The Goldna Sachs Saga

“Those who fail to learn from the mistakes of their predecessors are destined to repeat them.”

George Santayana

Marcus Goldman and his family launched their company in 1869, building a reputation highlighted in 1896 with an invitation to join the New York Stock Exchange (NYSE) and in 1906 to manage the initial public offering (IPO) for Sears Roebuck.

A couple decades later the partners launched Goldman Sachs Trading Corporation. It was basically a Ponzi scheme that made tons of money before the bottom fell out in 1929. At that point former office boy, Sidney Weinberg, took the helm and spent a quarter century rebuilding their reputation. In 1956 Goldman Sachs landed the IPO of the century, Ford Motor Company.

Even as Weinberg rebuilt Goldman’s reputation, however, others in the firm lost sight of their role: putting the Capital into Capitalism. Along with much of the banking world, Goldman Sachs moved increasingly into trading, crossing a line long considered a conflict of interest; a world of strange financial products, often with no societal value. They, of course, didn’t see it that way given the astronomical amounts the firm pocketed.

This world rapidly evolved into little more than a gambling den. The virtual Casino on Wall Street had become a reality. The bankers’ political clout (read contributions) generated legislation in 1992 and 2000 exempting derivatives –including their high risk cousins, synthetic derivatives and credit default swaps– from gambling laws.

From there on it was a race to disaster. In 2003 legendary investor Warren Buffett warned that derivatives could become “Financial weapons of mass destruction;” a warning soon to become fact. They became a root cause of the global financial sector collapse.

In the midst of this Goldman Sachs got involved in a smarmy deal. The SEC says they peddled some scummy bundles of mortgage derivatives to pension fund managers, European banks, and other large “sophisticated” investors. Legally the case is said to be on shaky ground. But why would Goldman Sachs (and other banks) ever let it get onto legal ground?

We don’t know if the course they have been following is legal, but it is anything but ethical. Under Sarbanes-Oxley (SOX) publically traded companies are required to offer those in their employ ethics training. It would be hard to imagine how anyone involved in this high flying flimflam could have considered any part of it ethical. Let alone how Goldman Sachs’ management could believe they fulfilled their SOX mandated ethics training obligation.

In a business built on trust and reputation, how could Goldman Sachs forget how long it took Sidney Weinberg to restore their reputation when it tanked in the 1920s? Or a famous quote from their largest shareholder Warren Buffett, “It takes 20 years to build a reputation and five minutes to ruin it.”

Public Safety - A New Cell Phone Era

Mobile telephone service has entered a new phase that is too little recognized, Public Safety. In recent years medical first responders have increasingly relied on mobile telephone technology to provide a connection to emergency room personnel while en route, sirens screaming, to the hospital. Vital signs, EKGs, and other data alert the emergency room physicians and staff, as well as giving them the ability to transmit lifesaving treatment instructions to the EMTs.

Newer mobile telephones are GPS chip equipped. This technology enables more than the special features your service provider would like you to purchase. GPS enabled mobile telephones can be mapped and located within one meter, give or take –a yard for us “metric deniers.” For you privacy types, just turn your phone off if you don’t want anyone to be able to find you.

For the rest of us, think of this: what if your home is on fire, or you are out for a walk, or cycling, or boating and need help? Even if you are barely able to call 911 the medical first responders can find you. In any emergency, mobile telephone GPS technology makes us all safer.

In 1959 when a mobile telephone was installed in my car, it was an oddity. The birth of cellular in the early 1980s dramatically improved the service. A marketing company I owned was hired to help launch this new concept. Our job was to find people who could afford a $3,000 phone for their car and $200-$400 a month to use it. In our wildest dreams none of us every imagined the scene today. Nor could we have imagined its evolution into a public safety necessity.

For reasons that are important only to the geeks among us, the more folks using their mobile phones at any one time, the more cells (tower locations) are needed. The federal government has placed these towers in the same category as any utility. While localities have some say as to their location, in the end they cannot prevent them from popping up where they are needed. Providing service to the users takes priority.

