Will Coal Finally Clean Up its Act?

I started writing about how dirty "clean coal" is back in 2010 and 2011 (here, here, and here), originally driven by the horrific death of 29 miners in the Upper Big Branch mine in April 2010, the worst mine disaster in the US in more than four decades. Massey Energy, owner of the Upper Big Branch, had come to see fines for safety violations as simply a cost of doing business, and it seemed as though no one could do anything about it.

Finally, maybe, someone is.

A 2011 Mine Safety and Health Administration report explicitly blamed safety violations at the mine for allowing coal dust and methane gas to collect and ignite (MSHA report, here), but it wasn't until November of last year that Don Blankenship, Massey Energy's former chief executive, was indicted on four criminal counts by a federal grand jury in West Virginia (13 November 2014 New York Times article by Trip Gabriel, here; indictment, here). Massey Energy is now owned by Alpha Natural Resources, which acquired Massey in 2011.

Penalties for the criminal counts Blankenship is facing, which include conspiracy to violate mine safety and health standards and conspiracy to defraud the United States (by obstructing the Labor Department and MSHA efforts to enforce mine safety standards), could add up to more than 30 years of prison time.

Blankenship's trial has not yet begun (originally scheduled to begin in January, it has been postponed to October; Blankenship has pleaded not guilty and is free on $5 million bond), but something has changed in West Virginia.

In a long article in Sunday's New York Times, David Segal recounts what brought down Blankenship, a man who had long acted as though the state in general and his coal mines in particular were a private fiefdom. The short answer is: hubris.

...How did Mr. Blankenship become the first coal chief in the region to face charges that could put him in prison? One answer is that the tragedy of Upper Big Branch was of such a scale and its apparent causes so mercenary -- prosecutors say the explosion stemmed from a hellbent emphasis on production at the expense of safety -- that a criminal case may have been inevitable. It came, too, at a time when economic shifts have reduced the power of coal kinds, who now rule over fiefs in decline.
Then there is Mr. Blankenship himself, a man who can come across as a cartoon of a corporate villain. He tangled with inspectors and buffaloed rivals. He is a Republican in a state that was long a Democratic redoubt, and he seemed to relish making public officials his enemies.

And while many senior managers -- think of the bankers who nearly ran this economy off the rails in 2008 -- insulate themselves from criminal liability with layers of middle management, Blankenship was micro-manager par excellence. There's no way he can pretend not to have know what was happening at Upper Big Branch.

Segal quotes a West Virginia University law professor: "One reason that Blankenship is being prosecuted is that he was different from other top coal executives. Most CEOs don't get production records every half-hour by fax. That places him right in the mine, hands on. That makes him vulnerable."

How vulnerable? We'll have to wait and see.

How Long Should It Take to Admit to Product Defects?

That, of course, is a very different question from, "How Long Will It Take to Admit to Product Defects?"

About six months ago, I wrote (here) about the growing number of automotive recalls related to Takata airbags, involving millions of vehicles in the US and elsewhere. The first hints of problems arose more than a decade ago. At the time, Takata was still denying that its airbags were at fault.

If you haven't been following the issue: The propellant, designed to help the airbag inflate very fast in the event of a crash, can under certain circumstances degrade; when that happens, the airbag may inflate with too much force, rupturing steel canisters that hold the propellant, and spewing metal shards into the passenger compartment. To date, six deaths have been linked to the defect, and more than 100 injuries, many of them very serious.

Yesterday, at long last, Takata admitted that its airbags were defective. According to an article in today's The New York Times by Danielle Ivory and Hiroko Tabuchi, Takata has now agreed to a massive recall of nearly 34 million cars and light-duty trucks, "about one in seven of the more than 250 million vehicles on American roads". This recall is "the largest automotive recall in American history."

It shouldn't have taken this long to get here.

