Remora
The chatter between members of the governing classes, up to June of this year, had been that Lula da Silva, the labor candidate for president in Brazil, had to be defeated. The threats became as thuggish as the manicured set gets. Here's what George Soros had to say:
According to Rossi's reporting, published on June 8th in a major Brazilian daily newspaper, Folha de S. Paulo, the markets believe that Luiz In�cio Lula da Silva (the leftist candidate, of the Workers Party, or PT, who is well ahead in the polls) will default on the debt payments if elected. Thus, says Soros, the markets are already betting against Brazil, specifically against the Brazilian currency, the real. If Lula indeed wins in the two rounds of the elections, scheduled to happen on October 6 and 27, the financial situation would be so dramatic that he wouldn't have any option other than defaulting on the debt.
Faced with the intrinsic totalitarianism of such prophecy, Soros acknowledged it, and added: "In
Ancient Rome, only Romans voted. In modern global capitalism, only Americans vote, Brazilians do not."
Soros, much celebrated for the beautiful sentiments about civil society with which he often perfumes the air, gets down to brass tacks here. Even vampires who read John Locke, at the end of the day, want their quota of vein.
However, a change occured after that interview. One wonders if there was a sense that one had been, well, a little too bold. The new line is that Lula is a poodle leftist, in the Tony Blair mould. Indeed, this is a good bet: in the U.S. in the nineties, and in Europe right now, a vote for the left almost guarantees economic policy from the right. The technocrats of the left are bored with labor. They are definitely bored with the urban poor, and their intractable problems -- best to solve them through massive police sweeps. What the technocrats of the left like best are to be interviewed for the Financial Times, and praised for their "bravery" in standing up to (otherwise known as betraying) their constituencies.
This is the line taken by Franklin Foers in The New Republic (an article that is not, alas, on-line) After explaining that Wall Street is "freaked" about the prospect of Lula, Foers provides the reassuring contrarian note:
"The markets have cause for displeasure: None of Brazil's three candidates are fervent devotees of the Washington Consensus. But their fears of Lula are out of date. The IMF bailout conditions $24 billion worth of loans on budget surpluses, severely limiting any future president's inclination toward reckless spending. What's more, Lula isn't significantly more protectionist or anti-globalization than his competitors. In fact, unlike Gomes and Serra, who are scrambling to move beyond their center-right bases by pandering to working-class resentments, Lula is moving to the center in a bid to win over skeptical middle-class voters. Ironically, the onetime radical may be the best hope for neoliberalism in Brazil."
Well, yesterday was the first step in Lula's probable ascent to the presidency. Here's the NYT:
"Mr. da Silva had never won more than a quarter of the first-round vote in three previous attempts at the presidency. Though he forced a runoff in his first try, in 1989, voters in the past have always been suspicious of his party's socialist platform and questioned his qualifications for office. For this campaign, however, Mr. da Silva revamped both his image and his program. He backed away from earlier threats to repudiate Brazil's foreign debt and to break with international lending organizations like the International Monetary Fund, emphasizing instead measures that would allow Latin America's largest country to export more and therefore generate more jobs and growth.
Mr. Serra, in contrast, as the candidate of the multiparty coalition that has governed this nation of 175 million for nearly eight years, has had to bear the burden of popular dissatisfaction with rising unemployment and a stalled economy. He has also been seriously weakened by disarray within the government camp and by and his own lack of charisma compared to Mr. da Silva."
One of the questions that has to be hanging here is: how is one to deal with an international financial system that did what it did in Argentina? That is, found a system of inefficiencies and left a desert? If it wasn't obvious before, by now the end of history thesis so beloved of the globalization crowd has been stripped of its pompous Hegelian subtext and laid bare for what it is: a collection note from a debt collector. Argentine debt, looked at in the light of day (a block of hours much deplored by the Vampirish set), has a somewhat freakish appearance -- what on earth induced the international lenders to loan out that much, and what on earth induced the government to take that much? Obviously, it was a way of paying for the New Deal State while installing the Chilean state. While, in the U.S., eight trillion dollars can evaporate in three years (as they have, in the markets) and the cars just keep on selling, Argentina doesn't have that scale. Whether the U.S. will continue to have the leverage of scale is a question the Soroses of the world don't want to ask right now. Brazil, in the eighties, famously leveraged its position as one of the grand debtors in much the way English dukes used to leverage their gambling debts at Harrolds. But if there is a capital strike against Brazil -- and the odds are pretty good that there will be one -- LI wonders if that gambit will work.
