“I’m so bored. I hate my life.” - Britney Spears

Das Langweilige ist interessant geworden, weil das Interessante angefangen hat langweilig zu werden. – Thomas Mann

"Never for money/always for love" - The Talking Heads

Friday, September 27, 2002

Remora

Kurds and ways

Christopher Hitchens has, since 9/11, rather fancied himself the Don Quixote of the Left, jousting with the anti-war contingent, rallying the troops around feminism, secularism, and democracy. Well, beyond the posturing natural to Hitchens, there is something to his perception of the anti-war left -- you don't have to look far before you find rather stupid analogies between, say, Saddam Hussein's use of nerve gas and lynchings in the U.S. South. The stupidity resides in the fact that there were mechanisms in the state to operate against the lynching spree -- and eventually, creakily, did. Genocide past neither justifies genocide present nor, necessarily, bars a nation from acting militarily. One can take a stand against any nation acting militarily at all, or one can take a stand against particular military actions, but the dumbest of all stands, LI thinks, is that which requires complete purity of nationhood (perhaps for a thousand years) before a nation is allowed to engage another. Until then, one supposes, the military force has to be content with sharpening knives and shining its buttons. Hitchens, criticizing such politics, is in good company. Marx saw how necessary the Napoleonic wars were in carrying the ideals of the French revolution across Europe, and lamented that Germany was never really conquered by the French. However, the modified lefty point seems to me quite plausible: if the actions of a nation have been morally stained in the recent past (say, the moral stain of selling the ingredients for chemical weapons, or condoning their use - that's pretty staining) in regard to a particular other nation, then it is quite right to doubt whether the former nation is morally qualified to proclaim itself justified in intervening in the affairs of the latter nation. Or, to speak with less cotton in my mouth, Iraqis have pretty good reasons to think that they are going to be manipulated, killed, and otherwise displaced for no good end, except, perhaps, the enrichment of some oil companies and the pleasure their deaths will bring to Ariel (or is it Caliban?) Sharon.

LI has been on the side of using military force against Al Qaeda. But count LI in the peace camp as far as Iraq goes. Hitchens has two columns in the nation in which he goes into the Kurdish side of the upcoming war. We want to comment at length about one of those columns -- Appointment in Samarra -- so we aren't going to quote it, as is usually our custom. To make sense of the three points that follow, probably you should go to the Hitchens column first. And now, without further ado:

Questions for Hitchens!

1. The 'devolved" Kurdish state. Devolution might work with Scotland, a region that has existed for three hundred years within the greater framework of British law and statehood, but it is hard to understand what it would mean for the Kurds.

If, indeed, we accept that the Kurds, like the Palestinians, deserve some kind of state, we have to be careful not to surrender to romantic illusions either about the means that might make this possible or the state that might result. Hitchens ignores the real political maneuvering in Northern Iraq during the last ten years. If he were more honest, he would at least allude to such evidences of Kurdish war-lordism as Masoud Barzani
's KDP Alliance with Saddam Hussein in 1996, which was aimed at destroying his Kurdish opponent, the PUK. We also know that Kurdish militias, far from buttressing the liberal dream of a secular, democratic state, have shown, in the past ten years, a mix of tendencies. One pattern is to revert to ideologies of Islamic extremism, or to act in ways that are pure banditry. Against this one can set the current governance of Northern Iraq, which by all accounts is generally one of tolerance. Hitchens can wish away recent history by selectively attending to liberal Kurdish groups, but such a move is fatal to the intelligent analysis of the Kurdish situation. Does Hitchens really think that those Islamicist factions in Northern Iraq are somehow going to vanish if Hussein is attacked? Remember, these factions are basically aligned with the kind of state the Taliban inaugurated - the kind of state Hitchens has attacked as fascist.
2. This brings up our second question. As liberal Americans, we of course would like to see a strong secular state in Northern Iraq, one that would possess structures for the peaceful transfer of power among different factions; one that would respect the human rights of minorities; and one that would contrive barriers to the wholesale looting of national wealth, which is as endemic to warlord prone areas of the world as it is to CEO-centric corporations. Now, by an accident, a safe haven has been carved out in Northern Iraq where these institutions, although often battered, seem to be growing. Would a war that deposed Saddam Hussein really be to the advantage of the growth of this type of state? I would suggest that the best course is to continue to keep the pressure on Hussein, to disarm him, to inspect him, to encourage popular revolt against him - but not to crush him through military force. Hitchens might say that retaining Saddam Hussein means, every day, imprisoning the people of Iraq. But all means of liberation aren't equal. Given the weakness of Hussein's forces, Northern Iraq is in no immediate danger of falling once again to the Republican Guard. It acts as a strong attractor, a model, for Iraqi discontent. Outside intelligence has been noticeably poor at predicting the downfall of dictators. I'd think the internal collapse of Hussein's regime is a much better goal to aim for. Frankly, there is no reason to think that the Americans won't prop up a military man to rule as a satrap in conquered Iraq. They've not only done this before: in Pakistan, they are colluding at it right now.