The National Highway Traffic Safety Administration, which is "dedicated to achieving the highest standards of excellence in motor vehicle and highway safety" (according to its website, here), began  receiving complaints about airbag-caused injuries nearly 15 years ago. Ivory and Tabuchi report that, "in 2009, the agency opened an investigation into Takata and its airbags, only to close it six months later, citing 'insufficient evidence.'"

Oops.

Fortunately, the new NHTSA administrator "has shown greater assertiveness towards companies like Takata."

Evidence kept piling up, and Takata kept denying any problem. Finally,

in the face of mounting evidence, federal safety regulators in February began to fine Takata $14,000 a day because it had not cooperated fully in the agency's investigation. The company disputed the agency's assertions. With the expansion of the recall, though, regulators said they would suspend that fine, which had reach more than $1 million. It is unclear if it will be collected.

So is your car one of the "lucky" ones? It's not clear. Ten automakers (BMW, Chrysler, Ford, Honda, Mazda, Mitsubishi, Nissan, Pontiac, Subaru, and Toyota) have already recalled 14 million vehicles due to the defect. The agency had posted a list on its website of the relevant models, but Ivory and Tabuchi report that

...[NHTSA] would not know exactly which models of cars would be recalled until it coordinated with automakers, which could be several days. The final number may change as more tests are performed....

Of concern to most motorists is that a recall of 1 in 7 vehicles now on the road obviously can't be done all at once.

It could in fact take several years; NHTSA recommends that owners continue to drive their cars in the interim.

At the risk of repeating myself yet again: If people are dying because of your product, you should really do something to fix the problem. Sweeping it under the rug will not make it go away.

What Does It Take to Get Fired?

If you're a stockbroker, apparently, more than can be believed.

As The New York Times' Susan Antilla wrote in today's paper (here),

In most professions, it would take only one or two acts of egregious conduct before troubled employees were shown the door. In the case of one stockbroker who has repeatedly had complaints from investors, it took 69 customer disputes filed over the last 13 years before he was barred from the business. [Emphasis added.]

Customers starting complaining about Jerry Cicolani Jr. in 2002. Despite that, he continued working for Merrill Lynch until 2010 (he started there in 1991), collecting a total of more than 60 complaints before his departure, during which time Merrill "paid $12 million in settlements to his customers". So we're not talking about showing up late for work on a regular basis, or parking in the boss's space.

In 2004, Mr. Cicolani was subject of an inquiry by the New York Stock Exchange over his handling of "numerous customer accounts" at Merrill, according to regulatory records, but wasn't sanctioned.

Moreover,

The Securities and Exchange Commission had already sued him, in May 2014, over his role in a Ponzi scheme. His most recent employer, PrimeSolutions Securities, based in Cleveland, fired him a day after that lawsuit was filed.

Despite all that, it wasn't until September 2014 that the Financial Industry Regulatory Authority (Finra), which is responsible for monitoring stockbrokers, decided to bar Cicolani from the business.

Back in November, there was a flurry of headlines in the business press suggesting that Finra was becoming more aggressive in pursuing broker-miscreants (example, here), but it's not clear that this is actually happening. (Antilla does quote a Finra spokesperson who claims that the agency "has refocused its resources over the last two years to aggressively pursue repeat offenders.")

Meanwhile, Antilla reports, there were clients who had been with Cicolani for years, who learned, from the FBI, that their money was gone. One 83-year-old retired doctor was quoted as saying, "It floored me because I always have trusted my brokers and their guidance. It was almost impossible to believe he would have done that to me."

Cicolani denies all claims, taking the Fifth.

Surprise! Looks Like Us Non-Bankers Were Right About the Bankers

Every since the 2008 financial crisis nearly imploded the whole global financial system, we non-bankers have been hoping for a perp walk in addition to the mounting array of fines.*

The bankers themselves have been adamant that they have done nothing wrong, pointing the finger of blame at lowered US interest rates after the dotcom bust in 2000, the flow of savings out of China, the long-standing US policy of increasing homeownership rates, Freddie Mac and Fannie Mae for encouraging "low-quality" buyers to invest in homes, and even the regulators (click here for a 2009 blogpost discussing this, and referencing an excellent Atlantic magazine piece by Simon Johnson).