That ruling assumes new importance as cellular mobile telephone service takes on an increasingly important public safety role. The definition of “needed” has changed dramatically. Where once local governments could push tower locations around a mile or so to satisfy their constituents’ concerns, any move that diminishes ideal coverage patterns can no longer be justified or tolerated.

Cellular tower signals have two basic characteristics: they are very weak (good for +/- a mile) and they travel pretty much in a straight line. If they run into any natural or manmade obstacle they are cut off. So even a minor site change can leave an area on the edge of a cell with little or no signal. Not what you want if you are in an ambulance headed for an emergency room. Not what you want if you are walking, hiking, boating, driving, or even alone at home and need help. A weak signal or no signal is now a life or death matter.

Federal law does not permit health issues to enter into tower location considerations. But the myth survives that the RF signal they transmit is a health risk. As I mentioned, cellular signals are very weak. Much weaker, say, than the RF transmissions from radio and TV stations, Ham operators, government and private two-way radio systems and a host of other RF sources. Not to mention Mother Nature, who has bombarded the earth with RF signals since the beginning of time.

Our TV sets and computers give off RF signals. Cellular towers add next to nothing, no matter how close you live to them. There is no indication that individuals who have worked in extremely high RF atmospheres for decades have experienced any health problems. Manmade RF signals have been around for about ninety years. If there were any grounds for concern they would have showed up years ago.

The RF signals from cellular telephone towers have a new role that is life saving, not life threatening. The rules for locating these towers need to be updated. They need to be put in the best available location to provide ideal coverage. Anything that stands in the way of that goal needs to be struck down.

Visual issues can be addressed. Towers disguised as palm or pine trees, massive sculptures, church steeples, bell towers, are all available to mitigate visual damage. That’s the only avenue that should be allowed those opposing what has become a vital public service tool.

Et Tu Toyota?

The Bulldog Reporter
The Journal Of Public Relations

Iconic Automaker's Downfall Offers Tough PR Lessons

February 9, 2010

Reputation Management Rule #1: When something bad—large or small—comes to light relating to your organization, alert the media, put it up on your website, put it out on Twitter and all the other social media; disclose it before an outsider hits you with it. Do not listen to your legal department; do not worry about how it happened, or who is at fault; instantly move to make it right. Do the right thing!

A second iconic organization fell victim to what happens when reputation gets shoved to the back of the bus, or in this case the backseat of perhaps the most admired automobile company in the world, Toyota.

Johnson & Johnson led the dumb response parade. They ignored a foul odor emanating from J&J consumer products ranging from Tylenol to Rolaids and St. Joseph Aspirin. After delaying a recall for a ridiculously long period of time, they came out with the lamest excuse ever. Somehow, a preservative chemical banned in the United States had found its way into their wooden shipping pallets and then through multiple layers of cardboard and plastic and into their products. Even if true, so what! If your products stink, recall them, think of the customer. At least no one seems to have been seriously harmed by the stinky J&J pills. Upset tummies and other intestinal problems seem to be the worst of it.

Not so in Toyota's case. It appears that an uncontrolled acceleration problem resulted in several serious automobile accidents. If the reports are true, people were injured and killed. Back in 2002, when the problem first surfaced, Toyota said it was driver error. More recently, they claimed it was connected to an improperly installed floor mat. It turns out that while they were talking driver error and floor mats, they suspected all along that they had problems with the electronic throttle control system used in a wide range of Toyota models. Now they have been forced to recall millions of cars, shutter factories and advise their dealers to stop selling some of their most popular models.

Let's go back to Rule #1. What if Toyota had jumped on this problem right away? Electronic throttle controls were probably not that widely in use six or seven years ago. It would have cost them a lot of money and thrown a monkey wrench into a promising technology. But it would have preserved their reputation and the trust of their worldwide customer base.

Instead, they now face perhaps the most costly recall in history. One analyst in Japan estimates that this issue will take over—wait for it— "a billion dollars a month off Toyota's bottom line." That, however, is peanuts in comparison to the long-term loss of reputation and trust that Toyota will suffer.

It's crushing to have two great companies stumble; they will pay the price for many years to come. Hopefully, others out there will observe and learn.

