Published CommPro.biz 2014.01.28

Surprise Surprise

The Great Place to Work® Institute has been creating Fortune magazine’s 100 Best Places to Work list for nearly twenty years. The new list is just out and it’s interesting to note that the 100 companies that make the list share another trait: they make more money than most other companies. Having happy, engaged workers propelled these 100 companies into a growth rate close to five times that of businesses in general over the last two years. Those are the Federal Bureau of Labor Statistics figures. The companies that make their revenue figures public jumped more than 20% in the last two years. 

That may come as a surprise to some; it’s no surprise to us. Happy workers are those who are treated better than their peers in similar jobs. Workers who feel valued are more productive. They stay in their jobs long term. Cut turnover and you build an experienced workforce. It’s a pillar of the ethical business model that marks the firms that stand out even further, firms focused on all the stakeholders that can make or break a company. 

Firms focused on their workers, their customers, their vendors, their community, and on the environment, generate the profits to keep their lenders and investors happy. In their 2007 book, Firms of Endearment, the authors identified a group of companies that met those standards. They earned eight times the S&P Average over the ten years leading up to the research. The levels of growth and revenues gained by the Fortune 100 Best Places companies is impressive, but not close to the earnings of those that made the Firms of Endearment list. It’s no coincidence that companies demonstrating good behavior make more money than their peers. 

However, the ethical business model is not a guarantee. You can treat your workers well, you can follow to the letter the ethical business model and still fail. Any successful enterprise has to have a bit of luck in addition to a lot of hard work and doing the right thing. What we can guarantee is that all things being equal, you are more likely to succeed or to succeed on a larger scale than those who follow a less savory business approach. It’s too bad the bad guys make all the headlines. It’s too bad that sometimes the minority -those bad guys- are seen as the norm.

So it’s no surprise that firms on Fortune magazine’s 100 Best Places to Work list are doing well. As it happens so are most all of the companies on all the lists that document some aspect of good behavior. Surprising to us are the companies that continue to follow the low road in business. While they are a minority, they still are a massive cancer on our economy. Here’s a surprise for those greed centered Wall Street Bankers and corporate executives. They would do better by doing the right thing for all their stakeholders. 

"Am I wrong?"--"Am I crazy?"

"What do you think?"--"Do you agree?"

Published CommPRO.biz 2013.10.03

Wall Street Ethics

Mid-September (2013.09.15) marked five years since Lehman Brothers, one of the largest investment banks ever, filed the largest bankruptcy ever, sending sky rockets up all over the world and marking the beginning of what we’ve come to call the “Great Recession.” Lehman’s implosion triggered a serious of herculean bailouts of the rest of our banking sector by the American taxpayers.

Hank Paulson, who became Treasury Secretary after a career at Goldman Sachs, saw a danger of another depression if the banking sector collapsed. He hurriedly threw together the bailouts. However, he failed to impose the controls needed to keep the banks from abusing these funds, leaving them free to award themselves over the top bonuses. The Federal Reserve kicked in billions more, throwing open the doors to the risky gambling (see London Whale) that caused the collapse.

Lehman wasn’t the only bank gone wild; all of the dozen or so monster banks were behaving badly. Lehman was just pushing the limits of the regulation-free climate the banking lobby created over the preceding two decades. Repo 105 was the accounting gimmick of choice at Lehman. The tricksters there would sell off billions of their really bad stuff before each quarterly reporting period, making their books look as though they were sound when in fact they were anything but. Emails, written just before the bankruptcy, show that senior management pushed their subordinates to cover their tracks.

On May 18, 2008, almost exactly two months before the bankruptcy filing, Senior Vice President Matthew Lee had a letter hand delivered to four of Lehman’s top executives with a copy to their house counsel. In it he detailed these practices and questioned both their legal and ethical grounds. Management responded by firing him. Later, Lee identified Repo 105 as one source of the collapse for the federal investigators. Matthew Lee is still out of a job today; nobody on Wall Street has hired this honest man.

Not so most of the schemers who played fast and loose with the financial facts at Lehman. According to a Huffington Post tally, three quarters of the Lehman folks -47 of 63 involved in the Repo 105 scam- are employed in the financial world and doing just fine thank you. In fact, while most Americans are struggling to recover from the crash and millions are unemployed, the Wall Street banksters are fine.

And why shouldn’t they be –aside from ethics and stuff like that– the banks know if they overplay their hand again, Repo 105 or whatever, a taxpayer bailout is just around the corner. So they gamble with your savings, secure in the knowledge that the FDIC will cover their losses and that we’ll loan them whatever they need to get back on their feet. Just don’t ask them to support the small businesses that create jobs or anything like that. Leave that to the suckers who run the regional and community banks.

Published in CommPRO.biz 2013.08.28

The Customer Is Not Always Right

Let’s review – America has been struggling to rise out of what has been called the Great Recession. A recession brought on by a systematic dismantling of safeguards that protected us for decades after the Great Depression. Engineered by lobbyists working for Wall Street banks and the super rich –the 1% of the 1%– this tearing down of the walls was not intended to cause a recession, just to allow those at the top to make more money.

The recession was an unintended consequence. The big banks had been buying up mortgages to create bundles that investors, pension funds and the like could stash away and collect interest on month after month. What could be safer, we all know real estate never loses value; it always goes up, right? Besides, the banks had these packages checked out; the credit rating services marked them AAA.

This new idea caught on like wildfire. Pretty soon the supply of mortgages wasn’t keeping pace with the need. So the banks pushed the mortgage brokers down the line for more and more mortgages. The brokers urged people to buy, coaching them and fudging the numbers when they didn’t qualify. The banks learned to pile the mortgages with the not-so-nice on the bottom. The rating services were overwhelmed. Under intense pressure from the banks to anoint the investment packages with top ratings, it appears that the services buckled. Soon packages the bankers were calling “Crap” were gaining AAA ratings and being sold by those same bankers to trusting customers.

