analysis

Commercial Real Estate Analysis Your Way 1.0 for iPhone

by on June 17, 2011

Tap Tonio today releases Commercial Real Estate Analysis Your Way 1.0 for iPhone, iPod touch and iPad users. The application is a comprehensive tool for investment property hunting, allowing investors to quickly assess potential real estate investment property without sacrificing the detailed financial calculations and metrics that help drive decisions. Commercial Real Estate Analysis Your Way …

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Commercial Real Estate Analysis Your Way 1.0 for iPhone

Deformulation Expert Dr. Shri Thanedar Joins Avomeen Analytical Services

April 5, 2011

Chemical Analysis Industry Veteran Appointed as Chief Executive Officer

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Lynn Parramore: Another Big Kiss for Big Business? Volcker out, Immelt in

January 21, 2011

Today, President Obama welcomes Jeffrey Immelt to his White House inner circle as chair of a newly created jobs council after saying good-bye to economic adviser and Wall Street critic Paul Volcker, who is leaving after a two-year term. Is this good news for workers… or corporate executives? Our economic brains at the Roosevelt Institute weigh in. Volcker out and Immelt in, because the administration now wants to emphasize ‘recovery’ and ‘jobs’ instead of ‘crisis stabilization’? Since when did any stabilization not include jobs as a top priority? What we actually have here is the disappearance from the scene of the best known and most visible critic of the excesses of the financial sector and his replacement by the sitting CEO of a company that is heavily dependent on government aid of all sorts, including diplomatic assistance to invest more in China. This is not about jobs, but political money — the White House knows that after Citizens United, it will need to raise about a billion dollars — that’s right, a billion — for its reelection campaign. That’s the context in which this and its other recent appointments need to be judged. ~Thomas Ferguson, Roosevelt Institute Senior Fellow and Professor of Political Science at U Mass, Boston President Obama seems to be putting all efforts into cultivating the confidence of the corporate community. One can see the appointment of Mr. Immelt in this light. It is an interesting question as to whether the CEO of a multinational corporation that employs many people outside of the USA will be a leader who aligns his thinking with the needs of the American people and job creation within the 50 United States. Corporations with large Foreign Direct Investments have very interesting incentives regarding military spending, exchange rate negotiations and labor policies that may not align with the well being of our citizens. It is important that Mr. Immelt embrace the larger concerns of U.S. society if he is to be a successful public servant and foster the reelection of President Obama in 2012. ~ Robert Johnson, Roosevelt Institute Senior Fellow and Director of the Institute for New Economic Thinking GE Capital, the major subsidiary of GE, is a major shadow bank. It used GE’s high-quality credit rating to become a major player in the capital markets, much in the same way AIG FP used the boring insurance industry’s high credit rating. GE Capital was the single largest issuer of commercial paper going into the financial crisis…GE has been at the forefront of blurring a ‘financial services’-centric model of business onto the remains of a hollowed-out manufacturing base, one kept in a minimal state just strong enough to qualify for high credit scoring…All in all, not especially a big win for the Jobs and Competitiveness. ~ Mike Konczal, Roosevelt Institute Fellow (read further analysis from Konczal on this topic here ). *Ferguson’s comments also appeared in a press release put out by the Institute for Public Accuracy . Cross-posted from New Deal 2.0 .

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Richard L. Revesz and Michael A. Livermore: Obama’s Executive Order: Olive Branch to Whom?

January 20, 2011

Tuesday’s news of a new executive order on regulatory review was not welcomed by some progressives. President Obama announced his move in a Wall Street Journal op-ed , and it was widely perceived as an olive branch to regulated businesses. But in its substance, the order mostly boosts the case for a strong government hand in protecting the public from the negative consequences of the free market. The timing of the president’s actions is important, and has played a big role in how they’ve been received. Employment growth has lagged the economic recovery and there is massive ground to make up for jobs lost during the recession. After the mid-term election shellacking of the Democratic Party, many Washington insiders are looking for a rightward tack by the administration. But while the President certainly did make some rhetorical concessions in his op-ed that recognized that regulation can have its downsides (like the now-infamous saccharine example ), the substance of the order, and the president’s reaffirmation of the need for regulation at a time like this, show a deep commitment to an aggressive agenda of agency regulation. In fact, there are several important new changes in the order that respond to long-sought-after demands from progressives. There are beefed up public participation requirements, including a requirement for better use of the Internet to engage the public. In a separate presidential memorandum, Obama creates a system to significantly increase the transparency of agency enforcement, which is where the rubber meets the road for all regulatory programs. This transparency will give public interest groups the tools they need to ensure that the rules on the books actually have the bite of an agency watchdog. There is also new language added to the order that encourages agencies to take into account “equity, human dignity, fairness, and distributive impacts.” While it is too soon to say exactly how that will play out in practice, it gives advocates a hook to go to agencies and push for programs that help the most vulnerable members of society. Perhaps the most important piece of the new order, and the subject that has gotten the most attention, is a requirement for agencies to conduct “retrospective analysis.” This analysis has been called for from both sides of the political spectrum, but importantly, the Obama order requires agencies to look both at “excessively burdensome” and “insufficient” rules — directing agencies to identify areas where rule could be eliminated, but also strengthened. At a time of deep economic crisis, a call to increase regulatory stringency should help alleviate fears that the administration is backing away from its track record of strong protections. The order is definitely a compromise, like pretty much everything that happens in government. In addition to these largely progressive reforms, the president is requiring agencies to conduct special analysis for small businesses that could encourage agencies to write permissive loopholes into new rules. In some cases, small business exemptions might make sense, but this process gives an unjustified precedence to a particular group. Better would have been to expand the section on distributional analysis into a more detailed and systematic procedure, which could take small business impacts into account, as well as other important factors like how rule affect low-income or minority communities. But overall, the order is a solid step forward in the direction of more balanced review. If progressives want to find evidence that the Administration is changing its tune, they will have to look elsewhere (for example, recent moves by EPA to delay important rulemakings on hazardous air pollutants). On this executive order, the olive branch offered to industry is more likely to bear fruit for the public interest in the long term.

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Robert Teitelman: Michael Hirsh’s "Capital Offense"

