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.

PS: UBS

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).

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.)

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...

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.

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.

Moreover,

...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.

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.