Day 311 – Penmanship (continued)

          Precluded  by genetics from the easy path to attracting and fascinating the opposite sex—that is by looking awesome—I was left to pursue charm. Realistically, most of us are in this boat. We must, perforce, resort to language to pitch ourselves as worthy companions. We must be glib, charming, communicative, and/or interesting. It’s not easy, especially for the shy and the conversationally disadvantaged, although, even here, some paths are easier than others.

I thought the easiest way would be to become a writer. That way I could have a reputation for a way with words that would precede me into social contexts. I would have a body of work to prove how well I could weave words. The beauty part would be that, having the evidentiary body of work, I would not be required constantly to prove my lingual mettle by actually carrying on conversations. It would be almost exactly the same as being rich or good looking.

By the time I developed what might pass for a body of work, though, I didn’t need it anymore. I was already married and off the market. I had found a woman who thought I was attractive—and still does apparently. I didn’t need to write or talk or play golf. It turns out I didn’t even need a job. She still thinks I’m good looking. I make her swoon a little bit. This is why I say it is better to be lucky than smart. If you are lucky, good stuff just happens that you will never be able to account for by logic. A little luck trumps handsome. Go figure.

Day 311 – Penmanship

          I almost always wanted to be a writer, but I never wanted to work at it. It’s a damn hard thing to do for one thing. It’s much harder than accounting or finance. I say this as an accountant who can discuss in-substance defeasance as it relates to advance refunding bond issues—not that anyone should care, but I think, from the way people’s eyes glass over when I utter that phrase, that it helps put things into perspective.

Just using English properly (or any language for that matter) is a thing that seems beyond most people’s ken. Going beyond mere correct usage, however, and forging language into a meaningful and compelling narrative is a superhuman undertaking that borders on the miraculous. This near miraculous facility with language is why guys like Salmon Rushdie can occasionally marry women like Padma Lakshmi. It’s easier to be good-looking of course, but, if you are not, it’s good to know that you can overcome a weak chin or pasty complexion with a resonant phrase.

Still I would rather be handsome than charming in the same way that I would rather be lucky than smart. I’m not just speculating. I know this—rather by accident, but I know it just the same. I had a neighbor once who was a spectacularly good-looking fellow. He was tall and lean and muscular. He had classic chiseled features, curly blonde hair, and stunning azure eyes. He was studying to become a golf pro. By studying, I mean he played golf every day with a teaching pro, and his aim was to get a PGA license and get onto the pro tour. He was also married to a very attractive young woman, whose function in life had been to support him in his quest to become a golf champion. Somehow she had either failed or grown weary in this role, and when I knew them they were in the process of divorcing.

One day this fellow asked me if I would accompany him to a pool party at an apartment complex across town. I doubt that he needed a wing man, but for whatever reason, he didn’t want to go alone. I agreed and happily. I was in my twenties, single, and almost adventurous…for an accountant. It may have occurred to me that being in tow to someone attractive could not fail but to get me some residual attention. Boy was I wrong. What followed was a revelation to me.

We came into the party on the back side of the complex. We grabbed a couple of beers and made our way around the pool to the club house at the front end. Along the way we passed maybe 100 young women, any one of whom I would have been glad to get to know. Not one of them seemed to know that I existed. Not one of them acknowledged my presence in any way whatsoever. They didn’t even glance at me to make sure their initial assessments had been correct, and that I was indeed beneath their notice or attention. They were all too busy swooning at the sight of my friend, Adonis.

I’m not making this up. I am not even embellishing. I had not realized up until that moment that girls could swoon over regular citizens. I knew they swooned. I had seen it on TV. Every time the Beatles got off a plane or out of a limo somewhere, there were plenty of hysterical chippies on hand to greet them, and they all had a particular look in their eyes like they had just seen their complete bliss and they had to get their fill of it before it was snatched away. I thought it was a little silly and laid it off to the music, the fame, and the glamour.

Now I was witness to the same kind of swooning, although without the screaming and hysteria, that I had seen on TV. This time, however, there was no music or fame or glamour. There was only handsomeness, but it was sufficient to make all these young women go weak in the knees.

It was a palpable thing, and, walking as close as I was to my good-looking friend, I could observe it as if it were happening to me, although clearly it was not. I watched the girls’ eyes get wide as early rising moons. They would blink once or twice, and stare unabashed. Their jaws would slacken and drop. They would forget how to walk. Most of them just stopped in their tracks, probably to avoid tripping over their own feet, which had been rendered useless by flooding hormones and misfiring synapses.

This happened time after time and without exception. I knew in a few minutes that it was possible to slay women with a glance, to induce in them a visceral longing without saying a word, without sweet nothings, without courting, without permission. I have never since coveted a power so much.    

It has never been mine to have, of course. It’s not the kind of thing you can develop. It is only a thing you can be born with, and, having been born with it, I don’t think it is a thing of which you are aware. At least you shouldn’t be. It just wouldn’t be fair. My friend certainly wasn’t—not on a purposeful level anyway. He couldn’t have cared less. In fact it was probably his indifference that allowed these women to swoon in the first place. Had he been aware of their reactions to his passing, had he been looking at them, they wouldn’t have been able to stare at him and swoon. Conversely, had they been less preoccupied with him, and thus able to look at me, I wouldn’t have been able to watch them swoon.

I might have been better off if it had worked otherwise. I mean I think it would be better for me not to know that this power is loose in the universe. It is a troublesome thing for me to have experienced. Having witnessed the power of gut attraction, my place in the cosmic pecking order of sexual magnetism will be ever precarious. Everyone else, however, is probably better off that it worked as it did. The women were happily unaware that I knew their weakness, and they were protected from their own folly in that my friend remained unaware of the power he had over them. This much is all as it should be, I think, but knowing it is a burden of which I am grown weary.

Day 304 – Punters and Touts

Shame on us if we don’t stop the banks from continuing to fleece the country. They will be happy to blame someone else for the problems they created. In fact they’ve already done it. Do Bank of America or Citibank or JP Morgan or Goldman Sachs take any responsibility for the financial crisis? Do they think the Great Recession has anything to do with predatory lending policies and profiteering on unregulated derivatives, or do they want to lay it all at the feet of people who defaulted on their mortgages? 