To understand why the rating services would hang a AAA on what the bankers called “Crap,” we have to look at their business model. The banks asking for AAA ratings paid for them. The banks are the rating service’s customers. They feared that saying no to the banks would just send them to another rating service. They anointed the “Crap” AAA to keep the bucks coming through the door.

That’s pretty much what the Justice Department is saying that Standard & Poor’s did when they sued the rating agency for $5 billion. The DOJ and 14 states are suing S&P, the largest of the rating services. The other two, Moody’s and Fitch, are likely to be next. The $5 billion suit is moving through the California court of District Judge David Carter. S&P rated $4 trillion in various bank investment vehicles over the four years leading up to the collapse.

While S&P is facing the $5 billion lawsuit, keep in mind that the real bad guys are the handful of monster banks that put together the piles of crap and coerced an AAA out of the rating services. What’s more the same banks are back at it– gambling wildly secure in the knowledge that we will have to bail them out again when they stumble. We like to think that doing the right thing is easy. It’s not, what’s easy is taking that first step in the wrong direction

Published 2013.03.04 in CommPRO.biz

Bad Pharma, Trials & Travails

“Everybody’s doing it.” That lame excuse seems the only explanation of rampant bad behavior in the Pharma sector. However, it becomes more than bad behavior when it costs lives. Psychiatrist, journalist, author, Ben Goldacre, a Brit with more degrees and credentials than seem possible for one not quite forty years old, has a new book, Bad Pharma.

This quote from the book sums up his case: “Drugs are tested by the people who manufacture them, in poorly designed trials, on hopelessly small numbers of weird, unrepresentative patients, and analysed using techniques flawed by design, in such a way that they exaggerate the benefits. Unsurprisingly, these trials tend to produce results that favour the manufacturer.”

Dr. Goldacre writes a weekly column, “Bad Science,” in the London Guardian. He has a history of well-researched work taking on the quacks and crooks in and on the fringes of medicine. His research on drugs and medical devices spills into America’s Pharma. The more of Dr. Goldacre’s work you read, the more horrified you become. Evidence that bad behavior is not an anomaly; it is common place, driven by the need to meet the quarterly profit marks Wall Street is looking for. And too often supported by doctors on Pharma payrolls who do not speak up publicly for a host of reasons.

How bad is it? This quote from Dr. Goldacre’s book nails it: “Sponsors get what they want. In 2007, researchers looked at every published trial that set out to explore the benefit of a statin. This study found 192 trials in total, comparing one statin against another, or comparing a statin against a different treatment. The researchers found that industry-funded trials were 20 times more likely to give results favoring the test drug.” When a sponsored trial does not deliver the results its sponsor is looking for, they bury it.

In a New York Times story* Johnson & Johnson, a communications community poster child for its response to the 1982 Tylenol nightmare, comes off practicing the worst of the worst. One of several memos from doctors working for J&J came to light in the first of more than 10,000 artificial hip lawsuits J&J is facing. The consultant was blunt in a memo sent to several J&J “C Suiters”. The doctor’s memo indicated that, “An artificial hip sold by the company was so poorly designed that the company should slow its marketing until it understood why patients were getting hurt.” 

This was not the only such report. Reports that languished for almost two years before J&J recalled the faulty hips. We’re not talking about recalling something simple; a hip replacement involves serious surgery. It would be unconscionable to put a single human being through the risks of this surgery once the dangers were known. To expose tens of thousands was criminal. The human beings –the J&J executives– who chose profit before ethics may have thought “Everybody’s doing it.” It’s time to offer a fitting remedy for such a deadly choice, a jail sentence.
*(02/15/13)

Published 2013.02.22 in CommPRO.biz

3,800 to Zero
 
Following the Savings & Loan Crisis a couple decades ago, roughly 3,800 bank executives were jailed. The more severe crisis we are slogging though, has for all intents and purposes, produced zero convictions, no jail time for the Wall Street executives who triggered it. You may have heard that one of three financial rating agencies that awarded AAA ratings to the toxic mortgage packages the big banks referred to as “Crap,” Standard & Poor’s, faces $5 billion in Securities Exchange Commission (SEC) fines. However, not one S&P executive faces prosecution.

The appalling failure of federal and state entities to hold responsible those who threw us into the most damaging recession in seven decades is shameful. In reviewing the litany of excuses offered for this travesty, this much is clear: it is difficult to prove fraud. And, George W. Bush’s Treasury Secretary Hank Paulson created a bailout atmosphere seemingly designed for the ethically challenged monster banks. Our leaders, Treasury Secretary Jack Lew, Attorney General Holder, and the President himself, can’t seem to deal with the legal challenges. It’s a situation crying out for creativity.
 
Al Capone, whose criminal “Creds” ran from hooch to hookers with lots of killings thrown in, laughed in the faces of the authorities just as the bankers have been laughing since the bailout. The banks sucked up the taxpayers’ bucks in billion dollar gasps, like the dying beasts they were. Once they were on sound footing, instead of using our money to help the economy, they went right back to the same crazy risky stuff that caused the recession. And why not? They know they can stick the taxpayers with their losses. When the authorities couldn’t pin Capone’s criminal activities on him they got creative and tried him for tax evasion, netting Capone 11 years in Alcatraz.
 
Senator Carl Levin watched Goldman Sachs CEO, Lloyd Blankfein, smirk his way through testimony before his Senate Committee and then turned his findings over to the Justice Department. Levin, a Harvard Law graduate and experienced prosecutor, was clearly disturbed when Justice failed to take action. The DOJ also declined to prosecute egregious criminal behavior on the part of HSBC, citing a fear that to do so might take the bank down and threaten our economy.
 
It’s time for creativity. The Supreme Court says corporations are people, so let’s prosecute their living parts. Let’s charge top executives and boards of directors who know –or have a fiduciary responsibility to know– what their corporation is up to. Sending the Board and the “C” Suite off to the slammer is not going to sink the ship. One thing we know for sure: there are lots of topnotch managers who could take over and probably do a better job than those they replace, especially when replacing the nitwits who green-lighted the HSBC mess. Unlike a massive fine that becomes a “Cost of Doing Business,” the prospect of a jail term should put a halt to the greed-fueled behavior all too common in our banking sector.