That is a sad note to end on. We aren't actually that pessimistic. We are rather cheered by Lula's victory. But our political anhedonia, right now, is nearly terminal.
Monday, October 07, 2002
Friday, October 04, 2002
Today's post.
Dope.
No. Not today. The Enron news comes thick and fast, and you know how LI laps this stuff up -- it is our personal financial porno, wish fulfillment that overwhelms the senses. Etc. But isn't it the better portion to resist the snares of the devil, especially when the devil comes bearing such unbearable proofs of the correctness of one's world view?
Surely our world view is not all that correct. Surely there's something diabolic going on here.
We try to diversify our little posts when we can. Actually, we had planned a post on Marilyn Monroe this week. Over the weekend, we watched the Seven Year Itch with our friend, S. We also urged her to see Some Like It Hot -- which she did. She was impressed by Jack Lemmon in the latter, and she laughed at the former, but in neither did she find Ms. Monroe the "stradivarius of sex," as Norman Mailer once pronounced that ill fated woman. Our friend S. doesn't cotton to the "flighty blond" imago -- which would put the keebosh on appreciating Marilyn.
Ourselves -- well, when I was a little boy, with a hey, ho, nonny nonny ne, I used to watch Monroe movies on Channel 17 in Atlanta, Georgia. Of course, I was learning, like any true American adolescent, to connect the hormonal dots with the help of visual aids, and she was a nice visual aid. But I like to think that even then I had a budding, so to speak, sense of what movies were about. Cinematic possibility imported into my own life, that was what they seemed to be about. You watched a movie in a theater, and the very bigness of the screen, the scale of sound and sight, guided you outside of that viewing -- it gave you a sense of how you could manipulate your own scale in the world, a sense for the action of the sensibility on the deceptively inert appearance of things. So, for example, some like it hot gave me the idea that someday I could troop around with scantily dressed chorus girls; it even made me see the girls in the seventh grade as possibly scantily dressed chorus girls, given the right circumstances. This is important -- those who lack any intuition of how fantasy can bend the world are not more careful judges of what exists, but the worst judges -- they walk through a world of locks without keys.
Yet when I watched Seven Year Itch this weekend, on S.'s tiny tv, I experienced this odd thing, this thing I've been experiencing whenever I see a film that was made more than twenty years ago -- I am more interested in the things that existed then, and their evidence in the pans and takes, than I am, really, in the content of the film. To give you a for instance -- S. and I saw The Blues Brothers a couple of weeks ago. The plot of the film was even worse than I vaguely remembered. But what moved me almost to tears was the introductory shots, which showed Chicago from the air. Guess what? Chicago, at that time, still had patches of industry. There were factory chimneys spouting smoke. Just this little factum seemed so intensely interesting to me -- filled me with such a sense of loss, and of time itself -- that I didn't really follow the rest of the movie.
The Seven Year Itch, with its lubricious/silly jokes about straying husbands, and its New York City without a/c, did not thrust its facts on me with the same force. It was an imminently theatrical film. The fact that slowly, slowly filled me with that sense of loss was more a social fact -- the existence, even in caricature, of this kind of culture, this post-war prosperity, that has been so radically altered that it doesn't really exist any more. Yes, I get my Proustian kicks watching b&w films. S., who is so much younger than me, is immune to this nostalgia.
It is one of the gifts of middle age. Alas, the term middle age is so loaded with unfortunate connotations that my readers will probably take me to be meaning something deeply ironic. I'm not being ironic. You don't really understand the past, I think, until you reach middle age. That in itself makes it worth being forty-four.
Okay, since this does seem to be vaguely about Marilyn Monroe: on the Monroe front, we found several articles, each more ridiculous than the other -- this, too, is a tradition that stems from Mailer's Monroe biography. We quite like that bio, but there's rather a disconnect between intelligence and subject in the book -- reading it is like watching a nuclear reactor being attached to a tricycle, the high tech artifice and energy of the one having little to do with the elementary mechanics of the other. The prize for the most ridiculous hommage to Marilyn surely goes to Andrew O'Hagan's St. Marilyn, an article that appeared, all moist and coldcreamed, in the London Review of Books.