There is no way that the threat of foreclosures on subprime loans brought the global financial system to its knees. The math doesn’t work. If all the subprime loans that are going to go bad went bad on the same day, the carnage still wouldn’t add up to what we got. What we got was a ridiculous multiple of the actual problem. And the reason we got a ridiculous multiple is the extent to which the banks leveraged their own folly.

The value of all residential mortgages outstanding in mid 2008 was $10.6 trillion. This number includes good mortgages and bad. Of this total 9.2% or just under $1 trillion were either delinquent or in foreclosure in August of 2008, the month before Lehman Brothers collapsed.

Of this amount there was still some residual value in the underlying residential real estate. Average home prices had declined about 20% by that time. If you consider that the homes with delinquent mortgages were probably in worse shape than the average home, the value lost might have been as much as 40%. So the actual losses on mortgages in default in August of 2008 was something like $400 billion. How did this amount devastate the nation’s economy and send our largest banks into a tailspin?

The answer is twofold—leverage and speculation. The five major investment banks (Bear Stearns, Merrill Lynch, Morgan Stanley, JP Morgan, Lehman Bros. and Goldman Sachs) were leveraged between 25- and 32-to-one at the end of 2007. That means for every dollar of assets they had $32 dollars of debt. They were at the limit of their capital requirements, so their leverage played heavily in determining their soundness. Because of the leverage, if a bank had a million dollars of losses in their loan portfolio and took the loss—that is marked their portfolio down to its realizable value—it would have to come up with $25 to $32 million of additional capital. As you can imagine, this is a pretty scary place to be. This is why no one wanted to write their assets down. This is why they invented accounting chicanery and subterfuge to get the bad assets off their books at full value. At this point, not that I would suggest this is what happened, even fraud would have seemed a better alternative to telling the truth. The consequences certainly would have been less onerous—a few hundred million in fines and sanctions against losing the company entirely.

Speculation just made the problem worse. While there were $10 trillion in outstanding U.S. residential mortgages in 2008, there were $47 trillion in nominal value of credit default swaps circulating in the largely unregulated over-the-counter derivatives market. No one really knew how much was outstanding because the market was unregulated. The market was unregulated because Alan Greenspan, Bob Rubin, and Larry Summers decided to keep it unregulated back in the late 90s. Not only that...they saw to it that Brooksley Born, then head of the Commodities Futures Trading Commission, was silenced for daring to suggest that an unregulated market this size might turn out to be a problem.

Today Greenspan at least admits that this was a mistake. Rubin has denied any complicity in the decisions, and in a Herculean revision of history akin to cleaning out the Aegean stables, now claims that he always thought regulation of the derivatives market was a good idea.

Credit default swaps are like insurance contracts put into place to cover the losses should some mortgages stop performing. The derivatives protect the income stream of the investment in the mortgage. If the homeowner defaults, the derivative pays off. The investor, the organization in this case that bought a package of securitized mortgages, is whole. This is the ostensible purpose of CDS, but if this were their real application why in the world would we need $47 trillion of swap contracts to protect us from $400 billion in losses? That is 117.5 times more protection than was needed.

The speculative part of the problem comes in because, in the world of derivative contracts, you don’t have to own a mortgage to insure against mortgages defaulting. These things are traded in banks and brokerage houses, but they would be more at home in betting parlors. They are not investments. They are wagers.

Derivatives are gambling in its purest form. They are perfectly analogous to a pari-mutuel ticket on a horse race. When you bet on a horse race, you do not have a stake in the horse. You have no interest or participation at all in the horse racing industry. Your only interest is in the outcome of the races on which you have bought tickets. Derivatives are the same. You are betting on the outcome of an event. You don’t have to have a stake in the event other than your contract. You don’t care about the owner of the mortgage, or its originator, or the homeowner, or the value of the mortgaged property. You only care if the mortgage stays good or goes bad. One way you win. One way you lose. Whatever else happens is not your concern.

You can buy a contract on anything. This is what our august financial institutions were doing—gambling on outcomes in which they had no stake other than the outcome. Because the market was unregulated and thus hidden from scrutiny, no one had any idea how deeply the problem ran. The banks were betting against their bets against their bets against their bets that mortgages wouldn’t go bad.

Of course the problem was that If a bunch of mortgages went bad, the companies that sold the derivative contracts were going to have to pay off three and four times...or 10...or 117. No one was prepared to do that. No one could. There wasn’t enough real value in the system to allow that to happen. The whole thing was an enormous house of cards that spun off hundreds of millions of dollars of profits over a decade or so, but which was so fragile that it would all come tumbling down in the balmiest zephyr of ill wind. That’s why now we taxpayers are going to have to pay off the losses three times over before we’re out of the woods.

This is crazy. This kind of stuff is no longer about saving the financial system or shoring up the markets against unforeseen volatility. This is about a handful of guys that we trusted because they were supposed to be the smartest guys in the room betraying that trust and using their smarts, their cultural advantages, and their connections, to systematically strip us of the wealth many of us actually worked for…and they’re still at it.

The banks are still lobbying for less regulation, still trying to keep unfettered access to derivative plays, still anxious to package and sell collateralized debt obligations, and still especially vested in remaining too-big-to-fail because that takes all the risk out of the game for them. Staying too-big-to-fail insures that they will be bailed out by the taxpayers whenever their risk models fail. They reap huge profits on inordinate risk, and we back their play. Who wouldn’t want a piece of that action?

For an excellent discussion of the events and failures leading up to the financial crisis you can stream the broadcast of episode 355, titled "The Giant Pool of Money," on This American Life, aired by Public Radio International in May of 2008 in plain English with stunning clarity!

Day 297 – Confessions of a Former Voldemort Republican

          I put a tweet up yesterday in which I referred to myself as a Voldemort Republican. I’m really not anymore—probably I never was—but I still think the concept is incredibly funny. I got it from a t-shirt/bumper sticker ad I saw during the last presidential election, but it seems that the concept actually originated with an online comic strip called Goats, which is written and drawn by Jonathan Rosenberg.

          That the humor has been embraced, one would think mostly by Democrats, speaks volumes about the low esteem in which Republicans were generally held leading up to the election of Barack Obama as president. Voldemort is of course the principal antagonist from the Harry Potter franchise. Voldemort is the embodiment of overarching patrician conservatism suffused with an unrelentingly callous evil. This is pretty much the way a lot of people still talk about George W. Bush.