October 18, 2010

There is a long and distinguished literature on what’s known, in the sniffy French, as “la trahison des clerics” – the betrayal of the intellectuals. In “Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street,” former Newsweek, now National Journal writer Michael Hirsh makes his own contribution to that genre. “Capital Offense” has a broad, sometimes canvas-busting, scope: He examines the wise men, most of them buzzing in and around the great honey pot of Washington, who provided much of the intellectual architecture for what became the great financial crisis of 2008. The book features many characters and ideas, but if there is a single, unifying theme, it’s the fallibility of economic thinking, and of ambitious economists and their fellow travelers, in creating the bubble, and the failure to anticipate its consequences. For devotees of the crisis, and you wouldn’t be reading this if you weren’t, much of Hirsh’s story is known. But Hirsh has generated some fresh reporting and, more importantly, he has constructed a narrative to try to make sense of it all. There are, inevitably, conflicts and confrontations – at the heart of the book Hirsh features the struggle between Larry Summers and Joe Stiglitz for both preeminence in academic economics and in policymaking – that inevitably morphs into a bad guy (Summers) vs. good guy (Stiglitz) stereotype. But despite that, and despite the fact that Hirsh is never shy about making his own opinions known, these portraits break from the caricatures that too-often substitute for analysis. Hirsh recognizes that these are complex personalities, driven by complex motivations, both good and bad. There is sadness to the ambition and drive of the eternally brilliant Summers; a modesty and realism to Milton Friedman; an endearing goofiness to Stiglitz (who for all his absentmindedness, notes Hirsh, seems to have a way with women). Hirsh gives us a sense about why these folks, to a person, were successful enough to influence events. Robert Rubin’s quiet political surefootedness. Alan Greenspan’s mastery of data. Stiglitz’s ability to listen. Summers’ ineradicable sense that the world was one long debating society. And then there is the technocratic Tim Geithner, less a disciple of Rubin and Summers in Hirsh’s view than a man married to saving the status quo. And at bottom, Hirsh is asking a question many others have tried to answer: How could these wise men, the best and the brightest, have failed to see this coming? How could economics have failed to predict the disaster? And given that failure, what are its components and how are they weighed against each other? Hubris, ignorance, greed, self-interest, ambition, self-satisfaction and probably the most insidious, pride all jostle with each other. If there’s an omission here, it’s that Hirsh does not really ever step back and ponder the limitations and uncertainties of all economic thinking, which renders prediction a fool’s game (for a crisis book that handles that subject quite well, see Yves Smith, “Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism”). Stiglitz is lionized in part because his analysis turned out to be at least partly on target. Summers is condemned to the darkness of those who failed history’s test: He supported a financial regime that broke down. But what Hirsh doesn’t say is that, given the ambiguities and perplexities of predicting human economic behavior, the game could as easily have swung the other way – and did for a very long time. Summers’ zest for arguing both sides of any economic issue may well be rooted in a profound realization: There are no (or very few) absolute truths in economics. Sophistry is always a temptation. That said, where’s the betrayal? That sense of betrayal begins when skepticism gives way to certainty, when possibilities congeal into formulaic ideology. From Friedman to Greenspan to Rubin to Summers, they all traded their doubts at one point or the other for a soaring confidence and a deep, nearly utopian belief. The way to the bountiful future involved market liberalization, free trade, deregulation, privatization, integration. A mighty finance sector bursting with innovation and complexity was a good, not a bad, thing. Size was important; speculation provided liquidity; the markets were self-correcting and self regulating. The Anglo-Saxon model, the Washington Consensus, had been proven far superior to other alternatives, whether the smoking ruins of Soviet communism or the Asian Model, with its crony capitalists. Free-market finance was the veritable engine of liberal internationalism. Finance trumped politics. What Hirsh doesn’t do is to confuse errors of policy or theory with criminality. There is no smoking gun here, no indictable offenses that I can find. Although he begins with the famous defenestration of the Commodities Futures Trading Commission’s Brooksley Born, who sought derivatives regulation, at the hands of Greenspan, Rubin and Summers, what he presents here is less dramatic declarations and more the steady construction of a shaky consensus, part free-market economics, part Wall Street reality, part Washington realpolitik. (After all, many of these folks, including Bill Clinton, were liberal Democrats, who needed convincing.) The fact was, for all the 20-20 hindsight, the ideas that supported the system were steadily confirmed by reality, with a few exceptions, throughout the ’90s and into the new century. Of course, those “exceptions” were quite serious – in real life and intellectually — notably the Asia crisis and the failure of Long-term Capital Management. But the very fact that we survived them, that contagion spread only so far, provided more fodder that the Washington Consensus was correct. There was, indeed, a bubble being born – both in the markets and in economics. Each step forward was a further descent into dogmatic orthodoxy. Debate was increasingly stilled; critics, like Stiglitz, were lampooned and ignored. Regulators were captured. The media was quiescent (Hirsh himself occasionally admits his own failures to see the future.) Shareholders were partying. The public was clueless. Those who questioned any of the underpinnings of the system, like economist Raghuram Rajan who warned of risk at Greenspan’s Jackson Hole valedictory in 2005, were dismissed, sometimes politely, sometimes brutally (a job Summers seemed to revel in). Well, we know how it turned out. An entire orthodoxy was upended the weekend Lehman Brothers failed. Economics, like Wall Street, was caught out by reality. But it’s not as if the entire discipline, with its roots in Adam Smith and the physiocrats and its tradition of rational inquiry, has been debunked; rather it was the predictive aspect of the field, with its all-seeing, all-knowing markets and its powerful grip on policymaking, that has taken the most knocks. How can anyone who has suffered through 2008 ever trust an economic forecast again? Well, apparently a lot of folks. Economics and economists continue to busily predict and advise, often with the kind of bullying certitude Summers mastered (and Summers, of course, has himself been busy, not only as Barack Obama go-to economics adviser, but before that, as a much-cited columnist during the crisis in the Financial Times). The depth of the crisis and recession, in fact, has sent economists opining not only on technical questions but also on broader, political and social questions, like latter-day John Stuart Mills. Economics, and its sidekick prediction, apparently remains a drug we cannot live without. The question that needs to be asked – and it’s one that is larger than just this crisis – is whether error represents a larger betrayal, not just a mistake of the intellect, but a conflict, a sellout, a failure of moral rectitude, at its most extreme, a crime. Now there are clear tests for criminality, which are adjudicated in the courts; the rest are judgments, guesses, opinions. It is becoming clear that one of the great problems of economics evolving from an indeterminate, philosophically based inquiry to a discipline with pretension to a science and thus the raw material of policy, is that making the wrong call is more than just a mistake, it’s a moral transgression. Economists then, like Greenspan or Summers, are thus strapped to the table and analyzed. Where does the flaw lie? What combination of weakness deep in their opaque hearts led them into the corruption of error? Hirsh is a sophisticated observer, sensitive to the inevitable crooked timbers of humanity. But many others are not as subtle. Journalism, punditry, even movie-making has, in its earnest attempts at analysis, labored to establish patterns and motivations and attempted to penetrate souls they can never truly enter. The analysis that wins is the one that accumulates the most votes, which may be the way retail politics and the box office works, but isn’t exactly intellectually rigorous. Hirsh does, I think, occasionally fall for the fallacy of hindsight, suggesting that these great minds should have seen this coming but did not, or chose not to look. But this is where we get to what’s often presented, perhaps unfairly, as the treason of the intellectuals: a kind of willful blindness, for whatever reason, a retreat into dogma and faith for their own selfish reasons. This is where Stiglitz is so vital to this story; not because he was omniscient, but because he raised contrarian issues that were systematically ignored by policymakers. Perhaps these wise men were in the bag to Wall Street, as a thousand bloggers insist, or ripe with hubris. Or perhaps they truly believed. Like Dick Fuld, if they could see what was coming, why would they not have acted? Still, the charge of bad faith sticks to them because we have already decided they were smarter and more far seeing than the rest of us on a subject as foreign to the Average Joe as nuclear physics; in fact they’ve briefed us over the years (through a willing media) on the reality of their brilliance: the Committee to Save the World. If the best and the brightest, the Nobelists and the market geniuses, failed to see the future, what hope do the rest of us have? They told us it was safe. – Robert Teitelman Robert Teitelman is editor in chief of The Deal.

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Richard (RJ) Eskow: Wall Street Noir: Moody’s "Double Agent" Ratings

September 28, 2010

What happened to Moody’s is what happens to every “agent” who thinks he can serve two masters. The sad thing is that it keeps happening, even though we’ve seen this movie before. Credit rating agencies are supposed to monitor debt that’s issued by financial institutions and governments. It’s their job to protect investors from purchasing financial instruments that are misleadingly packaged or are riskier than the buyer can afford. These “agencies” hold extraordinary power — to destroy companies, to make people fabulously rich, even to influence governments. The problem is they’re not “agencies” at all. They’re for-profit companies who have their palms outstretched to the big banks for revenue even as they’re “policing” the soundness of their portfolios. Consider the recent checkered past of Moody’s, which holds a 40% market share in the worldwide credit rating business. Allegations have been raised about its CEO’s stock trading, harassment of a whistle blower, and intentional deception of the public for its own financial gain. It got everything wrong when it came to rating debt, despite reports it should have known all along. How is Moody’s handling the public shame caused by its ignominious failures? By lecturing the government on how to handle the disaster its own ratings helped to create. The Moody’s File The SEC declined to file fraud charges against Moody’s last month, not because they thought the “agency” was innocent — the evidence showed otherwise — but because it said there was a jurisdictional problem. As the SEC’s report made clear, Moody’s knew a number of credit ratings had been incorrectly rated too favorably. But rather than face the public embarrassment of admitting its mistake, Moody’s let the public believe the ratings were accurate. Moody’s looked the other way as investors were placed at risk, twiddling its thumbs and whistling to itself like a crooked cop ignoring a robbery. To conceal its mistake, Moody’s s-l-o-w-l-y let the numbers climb back to where they should have been all along. As the SEC makes clear in its report, there is substantial evidence that fraudulent behavior occurred and that investors were misled as a result. The report also presents evidence which shows that Moody’s misled the SEC itself, which is a violation of law. In the latest scandal, a firm that analyzes home mortgages just testified that it told banks that the mortgages they were bundling were a mess , with more than one in four failing to meet even basic underwriting standards — and they kept on doing it anyway. They told the rating franchises, too . But, as the head of the analysis firm observed, “if any one of them would have adopted it, they would have lost market share.” He can’t help it if he’s lucky As if Moody’s reputation wasn’t battered enough, there’s the matter of Kevin Hall of McClatchy Newspapers as follows: “If you look at his major sales in 2007, 2009, 2010, they are all around price peaks and followed by large declines. The likelihood that this is just ‘lucky’ is very low — it appears he is using inside information to time his trades.” Hall and McClatchy had been on the Moody’s story like white on rice, as the saying goes. The headline McClatchy gave to Hall’s October 2009 story, ” How Moody’s Sold Its Ratings — And Sold Out Investors ,” shows how strongly his editors backed his work. Senate panels and the Financial Crisis Inquiry Commission both began investigating Moody’s shortly thereafter, and the FCIC found it tough sledding. Both the FCIC and California Attorney General Jerry Brown found that Moody’s was dragging its feet on providing requested documents. The FCIC was forced to issue a subpoena, and Brown had to go to court to force compliance with a subpoena he had already issued. Revenue over research Moody’s drive to “always be selling” severely compromised its judgment, according to reports. As Hall reported last June , Moody’s executives described its former CEO as “getting in their face whenever they raised obstacles to rating a complex deal, often boasting that they weren’t the ones responsible for Moody’s surge in revenues.” “Agencies” like Moody’s don’t make money by generating accurate ratings. They make it by generating ratings that make the customer — the banks, funds, and insurance companies issuing these debts — look good. No wonder analysts were discouraged from raising red flags about risky deals. A review of emails and other documents generated by the Senate Permanent Subcommittee on Investigations provided more evidence of this pattern. As an internal PowerPoint showed, consultants who spoke with members of the group that rated the riskiest financial instruments found that they saw their roles as follows: Generating increased revenue. Increasing Market Share and/or Coverage Fostering good relationships with issuers and investors Delivering high quality ratings and research Just in case that didn’t make priorities clear enough, the consultants added: “When asked about how business objectives were translated into day-to-day work, most agreed that writing deals was paramount, while writing research and developing new products and services received less emphasis.” A “franchise,” not an agency That’s why the word “agency” is such a misnomer. It’s a word with multiple meanings, but in this case it suggests a quasi-government function. The FBI is an “agency.” The Environmental Protection Agency is an “agency.” Moody’s isn’t that kind of agency. You’d have to look to another definition , like “the capacity, condition or state of exerting power” or “an establishment engaged in doing business for another.” The analysts who placed “writing deals” above research aren’t “agents,” except for the high-stakes gamblers who pay their fees. Follow the money. McDaniel held a “town hall meeting” with employees as the economy was crashing around them, thanks in large part to the great ratings they and their colleagues had given to fraudulent products. He said “… my thinking is there’s a much greater concern about the franchise. Everyone in this room is a long-term investor (ed: presumably in Moody’s stock), for sure.” The raters all own stock in Moody’s and want “the franchise” to succeed. That’s not an agency. It’s a “franchise.” That’s why the company reportedly ” purg(ed) analysts and executives ” who warned that there was trouble coming. It’s why Moody’s and its competitors don’t want to be held liable for “recklessly” issuing bad information. It’s why they withheld their services at a crucial time because they didn’t want to responsible. Now an ex-employee is alleging they defamed him after he raised issues of fraud and inflated ratings internally, and then to investigators. Agencies don’t do that. Franchises do. Ending the rigged game Despite all the evidence, Moody’s is still treated as a credible player … and one that’s powerful enough to send a warning shot across the bow of the United States government . It threatened to downgrade the US government’s debt last March if more wasn’t done to reduce the government’s debt. That’s the kind of rigged game we’re facing: One of the biggest sources of the government’s debt is the economic collapse. That collapse was enabled in large measure by the bad ratings issuing by rating franchises like Moody’s. Now Moody’s wants to hamstring the government’s ability to repair the damage it helped create. And it might. They’re that powerful, and the system is that rigged. Imagine: Moody’s still holds enormous power because it can deny the government a AAA rating — the same rating it once freely gave to mortgage securities underwritten so badly that 28% of them were virtually worthless. It’s a classic film noir ending: The double agents, the cops on the take, they’re the ones who wind up having connections, the ones who seem to come out on top in the end. The Franken Amendment would slow down the profit-driven salesmanship of the ratings franchises. Good idea, but why stop there? Where are the prosecutions? And it’s time to consider shutting these groups down. You’ve seen this movie, too: everybody knows you can’t trust a double agent. _______________________________________________________________ Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America’s Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