O'Hagan, like every writer on Monroe, seems impelled to put his arm over her shoulder. He starts out with a rather pat, and at the same time absurd, juxtaposition of St. Theresa and Marilyn Monroe. The connection here is that both leave relics... Well, undoubtedly, there are relics of saints and there are autographs, pearls, and chattels of dead stars that end up at auctions. But sainthood is not defined by the reliquary. I imagine you could make the argument that the believer's relationship with a saint is similar to the fan's relationship to a movie star, but I think the comparison is way to broad. It ignores way too many social relationships, including the role of the church. The kind of thrill the buyer of Marilyn's letters gets is not, I think, the same thrill experienced by making a pilgrimage to Lourdes.
He then shifts into the classic therapeutic approach to M.M. Odd how you can't write about M.M. without taking a side:
"Barbara Leaming's new book adds to a sense of Monroe as someone in constant struggle with fictionality and mental illness, with the demands of men, and with an overwhelming wish to be taken seriously as an actress. Monroe's mother blamed her daughter for being born, and the child grew up with a dark memory of people screaming in the hall, of departures and uncertainties, and of men taking advantage of her loneliness and dependence."
I wonder what men taking advantage of her loneliness and dependence means. Taking advantage seems to hint at having sex. And the thought behind that, of course, is that the woman surrendering that sexual treasure is, of course, giving a pure gift -- one that takes from her, and gives nothing back. A token, in fact, that signifies conquest. Well, the idea that M.M. was a martyr to the male brute's desires, a blond Olive Oyl, is not borne out by anything M.M. said. In fact, she seemed to enjoy sex quite a bit herself. O'Hagan's wording, here, slots all too easily into the madonna/whore logic Freud explored in his Three Essays on Sexuality.
Here's O'Hagan, being particularly dim, I think, on the period around the time of the Seven Year Itch:
It was Marilyn's misfortune to think that serious acting could save her from self-doubt. In fact it only exacerbated it. The Girl, though certainly choking and limiting as a character, was something she knew about, and it remained for her a very special and individual invention. But Leaming is bigger and better than any other biographer when it comes to describing Monroe's terror in the face of Twentieth Century Fox's view of her.
In 1955, after showing America and the world how to relax about sex by allowing her skirt to blow over her head in The Seven Year Itch, Monroe ran away to New York to become somebody else. But The Girl would always follow her. She threw a press conference to reveal 'the new Monroe':Cocktails were served for about an hour as guests awaited a 'new and different' Marilyn. Shortly after six, the front door opened and Marilyn blew in like a snowdrift. She was dressed from head to toe in white. A fluttery white mink coat covered a white satin sheath with flimsy, loose spaghetti straps. She wore satin high heels and white stockings. Her long, sparkling diamond earrings were on loan from Van Cleef & Arples.
Marilyn seemed disappointed when people asked what was new about her. 'But I have changed my hair!' she protested. Her hair did seem a shade or two lighter. Asked to describe the new colour, Marilyn replied in a child's voice: 'Subdued platinum.' The crowd received Marilyn with good-natured amusement. They responded as though she were one of her comical, ditzy blonde film characters? 'I have formed my own corporation so I can play the kind of roles I want,' Marilyn announced? She declared herself tired of sex roles and vowed to do no more. 'People have scope, you know,' said Marilyn. 'They really do.'"
He doesn't seem to connect this trope -- sexy comedianne wishing to be taken seriously -- with its long tradition in Hollywood, and M.M.'s probable awareness of it -- an awareness inscribed in The Seven Year Itch. As for the "terror" of being manipulated by the Studio publicity machine ... as for 'showing the world how to relax about sex..." Well, as we said earlier, M.M. has an extraordinary effect on writers. She makes them go off the road, over the river and into the trees, crashing all the way.
Dope.
No. Not today. The Enron news comes thick and fast, and you know how LI laps this stuff up -- it is our personal financial porno, wish fulfillment that overwhelms the senses. Etc. But isn't it the better portion to resist the snares of the devil, especially when the devil comes bearing such unbearable proofs of the correctness of one's world view?
Surely our world view is not all that correct. Surely there's something diabolic going on here.
We try to diversify our little posts when we can. Actually, we had planned a post on Marilyn Monroe this week. Over the weekend, we watched the Seven Year Itch with our friend, S. We also urged her to see Some Like It Hot -- which she did. She was impressed by Jack Lemmon in the latter, and she laughed at the former, but in neither did she find Ms. Monroe the "stradivarius of sex," as Norman Mailer once pronounced that ill fated woman. Our friend S. doesn't cotton to the "flighty blond" imago -- which would put the keebosh on appreciating Marilyn.