          I always liked George Bush. I thought he was naïve at times, maybe even a little stupid, but I never regarded him as evil. He’s an affable, down-home kind of goof-ball born with a silver spoon in his mouth. He’s a contradiction and an occasional buffoon, but he is not evil. By the same token I do not think that Barack Obama is a Nigerian Islamic communist. I do not think he has an agenda to take my money and redistribute it to the poor and disadvantaged. I do no think he is pursuing a reverse racist agenda.

I think each of these presidents did or is doing the best they can, given their particular ideological proclivities and extremely difficult circumstances. I’m giving them a break. This doesn’t mean I agree with the policies of either of them. In fact, just the opposite. I think they’ve both made a lot of mistakes. I’m just not about to presuppose that I, or anyone I know or know of for that matter, could do any better.

          I’m tired of the slash and burn rhetoric from both sides of the political equation. I’m tired of congressional votes that divide along party lines. I’m tired of the no-quarter-taken-and-none-given lack of compromise on all sides. Republicans were only too happy to give $1.5 trillion to GM, Chrysler, AIG and 13 banks when they thought the world as we knew it would come to an end if chips fell where they may. Now they don’t want to part with a few paltry billion in unemployment benefits because they’re afraid the world as we know it might come to an end unless the chips fall where they may. If they are truly interested in making the country a better place for its citizens, they have chosen an odd place to draw the line on stimulus.

          Just as bad, the Democrats were determined to pass health care reform just to prove that they could, but they couldn’t be bothered to listen to anyone else’s ideas, so we got reform that isn’t and cost savings that don’t. Is there anyone out there who is interested in actually fixing some of our formidable problems? All our politicians and all our pundits act like fundamentalist evangelists who would rather prove that their own personal interpretation of scripture is correct than to actually lead a soul to salvation.

          A few days ago (August 12) there was an article posted at the Fox Forum by John Lott blaming the Democrats for a recent, and nearly insignificant, spike in unemployment claims. Lott believes, along with a lot of other people apparently, that unemployment benefits create unemployment claims. This theory has been debunked nearly as many times as the flat earth, but still it persists. It persists because people are afraid that someone undeserving is going to end up with some of their money. They are afraid some lay-about like me is going to use extended unemployment benefits to fuel my yacht and stock my liquor cabinet with high dollar single-malt scotch. They are afraid that the Democrats are orchestrating a massive shift of wealth into the hands of the poor who are, after all, poor for a reason.

          A person calling himself ‘webedun’ who commented on Lott’s post put it most succinctly: “It's the ‘CLOWARD & PIVEN STRATEGY’ they've had in the works since the '60's. Google it. Glenn Beck saw this coming something like a year ago. Just look it up and learn. You'll see the Progressive's plan to take down the Government.” Well I did Google it, and I have to say that I don’t think that ‘webedun’ looked it up himself. He just took Glen Beck’s word for what Cloward and Piven were all about, and then he tried to apply it to a case where it doesn’t really fit.

          The Cloward and Piven Strategy was a proposal by two sociologists back in 1966 for a massive registration of qualifying poor people in order to create a welfare crisis and thereby force the Democrat controlled Houses of Congress to pass something like a guaranteed national income. It was folly then, and it remains folly today. Anyone who would posit it as a viable political agenda, a strategy to be either feared or embraced, would necessarily have an IQ hovering around their hat size. It is ridiculous, and yet there it is on the Internet, touted rather seriously as something I need to look up and guard against.

          The irony is that while Glenn Beck and his minions are worried about a massive shift of middle class income to poor, unemployed, illegal Mexican immigrants, shiftless African American welfare cheats, and secret cells of Muslim terrorists, there has in fact been a massive shift of middle class income. It went the other direction. Instead of going to the poor it went to the rich. We watched it happen and we were too dumbstruck to say anything about it.

          It didn’t have anything to do with Democrats or Republicans either…or liberals or conservatives…or George Bush or Barrack Obama. We were fleeced by our banks. Not only that. They’re still at it. Our banks robbed us of our prosperity. They stole our future. They bet our farm, lost, and got reimbursed for the loss…by us. We paid twice. They lost our stuff and then they got us to pay them for losing it. It’s not over either. They’re going to get us to pay for it a third time. All that lost value, all those toxic assets we heard so much about, they’re still there—still secreted on and off the banks’ balance sheets at inflated values. They haven’t taken the losses we already paid them for yet. They are waiting until they have enough profits to offset the unrealized losses on their books.

Where are they going to get these profits? From us. They are going to charge us fees for doing things they ought to do for free. Citibank is talking about charging a fee if you want to talk to a teller. They are going to charge exorbitant interest rates to loan us money that they get for free. The more trouble they get us into, the more they are going to charge us. They will justify this because we are bad credit risks, and we will be getting worse. We will be overextended.

Sadly, I think, if we don't stop them, we will deserve it.

Fox News (I used to like these guys) Perpetuates the Myth that Unemployment Benefits Make Joblessness Worse.

John Lott of Fox News put up a post on Fox Forum blaming the Democrats passing of extended unemployment benefits for recent increases in unemployment claims. You can read his post here.


Sorry, John, but this is pure drivel. The number of people qualifying for unemployment benefits may have changed, but the number of people actually unemployed has not. There is a relationship between length of benefits and average length of joblessness, but it is not a causal relationship as you would have us believe. The increase in benefits, which by the way did not actually increase the total length of benefits but only extended the eligibility window for the full amount, is a response to the real needs of the long term unemployed, not the other way around.


As Harold Meyerson of the Washington Post puts it: "What won't work as an economic solution -- indeed, it amounts to cruel and unusual punishment -- is blaming the unemployed for their failure to find jobs. There are now roughly five unemployed Americans for every open job, according to the Economic Policy Institute's most recent calculations, and that ratio isn't likely to decline much if we leave it to the corporate sector to resume hiring. Corporations have figured out a way to make money without resuming hiring. Their model is premised on not resuming hiring. If the public sector doesn't fill the gap, the era of American prosperity is history."


While extending unemployment benefits is not a viable long-term solution to the problem of unemployment, especially in the current circumstances, it is the humane thing to do, and certainly makes more sense than lining Lloyd Blankfein's pockets with multi-million dollar bonuses while the rest of us strive to crawl out of the smoking ruins.