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Expiring Tax Cuts Hit Taxpayers At All Levels

September 18, 2010

WASHINGTON — Here’s some pressure for lawmakers: If they don’t reach agreement on extending soon-to-expire Bush-era tax cuts, nearly all their constituents back home will get big tax increases. A typical family of four with a household income of $50,000 a year would have to pay $2,900 more in taxes in 2011, according to a new analysis by Deloitte Tax LLP, a tax consulting firm. The same family making $100,000 a year would see its taxes rise by $4,500. Wealthier families face even bigger tax hikes. A family of four making $500,000 a year would pay $10,800 more in taxes. The same family making $1 million a year would get a tax increase of $53,200. The estimates are based on total household income, including wages, capital gains and qualified dividends. The estimated tax bills take into account typical deductions at each income level. Democrats have been arguing for much of the past decade that tax cuts enacted in 2001 and 2003 under former President George W. Bush provided a windfall for the wealthy. That’s true, but they also reduced taxes for the working poor, the middle class, and just about everyone in between. Those tax cuts expire at the end of the year, setting the stage for a high-stakes debate just before congressional elections in November. If Congress fails to act, families at every income level will see more taxes being withheld from their paychecks come January. The tax cuts enacted in 2001 and 2003 reduced marginal income tax rates at every level. They also provided a wide range of income tax breaks for education, families with children and married couples. Taxes on capital gains and dividends were reduced, while the federal estate tax was gradually repealed, though only for this year. President Barack Obama wants to extend the tax cuts for individuals making less than $200,000 and joint filers making less than $250,000 in adjusted gross income. That’s income from wages, capital gains and dividends, before standard deductions and exemptions are subtracted. Republicans and a growing number of Democrats in Congress want to extend all the tax cuts, at least temporarily. On Thursday, House Republican Leader John Boehner of Ohio said he wants an up-or-down vote on extending all the tax cuts before congressional elections in November. “Raising taxes on anyone, especially small businesses, is the wrong thing to do in a struggling economy,” Boehner said. “On the issue of job killing tax hikes the American people are not going to accept anything less than the vote that they deserve.” House Speaker Nancy Pelosi, D-Calif., wouldn’t commit to vote on any tax proposals before the election. She did, however, pledge to address them by the end of the year. “The only thing I can tell you is that the tax cuts for the middle class will be extended this Congress,” Pelosi told reporters Thursday. More than half the country backs raising taxes on the richest Americans, according to a new Associated Press-GfK Poll. The survey showed that by 54 percent to 44 percent, most people support raising taxes on the highest earners. In a breakdown of the numbers, 39 percent agree with Obama, while 15 percent favor raising taxes on everyone by allowing the cuts to expire at year’s end. Still, 44 percent say the existing tax cuts should remain in place for everyone, including the wealthy. While Obama’s plan would spare about 97 percent of tax filers, it would mean big tax increases for the wealthy. Under Obama’s plan, a family of four making $325,000 a year would get a tax increase of $5,400, while the same family making $1 million a year would get a tax increase of $56,300, according to the analysis by Deloitte Tax. A family of four making $5 million a year would get a tax increase of $325,600. Pelosi said the nation cannot afford to extend tax cuts for top earners. “I see no justification for going into debt to foreign countries to underwrite and subsidize tax cuts for the wealthiest people in America,” Pelosi said. Making all the tax cuts permanent would add about $3.9 trillion to the national debt over the next decade, according to congressional estimates. Obama’s plan would cost a little more than $3 trillion over the same period. ___ Associated Press writer Laurie Kellman contributed to this report. (This version CORRECTS that family of four making $1 million would get a tax increase of $53,200, not $52,300.)

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Basel III Rules: Will New Capital Requirements Prevent Another Crisis?

September 15, 2010

Global financial regulators have pushed through a series of long-awaited requirements that stipulate how much capital banks must hold to protect against potential losses. The requirements, however, have been variously described as a “quiet victory,” something that should be ignored and compared to a ” mouse ” that should have roared. Under the ” Basel III ” rules, banks must hold 4.5 percent of ” Tier 1 capital ” by 2015 and a total of 7 percent Tier 1 capital after eight years. Also included in the accords, as Felix Salmon notes, is a countercyclical measure, which requires that banks hold more capital in when the economy is sound. (Salmon dubs Basel III a “quiet victory. “) At the Washington Post , Steven Pearlstein says the agreements are proof that regulators are “getting their spine back.” And, despite rules that would seem to still allow Lehman Brothers-style leverage, Pearlstein suggests the financial industry will be far more self-correcting in the future: I think we can be fairly confident that the regulators no longer believe, as Greenspan once did, that bank executives always know what is in the best interest of their own banks, and that to the degree that they don’t, the market can be relied on to discipline them. They have also lost confidence in the sophisticated risk-management systems that never questioned the wisdom of 72-month car loans, or loans to subprime borrowers with undocumented incomes or commercial real estate deals premised on returns lower than riskless Treasury bonds. Regulators claim that they now see the folly of their over-reliance on market indicators, such as quarterly profits or current asset values, in assessing the financial health of a bank or the quality of its loans. Supervisors have been told to be more forward looking in their analysis and less optimistic in their assumptions about future profits and prices. But, Martin Wolf, the Financial Times ‘ lead financial columnist, isn’t sold on Basel III. Not only are the capital requirements much too small, Wolf argues, but they’re actually “far below levels markets would impose if investors did not continue to expect governments to bail out creditors in a crisis.” Worse, he argues, the capital buffers don’t end the implicit subsidies provided to the only industry that has “limitless access to the public purse.” Here’s more from Wolf : “…the public has an interest in imposing higher equity requirements than any individual bank would, in its own interest, wish to bear. Banks create systemic risk endogenously. That cost must be internalised by the decision makers. More risk-bearing capacity is one way of doing so. Finally, to the extent that the public wants a specific form of risk-taking subsidised – lending to small and medium-sized enterprise, for example – it should do so directly. To subsidise the banking system as a whole, to persuade it to undertake what is but a small part of its activity, is grotesquely inefficient. ” What do you think? Will Basel III be enough to prevent another crisis?