3. Finally, I find the implied dismissal of Turkish interest both unfair and historically misplaced. The safe haven in North Iraq exists by courtesy of the use of Turkish air strips, and was suggested by the Turkish government itself, in 1993, in response to the wave of Kurdish refugees. While it is true that the Turkish government's war against the PKK, the Kurdish guerilla group, was waged with maximum brutality, it is also true that the PKK responded in kind. It is also true that the PKK's ideology, a mixture of Mao and Mohammed, was a charlatan politics; that it evolved into a typical mix of twentieth century crime and brute political force, accruing money through trading drugs and arms, and wiping out any sign of Kurdish opposition; and that it never received the support of even a substantial minority of Turkish Kurds. It is a mistake to think that the situation in Turkey is anything like the situation in Iraq. There are billionaire Turkish Kurds; there are Kurdish presses in Istanbul; there is a high mix of Kurds in the Turkish military. The question of discrimination, which is a valid issue in Turkey, shouldn't be confused with the issue of separation. Like the Mayan farmers in Chiapas, Kurds might be oppressed by discriminations in the power structure in existence right now, but their grievances are peacefully resolvable, with no injury to the state of Turkey as a whole.

Naturally, Turkey can't countenance a hostile Kurdish state in Northern Iraq. Whether Kurdish factions can resist the dubious romantic satisfaction of encouraging violence in Turkey should definitely be a condition for further steps towards Kurdish autonomy (of whatever kind) in Northern Iraq. Far better to preserve the present, fragile situation, in which non-violent organizations can form, than to hope that peace arise out of the chaos of war.




Thursday, September 26, 2002

Remora

The flame is on under CFO magazine's 99 CFO of the year --- everybody's favorite, Andrew Fastow! Yes, Enron's man with the plan -- the plan to loot the company's resources for his own benefit -- is edging close to the bonfire of the Vanities currently being lit in a court in Houston. This WP article is clearly a prosecutor's ploy,
but it does include one interesting detail for the Enron-maniac: the focus on Braveheart, the deal whereby Enron sold its potential profits to a Canadian bank in order to realize a sum in its books for 2001, coming up with a 100 million dollar profit. This deal is so incredible that it certainly needs to be examined -- and the heads of the execs at the Canadian company that made it need to be examined twice as hard. Only Enron would make a deal selling its potential profit to a third party, in order to mark down an immediate profit. In '99, CFO caught the great man himself explaining his tricks:

"When Andrew S. Fastow, the 37-year-old CFO of Enron Corp., boasts that "our story is one of a kind," he's not kidding. In just 14 years, Enron has grown from a heavily regulated domestic natural-gas pipeline business to a fully integrated global energy company with thriving activities in natural gas, electricity, infrastructure development, marketing and trading, energy financing, and risk management. And much of that growth has been fueled by unique financing techniques pioneered by Fastow.