Day 290 – Adirondack Chairs

Aderondack chairs...the spectacular view is absolutely essential. Cocktails preferred.

          I got interested in matters of finance and economics because I was curious to know what is going on that is making it so difficult for me to find another job. Admittedly I’ve got a few strikes against me in terms of employability—advanced middle age, narrow industry experience, health issues, increasingly inadequate credentials. Still I have a broad base of practical skills, a passable personality (for an accountant), and a modicum of native intelligence. It ought not to be so difficult to find someone who wants to hire me.

The answer to this conundrum, of course, is that no one wants to hire anyone. In spite of a return to earnings and an accumulation of cash reserves among the nation’s businesses, unemployment remains at near record levels. Jobs are not being created. It is a buyers’ market for labor. With too many candidates chasing a relative handful of available positions, any bit of tarnish on a résumé is sufficient to get it tossed out into the darkness where there is weeping and gnashing of teeth.

In other words, even though I have worked myself into irrelevance, and even though, in spite of the irrelevance, I still have some value in a competitive workplace that requires intelligence and creativity, I am at the mercy of externalities. I’m not going to find a job until jobs come back to the American marketplace. I’m beginning to believe that this is not going to happen anytime soon, if at all.

The reasons for this are myriad. As with almost anything problematic, the situation is more complicated than it first appears. It doesn’t make it any easier that so many well-meaning people think they know what’s wrong and how to fix it—all of them with different ideas—while so many others think the problem will fix itself…given enough time. It’s time, I think, to add my own two cents worth.

Big companies, while they may have returned to profitability and while they may be sitting on near record cash reserves, are not adding jobs. The New York Times reported August 8th that revenues increased only 6.9 percent on average for 175 S&P 500 companies reporting 2nd quarter earnings, but profits rocketed up by an astonishing 42.3 percent. The Fed has reported that American companies have stashed an estimated $1.8 trillion in cash reserves, the highest level in nearly 50 years. Harold Meyerson of the Washington Post suggests that none of this will translate into jobs because the American business model is fundamentally changed. They are not adding jobs because they are not seeing growth. Their profits are based on draconian cost cutting measures they took when times were not just bad, but scary. They trimmed jobs, outsourced overseas, cut overhead. Now they are making respectable profits on reduced revenues. They are not going to add jobs until they see growth. Even then they are going to add jobs overseas rather than stateside. It may be un-American, but it will be smart business.

Meanwhile, of course, the remaining employees are doing more work, picking up the slack for their fired compatriots. Anecdotal evidence would suggest they’re not that happy about it, but they have to suck it up because, well, they still have jobs, don’t they? The downside is that morale is sinking, and the incidence of job related health issues is likely on the rise. To me these things are given. I know they will happen sooner or later.

When they do, quality will suffer. Products will come apart at the seams, catch fire unexpectedly, fail. Customer service, becoming more important as product quality declines, will suffer as well. Before you know it another company is on the skids. This can play out in many different ways. Here’s a recent one.

An airline passenger, fed up with being shunted about like a heifer on the way to market and forced to share her personal space with unwashed strangers, decides she needs something out of her bag in the overhead compartment before the plane lands. She decides this even though the captain has turned on the seat belt sign and ordered the crew to prepare for landing. The flight attendant—overworked, underpaid, and tasked with the nearly impossible job of placating passengers who have been getting less and less value for their travel dollar from the airlines for years—attempts to intervene. It's his job to enforce safety standards he didn’t set upon passengers who do not understand or care very much about their importance. Tension brews. Words are exchanged. The passenger slams the overhead compartment door into the flight attendant’s head, leaving a mark.

Eventually the compartment door is closed. The passenger takes her seat. The cabin is prepped for landing. The seat-backs and tray tables are locked in their full upright position. Everyone is strapped in. It’s just another uncomfortable day in the annals of commercial air travel. No one is very happy about it, but what are they going to do…drive? Take the bus? No, passengers and crew alike, they’re all locked into unattractive choices, and they muddle through as best they can because that’s what we humans do...more often than not. I don’t know why. I just know that we put up with an inordinate amount of crap, because we think we have to, right up to the point where we don’t anymore.

Back in the ill-fated commercial airliner, the flight attendant is buckled into his little jump seat contemplating a decades long work history that includes tolerating every kind of rude and abusive behavior that indignant travelers are capable of lavishing upon the primary customer interface of airlines competing on price by cutting costs. He does not paint himself a picture of job satisfaction. He is tired of fading the heat for policies he did not implement, services he did not cut, and seats he did not shrink so he could fit ever-more-ever-less-comfortable passengers into the cabin for which he is responsible.

We all know what happened next. It was just a couple of days ago. The flight attendant, Stephen Slater, got on the plane’s PA system, cursed the abusive passenger, wished everyone else safe travels, deployed the emergency inflatable slide, grabbed a beer from the beverage cart, and slid to freedom. He got arrested later for criminal mischief and reckless endangerment, but his gesture will be forever remembered as one of the single most poignant resignations in the history of disgruntled employees. I wouldn’t be surprised if they make a movie of it. Slater is a hero to millions of overworked, underappreciated, and well abused employees all over the world. Jet Blue, on the other hand, has a PR problem they are not going to be able to shrug off. Jet Blue is on the skids. They just don’t know it yet.

I was talking about jobs, and why I don’t think the economic recovery, such as it is, is going to generate much in the way of new employment opportunities. The other part of the problem, as I see it, lies with small companies—the start-ups, the innovators, the mom and pops with a better mousetrap. Conventional wisdom is that this is the sector where jobs are created. The problem here is that these companies have not returned to profitability. If they existed before the storm, they didn’t have the resources to survive. After the storm, they can’t get the financing to either start or re-start. The banks won’t loan them any money, even though the banks can borrow money from the Fed for free, even though the banks are making record profits, even thought the banks have been bailed out by the federal government, even though the banks have been able to pay hefty bonuses and dividends.

This is because the banks are still loaded up with toxic assets. They still have untold billions of dollars of unrealized losses tucked away in the creases of their balance sheets that they are loathe to disclose. The government that bailed them out is loathe to disclose them as well, as are the audit firms that have for years been blessing the inflated valuations that the banks have put on these assets. Knowing this cancer exists, the banks are afraid to take a flyer on innovation. They are not about to loan money to a start-up and risk another default in their portfolio when they can generate just as much, probably more, profit from fees and usurious interest rates on debit and credit cards. Meanwhile employment lags for lack of start-up capital and funding for product innovation.