Reputation Counts

Corporate Responsibility Magazine released its first corporate reputation study in advance of its annual Commit!Forum (2012.10.02>03) held at the opulent Wall Street venue, Cipriani. The CARAVAN® telephone survey of 1,032 adults in early September came up with some startling results; especially startling in view of the existing job market.

They found that among the unemployed in the study, 75% said they would rather keep looking than take a job with an organization with a bad reputation. Among those currently working, 58% would move to one of the bad guys for more money. How much more? On average they would hold their nose and change jobs if their pay were doubled. On the flip side, among the currently employed, 87% would take an offer from a company with an excellent reputation. More money? Yes, but not all that much, between 1% and 10% added to their paycheck.

“The results of the new survey underscore Americans’ desire to align themselves with organizations that do more for society than increase their bottom-line. Even during a time when Americans face many fiscal challenges, most people would rather continue their search for employment than work for a company that has questionable business practices or ethics,” Elliot Clark, the CEO of Corporate Responsibility Magazine, is quoted in a press release. “The survey demonstrates that there is a cost of bad business behavior, which significantly affects the ability to attract and retain people.”

Great people who stay with an organization are one of the markers not only of a nice place to work; they are makers of a profitable business. Businesses that care for their employees, their customers, their vendors, their community, and the environment get a much better shot at profitability than outfits that focus on the bottom line. The authors of Firms of Endearment found that companies that followed these markers racked up eight times the profits of the S&P 500 average over a ten-year period.

So those who would rather keep looking are wise. Better to keep looking until you find a decent organization to work for than go to work for a bottom-line focused scumbag outfit that’s likely to fail or kick you to the gutter at the first sign that their bottom line is shrinking. That leaves you with another empty spot on your resume to explain when you are back out on the street. Who needs that?

A good place to work attracts good people who stay long-term, who work really hard, who take care of your customers and your suppliers. Employees who are active in your community and alert you to its needs; employees who are alert to environmental issues and keep you caring about those issues. Employees who keep your lenders and your stockholders happy because those employees keep the bucks coming in and the profits piling up. That’s what an ethical business model looks like, what makes it a fun place to work, a great place to work, and a secure place to work.

Missing The Point

The Security and Exchange Commission (SEC) has broad powers to regulate our security markets and those who do business in this arena, commonly known as Wall Street. Last week (2012.10.02) the SEC convened a high-frequency trading panel to review this practice that creates as many as 70% of all investment market trades. We use the term investment loosely, that’s the last thing high-frequency traders practice; they could be more accurately described as pirates.

Using ever more sophisticated algorithms, the high-frequency traders search for various types of large trades, then race ahead of them buying up the target and less than a second later sell, raising the price and essentially stealing from the institutional buyer. That means that your 401K or Granny’s pension fund ends up paying more. While it’s legal larceny it’s neither ethical nor in any way beneficial to society. The traders will claim they have lowered the cost of trading. While that might be true, any savings vanish in the inflated pricing they add to the markets.

Given all the damage the traders flying the Jolly Roger inflict on the markets, there was great hope that last week’s meeting would bring some relief. Kiss that hope goodbye. The panel focused exclusively on the problems high-frequency traders encounter when their computer programs malfunction. In May of 2010 a trillion dollars in market value briefly disappeared. Three computer-gone-wild incidents have occurred this year. On August 1^st Knight Capital lost $440 million in the blink of an eye and the firm nearly went bust. Oh, those poor babies.

That triggered this SEC panel discussion, a discussion that focused on protecting the high-frequency traders from harm. There seems to be a consensus on creating “Kill-Switches” that could cut off destructive (to the Jolly Roger sector) computer glitches. The discussions centered on Kill-Switch access, who can push the button and should they be hair triggered or take a little longer. For its part the SEC has created an Office of Analytics and Research to study the issues. It will take time to get the office set up, hire the geeks to man it and give them enough time to study the issues – albeit all the wrong issues.

The issue the SEC should be studying is how to reign in this useless, destructive  practice. The stock markets exist to allocate capital. High-frequency traders do nothing to serve that purpose; actually they interfere with the underlying purpose of the investment markets. It’s time to send them packing.

Currently capital gains on investments held more than a year are taxed at the 15% level. We’d like to suggest some new tax brackets. For investments held twenty years or more, there would be no tax liability on capital gains. For ten to twenty years, 5%, five to ten years 10%, two to five years 15%, one to two years 25%, one month to a year 50%, one week to a month 75%, less than a week 95%. That will force these pirates to sail off into the sunset; or perhaps to Las Vegas where the odds are not stacked in their favor.

Rule Or Ruin?

Many technical advances present two faces. For instance, we have an unrealistic view of life in the “Horse & Buggy” age. In the motor vehicle age we see death and injury rates and imagine that things were better in earlier times. They were not by any measure; horses are difficult to control at best and the drivers then were no more responsible than they are now. The key to reducing the downside of motor vehicles has been to make cars, trucks and big boy’s toys safer through technical improvements. The rules of the road -among other things- have to improve as well.

A new book, Automate This: How Algorithms Came to Rule Our World, came out last week. Former tech journalist Christopher Steiner delves into the rise in the use of this digital tool as well as its impact on our society. In a Fast Company interview, he says he initially planned to just cover the use of algorithms on Wall Street. But from that starting point his research took him out further and further into our lives like the concentric waves when a rock splashes in a lake. Algorithms make Google search work. They drive customer service programs, they are everywhere.

Many of us know that algorithms underlie the high-speed traders who dominate our stock markets these days. They carry out most of the billions of trades the markets see every day. The upside is that the cost of trading has been going down with this volume. One downside is that some high-volume traders use this tool to shadow trades being exercised by pension funds and other wealth management entities. They can race ahead of these traders scooping up their target stocks and selling them to the funds at a higher price seconds later. The effect is to drive up the cost of the securities in your 401(k) or Grandma’s pension plan.  