Ourselves -- well, when I was a little boy, with a hey, ho, nonny nonny ne, I used to watch Monroe movies on Channel 17 in Atlanta, Georgia. Of course, I was learning, like any true American adolescent, to connect the hormonal dots with the help of visual aids, and she was a nice visual aid. But I like to think that even then I had a budding, so to speak, sense of what movies were about. Cinematic possibility imported into my own life, that was what they seemed to be about. You watched a movie in a theater, and the very bigness of the screen, the scale of sound and sight, guided you outside of that viewing -- it gave you a sense of how you could manipulate your own scale in the world, a sense for the action of the sensibility on the deceptively inert appearance of things. So, for example, some like it hot gave me the idea that someday I could troop around with scantily dressed chorus girls; it even made me see the girls in the seventh grade as possibly scantily dressed chorus girls, given the right circumstances. This is important -- those who lack any intuition of how fantasy can bend the world are not more careful judges of what exists, but the worst judges -- they walk through a world of locks without keys.
Yet when I watched Seven Year Itch this weekend, on S.'s tiny tv, I experienced this odd thing, this thing I've been experiencing whenever I see a film that was made more than twenty years ago -- I am more interested in the things that existed then, and their evidence in the pans and takes, than I am, really, in the content of the film. To give you a for instance -- S. and I saw The Blues Brothers a couple of weeks ago. The plot of the film was even worse than I vaguely remembered. But what moved me almost to tears was the introductory shots, which showed Chicago from the air. Guess what? Chicago, at that time, still had patches of industry. There were factory chimneys spouting smoke. Just this little factum seemed so intensely interesting to me -- filled me with such a sense of loss, and of time itself -- that I didn't really follow the rest of the movie.
The Seven Year Itch, with its lubricious/silly jokes about straying husbands, and its New York City without a/c, did not thrust its facts on me with the same force. It was an imminently theatrical film. The fact that slowly, slowly filled me with that sense of loss was more a social fact -- the existence, even in caricature, of this kind of culture, this post-war prosperity, that has been so radically altered that it doesn't really exist any more. Yes, I get my Proustian kicks watching b&w films. S., who is so much younger than me, is immune to this nostalgia.
It is one of the gifts of middle age. Alas, the term middle age is so loaded with unfortunate connotations that my readers will probably take me to be meaning something deeply ironic. I'm not being ironic. You don't really understand the past, I think, until you reach middle age. That in itself makes it worth being forty-four.
Okay, since this does seem to be vaguely about Marilyn Monroe: on the Monroe front, we found several articles, each more ridiculous than the other -- this, too, is a tradition that stems from Mailer's Monroe biography. We quite like that bio, but there's rather a disconnect between intelligence and subject in the book -- reading it is like watching a nuclear reactor being attached to a tricycle, the high tech artifice and energy of the one having little to do with the elementary mechanics of the other. The prize for the most ridiculous hommage to Marilyn surely goes to Andrew O'Hagan's St. Marilyn, an article that appeared, all moist and coldcreamed, in the London Review of Books.
O'Hagan, like every writer on Monroe, seems impelled to put his arm over her shoulder. He starts out with a rather pat, and at the same time absurd, juxtaposition of St. Theresa and Marilyn Monroe. The connection here is that both leave relics... Well, undoubtedly, there are relics of saints and there are autographs, pearls, and chattels of dead stars that end up at auctions. But sainthood is not defined by the reliquary. I imagine you could make the argument that the believer's relationship with a saint is similar to the fan's relationship to a movie star, but I think the comparison is way to broad. It ignores way too many social relationships, including the role of the church. The kind of thrill the buyer of Marilyn's letters gets is not, I think, the same thrill experienced by making a pilgrimage to Lourdes.
He then shifts into the classic therapeutic approach to M.M. Odd how you can't write about M.M. without taking a side:
"Barbara Leaming's new book adds to a sense of Monroe as someone in constant struggle with fictionality and mental illness, with the demands of men, and with an overwhelming wish to be taken seriously as an actress. Monroe's mother blamed her daughter for being born, and the child grew up with a dark memory of people screaming in the hall, of departures and uncertainties, and of men taking advantage of her loneliness and dependence."