We all suffer for this. It’s not a new thing either. It was just hidden before—covered up by the huge bubble in housing prices and real estate speculation. In an excellent article in The Atlantic, titled “How a New Jobless Era Will Transform America,” Don Peck cites economists Edmund Phelps and Leo Tilman, who argue in The Harvard Business Review that “…dynamism in the U.S. has actually been in decline for a decade…[due, among other reasons] not least, [to] a financial industry that for a generation has focused its talent and resources not on funding business innovation, but on proprietary trading, regulatory arbitrage, and arcane financial engineering.”

Regulatory arbitrage and arcane financial engineering are nice generic terms. In their more specific and perhaps better known form they refer to Repo105 transactions and derivatives like credit default swaps. The latter crashed our financial system. The former helped hide the mess. The banking industry has been fleecing America for years, and now they are unable to help us crawl out of the smoking ruins they created because they bought their own swill.

They were so successful for so long at the fleecing that they began to believe their own lies, and that’s when they started fleecing each other. It wasn’t gambling really. All the time they knew that the government would bail them out. How did they know that? They kept cycling their best and brightest into Washington to make policy and emasculate regulation. Bob Rubin and Hank Paulson are the most egregious examples of the lot.

So as a nation we are at least 10 years behind in value-adding innovation. To me this represents 10 years of lost job creation potential. We’ve got a hell of a lot of catching up to do, but we apparently don’t have the money to do it. Republicans are trying to stymie any progress in the name of fiscal responsibility. Democrats are trying to stimulate votes with good money after bad. Meanwhile the same bad actors who got us into this mess—the thieving bankers—are still driving the bus, still hiding their problems, still avoiding any meaningful financial regulation, and still too big to fail. This is why the recovery, such as it is, will not create any jobs.

We all face trade-offs every day. This is especially true, I think, in our work. We expect to have to do things we don’t care for in order to get things we do care for. It might be just money, but for most of us, if you would believe the surveys occasionally by the media, there is more to job satisfaction than just a competitive salary. Most of us want to feel that we are making some kind of contribution, that our efforts are appreciated, that we count for something, that we have added value to the equation.

To me work is kind of like an adirondack chair. Adirondack chairs are almost always positioned to take advantage of a spectacular view. Personally I have never seen one that wasn’t facing water. Without the view I would never sit in one. They are difficult to get into and out of, and they are not very comfortable when you are seated. But, if the view is sufficiently interesting, if you are seated next to someone companionable, if someone is bringing you another cocktail when your glass gets empty, then a little discomfort is a reasonable trade-off, and an adirondack chair makes perfect sense.

Jobs are like that too. Being an airline flight attendant can’t be a very attractive proposition if you only consider the work. The day-to-day activities of flight attendants are in large measure identical to those of wait staff. Worse than that because they don’t get tips, and they have to bus their own tables. The only reason anyone would ever want to be a flight attendant is for the travel opportunities. You can put up with a certain amount of abuse and bad attitude if you occasionally get to visit Paris or Rome or the Carribbean for example. But, if you find yourself with a gash on your head on a flight full of schmucks from Pittsburgh to Kennedy International, you have to consider that the plus side of your tolerance equation has shriveled up to ‘just not worth it.’ That’s the point where you have to get out of the chair and find something else to do. No one is bringing you a cocktail, so just grab a beer on your way out.

Day 283 – Bringing in the Sheaves

As ye sow, so shall ye reap.

          We’ve filled out all the papers to file bankruptcy and reviewed them with the lawyer who is handling our case. We found him in the yellow pages. He specializes in bankruptcies. My hope is that this means he knows what he is doing. I wouldn’t say that he is a class act, but for a bottom feeder he seems competent enough.

The bankruptcy court looks back 6 months from the filing date to do an earnings test. This means that we will need to wait one more month to actually file because, if we file now, my severance pay will fall into the six month period and we will fail the test. Next month—no problem. By next month my average monthly income, looking back the requisite six months, will be well below the poverty level. Isn’t it odd to be in a position to refer to that sorrowful happenstance as ‘no problem?’

The bankruptcy itself is still depressing to me. I never figured myself to be in this boat. Odd as it may seem from a logical point of view, I’d rather get a job and continue to eke out monthly payments for the rest of my life to banks that have in effect orchestrated my indenture than to use the legal means available to get out from under the burden.

I keep thinking back to the comments posted by Jigaboo at Going Concern about how I’m giving accountants a bad name. While I know his assessment isn’t accurate, or even logical in the circumstances, we do agree, Jigaboo and I, that I have failed to live up to my own sensibilities and training. Fortunately, for my own sense of self-worth, I am not alone in this failure, nor is my failure even very notable in the grand scheme of things.

The banks to which I owe money have failed in a much more spectacular fashion than I have. They haven’t actually collapsed like Lehman Brothers, but they have taken large sums of money from Treasury and borrowed large sums at zero interest from the Fed in order to stay afloat. The fact is that the banks to which I am indebted on my pesky credit cards, principally Bank of America and Citibank, are way more leveraged than I ever was, and they will, because of this, forever be precluded from calling me irresponsible.

If they can take bailout money and use it to pay huge bonuses to the executives and traders who got them into trouble in the first place, I ought not to feel too bad about taking advantage of the bankruptcy laws that were put into place to protect me from folly, my own or someone else’s. It’s just too bad that I can’t orchestrate a bankruptcy to give myself a big bonus in order to retain my talent. After all I don’t want myself running off to ply my singular penchant for nonsense on behalf of some other self. I’d rather keep my self where it is, in spite of its lackluster performance to date. Alas I fear that I may lose my self if I can’t come up with the wherewithal to offer said self an attractive and competitive compensation package.

I can’t address the failures of the big banks without also addressing the failures of their audit firms—the supposedly independent accountants whose function it is to assess the validity and value of the assets and liabilities on the banks’ financial statements and tell the rest of us whether or not they are ‘fairly stated.’ There’s been a lot written already about how these auditors have also failed in spectacular fashion. There will be a lot more written in the coming months as public and regulator focus shifts from the financial institutions that robbed us of our prosperity to the accounting firms that were supposed to keep them honest. The irony is that my friend, Jigaboo, apparently does not think that these people are making accountants look bad.