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Jake Blumgart: A New Labor Standard for Labor Day: Paid Sick Leave

September 3, 2010

You wake up Monday morning with a throbbing headache, achy muscles and a hacking cough. Do you miserably trudge into work, likely prolonging your recovery time and exposing your co-workers to infection? Or do you give your body the time it needs to heal, and call in sick? Can you afford to? For almost 40 percent of the nation’s private workforce, the answer to that last question is no. A recent Bureau of Labor Statistics report shows only 33 percent of workers earning $10.50 an hour or less have access to paid sick leave, compared with 81 percent of those earning $24.22 an hour or more. This means, perversely, that if you can afford to take an unpaid sick day, you generally don’t have to. Politicians and policy advocates across the country are aware of this squeeze on working families, and paid sick leave bills have been introduced at the city, state, and national levels. Most of these proposals are based on the earned sick time model: Employees must work, say, 30 hours to earn one hour of sick leave. Those earned hours accumulate, eventually, into full paid sick days. All the proposals include a cap on the number of mandated paid sick days. Most require five to nine days a year. Some allow employees to carry over unused sick days from one year to the next. “The economic climate makes it even more important for lawmakers to act because, in this economy, workers can ill-afford to miss a paycheck or risk the long-term unemployment that often follows losing a job,” said Vicki Shabo, Director of Work & Family Programs for the National Partnership for Women & Families . “Workers shouldn’t have to put their economic stability and job security on the line every time they get sick. It’s bad for business, bad for workers, and bad public policy.” So far, only two U.S. cities have adopted paid sick leave laws. Since 2008, five other cities, as well as 21 states and the U.S. Congress, have considered similar bills. So far, none have passed, because organized business interests have thwarted the proposals, claiming that even the most modest benefits will harm the economy and kill jobs. That scare tactic has proven quite potent in the present climate, with employers fiercely resistant to anything that even hints at additional costs. Are these claims correct or are the business groups crying wolf? One way to judge is to examine whether places that already have paid sick leave laws are suffering the dire consequences that corporate America warns against. A majority of the world’s nations guarantee sick leave benefits, as do Washington, D.C., and San Francisco. (Similar legislation was passed in Milwaukee with 68 percent of the vote, but area business groups sued and a local court overturned it). In 2006, San Francisco became the first American city to guarantee its citizens the right to paid time off to recuperate from illness. Business groups, spearheaded by the local Chamber of Commerce, lobbied against the ballot measure, which came on the heels of a municipal minimum wage raise and a universal health care law in the city. The business-side arguments evoked the typical “job killer” rhetoric. After voters approved the law by 61 percent, Kevin Westlye, executive director of the Golden Gate Restaurant Association, told the New York Times, “There’s no such thing as a free lunch on something like this,” and darkly warned of rising prices and shuttered restaurants. Four years later, these dire predictions have not come to pass. A recent study by the Drum Major Institute (DMI) shows that San Francisco’s employment rate has remained stronger than in any of the five neighboring counties, including wealthy Santa Clara (Silicon Valley). Even the industries where opponents warned that the impact would be harshest – retail, hospitality, and food services – remained stronger, without exception, than their nearby counterparts. At least 145 nations guarantee working adults some form of sick leave, including rich countries like Germany and Canada, and poorer ones like Indonesia and Senegal. Most of them allow at least one week, and over half ensuring leave of a month or more. A 2006 study in the Journal for Comparative Policy Analysis revealed that there is little, if any, connection between sick pay laws and unemployment levels. A 2009 follow up study by the Center for Economic and Policy Research shows that the duration of European sick leave laws doesn’t have any discernible relation to unemployment rates either. Studies show that paid sick leave is beneficial for employers too. Currently, businesses lose money from high turnover rates caused by illness absences and from the lowered productivity that results from sick employees spreading their germs at work. The Institute of Women’s Policy Research found that if all U.S. workers were offered seven days of paid sick leave annually the result would be “a net savings of $8.1 billion a year due to increased productivity and reduced turnover.” Today, even San Francisco business owners have come around. Jim Lazarus, senior vice president of the city’s Chamber of Commerce, told the Wall Street Journal that the legislation hasn’t stirred up any backlash from his members. And in a June article in Business Week , former doomsayer Westlye, executive director of the restaurant industry’s lobby, sounded downright enthusiastic about the bill: “[Paid sick leave] is the best public policy for the least cost. Do you want your server coughing over your food?” Despite the success of the San Francisco law, business groups continue to use the same tired rhetoric against similar legislative proposals. From California to Connecticut, business groups cry wolf about paid sick leave, and its supposedly catastrophic economic effects. Our nation’s lawmakers would do well to ignore them. Paid sick leave would have a tangible impact on the lives of American families–and politicians. The National Opinion Research Center released a poll in June showing that 86 percent of Americans favored laws guaranteeing paid sick leave. Strong majorities of self-identified Republicans as well as Democrats supported the proposal. Most said they would be more likely to vote for politicians who backed it. All employees should be able to take time off for their illnesses, not just those lucky enough to have the right job. As the San Francisco experience shows, we can make our economy friendlier to beleaguered workers without harming their employers. Jake Blumgart is a researcher with the San Diego-based Center on Policy Initiatives’ Cry Wolf Project funded by the Ford Foundation and the Public Welfare Foundation. His work has been published by the American Prospect, the Philadelphia Inquirer, The Stranger, and Campus Progress. A shorter version of this article was originally published in the Philadelphia Inquirer. Follow him on Twitter .

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Bernanke Tells FCIC: ‘Too Big To Fail’ Problem Must Be Solved

September 2, 2010

WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke told a panel investigating the financial crisis that regulators must be ready to shutter the largest institutions if they threaten to bring down the financial system. “If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved,” Bernanke said Thursday while testifying before the Financial Crisis Inquiry Commission. Bernanke is presenting his analysis of the crisis and views on potential systemwide risks as the panel approaches the end of its yearlong investigation into the Wall Street meltdown. The Fed chief said bailing out these institutions is not a healthy solution and that great improvement will come from the new financial overhaul law. It empowers regulators to shut down firms whose collapse pose a broader threat to the system. “Too-big-to-fail financial institutions were both a source … of the crisis and among the primary impediments to policymakers’ efforts to contain it,” Bernanke told the bipartisan panel. “We should not imagine … that it is possible to prevent all crises,” he said. “To achieve both sustained growth and stability, we need to provide a framework which promotes the appropriate mix of prudence, risk-taking and innovation in our financial system.” Bernanke led the economy through the financial crisis and the worst recession since the 1930s. The Federal Reserve took extraordinary measures to inject hundreds of billions into the battered financial system. Last week he said the central bank is prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly. Sheila Bair, the chairman of the Federal Deposit Insurance Corp., also is testifying at Thursday’s hearing. She says in prepared testimony “the stakes are high” for regulators to effectively exercise their new powers under the financial overhaul law. If not, “we will have forfeited this historic chance to put our financial system on a sounder and safer path in the future,” she says.

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David Isenberg: Taking the Private out of PMC