"When I came here in 1990, Enron was a company with a $3.5 billion market capitalization," says Fastow. "Today, we're around $35 billion, and that's without issuing a whole lot of equity. We've increased shareholder value, grown the balance sheet, maintained a stable outlook from the rating agencies, and achieved a low cost of capital."

In fact, when energy stock analysts look for paradigm companies to vaunt, they point resolutely in the direction of Houston-based Enron, with $31 billion in revenues last year. And when they seek to explain how Enron has remade itself so completely, they point to "remarkably innovative financing." Says Ted A. Izatt, senior vice president at Lehman Brothers Inc. in New York: "Thanks to Andy Fastow, Enron has been able to develop all these different businesses, which require huge amounts of capital, without diluting the stock price or deteriorating its credit quality-- both of which actually have gone up. He has invented a groundbreaking strategy."

As Raymond Chandler might say, that's cute as a pair of tarantula pyjamas. Inventing those groundbreaking strategies for hiding huge amounts of capital -- hey, a round of applause right here!

If the prosecutors have any sense, they have sharpened their knives for the head of Enron's Broadband division, Ken Rice. The royal road to the conviction of Jeff Skilling might well lie through Mr. Rice, an amiable lout, by all accounts, who made off with 76 million dollars in cashed out stock options. A man who never, at any time, understood fiber optic cable, which is what his division was supposedly about. Luckily, he was only involved in it as its president - most of his billable time, at least according to Robert Bryce's book on Enron, he spent racing motorcycles.

Although you might think the piggy bank is broken, the new CEO of Chapter 11 Enron is still poking around for loot. Maybe it is something about the name, or maybe it is something about Houston business culture, but according to the Houston Chronicle,


"Stephen Cooper wants to hire 15 more managers from Zolfo Cooper, in a move that could earn him a rich reward. In a request filed with the bankruptcy court Tuesday, Enron asked to pay the restructuring firm founded by Stephen Cooper $864,000 a year per manager, the same rate as 15 Zolfo directors already with Enron." Cooper has apparently decided that his firm should staff Enron's skeletal crew, where they rub shoulders with highly compensated lawyers and such. And that, incidentally, he will receive money both from the company which he is running, Enron, and the firm he was running, Zolfo. Sweet, a deal like that. I mean, how do you squeeze more juice out of a dead carcass? See, Enron is pioneering entrepeneurial bankruptcy -- are we happy now?

This brings us round to yesterday's post. If you will remember, fair reader, we were discussing John Cassidy's New Yorker article, The Greed Cycle. One thing especially impressed LI about that article: the place of Michael Jensen in it. Jensen, Cassidy claims, was the academic godfather of the amazing inflation in top executive compensation packages. Jensen is currently hatching an academic paper to explain the collapse of Enron that blames it on -- get this -- the Wall Street bubble mentality. Why -- the universal solvent of explanations, now, that bubble. Once upon a time, the conservative view was that there are no bubbles -- this was, after all, the orthodoxy of efficient markets theory. Time moves on, however, and as it has become apparent that something has to be to blame for the crash -- and as it becomes apparent that the clash laid bare the irrationality of radical free market doctrine -- there's been a noticeable shift in that plank of the doctrine. Suddenly, there are bubbles -- and they are all the fault of Clinton! How convenient.

According to Cassidy, Jensen's idea is that Enron had to do what it did to maintain its stock prices because of pressure from Wall Street jockeys. It is the familiar story of trying to meet higher and higher expectations, and at some point going to the shadow side in order to do so.

Well, that is, to put not too fine a word upon it, bull shit.