For an thoughtful, incisive, and wholly excellent treatment of the nature and ramifications of at least one audit firm's failure to live up to our expectations, I direct your attention to an article by Francine McKenna at re:The Auditors.

Day 276 – Hood Ornaments

Lehman earnings before the collapse. Takes brass balls to make a hood ornament like this.

          There is nothing like a history of success as a basis upon which to build further success. By the same token, relying solely on past success to provide a clear path into a prosperous future is folly itself. Nothing persuades us quite so well as success that our instincts and abilities are sound, and nothing else is so quick to pull the rug out from under our feet.

          I have said repeatedly here that success is largely a matter of luck. There is no doubt that we can do things to capitalize on luck when it presents itself, but if luck does not present itself there is very little we can do to overcome the adversity that swallows our hopes in its absence. You can be ready for good fortune, but you cannot make it. You can even mitigate bad fortune, but you cannot unmake it.

          Still, we look to past success as an indicator of the probability of future success. We do this as investors. We do this as employers. We do this as humans. We are naturally drawn to what worked before. We are drawn to it, foremost I think, because it is familiar. We know that conditions change, and that, because of the mercurial nature of circumstances, the familiar may not serve us so well in unfamiliar territory. Yet the familiar attracts us because we do not have to think about it so much. This is a danger, but a natural inclination. We want to take the path of least resistance.

Successful executives, being for the most part human, are not much different from the rest of us in this regard. They just have a better recorded history of past successes on which to rely. This history may give them an occasional pass when they err, but it will not make them any more likely to perform up to their reputation when circumstances change. When their bubble bursts they will act and protest in the same ways and with the same results as the fools and charlatans in my past like Henry and Ivan. We have only to look at the events surrounding the collapse of our financial system to see that this is true.

          Dick Fuld, head of the ill fated Lehman Brothers, spent his time before the fall trying to get everyone to believe that Lehman’s problems had to do with irresponsible and predatory short sellers trying to profit off of lies and innuendo. He didn’t do anything to shore up Lehman’s cancerous balance sheet. He couldn’t. He’d been resting on his laurels until it was too late.

Lehman’s earnings were illusory. They were window dressing. They were like the hood ornament on a fancy car with bad valves and clogged injectors. They didn’t mean anything, and they didn’t have any substance. Still, Fuld kept touting earnings as if that should be enough to get the wolves off his back. The wolves did not desist. The scavengers among them were busy shorting his stock. The alpha dogs were demanding more and more collateral. Lehman was getting squeezed in the middle, and all the public hand wringing was just making it worse.

          The reason the wolves did not desist is that the wolves were mostly in the same boat as Fuld. They were all, and indeed they all remain almost two years later, deeply leveraged on overstated assets. An accurate valuation of their worth, individually and collectively, was problematic at best, impossible at worst. Certainly no one wanted to do it. A collective valuation that even approached accuracy would collapse the system. Everyone knew this...the bankers, the auditors, the regulators, Treasury. They just neglected to tell the rest of us. To forestall the collapse, Treasury and the Fed kept proposing ever more ridiculous mergers and absorptions to hide the mess. The NY Fed under Tim Geithner was determined to offload Lehman before it sank. Everyone Geithner approached, and indeed everyone who approached Lehman, wanted the same kind of sweetheart deal that JP Morgan got to absorb Morgan Stanley. Everyone wanted a dirt cheap price and a guarantee from the US taxpayers that they wouldn’t have to swallow any losses. All the potential buyers had enough losses of their own to worry about without buying billions more in a government sponsored fire sale.

          Eventually Lehman was hung out to dry. Treasury wouldn’t back anybody’s play. People are still arguing today about why this happened. Treasury was happy to sweeten the Morgan Stanley deal, and happy to bail everyone else out after the Lehman collapse. Why let Lehman go down the sewer?

I think it was to send a message to the rest of us, especially Congress, just how high the stakes were. In the ugly aftermath of a Lehman collapse no one was likely to question Treasury and the Fed colluding to prop up their buds and compadres at Morgan, Goldman and the rest. Certainly Paulson at Treasury used the prospect of financial chaos to shove TARP down everyone’s throat with little oversight and no accountability. There was even enough residual fear going into the first six months of the new Obama administration to have them looking like Republicans when it came to their treatment of the banks and markets. Of course when you think about it Democrats and Republicans alike use the same currency to get themselves elected.

          What we’re left with today is the same financial system that cleaned us all out two years ago, the same broken down heap with a spectacularly buffed and polished hood ornament. Admire it all you want, but don’t expect it to get you very far down the road.

Day 269 – Lean Chops and Blind Faith (continued)

          When my last company decided to go lean, they were determined to do it right. The lean project came down as a mandate from the private equity group that bought our company. This group had a heavy engineering background. Their strategy was to buy companies that were doing well in their markets—operating profitably and enjoying a respectable share of the total market—but that also had considerable opportunities for improvement. The equity guys would then begin to tweak these opportunity areas to add value to their acquisitions. They had so far done quite well with this approach.

          In my company they thought they had found an ideal combination of niche products that were well received in their respective markets, but which could be produced much more efficiently. This represented to them a very real opportunity to increase production, lower costs, increase profitability, and bump up their market share in the bargain. It all made perfect sense on paper. The execution blew them up. Why? They started in the wrong place and their timing sucked.

          If their timing hadn’t sucked, it probably wouldn’t have mattered where they started. They still would have gotten significant gains in all the areas that interested them. They started with the production end. They wanted to increase manufacturing efficiencies and boost production.

If they had started at the other end of the production line, they would have looked at their sales estimates and come to the realization that they were entering into a period when boosting production was folly. Sales were going to be flat. We already knew this from the cyclical nature of our business. Realizing this might not have stopped them, but they would at least have tried to tweak the demand before they tried to tweak production to satisfy it.

The Field of Dreams approach to marketing only works if you are building something really, really cool.

Instead they took what I like to call the “field of dreams” approach to increasing sales. That is “if you build it, they will come.” I guess you have already figured out that this only works in the movies. They did not come. In fact sales actually declined, and by a significant amount, due to unforeseen externalities at work in the marketplace. This just made matters worse.