August 29, 2010

The most important word in the phrase private security contractors is “private.” If and when someone working for a PSC does something wrong the company, depending on the offense, may very well fine him, ship him home, and fire him. But they will do nothing more. They can’t, as they rightfully point out, because they are, after all, a private company and processes like arrests, prosecutions, convictions and incarceration are something the state reserves to itself. Well, okay, not necessarily incarcerations, as anyone familiar with the Corrections Corporation of America will know, and I’ll skip over the obvious old joke about the best legal defense money can buy, but that is another story. A classic example of this happened back in December 2006 when an off-duty Blackwater employee, Andrew J. Moonen, who had been drinking heavily, tried to make his way into the “Little Venice” section of the Green Zone, which houses many senior members of the Iraqi government. He was stopped by Iraqi bodyguards for Adil Abdul-Mahdi,the country’s Shi’ite vice president, and shot one of the Iraqis. Officials say the bodyguard died at the scene. Although Mahdi wanted the man turned over to the Iraqi government, that did not happen. Blackwater fired the contractor and fined him $14,697–the total of his back pay, a scheduled bonus, and the cost of his plane ticket home. However, less than two months later he was hired by another private contractor, Combat Support Associates (CSA),to work in Kuwait, where he worked from February to August of 2007. Because the State Department and Blackwater kept the incident quiet and out of Moonen’s personnel records, CSA was unaware of the December incident when it hired Moonen. Blackwater subsequently acknowledged that the guard had done wrong but said there was little Blackwater could do about it. As Erik Prince of Blackwater said in a congressional hearing: PRINCE:(From tape) Look, I’m not going to make any apologies for what he did. He clearly violated our policies . . . we fired him, we fined him, but we as a private organization can’t do any more. We can’t flog him, we can’t incarcerate him. That’s up to the Justice Department. We are not empowered to enforce U.S. law. Nine months later a congressional report revealed that the guard was so drunk after fleeing the shooting that another group of guards took away the loaded pistol he was fumbling with. Furthermore, the acting ambassador at the United States Embassy in Baghdad suggested that Blackwater apologize for the shooting and pay the dead Iraqi man’s family $250,000, lest the Iraqi government bar Blackwater from working there. According to the report, Blackwater eventually paid the family $15,000 after an embassy diplomatic security official complained that the “crazy sums” proposed by the ambassador could encourage Iraqis to try to “get killed by our guys to financially guarantee their family’s future. Now it is true that PSC and private military contractors have to act, at least theoretically, in accordance with all sorts of laws both nationally and internationally, as well as regulations and directives from government departments (State and Defense in the case of the United States) as well as lots of contract language spelled out in the Federal Acquisition Regulations (FAR) and Defense Federal Acquisition Regulations (DFAR) Still, without the political will of the United States to act there can be no individual criminal accountability. This, as it happens is the point made in a law journal article published earlier this year. Specifically, the article by Amanda Tarzwell, published in the Spring 2009 issue of the Oregon Review of International Law . Note: Hurray for the U of O; now I feel better about having obtained my B.A. there. In her article ” In Search of Accountability: Attributing the Conduct of Private Security Contractors to the United States Under the Doctrine of State Responsibility ” Ms. Tarzwell offers an alternative means of analyzing the unlawful conduct of PSCs: the doctrine of state responsibility. As opposed to individual criminal responsibility, the doctrine of state responsibility holds a state accountable to another state. The doctrine dictates that “[e]very internationally wrongful act [IWA] of a State entails the international responsibility of that State.” In 2001, the International Law Commission (ILC) adopted the Articles on the Responsibility of States for Internationally Wrongful Acts (Articles), representing the culmination of more than forty years of work on the issue. Although the Articles were never formally adopted in treaty form, they are largely a codification of customary international law regarding state responsibility. There are potentially two legal tests for measuring attribution of a private individual or group: the overall control test applied in Military and Paramilitary Activities in and Against Nicaragua, and the effective control test set forth in Prosecutor v. Tadić. Research suggests that the overall control test offers the only viable means of attaching liability to the United States for the unlawful conduct of PSCs. By applying the overall control test, the unlawful conduct of PSCs in Iraq is attributable to the United States, and thereby invokes U.S. responsibility to Iraq. It doesn’t take a rocket scientist to see why this is very important. If a state was faced with the prospect that all of a sudden the rest of the world was going to find it responsible and culpable for wrongdoings by PSC headquartered in its country one can bet that the current woeful state of government oversight of PSC would magically improve at warp speed. The alternative in her view, is: Without a strong legal basis for attributing such conduct to the state, countries will continue to outsource their dirty work with impunity. However, if a state can be held legally responsible for the unlawful conduct of PSCs, any incentive to use PSCs for illegal purposes is effectively eliminated. In the same way that the doctrine of respondeat superior provides a powerful financial incentive for corporations to behave, the doctrine of state responsibility can serve a similar function on the international level. Although Tarzwell is writing about PSC in Iraq her analysis is relevant to any situation in which states employ private actors to operate outside the law. She notes the overall control test requires that the state wield “overall control over the group, not only by equipping and financing the group, but also by coordinating or helping in the general planning of its military activity.” In terms of equipping PSCs, Army Field Manual 3-100.21 makes reference to providing assistance in a number of areas including: uniforms, equipment, transportation, medical treatment, religious practice, and mortuary affairs. As for financing, the state is wholly financing these PSCs by contracting with them directly. One could further argue that the state finances PSCs by having provided the training and evaluation to its personnel while they were soldiers within the national military. That last point, by the way, can only be considered ironic as PSC advocates always argue that the fact that most of their personnel are experienced ex-military personnel is indicative of their high quality and reliability. She also notes: The overall control test also requires evidence that the state provided help in organizing, coordinating, or planning the group’s military activities. The most obvious proof of this is the contract between the United States and the PSC. As discussed earlier, the entire purpose of the contract is to provide support to a requesting military unit. Thus, the terms and conditions of the contract, which reflect the needs of the military, dictate the PSC’s activities. By performing the contract, the PSC has allowed the state to help organize, coordinate, and plan its military activities. Consequently it is not the military commanders per se who exercise control over PSC personnel, but the government officials writing and enforcing these contracts. Accordingly, applying the overall control test, the violations of the principle of distinction by PSC personnel in Iraq are attributable to the U.S. government and therefore engage the state’s responsibility.

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Marty Zwilling: Startups Need Focus to Cross All the Chasms

August 27, 2010

Everyone in the business world has heard of the book by Geoffrey A. Moore titled ” Crossing the Chasm ” (1991), but most entrepreneurs have no idea how it relates to them. In fact, it’s all about the “focus” required to get early stage technology products across the deadly chasm from early adopters to mainstream customers. Most investors and startup professionals expand this concept of focus to apply to key issues of every aspect of strategic and tactical planning in a startup. Missions and products that are too broad confuse your team, your customers, and potential investors. There are other chasms out there just as deadly as the technology one, such as the ones below: • Market requirements chasm. The first chasm is getting the customer requirements right, product or service, to satisfy a real need that a large number of customers will pay real money to satisfy. It takes focus to resist adding a long list of features that seem to make the opportunity larger, but dilute to focus on both you and potential customers. • Product development chasm. Another common chasm is never-ending product development. Focus is required to resist adding a few more neat features, made possible by the new technology, which in fact make the product more complex to use, impossible to test, and very expensive in time and cost. • Marketing and sales chasm. Lots of people still believe the major cost of a new product is development. These days, with all the clutter in the marketplace, the highest cost is usually marketing. Focus is required here to pick the low-hanging fruit, break through the clutter, and then move on to the next segment. Marketing costs can be a deep hole. • Customer support chasm. Products that have features which are unfocused, or aimed at too broad an audience, can be almost impossible to support. Customers need lots of help with installation, or can’t make the product work the way they expect. The result is that customer satisfaction in unachievable or at least very expensive. In his book, Moore limits his discussion to the transition between customers that are visionaries (early adopters) and customer pragmatists (early majority), in the context of high technology products that appear “disruptive,” meaning they move innovation in that arena to a new level. Here are the five customer segments outlined in his analysis: • Innovators – they love the challenge of a new technology and expect problems • Early adopters – customer visionaries driven by technology who expect it to work • Early majority – pragmatists that buy only with peer review, references and support • Late majority – conservatives who wait until the product is no longer state-of-the-art • Laggards – skeptics who will only adopt when forced or the need is critical The reason that his book was so popular, and is still studied in MBA programs and talked about by investors, is because his analysis has proven to be right so many times. There is a big gap between people who love to try new technologies, and the rest of us, who tend to be much more “technophobic.” Startups need to show real traction before attempting to cross the chasm. I always recommend focus as the key to avoiding Moore’s chasm, as well as the others highlighted here. Start your business with a narrow niche and a focused strategy, but don’t stay there. As the company matures, and you learn more about your customers and your market, then it is time to go broader or deeper. Build an overt strategy with feedback triggers to enhance the product to meet the needs of another segment of customers, and add more features to serve additional needs for the customers you already have. With this approach, you will find it a lot easier to jump all the chasms without crashing or breaking a leg

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Marty Zwilling: Eight Questions Every Startup Hopes You Won’t Ask

August 24, 2010

If you really want to impress a startup founder as a potential employee, or you want to be a smart investor, you need to know the right questions to ask. These are the questions that get past the hype of a founder “vision to change the world,” and into the realm of real business strengths, weaknesses, and current health. Some founders try to deflect these questions by talking incessantly, so you often need to be calm, patient, and persistent to get the answers. My advice to founders out there is to not volunteer too much, but be open and honest in the face of direct questions like the following: What is your burn rate and runway today? These are investor slang terms referring to how fast money is being spent, with an implicit question of how long the startup can survive before break-even or another cash infusion is required. You need to know this as a future employee, since it probably gates how long your new job will last. If the runway is less than six months, with no new source signed, both you and the startup are at risk. How much “skin” is already in the game? The intent of this question is to determine the level of commitment of founders, both cash and “sweat equity,” and how much others have already invested into this plan. Implicit in the analysis of the answers is how much progress has been made for the investment, and how stable the business is now. What’s the total history of this company? Gaps in the history of a startup are big red flags, just like gaps in your resume. If the company was incorporated five years ago, and is still in early stages, with the same founding team, chances are slim that it will suddenly get back on track with you as an employee, or you as an investor. How well do the founders get along with each other, and with the team? The smartest people are often the most eccentric, so some conflict in the ranks is normal. Excessive conflict, lack of communication, or lack of mutual respect is indicative of a dysfunctional team, and eventual failure of the startup. You won’t get this answer from the founder, but it’s not hard to get it by talking to other team members. What’s in this deal for me? Investing in a startup, or joining a startup, is always a very big risk, so the potential return better be large. As an employee, you salary will likely be low, your job security low, so the job title better be large, and the stock options better be large. As an investor, look for an ROI that is 10x your initial investment, based on something more than a dream from the founder. What traction can be measured today? Who do you have as outside board members? The only true outside board or advisory members are not family members, not current investors, but are experienced entrepreneurs with deep knowledge and connections in the relevant business area. They should be asking to speak to you if you are a potential investor or a superstar hire. If you talk to them, they better know the answers to the previous questions. Who is a real customer that I can talk to? Real customers are ones who have paid full price for the product, have it installed and in use, and are still satisfied. Free trials don’t count, betas don’t count, and “excited about the potential” doesn’t count. If there are no customers yet, when will the product ship, and how many times has the date been set? How solid is the intellectual property? Provisional patents, or lawsuits pending, don’t add up to a strong sustainable competitive advantage. You need to know these things before you put your money on the table, or bet your career and your family’s future on this startup. Again, I’m not suggesting that you go on the attack to get answers to these questions. But don’t let management divert you with comments on your failure to understand “the vision and the big picture.” If you are a potential employee, it probably makes sense to get the job offer first before you tackle some of these, always staying calm and assertive. In the parlance of an investor, asking these questions and getting answers is the heart of that mysterious “due diligence” process. Now you know. If you are a potential employee, you need to do the same due diligence before you sign on. Every good founder will have done the same on you, before they make you an offer.