We non-bankers remained skeptical.

And Monday, a federal district court judge in Manhattan sided with us against Nomura Holdings and Royal Bank of Scotland (RBS).

As Peter Eavis writes in a DealBook article for The New York Times today, the judge found that the "two banks misled Fannie Mae and Freddie Mac in selling them mortgage bonds that contained numerous errors and misrepresentations."

The full 361-page decision can be found on the Times website, here. Right up front, the judge writes:

This case is complex from almost any angle, but at its core there is a single, simple question. Did defendants accurately describe the home mortgages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The Offering Documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous. [Emphasis added] 

Given the magnitude of the falsity, it is perhaps not surprising that in defending this lawsuit the defendants did not opt to prove that the statements in the Offering Documents were truthful. Instead, defendants relied, as they are entitled to do, on a multifaceted attack on plaintiff's evidence. That attack failed, as did defendants' sole surviving affirmative defense of loss causation. Accordingly, judgment will be entered in favor of plaintiff. 

The plaintiff is the Federal Housing Finance Agency (FHFA), the independent regulatory agency "responsible for the oversight of vital components of the secondary mortgage markets", mostly Fannie Mae and Freddie Mac (from their website, here).

Nomura and RBS were the only two banks included in this case because sixteen others settled with the government, paying, according to Eavis, "nearly $18 billion in penalties but avoiding public airing of their conduct."

The judge has asked FHFA "to submit a proposal for damages, which are expected to be about $500 million."

So, still no perp walk. But a lot more clarity.



* Fines: (n.) For bankers, "cost of doing business". Ugh. Me, I think close to $18 billion in fines is pretty clear evidence of a massive criminal operation (see previous post, here).

It's a STEAL! But From Whom, Exactly, Are You Stealing?

I've complained a lot in this blog about corporations and executives, about bankers behaving badly (example, here) and about corporations blaming everyone for a disaster except themselves (I'm talkin' 'bout you, BP, here).

But I've also tried to look at the things that I do wrong, the things that we all as consumers do (and don't do) that could make a difference in the ethical landscape in which we move and breathe. My very first post for this blog (here) asked us all to think about toilet tissue, recycling, and whether softness was worth deforestation.

And I've thought about whether a $101 pair of sneakers would be as nice as $100 pair (here). Read the labels, I exhort (here), even though those labels rarely provide any real information.

So here I am, back again, asking us all to think about ... nail salons. And what that mani-pedi is really worth.

Yesterday's New York Times carried a devastating piece by Sarah Maslin Nir on "the price of nice nails" (full article, here), since picked up by outlets as varied as Business Insider (here) and Jezebel (here). Nir spent months researching salons, talking to the Korean, Chinese, and Hispanic women who work in them, detailing the wage theft (including tip-skimming), horrendous hours, and deep racism. It's a depressing read.

As Nir said herself in a follow-up interview (here),

There is no such thing as a cheap luxury. It's an oxymoron. The only way that you can have something decadent for a cheap price is by someone being exploited. Your discount manicure is on the back of the person giving it. Everybody I asked said, "I know it's too cheap." Everybody knows that something is off...

Many of the salon workers are immigrants, often without documentation. Many don't speak English. So they don't know that $3 / hour, or even $10 per day, is an illegally low wage. Most work insane hours (because how else can you get by on $3 per hour?), and get no overtime pay. Most also pay fees to their employers for "training".

Of the "more than 100" employees Nir interviewed (with the assistance of Spanish, Chinese, and Korean translators), less than one-quarter were making anything close to New York's minimum wage of $8.75 an hour (slightly less for "tipped" jobs), but when tip-skimming, no overtime, and fees were factored in, only three had salaries close to the minimum.