          Selling a lean project downstream is almost always a difficult undertaking. The reason for this is that the people in the Gemba, the people who make stuff, believe in their hearts that a lean organization is going to have fewer employees. They know that some people are going to lose their jobs. It would be nice in the Gemba, where value is added, to think that the people who were going to lose their jobs would all work in the offices, where value is often subtracted. Gemba goons know better though.

They have all been through the implementation of countless examples of managerial ideas. They know that some otherwise useless director with too much time on his hands or some prima donna executive is going to want to measure product cost before and after the implementation of the brilliance du jour, and they are going to want the unit costs to go down. That they will measure product costs in an antiquated accounting model that does not understand or accommodate lean results will matter very little. When they have done their comparison, and realize that unit costs have not declined, they are going to want to trim production staff.

This may in fact save money, but it is not a very good way to get production staff to buy into a lean project. No one wants to work overtime implementing a system that eliminates their job. To do so runs counter to the very powerful instinct for self preservation. To do so would be unnatural.

          The lean believers will tell you that this is not how it is supposed to work, and, indeed, they are right. Lean is not about trimming head-count; it is about eliminating waste. When you use lean principles to figure out how to do something in less time with less material, you are supposed to redirect the saved effort into something else that adds value. There are two reasons for this. First and foremost, the objective of lean methodology is not to save money. It is to grow and prosper the company. You don’t want to just be doing the same thing with less effort. You want to be doing more with the same effort. The second reason I’ve already stated. Once you start losing heads as the result of an initiative, the poor slobs in the Gemba, who are way smarter than you give them credit for, are going to balk. Your efforts will be for naught.

What you usually want to happen is for deliveries to increase so that you are producing more with the same effort that used to produce less. This presupposes that your sales are going to increase. If your sales are not going to increase, due say to a cyclical downturn or unforeseen externalities, then your efficiency gains haven’t actually gained you anything. Your costs are exactly the same. The only difference is that the now more efficient production staff is finishing their work early and standing around waiting for the end-of-shift whistle to blow. At this point there is only one way out of the dilemma your lean project has created. I think you know what that is.

          When you do a lean project, it doesn’t matter what the gurus and consultants say about lean not meaning you are going to trim head count. They have to say this stuff to get everyone on board. They may want to mean it, but they also know how it really works. They know it only really works like they say it does when there is plenty of pent up demand to absorb the extra production. The production people know this too. That’s why they are a hard sell. The reality is, always, when sales are flat and management wants to get lean, the first thing they ask when you come to them with an idea for a gain in efficiency is, “How many people can we lose?”…the first thing…every time.

This is why you need to start at the end. Everything needs to start with a sales forecast that you can trust. I’ve never actually seen one of those—not a published one at any rate. A real, trustworthy sales forecast would be the most useful document any business could develop. It would make all the other decisions a business has to make so much easier. Virtually everything goes back to sales—everything important anyway. Decisions about inventory levels, materials and supplies purchases, staffing levels, capital investments, borrowing needs—all these depend on sales forecasts. The more accurate the forecast, the better the decisions are going to be.

The trouble is that no one in management ever wants to see a realistic sales forecast. If you give them one, they will ask you what it would look like if you pumped it up by, say 10%, or if you skewed the mix in favor of higher margin products, or if you added a new and as yet undeveloped foreign market. A sales forecast is never as good as management wants it to be, and no matter what you take them they will try to improve on it by making you quantify their wishful thinking. Then, when they finally get it where they like the way it looks, they publish it and proceed to base all their bone headed decisions on it because, well, it’s in writing, isn’t it?

          So this is what our new private equity group did. They started tweaking production to support a bogus sales forecast. They invested millions of dollars and thousands of man hours into upgrading and revamping our production lines. They had budgets for everything, and everything was coming in under budget. The various work groups were reporting quantum gains in time and through-put. We were all waiting for the money to start pouring in. It didn’t though because sales fell off. They fell off a lot.

          The production staff started looking at the finished inventory stacking up all over the place. They are not stupid. They know when inventory starts stacking up that money is not flowing in. They know that their wages are paid in money, not inventory. They know when heads are going to have to roll to keep the directors in Porsches and Jaguars. They know when the company is about to be forced into an old-fashioned kind of lean exercise—the kind where Gemba guys do not pass go and do not collect $200. So they did what production people everywhere do when confronted by the prospect of no more work. They slowed down. All the touted efficiency gains evaporated almost overnight.

The vice-president of operations and corporate lean champion had to step down. He’s the guy that my boss, Bill, threatened if he ever saw him at a stop light he would yank him out of his truck and beat the shit out of him. When he left he said, “Production is broken. I thought I could get a handle on it, but I couldn’t. It’s broke, and I don’t know how to fix it. I’m out of ideas.”

Well production wasn’t broken. It was working exactly as you would expect it to work based on the compensation model in place. Shop floor workers got paid for producing products up to the point they were producing the amount the company could actually sell. After that there were no real incentives for them to produce any more because the company didn't want or need any more. When it had all the products it could sell the company would start cutting people loose. The production staff was perfectly capable of monitoring the finished goods inventories and adjusting their output accordingly. Production wasn’t broken. Management was broken. In my experience this is almost always the case.

There is an old saw in the army that is instructive about their philosophy of training: “If the student has failed to learn, the teacher has failed to teach.” This was probably truer back in the day when grunts were grunts and soldiers were cannon fodder. A military instructor only had so much material to work with, and he had to teach them or else. ‘Or else’ meant unacceptable casualty rates. In today’s army it’s probably different—especially when you’ve got a bunch of teenage fighters sitting in a big room in Kansas operating lethal drones in Iraq and Afghanistan via remote control. I could be wrong, but I like the old saw.

I think it’s a good philosophy. The burden is on the teacher to train the student. It works better in the military where you can depend on really big and abusive drill sergeants to provide the proper motivation. I think it also should translate well into business practice. If the employee has failed to perform, the manager has failed to manage. There is the problem of proper motivation, but sound compensation plans go a long way to providing the necessary incentives.

Management needs to shoulder the performance burden. When the company falls on its face, management needs to suffer the consequences—not the production staff. When management makes bone-headed decisions, management needs to be thrown out on its ass. Everyone knows this, or seems to. You will often see a manager or two dismissed when things go wrong. BP CEO, Tony Hayward, is just the most recent of newsworthy examples.