I wonder what men taking advantage of her loneliness and dependence means. Taking advantage seems to hint at having sex. And the thought behind that, of course, is that the woman surrendering that sexual treasure is, of course, giving a pure gift -- one that takes from her, and gives nothing back. A token, in fact, that signifies conquest. Well, the idea that M.M. was a martyr to the male brute's desires, a blond Olive Oyl, is not borne out by anything M.M. said. In fact, she seemed to enjoy sex quite a bit herself. O'Hagan's wording, here, slots all too easily into the madonna/whore logic Freud explored in his Three Essays on Sexuality.
Here's O'Hagan, being particularly dim, I think, on the period around the time of the Seven Year Itch:
It was Marilyn's misfortune to think that serious acting could save her from self-doubt. In fact it only exacerbated it. The Girl, though certainly choking and limiting as a character, was something she knew about, and it remained for her a very special and individual invention. But Leaming is bigger and better than any other biographer when it comes to describing Monroe's terror in the face of Twentieth Century Fox's view of her.
In 1955, after showing America and the world how to relax about sex by allowing her skirt to blow over her head in The Seven Year Itch, Monroe ran away to New York to become somebody else. But The Girl would always follow her. She threw a press conference to reveal 'the new Monroe':Cocktails were served for about an hour as guests awaited a 'new and different' Marilyn. Shortly after six, the front door opened and Marilyn blew in like a snowdrift. She was dressed from head to toe in white. A fluttery white mink coat covered a white satin sheath with flimsy, loose spaghetti straps. She wore satin high heels and white stockings. Her long, sparkling diamond earrings were on loan from Van Cleef & Arples.
Marilyn seemed disappointed when people asked what was new about her. 'But I have changed my hair!' she protested. Her hair did seem a shade or two lighter. Asked to describe the new colour, Marilyn replied in a child's voice: 'Subdued platinum.' The crowd received Marilyn with good-natured amusement. They responded as though she were one of her comical, ditzy blonde film characters? 'I have formed my own corporation so I can play the kind of roles I want,' Marilyn announced? She declared herself tired of sex roles and vowed to do no more. 'People have scope, you know,' said Marilyn. 'They really do.'"
He doesn't seem to connect this trope -- sexy comedianne wishing to be taken seriously -- with its long tradition in Hollywood, and M.M.'s probable awareness of it -- an awareness inscribed in The Seven Year Itch. As for the "terror" of being manipulated by the Studio publicity machine ... as for 'showing the world how to relax about sex..." Well, as we said earlier, M.M. has an extraordinary effect on writers. She makes them go off the road, over the river and into the trees, crashing all the way.
Thursday, October 03, 2002
Remora
Kurt Eichwald, NYT's man on the spot, pens one of those baffled by it all news analyses of Enron's business structure. He notices -- as man and dog tend to do, once their noses are rubbed in it -- the nature of the stuff before him, and gently cries, why, this is not gold dust!
He takes the Cuiaba project -- which we have commented about, back in January was it? -- as an example of a fools gold mislabeled the real stuff. Here's his summary:
"For example, among the examples of failed business dealings cited in the complaint is a power plant construction project in Cuiab�, Brazil. This effort, known as the Cuiab� project, was troubled from the inception, according to the complaint. It rapidly went $120 million over budget and had numerous risks and impediments to keep it from being profitable, the complaint says � problems that were well known throughout Enron.
"The Cuiab� project was so problematic," the complaint says, quoting a statement from an unidentified Enron employee who worked on the effort, "that no buyer would be interested in purchasing the project from Enron."
In the standard world of corporate endeavors, the results of the effort were easily predictable. The doomed project would have to be shut down and then written off, with the marketplace reacting to the stumble in a predictable fashion: Enron shares would drop, the company would remain in the doghouse for a few months, and perhaps a few heads would roll.
But with the partnership scheme described in the complaint, all of that was sidestepped. Instead, Enron shifted enough of the failed project to LJM to remove it from its books, in a transaction that appeared to be a sale. Through that transaction, Enron was able to recognize $65 million in income in the final half of 1999, when it was struggling to meet its financial projections."
Now, why would Enron do that?