Worse, they have contributed to the market’s abandonment of its only benefit to society, as a source of capital for business. In fact the markets have veered from the view of arguably the most talented investor in the world, Warren Buffett, who famously said, "The best time to sell a stock is never." Businesses are obsessed with daily prices and struggle to meet the quarterly expectations of the market instead of the long-term goals that could make them hugely more profitable.

There is a simple solution for this problem. Tax capital gains based on the length of time an investment is held. Just for fun let’s say if you hold an investment for twenty years or more, there would be no tax liability. Ten to twenty years, 5%, five to ten years 10%, two to five years 15%, one to two years 25%, one month to a year 50%, one week to a month 75%, less than a week 95%. Better than pirating value from Grandma’s pension, better for investors, better for business and their employees, better for America. Ethically there is no basis for the gambling hall culture on Wall Street; high speed trading is one gaming table we don’t need.

Say What?

We were pulled up short when a financial expert on a national radio show put forth the most nonsensical causal scenario for the 2008 economic collapse imaginable. It began with, “As we know, the cause of the collapse” –as if to imply that what followed was verifiable fact, set in stone. Actually what followed was nonsense. It was an effort by the reckless too-big-to-fail banks to shift the blame for their disaster to, well, anyone but them. It was even less plausible than the ongoing effort to pin the economic train wreck on some imaginary Clinton era mandate forcing banks to knowingly lend to people who they knew would never be able to repay the loans. Right; and even if this pipe dream were true, would it have taken eight plus years for those mortgages to sour?

While Bill Clinton had a role in running our economy off the cliff, it had nothing to do with any mortgage mandate. In 1999 Clinton signed into law a bill repealing the Glass-Steagall Act that had protected us from this kind of nonsense for sixty plus years. So Clinton played a minor part in passing a bill nicknamed the “Citigroup Relief Act.” At the time, Congressman John Dingell argued on the House floor that this bill would result in creating “too-big-to-fail banks and that should they get into trouble taxpayers would have to bail them out.” With help from another ill advised law, the 2000 “Commodity Futures Modernization Act” exempting the banks and others from State gambling laws it took less than a decade for Dingell’s prophecy to play out.

First let’s get things straight. While there are minor players in the 2008 tragedy, the too-big-to-fail banks bear 99.99% of the blame. Had they not been on the brink of failure, in need of a taxpayer bailout, there would be no recession. They put themselves in this position by bundling mortgages that they referred to as “Crap,” strong-arming the rating services into stamping them AAA, and selling them to anyone dumb enough to buy them. These banks pushed the little folk in the mortgage pipeline for more and more sub-prime mortgages until the whole house of cards collapsed. Everyone got hit, including some of the too-big-to-fail banks, and just as John Dingell predicted we had to bail them out. That left the big banks in good shape and the rest of us literally holding the bag; an empty bag.

So what are the Wall Street bankers up to? Why this propaganda campaign to shift the blame for the horrific recession we are still struggling to overcome? That is pretty clear. They are engaged in the same risky stuff that got us into this mess in 2008 and they want to keep right on doing it. Ethics be damned, they think that pouring millions into the pockets of the Washington crowd will stave off sensible regulation like the Volcker rule. They may be right; an outrageous lie combined with the big bucks may do it in an election year.

Let’s hope they’re wrong.

The Clock is Ticking

If ever there was a moment illustrative of the need to restore Glass-Steagall, enforce the Volcker Rule, and repeal the foolish gambling exemption Congress gave Wall Street, it is now. JPM Chase CEO Jamie Dimon’s culture of Wild West saloon gambling was outed when the loss side of the bank’s bets was exposed by a huge bet gone bad in their London trading office (AKA gambling hall). The $2 billion loss is quickly ramping up and will likely be double that or more.

Fast forward to the JPM Chase annual meeting last week (05.15.12) where we find a visibly irritated and agitated Dimon facing questions on the multi-billion dollar losses and a shareholders’ challenge to his dual role as both Board Chair and CEO. He managed to hold on to his grip at the top with 60% of the shares voting to defeat the move to unseat and replace him as Chairman. While that sounds good, you must keep in mind that prior to corporate meetings companies routinely include as part of the meeting notice a request to hand over the voting rights to the management if you do not plan to attend and vote in person. Most shareholders comply and so you can figure that Dimon walked into the meeting with the votes in his pocket. You can bet he was shaken by the margin; to have 40% opposed is too close for comfort in that game.

Turning to the “snake eyes” that is piling up billions in losses, Dimon, according to the New York Times, came up with this gem: “We are going to manage it to maximize economic value for shareholders.” That has to be one of the wildest -let’s flip the conversation to my favorite subject- “Shareholder Value” moves in history. We’d guess that Dimon’s point is that shareholders benefit from the JP Morgan Chase gambling hall because they win more often than lose, and besides in the unlikely event that we drive off the cliff we are “too big to fail” and so the suckers (that’s us, taxpayers) will bail us out again. There’s no way we can lose.

Shareholder Value -as former GE CEO Jack Welch pointed out- is an outcome; as a strategy Welch famously dubbed it, ”the dumbest idea in the world." Dimon and his ilk love it as a strategy; it enables them to parlay their gambling culture into monster bonuses, with the ultimate backup, taxpayer bucks. Shareholder Value is a meaningless term the way Jamie Dimon and others use it these days. And it will come around to bite the taxpayers unless we force the too-big-to-fail banks back into their corners. We need to get them out of high stakes gambling. We need to make them choose: either create capital as an investment bank, or take deposits and make loans as a commercial bank. Anything less leaves all of us outside the game at their mercy. It’s time for Congress to act, restore Glass-Steagall, enforce the Volcker Rule and repeal the foolish gambling exemption Congress gave them. 

“It’s Official, Even the Banks Say They Messed Up” 

A Wall Street Reputation Study* commissioned by New York communications firm, Makovsky + Company unearthed some not too surprising outcomes, from a very surprising source. The study targeted communications and marketing types at mid-sized to large publicly traded and private financial organizations: banks, brokerages, insurance companies, etc.