These are just sacrificial lambs though. They are scapegoats offered up to appease the marketplace. They do not represent the real carnage of their failures. The first casualties, the most numerous and long-suffering victims of management induced downturns, are always from the Gemba—the place where shit happens.

Day 269 – Lean Chops and Blind Faith

Mid 30's Lincoln V12 Victoria. Greyhound hood ornament detail. Lean to be sure, but not a product of lean manufacture.

          Danish philosopher and theologian, Soren Kierkegaard, once said, “Faith is a state of ultimate doubt.” At least he said something very like it. I heard it in college, and, as my attention at the time was mostly attuned to a plump, spooky co-ed named Pat Hillman, I’m not sure I got it exactly right. Now, when I want to know a little more about it and I want to be able to quote the quote with some authority, I find that I can’t find the quote. I find a lot of paraphrasing, which is okay, but I’d really like the quote for this piece, which is about lean manufacturing.

Kierkegaard had a lot to say about the relationship between faith and doubt, and whatever the point my professor was trying to make 40 some years ago, either about faith or about Kierkegaard, the quote, as I remember it, has stuck with me. I think there is a range of possible interpretations of the quote, from ‘faith is committing to something for which you have no objective proof’ to ‘faith and doubt exist in tension in the human soul.’ Somewhere in the middle is the idea that doubt ultimately defines faith. Without doubt there is no faith. There is instead certainty. Certainty does not require or inspire faith. Mark Twain’s spin on it: “Faith is believing something you know ain't true.”

          It is hard to be a believer—in anything. Belief is demanding. Knowing is not demanding. Knowing is just knowing. When someone wants to get up in your face about what you know, you just trot out your proofs and you are done.

Believers like to act as if they are certain. Certainty is held in high esteem by believers, and believers sometimes attempt to trot out what they believe are proofs. Mere knowers will call them on the scantiness of their proofs, and the believers will be undone. You can’t tart up proofs that don’t prove anything and expect anyone who wants to know to take them at face value. You can’t make proofs without legs attractive enough to get knowers to cheer for their undressing. The believers won’t know that they’ve been undone, of course, because they don’t really rely on proofs. They are believers. It’s when you are a believer but you think you might also like to know a little bit that believing becomes such a bitch.

          This brings us to lean manufacturing. Lean manufacturing philosophy is a religion among its believers. Lean proponents want to adapt lean principles to everything. They keep expanding the Gemba—the place where stuff happens, the area to which one applies lean principles in order to make it lean. It used to be that the Gemba was the plant floor where things got made. Now we have the concept of the lean enterprise. The Gemba has grown like the blob in the movie of the same name, swallowing up territory as it expands. The Gemba now includes the offices—the place where, historically at least, stuff mostly does not happen.

I’m not sure this makes any sense. At its roots lean is about the elimination of waste. Lean wants all activities to add value. A place like an office, specifically a management office where nothing happens, does not add value. The natural inclination of lean is to eliminate offices. You only need to attend one Kaizen event to realize that this is true. When everyone is focused on the creation of value and the elimination of waste, everyone wants to get rid of the paperwork.

The record-keeping function does not add value. The record keepers and transaction recorders who get invited to these events find themselves trying to justify their existence. Kaizen events put a fear into them that they have not experienced before. They realize suddenly that they don’t do anything of value and they need to be eliminated. They will go to great lengths to concoct alleged proofs whose only purpose is to justify the existence of a certain amount of waste as necessary. That this often works is testament, not to the lucidity of the proofs, but rather to the obfuscation offered by the arcane and difficult terminology of the office environment. (We have accountants to thank for this. Luca Pacioli invented double-entry bookkeeping and included a treatise on it in his book, Summa de Arithmetica, Geometria, Proportioni et Proportionalita, in 1494. Since then accountants everywhere have used ever more difficult terminology to make what they do seem magical.)

True lean believers want to extend the Gemba to their homes, their hobbies, their sports teams, and their government. I point this out because I would like to know a little more about how this is supposed to work before I start orchestrating Kaizen events around family meal preparation or cleaning the bathrooms. I don’t want to have to overcome a lot of sensible objections with scantily clad proofs about how much better my household is going to be for the implementation of a family-wide lean philosophy. I am not a believer.

          I have pretended to be a believer. I have even tried to be a believer. The fact is though, after three failed organization-wide lean initiatives, I want a little proof. I’d like to see lean work…just once. I’d be happy if it was just on the plant floor, the Gemba where stuff gets made. I’d like to see it work in the place for which lean was originally intended before I start trying to export lean principles willy-nilly to places where believers are in short supply and everyone, reasonably I think, expects some proof before they will follow you off the preserve.

          I know why lean failed at Albatross, twice. The first time it was because the change agent who got the initiative launched didn’t actually have any idea what he was doing. He didn’t know anything about lean beyond cleaning the place up and organizing the work spaces. This much had some impact to be sure. Common sense tells you that it would. Cleanliness is next to godliness. This is an easy faith to keep. However, 5-S (Sorting, Straightening, Shining, Standardizing, and Sustaining) does not make a lean initiative. It is a good idea but it is not sufficient to philosophy. It is not enough to get a truly lean result. When we stopped at the end of 5-S at Albatross because we didn’t know what else to do, we stopped lean. We didn’t see any results falling to the bottom line so we stopped 5-S as well. Lots of us wanted to be believers, but none of us wanted to make a messiah out of the idiot who got us started but couldn’t follow through. He didn’t have the lean chops. Hell, he couldn’t even access his own e-mail account without help from the people who reported to him.

          The second time lean failed at Albatross, it was because everyone was distracted by another initiative. Management launched strategic sourcing, and enlisted virtually everyone with any supervisory capacity into the project to justify the enormous consulting fees. They did this at the same time that they had actually handed over the lean process to someone who understood how it was supposed to work. The new lean champion was suddenly a lone voice crying out in the wilderness, and feasting on locusts and honey. Eventually this baptizer’s head was served up on a platter to someone’s secretarial Salome.

          Lean also failed at my last job. That one is more of a mystery to me. I thought they were going to get it right. They had focus and commitment across the board. They put incentives in place to get everyone, not just trained, but indoctrinated in lean principles. They had a schedule. They had truly high-caliber consultants to shepherd the process. Still the exercise fell on its face in the end. I think it’s because they started in the wrong place. (More on that tomorrow)