norris puts it, more simply: "What this could indicate is that people who are willing to violate one set of social norms are more likely to be willing to violate far more serious ones."

I've written before of our human capacity for self-delusion (e.g., here, writing about the need to get rid of the "gimmes"). While I don't think that a speeding ticket on my record should automatically mean that I couldn't be a great CEO (on the other hand, felony drug charges? Really?), I do think that before the board offers me the job, they should do a background check. And look for answers more compelling, and less self-serving, than "I was just keeping up with traffic."

Tuesday, July 9, 2013

If Greed is Good, Is Speed Even Better?

To coin a phrase: The early bird catches the worm.

Being first with the news is an obvious advantage, and not just if your livelihood comes from trading either stocks or gossip. If you're in the market for a Manhattan apartment, knowing that a friend-of-a-friend is about to sell and move out to the 'burbs can mean landing that perfect (tiny) West Village condo.

Sometimes being first is just good luck.

Sometimes it comes from greasing the right palm, a.k.a. insider trading, which is illegal -- although proving the illegality can be tough.

And between pure luck and insider trading, there's a lot of grey.

As Nathaniel Popper reports in today's New York Times, "first access" has become a profitable business model.

He writes, "Dow Jones recently announced the creation of DJ Dominant, a program that will release news articles two minutes early to subscribers who pay more."

Another examples Popper cites is
a service that the Nasdaq market and Chicago Mercantile Exchange introduced in May, which promises to get Nasdaq's market data to customers in Chicago -- and Chicago data to the East Coast -- 2 milliseconds faster than it is otherwise available thanks to the use of microwave transmission. The cost for the advantage is a reported $20,000 a month.

Similarly, Thomson Reuters has offered clients information about the University of Michigan's influential consumer confidence index "a full two seconds" before its "early" release, itself two minutes before the official release.

As trading is increasingly computer-driven and high-speed, even two seconds can make a significant difference.

But Thomson Reuters has just suspended its early-early release, under pressure from the New York attorney general's office, which is reportedly taking a "broad look" at the practice. According to a New York Times DealBook article by Peter Lattman (published Monday), the state's "investor protection bureau" is looking into the question of "whether preferential disclosure of data is a fair and appropriate business practice."

The New York attorney general's office has considerable power over Wall Street, thanks to the Martin Act, which gives "the attorney general broad powers to pursue either criminal or civil actions against companies... [and] does not require the government to show proof that a company intended to defraud anyone."

Popper quotes state attorney general Eric Schneiderman as saying, "The securities markets should be a level playing field for all investors and the early release of market-moving survey data undermines fair play in the markets."

Since I'm not a lawyer, I can't speak to the legality of Thomson Reuters' behavior (nor that of Dow Jones, the Nasdaq, et al.). But I can speak to the ethics.

The stock market is often held up as an example of a perfectly level playing field -- if you can spot a great investment opportunity before your neighbor can, it doesn't matter that she's a high-powered hedge fund manager and you're a day trader working from your home office: You'll win.

But if that hedge fund manager can pay to get information about that potential opportunity two seconds before you can ... Just how level is that playing field, really?

Monday, July 1, 2013

Want to Get Paid? Pay a Fee.

How many more ways can we find to make it seem reprehensible to be poor?

The working poor used to be admired for their grit and perseverance in the face of remarkable road-blocks. People talked about the "dignity" of working poverty (this was generally said by those who had never experienced the soul-corrosiveness of genuine poverty).

Today, we seem to specialize in finding new ways to nickel-and-dime the people who are barely making it by as it is.

Today's New York Times has a lengthy, depressing, but valuable article by Jessica Silver-Greenberg and Stephanie Clifford on the new way to pay workers: not with a paper check, or by direct deposit, but prepaid cards, similar to a debit card.
Companies and card issuers, which include Bank of America, Wells Fargo and Citigroup, say the cards are cheaper and more efficient than checks — a calculator on Visa’s Web site estimates that a company with 500 workers could save $21,000 a year by switching from checks to payroll cards.

Savings like that can get the attention of corporate financial officers. 

The cards are particularly popular with retailers and restaurants, which have large numbers of minimum-wage employees. According to the Times, "$34 billion was loaded onto 4.6 million active payroll cards [in 2012], according to the research firm Aite Group." And the total is expected to grow to $68.9 billion( and 10.8 million cards) by 2017.

But what does it mean for the workers? In theory, it should be just as easy to use as a debit card. In practice... not so much:
...In the overwhelming majority of cases, using the card involves a fee. And those fees can quickly add up: one provider, for example, charges $1.75 to make a withdrawal from most A.T.M.’s, $2.95 for a paper statement and $6 to replace a card. Some users even have to pay $7 inactivity fees for not using their cards. These fees can take such a big bite out of paychecks that some employees end up making less than the minimum wage once the charges are taken into account...

As an example, the Times reporters spoke to a young man who works at a McDonald's in Milwaukee, earning $7.25 an hour (which is the current minimum wage in Wisconsin). He gets paid via a prepaid card, and spends "$40 to $50 a month on fees associated with his JPMorgan Chase payroll card."

Do the math. $7.25 per hour for a standard 40-hour week is $290. Multiply that by 52 for a year, without any vacation time, and you're up to $15,080. Forget about Social Security or other payroll tax deductions for the moment, and you try living on that. $45 a month in fees adds up to $540, which is more than 3.5% of his gross earnings, and a substantially higher bite on net earnings. Do the math backwards, and this young man is now earning $6.99 an hour. A 3.5% drop in earnings may not sound like much, but when you're living this close to the edge, it can easily mean the difference between having enough to eat and not.

To be fair, it's worth noting that some 10 million American households are now "unbanked", and
Some employers and card issuers say that the payroll cards are useful for low-wage workers who do not have bank accounts. They also say that the fees on the cards are usually lower than those associated with check-cashing services, which are often the only other option for people who do not have bank accounts. 

But I think the more important factor for the issuing banks is that prepaid cards have been virtually untouched by recent financial regulation.
The lack of regulation in the payroll card market, while alluring for some of the issuers, can potentially leave cardholders swimming in fees. Take the example of inactivity fees that penalize customers for infrequently using their cards. The Federal Reserve has banned such fees for credit and debit cards, but no protections exist on prepaid cards. Cards used by more than two dozen major retailers have inactivity fees of $7 or more, according to a review of agreements. 

Some employees can also be hit with $25 overdraft fees, called “balance protection,” on some of the prepaid cards. Under the Dodd-Frank financial overhaul law, banks with more than $10 billion in assets are barred from levying overdraft fees on customers’ checking accounts [but not on prepaid cards].
So the people who are least able to pay the fees are the ones getting hit with the fees. And those cost savings for the companies? If you're wondering where they go, I suggest you check out a headline on page-one of the business section in Sunday's New York Times: "That Unstoppable Climb in CEO Pay".