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Joan Williams: The Gender Pay Gap Grossly Underestimates Women’s Economic Inequality

August 20, 2010

The gender pay gap is standard measure of women’s economic inequality. At the dawn of second-wave feminism, it was 59 cents: women earned 59 cents for every dollar men earned. Today it’s up to 77 cents, according to the National Committee on Pay Equity. That’s progress, right? Here’s even more rosy news: women without children now earn over 90% of men’s wages. So maybe it is time to stop worrying about women and economics. Not so fast. Let’s start with the 90% statistic, which describes childless women at age thirty. Conservatives like to point to that one, concluding that what ails mothers is not discrimination but their own choices. In fact, I have argued, what the 90% statistic really means is that women, if they want equality, should plan to die childless at thirty. Such women have earnings nearly as high as men’s because most have not hit either of the two major forms of workplace gender bias. The single strongest bias is the maternal wall. Motherhood triggers powerful assumptions that mothers are less competent and committed to their jobs. “I had a baby, not a lobotomy,” protested a Boston lawyer, voicing the experience of many who find that, upon their return from maternity leave, they are given less work, no work or dead-end assignments. The resulting bias is a powerful drag on women’s prospects: mothers are 79% CHECK less likely to be hired, 100% less likely to be promoted, offered an average of a whopping $11,000 less in salary, and held to higher performance and punctuality standards than men, according to a study by Shelley Correll and co-authors. Most women at age thirty haven’t hit the other major form of gender bias either: the glass ceiling. Glass ceiling bias reflects, first, that qualities associated with leadership–assertiveness, self-confidence, directive behavior — are linked with masculinity. So women who exhibit them often are seen as socially clueless. To compound the problem, glass ceiling bias also means that women often have to prove themselves over and over again before they are even considered for leadership positions. Contemporary studies by social psychologists show that the glass ceiling is alive and well. So the claim that fact that childless women at age thirty make nearly as much as men does not prove that women have gained equality. Neither does the gender pay gap. Although it is standard measure of women’s economic equality, that statistic grossly overestimates women’s economic equality. Why? Because it compares men who work full time with women who work full time. This is an accurate picture of men, but it is an extremely partial description of women. Fully one-quarter of employed women work part time. The penalties associated with part-time work are an important contributor to women’s economic inequality. The penalty for working part time in the U.S. is enormous: seven times as high as in Sweden, and twice as high as in the U.K., according to Janet Gornick and Marcia Meyers. A recent report by the Joint Economic Committee documented that two-thirds of part-timers are women, and that part-timers in sales earn only 58 cents on the dollar, as compared with full timers. The last time I looked, when one compared all employed women with all employed men, including part-timers as well as full-timers, women only earned 59 cents for every dollar earned by men. Now that’s a sobering statistic. The old-fashioned gender pay gap statistic embeds the assumption that it is somehow “natural” and uncontroversial to impose sharp penalties on those who don’t work “full” time. But what, after all, is “full” time? As Alice Kessler-Harris pointed out long ago, its definition has changed a lot. The one thing that has remained constant is that “full time” has always been defined as the amount of time a man typically works. From the start of the Industrial Revolution until today, men have been able to work more hours than women outside the home because they work fewer hours inside it. And women still do twice as much housework, and four times as much routine housework, as men, according to Suzanne Bianchi and her co-authors. They also do three hours of child care for each hour men do. Of course, women could just stop changing the diapers, doing the laundry, cooking the meals. But no one wants them to, because that kind of unpaid work is every bit as crucial for sustaining a productive economy as paid work is. So it’s time to document, and to challenge, the highly artificial penalty imposed on anyone who does not work a full time schedule. The recent report by the Joint Economic Committee is a good first step. The second crucial step is to change the way we measure the gender pay gap, and to compare employed men and women, rather than restricting the analysis to full-timers. Only then can we get an accurate picture of the yawning gap between the earnings of men and those women. This piece originally was published in On The Issues :

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David Isenberg: MPRI Couldn’t Read Minds: Let’s Sue Them

August 19, 2010

The interesting news today is that MPRI , one of the earliest U.S. private military contractors, albeit one that has operated strictly in a training capacity, is being sued. The suit, filed by the Genocide Victims of Krajina in Chicago Federal Court, against both MPRI and its parent company, L-3 Communications, alleges, that MPRI “trained and equipped the Croatian military for Operation Storm and designed the Operation Storm battle plan,” which killed or displaced more than 200,000 Serbs in 1995, in the largest European land offensive since World War II. The complainants demand billions of dollars in damages from MPRI, founded by former high-ranking U.S. military officers who were “downsized” at the end of the Cold War, and L-3 Communications, which bought MPRI for $40 million in 2000. Ahh, I feel some serendipitous nostalgia coming on., I first wrote about MPRI in 1997. Back then its not so modest advertising slogan claimed MPRI to be “the greatest corporate assemblage of military expertise in the world.” It provided basic training, doctrinal analysis, wargaming operations and non-military services in Europe, Africa, Asia, and the Middle East. Founded in 1987 by eight former U.S. senior military officers, MPRI said it only operated in areas approved by the U.S. State Department. Although MPRI still operates in numerous countries overseas it is fairly low profile. You are more likely to hear about it in connection with its maritime, aviation, driving, and marksmanship simulators than about their work in Bosnia or Iraq. The background to its work in Croatia is that in March 1994 the Pentagon referred the Croatian Defense Minister to MPRI. For the next few years retired Major General Richard B. Griffitts led 15 MPRI employees in training the Croatian army so that it could provide national security and meet defense needs as Croatia transitioned into a democratic society. Reportedly the Croatian government hired MPRI to advise them on how to construct a civilian-controlled army and to provide leadership skills training. The U.S. State Department only approved MPRI’s activities after determining that the course did not involve tactical training or otherwise violate the 1991 U.N. Security Council arms embargo on Yugoslavia which made direct military assistance illegal. Subsequently, in May 1996, MPRI was granted a contract to train the military forces of Bosnia. 185 MPRI personnel participated in the US-supervised “Train and Equip” program. The program’s objective was to integrate and build up the Bosnian army of Muslims and Croats against the Serbs. Although MPRI denies conducting offensive operations, the August 1995 Operation Storm which resulted in Croatia recapturing its previously Serb-held Krajina region utilized typical American operational tactics, including integrated air, artillery and infantry movements, and the use of maneuver warfighting techniques to destroy Serbian command and control networks. Many observers at the time claimed the Croatians never could have done that without the training provided by MPRI. At the time that struck me as somewhat of a patronizing view, i.e., the pitiful, helpless, tumbling Croatians can’t do anything without help from former U.S. military personnel. A couple of months after writing the above report I wrote the script for a show on private military contractors. One of the people I interviewed was Lt. Gen. Ed Soyster (USA-Ret.), an MPRI Vice President and former head of the Defense Intelligence Agency. I asked hmm about the charge that the Croatians could not have retaken the Krajina without MPRI’s prior training. His response was: INTERVIEWER: Somebody said the training provided by MPRI was helpful to Croatians in terms of their battlefield skills. Is that a correct assessment? GEN. SHOYSTER: It is not. It is not for a couple of reasons. One, we don’t teach in the battlefield skills. We do that in other places. We didn’t, we didn’t teach that in Croatia. That’s not what we were asked to do. And the other realization is, for the analysis, is that we went there in January of ’95, began instruction in April of ’95 because the rest was a course development and so forth to do that. We had one class of about 40 who had graduated in July from the, from the overall course. And the concept that one could go there, or go anywhere, no matter how brilliant your instruction may be, and turn an army around in a month, no, no serious military analyst would ever dream that anyone could do that. So it’s a, we had absolutely, gave no instruction in anything strategic: strategic planning, strategic operations, operational bit. Because that’s not what we were asked to do. And as a contractor you do what the contract says. We were not licensed to do that, and the Croatians never asked us to do that. So somehow in the process, because it was a well-coordinated attack, they look for an American footprint, or fingerprint. The only people they could find were MPRI. We were also accused of having 15 generals over there. We had 15 people over there, one general. And as you can imagine, if you’re an analyst and you think you would send in 15 generals to accomplish a task, not very good analysis. So fundamentally we taught the democracy transition assistance program, not related anything operational there. The credit goes to the Croatian army. … INTERVIEWER: Okay. Can you tell us just a little bit more about the specifics of what was taught during the Croatian democracy transition assistance program? GEN. SHOYSTER: Yes. I, I mentioned fundamentally the, that program. But it, it includes training of officers in the, in basic officer leadership skills and an understanding of where they fit into a democratic society. So we, we emphasize that. We teach general management, training management. We teach how to do planning, programming, the budgeting process, which is, which is new to them. And also an assistance in developing a noncommissioned officer corps. As you know, the Eastern Bloc characteristically did not have a what we would term a professional noncommissioned officer corps. They had a, an officer corps highly vested down at the lowest levels, and then they brought in conscripts. They saw the Western armies, recognized the importance of our noncommissioned officers, and so we’re assisting in developing that kind of professionalism and long-term growth and capability for their noncommissioned officers. Now I am not a lawyer, but even if you choose to ignore the above, it seems to me that the case against MPRI seems weak. The complaint that was filed in court says “allege that MPRI is liable for complicity in genocide. This crime has the same specificity as genocide, the only difference being that genocide requires a specific intent to kill or destroy the target groups whereas complicity in genocide requires knowledge that the perpetrator has that specific intent.” Genocide? Hold on there a moment. Were war crimes committed? I assume they certainly were. But genocide; I think not. Reportedly, during the Operation Storm and mainly in its aftermath between 116 (Croatian Helsinki Committee) and 1200 civilians (Serb statement) were killed and between 150.000 and 250.000 Serbs left the Krajina before the operation. The difference in the numbers of murdered civilians might be explained by the fact, that the distinction between soldiers and civilians was difficult. Part of the suit centers on the fact that back in WWII, when Croatia was a puppet state of Nazi Germany, some 600,000 Serbs and Jews were murdered in the killing fields of Jasenovac in Croatia. The complaint states: In 1994, when Defendant MPRI entered into negotiations with Croatia (to be amplified below), MPRI knew or reasonably should have known the open facts of the genocide at the Jasenovac Concentration Camp. MPRI knew or reasonably should have known of the intense hatred the Croats felt toward the Serbs. MPRI knew or reasonably should have known that the Croatian leaders with whom it was negotiating had been key figures in the Ustasha Party that fomented, organized and led the massacres at Jasenovac and other killing camps in Croatia during World War Two. This seems to be arguing that MPRI was negligent in not doing historical due diligence. It implies that MPRI was a charter member of the Psychic Friends Network, and should have known what was in the hearts and minds of the Croatians in 1994. That the Croatian acted in an unspeakably vile and inhuman manner towards Serbians and other ethnic groups back in WWII is inarguable. But to assert that Croatians still felt the same way more than 50 years later and that MPRI and L-3 were supposed to know that seems to me to be an incredibly weak argument. MPRI’s Croatian contract – officially termed the “Democracy Transition Assistance Program” was one of several in the region licensed by the State Department Office of Defense Trade Controls. Federal law requires companies who sell military goods or services abroad to register with the Office of Defense Trade Controls and obtain a license for each contract. Furthermore, even if you accept the argument that past historical animosities bear on contemporary contracts the simple truth of the matter is that it was the U.S. government which approved the contract. MPRI can’t undertake any contract overseas without first having it vetted and approved by the States Department. And, if anyone should be expected to be aware of past historical grievances it should be the diplomats at Foggy Bottom. So, if anyone should be sued it would be the State Department.