They see the viewpoint held by the public that their behavior tossed America and the world into economic chaos as “The” biggest challenge they face. Almost all of those surveyed (96%) believe they brought it on themselves. Eight of ten see bonus swollen “C” Suite compensation packages as a major issue for the financial sector. Big surprise: three out of four believe that “increased regulation will help their firms improve reputations and trust with customers faster.” 

Now that’s not big news to anyone who has looked at the roll deregulation played in allowing the greed driven, crazy speculation fueled trip that took most of the world down the drain, but to hear it from the greed sector, WOW! We can imagine how that went over on “K” Street where the financial types have been pouring bucks by the tens of millions into the politicians’ pockets fighting even modest regulations.

It gets even more interesting; more than half admitted the “Occupy” movement had a “real impact on their business.” Four out of ten said they were surprised by “Occupy,” but only three out of ten think it’s over. Seven of ten say it will carry on at least through the November elections. Given the reaction of the Wall Street types who were pictured literally looking down their noses while enjoying pricy luncheons as the protesters marched outside their watering holes, this is a real surprise. Our guess is that those distaining the riff-raff were not the folks from communications, who likely saw the storm clouds gathering. That’s reflected in the 73% who said, “Their marketing/communications departments grew in importance over the past year.” Let’s hope their influence upstairs grew as well.

"With the six-month anniversary of the movement sparking a resurgence, the consensus is that Occupy Wall Street is not going away anytime soon, and financial services executives need to be better prepared to address this issue moving forward," Scott Tangney, executive vice president and head of the Financial Services practice at Makovsky, said in a news release. Time will tell if the warnings expressed by this study and clearly elucidated by Tangney sink in up in carpetland. 

When asked to take a look in the mirror and grade the industry, communications pros surveyed gave themselves pretty low grades, 57% graded "average," "below average" or "failing.” But then there were those with their heads in the sand, the 9% who gave themselves a “perfect” grade. This could be a watershed moment. Will the financial quarter embrace reform, or seek a return to the dark side? 

*Echo Research, February 22 through March 1, 2012

© 2012 GLG

That Greasy Sleazy Feeling

 

As we pull out of the gas station these days, in addition to the empty spot in our wallets there’s a scent of sleaze in the air. It’s not our friendly gas station dude, he’s just trying to get by like a lot of us; it’s more complicated than that. The more we drill down, we discover that it has little to do with the price of oil. But isn’t oil scarce, aren’t we importing more than ever before? No, actually we are producing about 80% of our needs. All that new drilling that fired up over the last few years combined with reductions in usage, has narrowed that gap. Don’t say anything out loud, but America is even exporting oil. What’s the problem then?

There are many factors from the seasonal bump we see this time every year, to the capacity of our refineries, to unrest in the Middle East. While the latter does not seem to be a real factor given how little we need from those folks, there is no doubt that it is a factor. Not in the way you might think, however. No less an authority than Goldman Sachs has found a culprit that adds at least $.56 to the price of every gallon of gasoline. It’s the casino called Wall Street.

The commodities market was designed to stabilize the price of grain, cattle, pork and other things including oil. The idea is to assure the producer’s pricing when the fruits of their labor hits the market. But of course it turns out that you don’t have to be a buyer or seller of these commodities to get into the game. You just have to have the bucks and the free pass that the Congress gave Wall Street, immunity from gambling laws. Add something like instability in the Middle East and give their roulette wheel a spin; we always lose.

Now the commodities market is flooded with all kinds of financial instruments, things like “swaps,” the fun stuff that helped toss the world economy into the dumpster. Speculating on commodities has always been around but until recently the end users and producers controlled over two-thirds of the contracts. Today that number has flipped and two-thirds are in the hands of speculators. Not the players in the oil market that have traditionally dominated this game. Today a frighteningly small number of Wall Street types hold the price of oil in their hands; playing with what we pay at the pump.

You can figure that seven to eight bucks is pocketed by the Wall Street types every time you fill up, ten bucks or more if you drive a bigger vehicle. The average price for a gallon would be a little over three bucks without Wall Street’s “take.” Given the rare peek we got into the wonderful world of Wall Street when one of its own, Greg Smith, laid out his reasons for leaving Goldman Sachs in an OP-ED, you can imagine the nicknames the Wall Street types pin on us. While most businesses, in fact most folks are trying to do the right thing, pond scum like Goldman and their ilk have no concept of the ethical life.

Banking 101

The “K” Street Banker Boys are pouring millions into the political arena in a desperate effort to hold on to the massive Las Vegas style gambling enterprise that characterizes too much of our banking sector today. Banking differs from Vegas in two important ways, however.

1)  When the bets the Wall Street Bankers place against the suckers (AKA “us”)  go against them, they just run to the taxpayers (us) who cover their losses. So they can’t lose. That’s too-big-to-fail banking.

2) The banks managed to get themselves immunized from the state lottery laws, so they can bet on anything. For instance, they could legally bet whether you will make your mortgage payment on time when they have no connection to you or your mortgage.

This set some of our biggest financial institutions onto a path focused on profit and the outrageous bonus structure that this gambling hall culture has spawned. A culture defended haughtily by JPMorgan Chase “Whiner-in-Chief” Jamie Dimon, who chose newspapers to justify the banker’s insane paychecks.

Duded out in his trademark 1950’s “Ducktail” do, Jamie is quoted, “Obviously our businesses have high capital and high human capital,” implying that nobody in newsprint land could compare. What nonsense. And, their capital –cash, that is– is not theirs, it’s ours, the billions we gave the banks to stabilize our economy. So what are they doing with our money? They are rolling the dice again, confident that we will bail them out again, when the dice come up snake-eyes again.

 “Proprietary Trading,” as the bankers like to call it, was a principle cause of the recession. This practice is a recipe for disaster. Here and there the milk-toast mild Dodd Frank Act does have a tooth left. The one dealing with proprietary trading, called the Volcker Rule, is facing a firestorm from the banking lobby. It would pretty much take gambling out of the banking business, push the bankers back into the real world where they can fail, and when they do, fail without taking the country down with them.