Johnson & Johnson Stinks Up Its Reputation

Bulldog Reporter

The Public Relations Journal

February 1, 2010

In 1983, a year after the Tylenol tragedy in Chicago, I was in that city looking forward to hearing the keynote speaker at a communications seminar. His name escapes me but his task a year earlier is burned in my memory. He was a high ranking C-Suite executive from Johnson & Johnson who had led the team from

J&J sent to Chicago to deal with people dying from tainted Tylenol.

By then our discipline and the general public had made J&J's handling of the tragic incident Legend. He opened his remarks describing his feelings. He said he felt ill as his plane descended into O'Hare, as he had the first time he came to deal with the tainted Tylenol issue and every time since. And then he gave us an inside view of the sequence of events from the first report linking Tylenol to the unfolding tragedy. From the beginning management at J&J had acted to protect people. Help those harmed, prevent additional harm, and search for the source.

You’ll note that "Fault" is conspicuous by its absence. J&J did not hesitate to help those damaged, or to suffer massive losses by immediately recalling a product that ultimately was shown to be harmless. Nor did they stop there. When their products returned to the market it was in sophisticated packaging to protect against future efforts to tamper with them. Before the Chicago incident Tylenol enjoyed about a third of the market, more than double its nearest rival. Even though Tylenol was then, as it is now, just a J&J brand name for acetaminophen, a compound with no patent protection, none of its competitors were able to take over its dominant share of market.

A year later when I was reliving the horror story through the eyes of this frontline player, J&J had already been rewarded for its response by a rebound in market share. They were soon back to a third or better of the market; a position now at serious risk. They are facing charges of using kickbacks to a nursing home Pharma provider to push their Alzheimer's drug to unsuspecting old folks. And, of dodging possible contamination reports for nearly two years before issuing the recall of foul smelling products across several J&J lines.

A company as trusted as J&J may come away not much harmed. They may retain their massive market share or most of it. But what if the latter should prove to be the case? How much over the next few years would the loss of a point, or two,, or three,,, cost J&J? And how vulnerable are they now to the slightest misstep?

It's important for them to find out what's causing the foul odor, both in their products and in their marketing practices. However, it is much more important to find out who in their midst is responsible for exposing their reputation to these potentially catastrophic issues. In both cases they need to remember their first duty is to serve and protect the public. Then they need to rid themselves of those who twisted the J&J culture and caused the stink before it permeates the entire organization.

Comes the Revolution

IR Alert
The Journal of Investor Relations

January 21, 2010


CEO Compensation will be in our shareholders' crosshairs this year

Anyone in our discipline who believes that public outrage will end at financial sector bonuses is whistling through the graveyard. Executive compensation will be the next target and our shareholders will hit us hard. Anytime the gap between those at the top of our economic food chain and those further down grows too wide, folks rebel.

Teddy Roosevelt became perhaps the most successful occupant of the White House in the twentieth century riding such a rebellion. The former Rough Rider rode roughshod over arguably the most powerful businessmen in our history.

A trustbuster president and master politician led the first revolution during the last century. Growing in the background even as Teddy spoke softly and carried a big stick was the American Federation of Labor. Labor pioneer Samuel Gompers gathered a group of disparate trade unions together under one banner. His dream laid the foundation for John L. Lewis to leverage his position as head of the Coal Miner's UMWA into the head of the AFL-CIO and a partnership with another Roosevelt, Franklin D. This revolution carried up to World War II and created a major portion of middleclass America during the last half of the twentieth century.

That same time span, however, saw the roots of another revolution-inspiring trend: ballooning salaries at the top of America's corporate structure. At the end of World War II, these executives earned salaries that allowed room for fair compensation to the middle management and those below. In the ensuing decades, however, executive pay scales have grown way out of proportion to those at the other end of the scale.

Depending on whose figures you use, just the last thirty years have seen a huge disparity emerging. In the early 1980s, CEOs were earning about forty times as much as their average hourly employee. Today they are earning ten to twenty times that much; five hundred times as much is common and a thousand times as much is not unheard of.