The racism is jarring. In Manhattan, 70-80 percent of nail salons are Korean-owned. And if you're not Korean yourself, you will not get a shot at the best jobs there.

Many Korean owners are frank about their prejudices. "Spanish employees" are not as smart as Koreans, or as sanitary, said [one Korean salon owner]....

Salon owners may also exploit their Hispanic employees because they know their desperation, "often drowning under large debts owed to 'coyotes' who smuggled them across the border."

Even if salon owners are caught cheating their employees, things don't necessarily improve:

In rare instances when owners have been found guilty of wage theft, salons have often been quickly sold, sometimes to relatives. The original proprietors vanish, along with their assets, according to prosecutors. Even if they do not, collecting back wages is difficult. Owners can claim they do not have the means to pay, and it is often impossible to prove otherwise, given how unreliable salons' financial records are.

Despite winning a landmark court award of over $474,000 in 2012 for underpayment [April 2012 Times story, here], six manicurists from a chain of Long Island salons under the name Babi have so far received less than a quarter of that, they said. The chain's owner, In Bae Kim, said he did not have the money, even though records show he sold his house for $1.13 million and a commercial property for $2 million just before the trial.

So what's a woman who just wants nice nails to do?

Well, there's always the do-it-yourself route.

Nir does have three suggestions, in a follow-up article that appeared today:

Her first suggestion is to talk to your manicurist: Ask her what she's being paid, or if she get to keep her tips, or if her employer charges a "training fee". If you're not satisfied with the answers, Nir's article includes a hotline for the state labor department.

Nir also recommends being observant:

At one shop in SoHo, manicurists do something unusual when they walk in the door: They punch in with a timecard at a machine near the front desk. Such a device... suggests that [workers'] hours are being tabulated accurately by their employer, and that they are being paid overtime if necessary. But it is not a guarantee. Salons frequently keep a second set of books, according to salon owners, which lists people they are paying under the table.

Nir's final recommendation is simple: pay more. There's no way a salon can pay Manhattan rents, heat, light, etc., and a living wage to its employees, while charging customers $10.50 for a manicure. A higher price, of course, does not guarantee that your extra dollars are going to the women caring for your hands, but a lower price pretty much guarantees that wages are being stolen. Note that this does not necessarily mean "tip more" -- tips are frequently skimmed, and according to Nir, if paid by credit-card, are often not delivered at all.

So now how do you feel about that mani-pedi "steal"? Personally, I feel sick.

Why Are We Talking about a $10 or $15 Minimum Wage? What About $33.65?

The news has been full of reports lately about planned increases to the minimum wage by various large employers (and for those who haven't gotten the message, there's a planned nationwide walkout for tomorrow -- coincidentally or not, Tax Day -- to rally support for a $15 / hour minimum wage).

If you haven't been paying attention (or trying to live on it), the current federal minimum wage is $7.25 / hour; at 40 hours per week and 52 weeks per year (what -- you thought you could afford a vacation on that salary?), that comes to the "generous" gross pre-tax sum of $15,080.

Some politicians, including the President, have come out for $10.10 an hour. Others, like Sen. Patty Murray (D-Washington) have come out in favor of $12 / hour (by 2020).

In an article in today's New York Times, reporter Noam Scheiber quotes a co-founder of a grass-roots organizing group, Progressive Change Campaign Committee: "The days of debating $9 or $10 an hour are over. The active debate is in the realm of $12 to $15."

Maybe it should be higher still -- $20 / hour. Or maybe $33.65.

There is at least one business owner out there who isn't waiting for new regulations to be written. And, apparently, reads scholarly journals in his spare time.