When Bill Clinton signed “The Commodity Futures Modernization Act” opening up Wall Street to gambling, Washington unleashed a chain of events that resulted in the collapse of the world economy eight years later. Wall Street began leaping one ethical barrier after another and today everyone but the bankers is suffering.

The folks who actually toil day in and day out for a living, like those struggling to find a workable journalism model, shouldn’t have to put up with sneers from a second-rate punk like Jamie Dimon. Banking at every level has but one reason to exist, to provide the capital that sustains our economic life. Dimon and his lot are clueless when it comes to that kind of banking.

Just in Time for Christmas

As day after day of misery goes by in the lives of the little folks crushed by the financial crisis, one question lies in the back of their minds. Who did this to us? Who’s looking for them and when will they be punished? We have known the answer to the first question for some time. The Wall Street investment banks’ sophisticated (read Crappy) investment packages whipped up a perfect storm.

They sold this Crap (their term not ours) to people who should have known better based largely on stellar ratings from the agencies charged with vetting these investments. The ratings agencies were pushed by their customers (big banks)  and did not look – as hard as they should – at the packages.

And it turns out that the bailout bucks we knew about (TARP) were nothing when compared to the zero interest loans the Federal Reserve was handing out to keep the banks afloat, trillions in secret loans. Bloomberg Markets Magazine blew the lid off this program. It was ten times the size of TARP.  By far the biggest hunk of these bucks (63% of the daily average) went to the same gang that got us into this mess – six humongous banks.

How did these half-dozen too-big-to-fail banks position themselves to come out of any crisis they might create covered in gold? Over a couple of decades they conned Congress into repealing the laws designed to prevent things like the 2008 crash. They even got “The Fools on the Hill” (AKA the Congress) to exempt banks from State Lottery laws. Who helped this along?  Clinton’s Secretary of the Treasury, Robert Rubin, fresh from 26 years and the top job at Goldman Sachs.

When the house of cards collapsed, who came up with the plan to save the banks? Bush Secretary of the Treasury Hank Paulson, fresh from the top job at Goldman Sachs, led the charge to save his comrades.  It gets even better; in 2006 Goldman Sachs was able to foresee that the crap was really crappy and likely to crash. Did they sound the alarm? Of course not, that might have interfered with their efforts to sell crap to their customers. Instead they bet it would crash and reaped a huge profit.

What ties this all together? Two of the key players, Rubin and Paulson, both came from Goldman at just the right moment to get rid of the pesky banking laws. So in addition to the efforts of all the banking lobbyists, you might say it was an “Inside Job.”

However, our wait to make those responsible pay may be nearly over. The SEC has charged six former Fanny Mae and Freddy Mac executives. More important, New York State Attorney General Eric Schneiderman and other State AGs are looking at criminal and civil charges. It would be nice to see a few of the arrogant bankers on their way to jail?  When you think about it, what they did was harmful than Bernie Madoff’’s scams. “Pants-on-Fire” Goldman CEO, Lloyd Blankfein has another view; bankers, he says, are “doing God’s work.”

Take Off The Kid Gloves

Take Off The Kid Gloves

The Securities & Exchange Commission (SEC) ended its fiscal year in September having filed a record number of cases (735), up almost 10% from their pace (677) last year. They collected nearly $3 billion in penalties both years. Meanwhile the annual Johnson Associates’ “Executive Compensation Study” shows an alarming drop in pay for the folks on Wall Street, as much as 20% - 30%. Alarming perhaps to the Wall Street types, but to those who are trying to make ends meet the Wall Street pay scale, that begins at a hundred grand and can escalate into seven or eight figures, still looks really good. 

Reuters reports that over the last two years the SEC has removed a management layer and restructured their enforcement division. And, they have created a new whistleblower bounty program alongside other incentives to encourage witnesses to cooperate. Given the two record years they have registered, it must be working.

Or is it? It appears that the SEC is still treading softly with the big banks and the individuals behind the misdeeds (AKA CEOs etc.).  A Federal District Judge, Jed Rakoff, doesn’t seem convinced that a proposed settlement with Citibank is tough enough on the bank. Citi is charged with fraud; selling customers crappy financial instruments at the same time the bank was betting they would fail. The very same double dealing that triggered the financial collapse we are enduring.

In a hearing last week Judge Rakoff questioned the SEC on the settlement: $95 million when the investors Citi ripped off lost $700 million. The judge has taken a similar position with several lowball settlements the SEC proposed in the past. Rakoff also questioned why only one individual in this case has been charged with wrongdoing.

We –along with many others, including State Attorney Generals across the country– have been wondering about the SEC slap-on-the-wrist penalty proclivity. A concern the Attorney Generals also direct toward the Justice Department; why has it not zealously prosecuted bankers who triggered the recession? We know who they are and what they did. Instead, after bailing them out we are forced to watch as they go back to the same risky stuff all over again, sure that we will bail them out again when it collapses. All the while taking home eight-figure bucks.

The banks’ reaction to the relatively mild restraints of the Dodd/Frank Act is to pile new fees on their customers. They have grown so accustomed to inflated profits from what are nothing more than risky gambling schemes that when a little of that revenue stream is cut off, they sock it to their customers instead of living lean. In the meantime we have to listen to Jamie Dimon, JPMorgan Chase “Whiner in Chief,” and Goldman Sachs CEO, Lloyd Blankfein (AKA The Artful Dodger) complain. They are so misunderstood and unappreciated after all they do for us, poor babies.

Alan Johnson, managing director of Johnson Associates, the firm that carried out the Wall Street wage study, put the ethical issue very succinctly, “Wall Street executives,” he said, “haven’t gotten the memo at all.”

The Bottom Line

Dog Eat Dog, nothing but the bottom line matters. Surprisingly there are those in business who still buy into this myth. Understand, it works. Goldman Sachs and many of the other Wall Street types come quickly to mind. It is always those who get away with playing dirty and breaking the rules who make the headlines. As the saying goes, “Good News is not News.”