Enron had to maintain its stock at a high level because much of its dealing depended on the stock being at that price. That guaranteed credit. Why was the need for credit so pressing? Because cash flow was so radically out of synch with claimed earnings. This occured because Enron made a systematic attempt, under Jeff Skilling, to institute mark to market accounting, a financial instrument by which it could aggregate future earnings as present earnings. Why did it do this? Well, among other things, such an accounting system could justify huge bonuses for execs. These bonuses were not postponed until the real profit was realized -- since in the vast majority of the deals Enron pursued, profit either never appeared, or was eaten up by costs. In fact, in the vast majority of those deals, including those being made by the thousands at Enron's famous energy trader's desk, Enron was losing money. So it was not Wall Street expectations that caused Enron to engage in the massive distortion of its financial position, but the need to justify grossly inflated compensations -- which of course brings the ball home into Jensen's court, doesn't it?

Jensen, who is working for something called Monitor, has posted a version of his version on the site. Here's the first three grafs -- and a word to the wise: notice that the "problem", as Jensen carefully designs it, is "fixed" by a courageous CEO. Jensen is the type of guy any CEO would be proud to have in his court -- a natural born syncophant:

Once, companies gave whispers and informal advisories to favoured analysts of what to expect in coming earnings announcements. Then the conversations became more elaborate, engendering a kind of twisted logic. No longer were analysts only trying to understand a company so as to predict what it might earn. The analysts' forecasts themselves became the centre of discussions. The forecasts no longer represented a financial by-product of the company's strategy but came to drive that strategy.

Yet as the case of Enron suggests, when companies scramble too hard to meet unrealistic forecasts by analysts they often take highly risky value-destroying bets. The process - euphemistically referred to as "earnings guidance" - is a high-stakes game, with management seeking to hit the targets set by analysts and being punished severely if they miss.

But a few courageous chief executive officers have wisely decided to put an end to the game by saying "no". Managing Wall Street's expectations may be a decades-old game but Barry Diller of USA Networks and Jim Kilts, Gillette's CEO, have decided to end it."

Jensen is a typical Chicago economist. He uses mathematical models to achieve results that he wants -- such as the model that shows why executives, as agents of the shareholders, must be compensated in such a way that their "interests are aligned with the company." Unlike, say, secretaries and technicians, I guess. When this model, in the real world, produces bad results -- when it is tested, that is, and found wanting, because of an insufficient attention to other, structural variables -- he reaches immediately for psychological terms. In other words: cue the mind when the going gets tough. That's always a good strategy to detract from your pisspoor mathematical models. Thus, his suggestion that Enron executives, hitting their targets, are driven by "egotism:" "High share prices stoked already amply endowed managerial egos.." Psychology intrudes when, embarrassingly, rational self-interest is really the parameter at stake. If compensation is set up to award performance without any index for performance -- if, that is, compensation is set up in the absense of those constraints that come with a competitive job market -- then guess what? performance will be skewed to justify compensation. This happens over and over again -- merger and acquisition is substituted for entrepeneurship, accounting shenanigans for true cost cutting, and pensions are looted in place of products being innovated. You would have to be a fool -- or an economist -- not to see that something in the system must be causing this systematic effect.

Discussion of corporate performance and its relation to compensation is on a truly childish level in the business press. Take General Electric. LI has seen, compulsively repeated, justifications of Welch's swollen compensation package by reference to how vastly GE grew under his leadership. No attention is paid, in this analysis, to the growth of other, similarly structured companies during the same period, or the patterns of organizational adjustment common to all of them. In other words, no argument is made that Welch added some unique value that, in the boom that began in 1982, distinguished his operations in some special way. As an instance of Welch's genius, measured by capitalization, take GE Credit, which contributed significantly to GE's profit in the last ten years. Was this some unique contribution of Welch's? By no means. Disintermediating from orthodox financial institutions -- ie banks -- is a common pattern in American industry. If I truly wanted to bore my readers, I would allude to Alfred Steinherr's exhaustive treatment of this in Derivatives: the Wild Beast of Finance. GM, Ford and Sears have all done it, and it wasn't due to the genius of CEOs. It was due to the opportunity presented, accidentally, by the confluence of two events: pools of capital that came into these companies from various sources (like pensions) that could more profitably be used as a financing instrument, and the peculiarities of the American financial structure due to regulations deriving from the Glass-Steagall act. Does anybody really want me to go into this? No. But the fact is, a pattern is found in various similarly capitalized companies that strongly implies no one CEO was the innovator in this area. So when the market soared, in the long boom from 82-2000, guess what? Those companies started overflowing with apparent money, as they "managed" financial assets. Of course, the flow depended, to a large extent, on two things: the equity bubble, and the enlargement of financial services, like loans to customers. Well, the equities bubble collapses, and the loans begin to bite back as interest rates lowered, customers defaulted, and returns in other areas of company activity slowed. Welch hopped off before the full bust hit, but his final days, riding the Honeywell fiasco, might well tell us what his CEO-ship would look like now if he had stayed on.