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Daniel Krotz: How to Write a Grant

August 19, 2010

I’ve been reviewing a lot of grants applications (for federal agencies and private foundations) over the past year. I’m doing this because I think it will improve my own grant writing skills, and because I am extremely interested in what people “in the field” are thinking about. It is work that I enjoy and I hope to do more of it. My general impression is that organizations chosen for funding have written well about deserving ideas, and they have answered the questions asked by the funding entity in an orderly and logical manner. Naturally, there are successful applications from organizations that are patently self-serving and slipperier than an eel in a barrel of snot. Mostly though, folks who get funded deserve to be funded. Applications that routinely fail are from organizations that don’t seem very connected to the work they propose to do. It is apparent that they haven’t involved a worker bee in planning, designing, or otherwise thinking through how the work will get done, and there is a kind of soullessness in the way that objectives and budgets are developed; they don’t really seem to have a real relationship to the project’s beneficiaries. I have — more often than I care to admit — been guilty of trolling for bucks for the sole purpose of feeding the company’s machinery. I’ve never felt good about it, but I’ve done it because I recognize that the machine has to be fed if it is to be able to “help” folks downstream. But funding development that is done solely for the benefit of the machine is a sign that the organization’s values and ethics are in critical condition. More to the point, grant writers and reviewers, like me, almost always see through these values and ethics challenged organizations at a glance. Sophisticated opportunists use lots and lots of words, pages, charts, graphs, and letters of support that never quite say anything. Simpler opportunists just need a job or a job for a pal — which is okay — but to do what and for whom often remains a mystery. Some of these organizations do slip by and get funding, but the implemented projects are almost always a waste of the funder’s time and money. So what does a deserving application look like? There are five characteristics of a worthwhile project: First, the applicant has a passion for the work it proposes to do — and knows that work intimately. They are able to communicate excitement about the potential rewards and benefits of the project, and how the project contributes to the wider community. Second, the applicant’s enthusiasm is harnessed to thoughtfulness. Their application demonstrates that they have thought for a long time about what it is they want to do, and why, and that their thinking includes ideas and opinions from the people who will do the work, and from the people who will benefit from the work. Third, the applicant’s idea is sustainable and scalable, and that the funding received is just seed capital for a better, brighter, and maybe bigger future for the proposed idea. The application demonstrates that they want to do the work over the long haul; that the work proposed is their “life’s work.” Fourth, the applicant can demonstrate a cost benefit ratio that clearly shows what the good results of the project will cost on an individual beneficiary basis. If the project is a community garden, for example, the applicant should be able to estimate the value of the garden’s production and divide the value by the number of gardeners (beneficiaries). Continue the analysis by comparing the gardener outcome to the overall cost of the project. There are certainly other, non-monetary benefits to a community garden, but these too should be stated in measureable terms. Fifth, the applicant accurately describes the organization’s stage of development — ranging from grassroots and start-up stage to mature, savvy, and institutional — and proposes work that it has the capacity to do, depending on its stage of development. The early stage organization should identify essential helping and mentoring partner agencies, while the well-founded institution should identify how its experience translates into lower administrative costs. There are many other “rules’ for grant writers. Among them are to thoroughly answer the questions asked by the funder, follow the application’s format, and to make sure that the funder is the best target for the project that is proposed. But the ultimate, long-term success of any organization’s development efforts really depends on knowing who it serves, and to passionately care about why.

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Daniel Krotz: How to Write a Grant

August 19, 2010

I’ve been reviewing a lot of grants applications (for federal agencies and private foundations) over the past year. I’m doing this because I think it will improve my own grant writing skills, and because I am extremely interested in what people “in the field” are thinking about. It is work that I enjoy and I hope to do more of it. My general impression is that organizations chosen for funding have written well about deserving ideas, and they have answered the questions asked by the funding entity in an orderly and logical manner. Naturally, there are successful applications from organizations that are patently self-serving and slipperier than an eel in a barrel of snot. Mostly though, folks who get funded deserve to be funded. Applications that routinely fail are from organizations that don’t seem very connected to the work they propose to do. It is apparent that they haven’t involved a worker bee in planning, designing, or otherwise thinking through how the work will get done, and there is a kind of soullessness in the way that objectives and budgets are developed; they don’t really seem to have a real relationship to the project’s beneficiaries. I have — more often than I care to admit — been guilty of trolling for bucks for the sole purpose of feeding the company’s machinery. I’ve never felt good about it, but I’ve done it because I recognize that the machine has to be fed if it is to be able to “help” folks downstream. But funding development that is done solely for the benefit of the machine is a sign that the organization’s values and ethics are in critical condition. More to the point, grant writers and reviewers, like me, almost always see through these values and ethics challenged organizations at a glance. Sophisticated opportunists use lots and lots of words, pages, charts, graphs, and letters of support that never quite say anything. Simpler opportunists just need a job or a job for a pal — which is okay — but to do what and for whom often remains a mystery. Some of these organizations do slip by and get funding, but the implemented projects are almost always a waste of the funder’s time and money. So what does a deserving application look like? There are five characteristics of a worthwhile project: First, the applicant has a passion for the work it proposes to do — and knows that work intimately. They are able to communicate excitement about the potential rewards and benefits of the project, and how the project contributes to the wider community. Second, the applicant’s enthusiasm is harnessed to thoughtfulness. Their application demonstrates that they have thought for a long time about what it is they want to do, and why, and that their thinking includes ideas and opinions from the people who will do the work, and from the people who will benefit from the work. Third, the applicant’s idea is sustainable and scalable, and that the funding received is just seed capital for a better, brighter, and maybe bigger future for the proposed idea. The application demonstrates that they want to do the work over the long haul; that the work proposed is their “life’s work.” Fourth, the applicant can demonstrate a cost benefit ratio that clearly shows what the good results of the project will cost on an individual beneficiary basis. If the project is a community garden, for example, the applicant should be able to estimate the value of the garden’s production and divide the value by the number of gardeners (beneficiaries). Continue the analysis by comparing the gardener outcome to the overall cost of the project. There are certainly other, non-monetary benefits to a community garden, but these too should be stated in measureable terms. Fifth, the applicant accurately describes the organization’s stage of development — ranging from grassroots and start-up stage to mature, savvy, and institutional — and proposes work that it has the capacity to do, depending on its stage of development. The early stage organization should identify essential helping and mentoring partner agencies, while the well-founded institution should identify how its experience translates into lower administrative costs. There are many other “rules’ for grant writers. Among them are to thoroughly answer the questions asked by the funder, follow the application’s format, and to make sure that the funder is the best target for the project that is proposed. But the ultimate, long-term success of any organization’s development efforts really depends on knowing who it serves, and to passionately care about why.