Truth is, from the days of the industrial revolution businesses that treated their stakeholders well– their employees, their customers, their community, their suppliers, and the environment– found that the bottom line took care of itself.   Does that mean the good guys always win? Of course not. It does mean they have a better chance of winning.  And when they do, they win bigger than those who choose the alternative path.

The problem is documenting this truism. A few years ago a writer and couple of  college professors set out to do just that. Their book, Firms of Endearment, showed that those who took care of all their stakeholders returned eight times as much as the Standard and Poors average over the ten years prior to their study. That’s not eight times the worst, that’s eight times the AVERAGE return; that’s the kind of bottom line every company dreams of.

A massive research effort, 10,000 consumers in ten countries, The Cone/Echo 2011 Global Corporate Responsibility Study, shows that consumers not only support those who follow this business model, they will punish businesses that focus solely on the bottom line. The margins surprised the researchers as they did us. Over nine out of ten respondents said that to win their business companies must go beyond the legal requirements and that they need to look at their practices and make sure their overall impact on society as a whole is as positive as possible.

Their number one concern is a company’s efforts to support and expand the economy. Nearly all the respondents (96%) placed economic development at the top of the list they expect companies to strive for. The environment comes in at the same level (96%), followed by human rights, education, health, and poverty, all above -or just below- the ninety percentile mark. That’s pretty dramatic.

And it’s widespread; the study covered a lot of geography: Canada, China, Brazil, France, Germany, India, Japan, Russia, The United Kingdom and The United States. Nations that house almost half the people on the planet and by far the majority of enlightened consumers. Consumers who told the researchers that they would switch brands to be assured of their makers’ devotion to high ethical standards.

Pack that all together and it makes for an overwhelming argument for the ethical business model. It makes sense; who would want to do business with someone or a company that is trying to rip you off? Who wants a company that does not care about you, your community, the air you breathe, the water you drink? Who needs those kind of people? You can no more run a company by focusing on the bottom line, than you can win a ball game by focusing on the scoreboard. 

© 2011 GLG

Unexpected Consequences

Unexpected consequences frequently arise from actions at every level of life. Not in the least when it comes to enacting new legislation. Take the Wall Street Reform & Consumer Protection Act (AKA Dodd–Frank), created in response to the reckless actions of a handful of bankers that triggered the 2008 financial collapse.

(Actually the collapse was triggered by the banking lobbyists’ success in conning a brain dead 1999 Congress into removing one of the last remaining firewalls in the circa 1933 Banking Act (AKA Glass–Steagall). This Act protected us from this kind of nonsense for +/- 70 years; anybody for reinstating Glass–Steagall? Dodd–Frank left the gap opened in 1999 unfilled and the banks are headed full tilt for the same cliff they took us over in 2008. But that’s another subject for another day)

Dodd–Frank will “undermine existing compliance programs” according to its critics–read lobbyists. That pile of bovine excrement has vanished in the light of a study conducted by the SCCE (Society of Corporate Compliance and Ethics).

The SCCE surveyed compliance and ethics professionals on Dodd–Frank. Surprise, they found the exact opposite of the banking lobby fueled fears and expectations. The SCCE found more transparency; companies are making employees more aware of how to react when they come across misdeeds or misbehavior in the workplace, even if it’s your boss. They found compliance programs grown stronger thanks to Dodd–Frank.

The Act has also triggered more ethics training at the management level. Anything that improves ethics in our society is good news. Business ethics is not an oxymoron. Most people strive to do the right thing day in and day out. The impression that nice guys finish last is dead wrong. Study after study shows that –all things being equal– an ethics driven business model will out perform any alternative. Does that mean that dog-eat-dog never wins? Of course not, but even then the good guys will win bigger.

If that’s true, then why do we never hear about it? Simple, good news is no news. We want to hear about the unusual, the dramatic. Same thing with drama, on

stage, television or the movies, if it’s not comedy it’s got to be action. Even in the most famous good guy movie of all time, It’s a Wonderful Life, it took divine intervention to save George Bailey.

Aristotle is quoted* as declaring that Philosophy** led him, “to do without being commanded what others do only from fear of the law” That exactly defines ethics. And while ethics often gets bundled up with compliance, there’s a vast chasm between complying with a rule or law and doing the right thing.

 

* Supposedly uttered by Aristotle according t0 Laërtius Diogenes, who lived six or seven hundred years after Aristotle    (BTW not the lantern dude, Diogenes of Sinope. He also lived six or seven hundred years before Laërtius Diogenes).

** Philosophy, a system of principles for guidance in practical affairs. – Dictionary.com 09.20.11

Whose Money Is It Anyway?

Occasionally we get to see the folks on Wall Street actually engaged in the job we expect them to carry out, creating capital. All of the other nonsense that takes up most of their time –trading bogus investment instruments, pawning them off on unsuspecting clients and then laying bets that they will fail– are not interrupted, of course, but some social good does bubble up to the surface of the slime pit in lower Manhattan from time to time.

Initial Public Offerings (IPOs) are perhaps the most visible benefit provided by the monster (in all defining aspects of that word) banks like Morgan Stanley, Goldman Sachs and the three or four other names we have become painfully aware of since they sent us crashing into a recession in 2008.  They gleefully took our money to forestall a world-wide economic collapse. And while we are slowly climbing out of the crater they left us in, they are doing very well thank you, making money hand over fist.

Actually they are doing exactly what they were doing before, the same things that dumped us into the sewer. We thought our money was supposed to help small businesses and other job creating stuff. But that’s hard and it’s so much easier to succumb to their gambling habit of old. That’s what some folks see even creeping into the IPOs that are beginning to turn up again on Wall Street.