So, Welch is paid genius bonuses for non-genius work. Competent, even excellent some years, but not great -- and certainly not something to give him compensation equivalent to one of the founding capitalist fathers, like Carnegie. Yet I have never seen an article in the financial press make this simple comparative point. The point needs to be made because the question should be: could GE have acquired its financial position cheaper -- ie, with a cheaper leadership? This is, of course, taboo for the CEO apologist, and the multitudes that labor to create the uber-management myth.














Wednesday, September 25, 2002

Remora

Notes from all over

BW offers a "scourging" of the business press for its lickspittle attitude towards the New Economy boys during the bubble years. Readers of LI have already been here -- of course, they are all secretly sneaking glances at this weblog and ripping us off! The brutes! Isn't it stifling in this cabin? Where's my bundle of ivory... The snakes! The snakes!

Uh, forgive us, a touch of that old tropical fever, you know.

Anyway, Ciro Scotti winds into a denunciation of the biz press from the very odd angle of Pat Buchanan's rhetoric. Scotti borrows Buchanan's phrase about Bush -- that he is a corporation bellhop. While this is about as nice an image as you can expect on the hustings nowadays, I don't see it as being so insightful that Scotti needs to press it. And though Scotti wishes to come off as suitably tough and disgusted in the column, Mr. Take no prisoners, he actually --- takes no prisoners. That is, he names no names, but contents himself with generally derogating the young. Young guys, infatuated with young dot-commers, are to blame for everything. We advise you not to buy that story. The credulity of the business press derived from their general Reaganite faith in deregulation and the power of the markets, in themselves, to produce utopian outcomes. The business press suffered from a structural deficit of scepticism which was not confined to young tech enthusiasts. Blinded by rhetoric, and attached to a particularly insolent version of the managerial class -- the class indoctrinated, since the 80s, with the idea that their greediest impulses were synonymous with good business -- the business press has suffered a collapse in credibility that the managers of that press still don't understand. We recommend that Mr. Scotti read a few of our previous posts, instead of old Pat Buchanan speeches: our Glassman nominee of July 23 was Nelson Schwartz, and on August 2 we named James Glassman himself (although the latter is, we admit, a pretty obvious call -- it is like calling Bozo a clown). We've thought of pursuing some other journalists, notably Geoffrey Colvin, the Welch apologist at Fortune Magazine whose puff piece on Welch (with a heading that has the true, bullying ring of a General MacArthur explaining his Korean strategy: "VALUE DRIVEN Welch's Decision: The Inside Story. Most advisors told Jack Welch to shut up and tough out the news reports. He didn't. Here's why") is in the line of his general attitude towards Welch. Down on your knees about sums it up. Eventually we will do that. LI's motto is: what if they held an inquisition and nobody came? Because, of course, this is where we release our inner Torquemada.