Not only that, they are paying a smaller percentage of their income in taxes than those at the bottom of the scale. Who says so? Warren Buffett, who issued this challenge in a 2007 interview on NBC television: "I'll bet a million dollars against any member of the Forbes 400 who challenges me that the average (federal tax rate including income and payroll taxes) for the Forbes 400 will be less than the average of their receptionists." So far he has had no takers, because he's right.

What does that mean for us? It means that not just the folks on the street are fed up with executive compensation. The shareholders we face day to day are increasingly going to raise this issue, and what we're hearing this week tied to banking bonuses is just the tip of the iceberg. We need to be ready, and we need to know the numbers, be it for our CEO or the CEOs of our clients. We need to know the ratio of our top folks versus the hourly folks, and yes, we need to know the tax rate they pay and how it compares to those who greet our visitors (and our shareholders) when they walk up to the reception desk.

Then, as trusted advisors, we need to have a heart to heart with our CEOs.

Dear A.I.G., I Quit!

Poor Jake!

An A.I.G. EVP vented on the New York Times opinion page today (3.25.09). Jake DeSantis is quitting because he has been betrayed by the company that has paid him to make money for them trading “Commodities, Energy, (and) Derivatives” according to his public profile on the professional social media site, LinkedIn. Now A.I.G. (and most of the rest of us) expect him to give back the +/- million buck bonus he was paid earlier this month.

Jake says it’s unfair that A.I.G. is reneging on the deal they promised him. That the division where he labored 10-14 hours a day was not responsible for the “credit swaps” that sent A.I.G. reeling. That he had agreed to work for $1 a year on the belief that he would be rewarded for his effort with the big bonus in question. It was a deal, a “contract in writing,” and he should get to keep his money. So there!

Jake says, “I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.” Jake graduated from M.I.T. S.M., Materials Science in 1992. His thesis? "Chemical Vapor Deposition of Iridium and Rhodium from Organometallic Precursors conducted at the Los Alamos National Laboratory”, where he was an intern.

Bright guy, most of us can’t pronounce that stuff let alone understand what it is about. So where did this scientific genius head? To the Union Bank of Switzerland (UBS) where he worked in “Equity derivatives trading.” Isn’t that what’s being called “toxic” these days? After six years at UBS he moved to A.I.G.. Over the last eleven years Jake made a lot of money.

He says, “I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.”

Hard work? Actually most would argue that commodity and derivative trading during the boom years that Jake has been at it, was a piece of cake. If -as he says- he and his fellows have been overpaid, why did it not occur to him earlier that the retention contracts he and others signed to hang in there and try to salvage the company that has made him rich were wrong? Is he saying that the sailors on a sinking ship should be given a contract assuring them of a big pay check before they agree to help to bail it out? Just because the hole in the bottom of the ship is in the bow doesn’t relieve those in the stern from the need to help save the ship.

That’s what it’s all about, Jake. If the American people -few of whom are as privileged as you- are going to throw billions of their hard earned dollars into saving your company, shouldn’t you be willing to work for a $1 a year and live off the fat of the land (all the money you made in the last eleven years) for a couple years to help save the company that has been so good to you? When little folks all over the country are being asked to give up part of their earnings, why are you whining all the way back to your luxury life?

Where is the moral compass that allows your vindictive plan to be sure that the company that put you where you are and/or the taxpayers who are trying to save the company do not get one cent of the bonus that you are giving up. Where would you be if A.I.G. had been allowed to fail? There would be no bonus. Nor would there be most of the other goodies that assure that you and yours will live comfortably for the rest of your lives.

You stepped off the ethical high ground when it even crossed your mind that you should be paid to do the right thing. Maybe you didn't lose any money for your company but you are a loser Jake!

The Thinker

Today my friend and colleague Chris Dunstan introduced me to Nick Bostrom. Professor Bostrom's thinking makes my hair ache. He functions at a level that I can only imagine. Yet he lays out his thoughts in verbiage that reads as easy as a summer breeze.

This fable that Chris shared with me is particularly resonant as I progress through the final year of my eighth decade. Enjoy:
http://www.nickbostrom.com/fable/dragon.html

If you are intrigued with his thinking try his website:
http://www.nickbostrom.com/

If you can advance his agenda, you might want to think about it.