Merrill Lynch and Morgan Stanley were hired by LinkedIn, the B2B social media site, to take the company public. The banks’ role was to evaluate LinkedIn and judge what the market would pay; their figure was $45.00 each for the just under eight million shares in the offering. That netted LinkedIn about $350 million, a healthy infusion of capital. However, the $45.00 turned out to be way low; by the end of the first day the stock had rocketed up 110%. In fact the minute it went on the market it jumped over 80%. So the investment bank’s customers and a few others bought low and probably sold high, doubling their money in one day. Money that some believe should have gone to LinkedIn.

It’s easy to tag Merrill & Morgan as the bad guys. With their fingers on the pulse of the market they should have known the run-up would be huge. On the other hand, LinkedIn was the first of the social media companies to go public. With a yet-to-be proven business model that only pushed $16 million to its bottom line last year, LinkedIn was hardly a slam-dunk to rocket into Wall Street Stardom. When you take into account that the Street still has the dot.com bubble in its rear view mirror, the $45 price doesn’t look so bad. Had the banks overpriced the shares and seen them plummet when they hit the market, the legal beagles in the banks would have been busy for years defending a storm of lawsuits.

There is an alternative, an auction that allows the investors, the market, to set the price. While that description is a bit too simple, the auction model IPO seems a better path. It doesn’t take the banks out of the process completely, but it does give the company a lot more control over who gains from the offering. Take away for the other IPOs in the wings? An auction will put more of your money in your pocket.

Doing Time

There has been endless speculation as to what and or who created the giant economic bubble that burst in 2007.  To prevent a global financial meltdown the Bush administration created a huge bailout program for banks and for the colossal insurer AIG. The bailout not only prevented a bad situation from becoming unimaginably worse, it has paid off for the taxpayers as the banks pay back the loans with interest. It appears that the bailout of General Motors and Chrysler may pay off as well.

None of this is very comforting to those who lost their jobs and homes. Those folks and many of the rest of us have been wondering when the high flyers whose reckless behavior triggered all this might get theirs. Perhaps that time has come.

Last week (4/13/11) the Senate Permanent Subcommittee on Investigations released its two-years-in-the-making report “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.” Frankly, given the spineless catering to the special interests over a few modest reforms in the Dodd/Frank Bill, it was hard to imagine that this investigation would amount to much. Surprisingly the members of this Committee were on the job. They were, as the saying goes, “Taking names and kicking butt.”

They paint a detailed picture of the out-of-control atmosphere that saw investment bankers enabling downstream players, mortgage brokers and lenders to spread money across the housing market like there was no tomorrow. All showered with encouragement from the boneheads at Fannie Mae and Freddie Mac, not to mention the rating agencies and –of all people– the head of the Federal Reserve Bank.

People were encouraged –coached if you will– to falsify loan applications. They ended up owning property they could not afford and well, you know the story. These sure-to-fail loans were bundled into increasingly sophisticated –read deceptive– packages and sold as securities by the investment bankers.

It’s not that the bankers didn’t know they were selling crap; they even called it crap inside the trading desks. And they protected themselves; as they sold these so-called toxic securities they bet against them at the same time. Some bankers were more aware than others. Not that any of them had reason to miss what was really going on. Read Michael Lewis’ The Big Short for an inside view.  

Prosecutors are poring through the 650-page Senate Report looking for criminal behavior. Many believe that those who triggered the catastrophe are too big to go to jail, just as their organizations were too big to fail. Maybe not. No major public official in NY State ever headed behind bars until last Friday (4/15/11) when former Controller Alan Hevesi was led out of court in cuffs sentenced to one to four years in jail. So maybe there’s hope that we will see some of these arrogant bankers in cuffs on their way to jail.

It would be nice if the members of the Congress would rethink the laws that allowed all this to happen; that still allow Wall Streeters to gamble. Investment bankers need to get back to creating capital for business. That would help in a real way. It would create jobs. Isn’t that what they keep talking about in DC?

© 2011 GLG

Problems We Know How to Solve, “Piracy”

A host of issues plague our nation that I have no idea how to cure. However, I can make some disappear. The ones I have in mind are protected by powerful special interests although it would be hard to find anyone who would consider them beneficial to society or our nation.

Piracy is generally frowned upon at almost all levels in America, indeed in the world. However, the same electronic trading that has modernized our capital markets has opened the way for traders flying the Jolly Roger to make a mockery of the market’s purpose. Be it stocks, bonds, commodities, derivatives (yes there are good derivatives), or anything other financial instrument, there is but one reason for them to exist; to support our economic system. To put the “Capital in Capitalism.”

Unfortunately that purpose has been lost in what has come to be known as the “Casino on Wall Street.” “Playing” the market, as it’s called, has long been a problem. A focus on short term gains has pushed aside solid growth as the players –it would be wrong to dignify them with the title investors– jump in and out of market instruments. But now a new breed of players using sophisticated software and massive computers have created a new way to game the system, High Frequency trading.

Algorithms allow them to race alongside the flow of electronic orders in the markets not unlike the sea going pirates of old that they emulate. They jump in and out in nanoseconds, thousands of times in a few minutes picking up a fraction of a cent here and there. They are daytraders on steroids. High Frequency traders contribute nothing to the companies they trade, worse they drive up prices for legitimate traders looking to improve their long term holdings. Often those entrusted with little folks’ life savings.

How does the Casino on Wall Street get away with gambling that is illegal in New York State as it is in most states? Simple. The United States Congress exempted this form of gambling from State Laws. While that legal loophole should be closed it is not the most effective way to curb this abusive practice.

A change in our tax code would pull down the Jolly Roger. Let’s eliminate all capital gains taxes on profits from investments held for more than twelve months. Tax profits earned from investments held less than a year at 35%; those held less than six months at 50%; those held less than 90 days at 60%; those held less than 30 days at 70%; those held less than seven days at 80%; those held less than 24 hours at 90%; and those held less than an hour at 95%.

High Frequency trading generates as much as 70% of the trading on Wall Street; one of these outfits is reported to make 20% of the daily trades. When you add in the daytraders, there’s not much focused on what should be the primary role of the market, raising capital to support our economy. It’s past time to shut down the Casino and pull down the Jolly Roger. That will take the focus off quarterly returns and allow management to look to long term growth.