The answer, dear reader, is that Enron was just responding to the kind of "entrepeneurial structure" people like Michael Jensen had advised in the 80s. Economists of the red meat school (you know, the ones who want to the poor to work harder in their maquilladoras over the river, so that eventually, as the soil is fertilized with their bones, accumulated over the generations, one of their great great grandchildren might enjoy the rare executive perk) -- yes, the governing classes' shock troop theorists, that is who we are talking about, in a word -- had promoted the idea that no amount was too great for the entrepeneurial exec to earn. Steve Jobs gets one billion dollars for last year? Why, he earned it. Larry Ellison walks off with seven hundred million dollars while his company wallows in shortfalls? He deserves it. These, of course, are the same troopers who we can count on to come out whenever the discussion turns towards raising the minimum wage. Heavens, that just hurts the poor!
So, what do you do? You establish a bonus structure that parallels your accounting structure. The latter is designed to make all deals seem immediately profitable, by various pathetic tricks. And that stimulates the greed gland (located south of the hypothalamus), because guess what? You get a nifty bonus on big deals like that.
Thus, one can only laugh when Eichenwald brings out the true blue market as darwinian force argument:
"But in the end, Enron and its executives were given a harsh lesson about the realities of market discipline. By failing to promptly take their medicine for the wrong-headed mistakes committed over the years, the executives allowed Enron's business problems to build up, hidden behind a thick curtain of obfuscation.Then, finally last year, when errors discovered in the partnerships required certain of them to be moved back onto Enron's books, the curtain began to part."
Right. What executives? Skilling? Out by June, 2001. Lay? Having used the company as a slot machine, by November, 2001, he'd gotten all he was going to get out of the beast. How about Thomas White, our secretary of the Army, and the presumed head of Enron's energy unit? Out by February, 2001, when his stock options were primo. The harsh lesson, here, is for the suckers, not the execs. Folks like the Enron employees who couldn't get their money out of the place when the accounting department froze their 401ks on a technicality.
So what is an exec to do if the rules of the candystore look like they are changing? Well, hit back, and sound the great themes of America, liberty and loot, uh, scratch that, justice for all. The FT has a report on the annual meeting of Pigs of America, uh, scratch that, the Business Council, an annual reunion of CEOs. This kind of gas is being vented at this event:
At the press conference to launch the event on Wednesday, he [Esrey, CEO of Sprint] and other members of the Council's committee pointed out that a combination of new legislation, tighter credit, depressed markets, and stricter regulation was stifling risk-taking at US companies."This is a climate that doesn't reward risk-taking - yet the fundamentals of business are to take prudent risks at the right time," said Carly Fiorina, chief executive of Hewlett-Packard. She said she was pleased that the group had completed its takeover of Compaq Computer already, because in the current environment "you're less likely to undertake bold moves even if you feel they're right".
Bill Harrison, chief executive of JP Morgan Chase, warned that attempts to reform Wall Street - led by Eliot Spitzer, New York attorney-general - might further weaken the sector. "I just hope we don't go too far with these things [so] that we damage what's made Wall Street great and what's made this country great."
What can one say about a JP Morgan man bitching about being investigated for penny ante stuff -- you know, bilking the greedy masses of billions of dollars and the like -- by this Spitzer fella?
Laughter in the dark, laughter in the dark.
Kurt Eichwald, NYT's man on the spot, pens one of those baffled by it all news analyses of Enron's business structure. He notices -- as man and dog tend to do, once their noses are rubbed in it -- the nature of the stuff before him, and gently cries, why, this is not gold dust!
He takes the Cuiaba project -- which we have commented about, back in January was it? -- as an example of a fools gold mislabeled the real stuff. Here's his summary:
"For example, among the examples of failed business dealings cited in the complaint is a power plant construction project in Cuiab�, Brazil. This effort, known as the Cuiab� project, was troubled from the inception, according to the complaint. It rapidly went $120 million over budget and had numerous risks and impediments to keep it from being profitable, the complaint says � problems that were well known throughout Enron.
"The Cuiab� project was so problematic," the complaint says, quoting a statement from an unidentified Enron employee who worked on the effort, "that no buyer would be interested in purchasing the project from Enron."
In the standard world of corporate endeavors, the results of the effort were easily predictable. The doomed project would have to be shut down and then written off, with the marketplace reacting to the stumble in a predictable fashion: Enron shares would drop, the company would remain in the doghouse for a few months, and perhaps a few heads would roll.
But with the partnership scheme described in the complaint, all of that was sidestepped. Instead, Enron shifted enough of the failed project to LJM to remove it from its books, in a transaction that appeared to be a sale. Through that transaction, Enron was able to recognize $65 million in income in the final half of 1999, when it was struggling to meet its financial projections."