In an article published in 2010 in the Proceedings of the National Academy of Sciences (here), psychologist Daniel Kahneman (a 2002 Nobel Prize winner in economics, with Vernon Smith, and now professor emeritus of psychology and public affairs at Princeton's Woodrow Wilson School) and economist Angus Deaton (currently Dwight D. Eisenhower professor of economics and international affairs, also at the Woodrow Wilson School) wrote that "High income improves evaluation of life but not emotional well-being" ... above a threshold of about $70,000 per annum. In other words, making more money will make you happier up to about $70,000 annually. Or, as the authors put it, "high income buys life satisfaction but not happiness, and ...low income is associated both with low life evaluation and low emotional well-being."

Having read that, and as the owner of your own company, what would you do?

Here's what Dan Price, founder and president of Seattle-based Gravity Payments (a credit card processor), did: He announced that, over the next three years, he will raise the annual salary of his entire 120-person staff to a minimum of $70,000.

What are his employees making now? On average, $48,000. For about 30 members of his staff, their salaries will double.

As reported by Patricia Cohen in today's New York Times (here), Price will pay for the increase in his employees' salaries "by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company's anticipated $2.2 million in profit this year."

Cohen noted,

The United States has one of the world's largest pay gaps, with chief executives earning nearly 300 times what the average worker makes, according to some economists' estimates. That is much higher than the 20-to-1 ratio recommended by Gilded Age magnates like J. Pierpont Morgan and the 20th century management visionary Peter Drucker.

"The market rate for me as a C.E.O. compared to a regular person is ridiculous, it's absurd," said Mr. Price, who said his main extravagances were snowboarding and picking up the bar bill.

Can I buy Price his next round of drinks?

Of course Gravity Payments is a special case. It's not Walmart; it's not Target; it's not Bank of America. But I can hope that it gets more CEOs thinking seriously about what their workers are worth.

When is That "Great Deal" Not So Great?

I've written before (for example, here) about the difficulty in buying ethically-sourced clothing. Most of us don't have our clothes made by local tailors from cloth woven in local (regularly inspected!) factories from fabric grown organically and sustainably. 

So we take a lot on faith. Even those of us who read labels (most of the time), are unsure: Is "Made in Cambodia" better or worse than "Made in Bangladesh"? Is cotton grown in Egypt better or worse than cotton grown in India? 

Because of disasters like the factory fires in Bangladesh and Pakistan in 2012 and 2013, and the Bangladeshi factory collapse in 2013, reminded us that a lot of human suffering and rule-bending (and, usually, rule-breaking) goes into making that cute $9.99 blouse. But Bangladesh and Pakistan are far away, and our memories are short.

Yesterday, Salon republished a Global Post article on how little has changed. As reporter Patrick Winn writes:

Americans have reason to cringe over the sad conditions forced on Cambodian clothing makers. The United States is the top destination for "Made in Cambodia" clothes. Major brands such as Gap, Marks & Spencer and Adidas all rely on Cambodians to stitch their clothing.

Outlets such as H&M can sell hoodies for as little as $25 because Cambodian women (almost all the workers are women) will sew for roughly 50 cents per hour.

Cambodia's clothing factories are notoriously unpleasant. They're hot and loud. Workers routinely flop on the floor in mass fainting episodes. Last year, strikes for better pay were crushed by authorities who shot dozens dead.

And yet half a million Cambodians work in this sector -- namely because the main alternative, toiling in rice paddies, can be even worse.

Winn references a Human Rights Watch report, "Work Faster or Get Out" (available here). Cambodian labor laws are routinely flouted, and brands have taken actions that make it harder to conduct inspections.

Do you still wonder why I'm such a strong proponent of regulation and verification? The poor are routinely exploited because they can be. Cambodian women will work for 50 cents per hour because their other options are worse. And no, 50 cents / hour is not a living wage in Cambodia. Cambodia agreed in November of last year to raise garment workers' minimum wage to $128 / month, less than the $140 / month sought, but above the $120 / month poverty level. You do the math to see how many hours a month you have to sew at 50 cents / hour if you are trying to get to $128. Not to mention that the minimum wage does not equal a living wage.

The "Market" cannot be relied on to do the right thing. There will always be people willing to do the wrong thing for greater profit for themselves.