Since we are going over old posts and new business articles, we read John Cassidy's New Yorker article, The Greed Cycle, yesterday, and we're impressed with it -- as apparently a lot of people have been. It is not, unfortunately, on line. Here's a preview of it at the Connection. The kicker at the end of it is Paul Volcker coming out for abolishing stock options. What attracted interest in the piece, however, was the seemingly rational explanation of how executive pay suffered the fortunate elephantiasis that now routinely produces Nicks tickets for the exec and wastepaper baskets from France for his mistress. Althought I have heard the statistic a thousand times, apparently Cassidy's discovery that that the Fortune 500 CEO earns 500 times more than the average employee he CEO-s has gotten spread about. I've heard the figure misquoted on NPR this morning (by an oddly cheerful commentator who defended Jack Welch) and seen it in editorials.

We have ambiguous feelings about Cassidy: his articles on Marx and Hayek were fascinating, but he, too, seemed to swallow much of the new economy propaganda during the bubble years. The core of the article is about the academic justification for changes in the compensation structure of the executive class from the seventies (when the corporation structure was pretty much as described in Galbraith's New Industrial State) to the nineties, and the part played in that by academic gun Michael Jensen. We want to read Jensen's '91 piece in the Harvard Business Review (which Cassidy quotes for its inspirational line about not compensating the CEO like a bureaucrat -- oh my no, you have to compensate him like an entrepeneur! like a movie star!) for an upcoming dissection of same. Suffice it to say that Cassidy takes up the issue of compensation by referring, ever so discretely, to the matter of competition in the executive labor market. Jensen, a Chicago alum, should, of course, have been a true fan of competition, but his work showed that the exec market was different, due to what the executive did. It was more like paying a contractor than paying an employee. We think that this is a fatally mistaken analogy. And we also think that the unspoken class bias in the Chicago school, which invariably lays the onus of competition in the labor markets on the poor or the middle class, and invariably sees the augmentation of the wealth of the wealthy as an automatic good, must be pointed to -- again and again.









Tuesday, September 24, 2002

Remora

Trickle Up

The conventional wisdom -- which is only shorthand for, the chatter among the governing class -- is that the upcoming election is going to be a Republican fest. The focus, now, is firmly on Iraq, and Bush is the maestro who has put this all together.

Well, the governing classes do govern, so one would think that they would know about such things. Elections, after all, are to be manipulated in such a way that there is no disturbance in the well ordered diffusion of power among the people who already have it, and no doubt feel they deserve it.

But isn't it possible, LI would like to know -- speaking out of turn, in his best Oliver Twist wants some more gruel tones -- isn't it slightly possible that the populace will look at the events of the past year in terms of their deteriorating economic situation? A story in the WP about the latest data on income and poverty brings up this point. The census bureau reports that income inequality is again on the rise, that median household incomes are declining, and that more people have officially become poor.

"This report signals a significant reversal of what had been a very positive trend in terms of income and poverty," said Jared Bernstein, senior economist at the union-backed Economic Policy Institute in Washington. "It also underscores the point that the recession was deeper than many had thought."

Other data indicates that the decline in household income came largely as a result of falling employment and loss of overtime hours, offsetting continued gains in hourly wages.

In terms of class breakdown, only households with incomes above $150,000 were able to post gains, with the greatest losses in percentage terms occurring at the bottom of the income ladder, the report showed."

Perhaps the G.C., living as it does mostly on the East Coast, is more sheltered than usual from these figures. Apparently the income lost has been heaviest in the Midwest and the West.

"Geographically, incomes also fell the most in the Midwest (3.7 percent) and the West (2.3 percent), reflecting the recession's heavy impact on manufacturing in the high tech sectors. Household incomes actually increased 1.7 percent in the Northeast."

This is obviously a stealth recession, but as the market falls, and as it becomes apparent that the Bush economic plan, like Enron's bonuses, is oriented solely towards lavishing perks on those who have already obtained, by various obscene tricks, lavish perks, there will be a backlash. Republicans are reportedly sitting pretty right now, thinking that Iraq will be rubbed in the faces of the Dems. The Dems are nervous, and have adopted a robotic attitude of yes-sir to the odious commander in chief and his henchmen. But maybe they will gain a little spine from the November results.

LI has to have a little hope, after all.