Now, why would Enron do that?
The answer, dear reader, is that Enron was just responding to the kind of "entrepeneurial structure" people like Michael Jensen had advised in the 80s. Economists of the red meat school (you know, the ones who want to the poor to work harder in their maquilladoras over the river, so that eventually, as the soil is fertilized with their bones, accumulated over the generations, one of their great great grandchildren might enjoy the rare executive perk) -- yes, the governing classes' shock troop theorists, that is who we are talking about, in a word -- had promoted the idea that no amount was too great for the entrepeneurial exec to earn. Steve Jobs gets one billion dollars for last year? Why, he earned it. Larry Ellison walks off with seven hundred million dollars while his company wallows in shortfalls? He deserves it. These, of course, are the same troopers who we can count on to come out whenever the discussion turns towards raising the minimum wage. Heavens, that just hurts the poor!
So, what do you do? You establish a bonus structure that parallels your accounting structure. The latter is designed to make all deals seem immediately profitable, by various pathetic tricks. And that stimulates the greed gland (located south of the hypothalamus), because guess what? You get a nifty bonus on big deals like that.
Thus, one can only laugh when Eichenwald brings out the true blue market as darwinian force argument:
"But in the end, Enron and its executives were given a harsh lesson about the realities of market discipline. By failing to promptly take their medicine for the wrong-headed mistakes committed over the years, the executives allowed Enron's business problems to build up, hidden behind a thick curtain of obfuscation.Then, finally last year, when errors discovered in the partnerships required certain of them to be moved back onto Enron's books, the curtain began to part."
Right. What executives? Skilling? Out by June, 2001. Lay? Having used the company as a slot machine, by November, 2001, he'd gotten all he was going to get out of the beast. How about Thomas White, our secretary of the Army, and the presumed head of Enron's energy unit? Out by February, 2001, when his stock options were primo. The harsh lesson, here, is for the suckers, not the execs. Folks like the Enron employees who couldn't get their money out of the place when the accounting department froze their 401ks on a technicality.
So what is an exec to do if the rules of the candystore look like they are changing? Well, hit back, and sound the great themes of America, liberty and loot, uh, scratch that, justice for all. The FT has a report on the annual meeting of Pigs of America, uh, scratch that, the Business Council, an annual reunion of CEOs. This kind of gas is being vented at this event:
At the press conference to launch the event on Wednesday, he [Esrey, CEO of Sprint] and other members of the Council's committee pointed out that a combination of new legislation, tighter credit, depressed markets, and stricter regulation was stifling risk-taking at US companies."This is a climate that doesn't reward risk-taking - yet the fundamentals of business are to take prudent risks at the right time," said Carly Fiorina, chief executive of Hewlett-Packard. She said she was pleased that the group had completed its takeover of Compaq Computer already, because in the current environment "you're less likely to undertake bold moves even if you feel they're right".
Bill Harrison, chief executive of JP Morgan Chase, warned that attempts to reform Wall Street - led by Eliot Spitzer, New York attorney-general - might further weaken the sector. "I just hope we don't go too far with these things [so] that we damage what's made Wall Street great and what's made this country great."
What can one say about a JP Morgan man bitching about being investigated for penny ante stuff -- you know, bilking the greedy masses of billions of dollars and the like -- by this Spitzer fella?
Laughter in the dark, laughter in the dark.
Monday, September 30, 2002
Remora
The unwinding
LI recommends a Schopenhauerian article in the Economist today. War, depression, and a moronic leader -- it sounds like Austria in 1935, but no, my good buds, no. It is our own beloved superpower, or hyperpower, or mononucleus macronuclear power, the US of A, which seems destined for a bad period. Although we aren�t totally convinced by this kind of talk � after all, during the last bad period, 1991, there was talk of the collapse of US banking. The better bet is that we will eke out this time. But odds wouldn�t be odds if there wasn�t a chance of the losing end:
"The unwinding of America's economic and financial imbalances has barely begun. Share prices are still overvalued by many measures. Companies still need to prune much more excess capacity. Most worryingly, debts still loom dangerously large. Although much of the increase in reported profits in the late 1990s was illusory, the increase in corporate debt to finance that unprofitable investment was horribly real. Dresdner Kleinwort Wasserstein, an investment bank, estimates that American corporate balance sheets are more stretched than at any time during the past half-century.
"American households' net worth is likely to shrink again this year, for the third year running, after a long, uninterrupted rise since the second world war. If lower share prices cause households to increase their saving sharply, America could be pushed back into recession. Even if saving rises more gradually, the economy is headed for several years of below-trend growth. A weaker dollar would help to cushion the economy, but only by squeezing growth in other countries. The rest of the world, which benefited so handsomely from America's speculative binge, will now have to share its hangover."
Isn't that a lovely word, "unwinding"? It has the crisp techno-beauty of one of those words so cleverly collected by Don Delillo � an artificial flower of rhetoric. All those snappy terms that derive distantly from the impression managers, the think tank, the game theorists. Unwinding should remind us of yarn, and homemakers, and cats; oddly enough, it evokes none of those things. My guess is that unwinding comes from a more clockwork world, one in which the key can go in the slot and uncoil the mechanism. We don�t know when "unwinding a position" became a wall street phrase of art, although we�ve looked around. Where are the lexicographers of tomorrow? Here�s a puzzle for you.
Swift uses a prototype of the phrase in "The tale of a tub;"
"However, that neither the world nor our selves, may any longer suffer by such misunderstandings, I have been prevailed on, after much importunity from my friends, to travel in a complete and laborious dissertation upon the prime productions of our society, which, beside their beautiful externals, for the gratification of superficial readers, have darkly and deeply couched under them the most finished and refined systems of all sciences and arts; as I do not doubt to lay open by untwisting or unwinding, and either to draw up by exantlation, or display by incision."
LI knows that Wall Street does have its litterateurs. However, we doubt that the term came from Swift, however nicely this would fit our sense of the, uh, impostures of high finance
The unwinding
LI recommends a Schopenhauerian article in the Economist today. War, depression, and a moronic leader -- it sounds like Austria in 1935, but no, my good buds, no. It is our own beloved superpower, or hyperpower, or mononucleus macronuclear power, the US of A, which seems destined for a bad period. Although we aren�t totally convinced by this kind of talk � after all, during the last bad period, 1991, there was talk of the collapse of US banking. The better bet is that we will eke out this time. But odds wouldn�t be odds if there wasn�t a chance of the losing end:
"The unwinding of America's economic and financial imbalances has barely begun. Share prices are still overvalued by many measures. Companies still need to prune much more excess capacity. Most worryingly, debts still loom dangerously large. Although much of the increase in reported profits in the late 1990s was illusory, the increase in corporate debt to finance that unprofitable investment was horribly real. Dresdner Kleinwort Wasserstein, an investment bank, estimates that American corporate balance sheets are more stretched than at any time during the past half-century.
"American households' net worth is likely to shrink again this year, for the third year running, after a long, uninterrupted rise since the second world war. If lower share prices cause households to increase their saving sharply, America could be pushed back into recession. Even if saving rises more gradually, the economy is headed for several years of below-trend growth. A weaker dollar would help to cushion the economy, but only by squeezing growth in other countries. The rest of the world, which benefited so handsomely from America's speculative binge, will now have to share its hangover."
Isn't that a lovely word, "unwinding"? It has the crisp techno-beauty of one of those words so cleverly collected by Don Delillo � an artificial flower of rhetoric. All those snappy terms that derive distantly from the impression managers, the think tank, the game theorists. Unwinding should remind us of yarn, and homemakers, and cats; oddly enough, it evokes none of those things. My guess is that unwinding comes from a more clockwork world, one in which the key can go in the slot and uncoil the mechanism. We don�t know when "unwinding a position" became a wall street phrase of art, although we�ve looked around. Where are the lexicographers of tomorrow? Here�s a puzzle for you.
Swift uses a prototype of the phrase in "The tale of a tub;"
"However, that neither the world nor our selves, may any longer suffer by such misunderstandings, I have been prevailed on, after much importunity from my friends, to travel in a complete and laborious dissertation upon the prime productions of our society, which, beside their beautiful externals, for the gratification of superficial readers, have darkly and deeply couched under them the most finished and refined systems of all sciences and arts; as I do not doubt to lay open by untwisting or unwinding, and either to draw up by exantlation, or display by incision."
LI knows that Wall Street does have its litterateurs. However, we doubt that the term came from Swift, however nicely this would fit our sense of the, uh, impostures of high finance
Saturday, September 28, 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.
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.
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.
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.
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