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Reggie Middleton: Empirical Evidence of Android Eating Apple

August 17, 2010

Android’s market share is growing by nearly 900%, causing competing OSs and associated hardware vendors to experience negative smart phone market share gains. Many believe that Apple is not included in this category. Here I present hard evidence that Android is eating Apples along with everything else.

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Reggie Middleton: Lodging Management Spins Crafty Tales as Consumer Macro Data Continues to Verify What I Susptected All Along – We Never Left the Recession!

August 6, 2010

A few days ago I warned my subscribers that the lodging industry, and the economy as a whole, were not truly recovering to any material extent (see The Most Recent Lodging Co. Forensic Analysis is Available and We Think Management Have Been a Little Optimistic). Y-o-Y comparisons made everything look good when you are on the verge of insolvency last year! Well, in the headlines Thursday we have: Weekly Claims Show Surprise Gain in Wobbly Jobs Market :

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Timothy Karr: The Big Industry Lie: Regulation = Job Loss

July 21, 2010

My old friend Jay Stuckey had a saying that has stuck with me for decades: “Don’t let them piss on your leg and tell you that it’s raining.” When Jay used it he was referring to politicians who lied to scare up votes. Today, this adage refers to powerful corporations that lie to scare politicians. The companies in question are AT&T, Comcast and Verizon. And the piss that they’re spreading is misinformation about Internet regulation and America’s jobless recovery. Today, a phone and cable-funded “think tank” joined a chorus of others claiming that the Federal Communications Commission’s efforts to provide basic oversight over Internet providers would kill jobs in America. Deregulation Dystopia The path the FCC is considering is whether to “reclassify” Internet access services under a category – Title II – that would allow it to protect Net Neutrality and foster universal access to broadband. Both of these goals are priorities of President Obama’s economic recovery plan. The FCC wants to restore common-sense open Internet protections. Under the Bush administration, the FCC deregulated high-speed Internet providers by relinquishing its Title II authority. At the time, the agency claimed this shift would foster competition and drive down broadband prices for consumers. Instead, it unleashed a torrent of industry consolidation that raised prices, slowed broadband services and otherwise left the United States far behind in every international measure of Internet success. This radical move undermined the long-held assumption that nondiscriminatory communications networks were essential to free speech, democratic participation and economic opportunity. Now, just as the FCC is on the cusp of reasserting its Title II authority to fix past mistakes, along come a slew of “studies” that claim that doing so would scuttle efforts to put Americans back to work. Coin-Operated Analysis Citing speculative job losses, the Progressive Policy Institute (PPI) study, released today , calls for a two-year moratorium on all FCC efforts to restore the agency’s role in safeguarding our Internet rights and spreading broadband adoption. The study is part of a desperate strategy to spread fear and obscure the facts about Internet regulation, and pave the way for carrier control over online content. What the study doesn’t say is that PPI has received funding from AT&T, as well as from the Lynde & Harry Bradley Foundation. I’m sure you’ve heard of the former. The Bradley Foundation, for its part, funds a right-wing cabal of anti-Neutrality groups, including the American Enterprise Institute, The Heartland Institute, the Heritage Foundation and the Competitive Enterprise Institute. The PPI study, like other industry-funded efforts that came before it, is completely void of any actual evidence connecting broadband reclassification to job losses. The Politics of Fear-Mongering “Policymakers should recognize this ‘study’ for what it is — part of a transparent attempt by the biggest phone and cable companies to raise unfounded fears about job losses in an election season,” says Free Press Research Director Derek Turner. PPI’s report assumes that if the FCC has basic oversight authority, it will lead to bad outcomes. But history tells a different story . When the Bell companies were subject to the full weight of Title II, they increased employment by 15 percent, according to their own SEC filings. But once the FCC began dismantling these pro-competitive rules through massive deregulation, these companies shed nearly 40 percent of their work force, even as their revenues increased and profits soared. AT&T and Verizon alone are responsible for tens of thousands of layoffs over the last two years. Verizon is accelerating its layoffs , while AT&T laid off 12,000 workers through 2009 and thousands more in 2010. “Sadly, this pattern of ISPs destroying good jobs while reaping higher profits will likely continue with or without reclassification and Net Neutrality,” Turner says. Telco Doublespeak Here’s the rub: While the telecom companies are telling Washington that government oversight will freeze investment, they’re telling Wall Street just the opposite. Time Warner Cable COO Landel Hobbs told an investor conference , “Yes, we will continue to invest, yes, we will participate in the Notice of Inquiries and we will have an open, healthy dialogue with the FCC throughout the whole process.” Comcast Chairman and CEO Brian Roberts said, “The government is not a big worry.” And a reporter from the investment newsletter SNL Kagan covering Roberts’ remarks at an industry trade show wrote, “Given the potential impact of reclassification on broadband pricing, Roberts said he expects the industry to continue to invest, innovate and work through the government issues.” Verizon Wireless Chief Executive Lowell McAdam told the Wall Street Journal that the company has no plans to slow investment in its wireless broadband network as a result of the FCC’s move. In effect, the phone and cable business appears to be “recession-proof,” even as these companies do nothing to prevent their hardworking employees from feeling the effects of the jobless recovery. But the facts won’t stop them from treating your leg like a fire hydrant.

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Dominique Strauss-Kahn: Listening to and Learning From Asia

July 15, 2010

In Daejeon, Korea earlier this week, a remarkable event took place that enabled the world to hear the voice of Asia and to learn how the region has been able to show such great resilience in the face of the worst global financial crisis since the 1930s. On July 12 and 13, more than 1,000 officials, economists, bankers, analysts, and media assembled for a conference titled Asia 21: Leading the Way Forward , hosted by the Korean government and the IMF. I personally learned a great deal about Asia’s growing stake in the global economy–and the global economy’s growing stake in Asia. As the world strives to leave the crisis behind, the economic center of gravity is shifting increasingly eastwards, and Asia’s role is more vital than ever before. Our objectives with this conference, jointly organized with the superb help of our Korean partners, were three-fold: to discuss the lessons of Asia’s experience during this crisis–and what it might mean for other regions; to learn about Asia’s new leadership role in global economic policy–epitomized by Korea’s leadership of the G-20 this year, the first emerging market country to play that role; and to renew the Asia-IMF relationship, which has suffered from memories related to the Asian Crisis from more than a decade ago. What did we learn in these three areas? 1. Asia’s Economic Resilience. There was consensus in Daejeon that Asia has emerged from the crisis as an economic powerhouse. While initially hit hard, Asia has been able to bounce back quickly and return to a strong growth path–7 ¾ percent in 2010 relative to 4½ percent for the rest of the world and about 1½ percent for Europe. Why such Asian resilience? Part of the answer is certainly the wide range of macroeconomic, financial and corporate sector reforms implemented over the last decade. These reforms began, painfully, during the Asian Crisis–but they have been sustained since then and there is no doubt they have helped Asia withstand the brunt of the crisis. That is a lesson for the rest of the world. Nor is there any complacency in Asia about the challenges ahead. I was struck by the recognition among Asian policymakers and experts that, looking ahead, Asia must continue to build its “second engine of growth”–based on domestic investment and consumption–beyond its clear strength in exports. This is especially the case given that some of Asia’s leading trade partners–in Europe and the U.S.–may be entering a period of relatively low growth. There was also a lot of discussion–including among Asian business leaders at the conference–that the big issues of poverty and inequality in the region must be addressed if Asia’s progress is to be sustained deep into the 21st century. Interesting to me was that most participants in the conference were confident that today’s low-income countries in Asia comprise the “next generation” of the world’s emerging markets. Many of these poorer countries are implementing the policies needed to develop, grow and–a point of emphasis–attract capital flows in a sustainable way. 2. Asia’s New Leadership in Global Economic Policymaking. As Asia’s economic weight in the world is rising, its voice and representation on the global economic policymaking stage is rising too. There are six Asian nations among the G-20, and Korea is leading the way toward what promises to be a pivotal G-20 summit in Seoul this November. In particular, Korea has placed the issue of strengthening the global financial safety net high on the Seoul agenda. At the Daejeon conference, senior Korean officials including Il Sakong (Chairman of Korea’s G-20 summit presidential commission) and Finance Minister Jeung-Hyun Yoon, emphasized the urgent need for enhancing global liquidity provision. Asians at the conference were acutely aware that, as the region becomes increasingly globalized, it is also becoming increasingly exposed to spillovers from other regions. This, in turn, increases the imperative of Asia being able to influence the policies of other major economies in order to secure strong, sustainable and balanced growth. Based on recent IMF analysis, for example, enhanced global policy cooperation–now being furthered through the G-20′s mutual assessment process –could result in about $250 billion more in economic growth for Asia over the next five years–and 14 million more jobs. So Asians fully understand that having an effective voice in global economic policymaking is not an option in the 21st century, but rather a necessity. And they are clearly making excellent progress in this area. 3. The Evolving Asia-IMF Relationship. From the beginning, it was my hope that the conference might serve as a platform for a renewal of Asia’s relationship with the IMF. We spoke frankly about the lessons we at the IMF have learned from the Asian Crisis, and how those lessons have helped to change the way we work. A few points that I mentioned during the discussions included: more focused conditionality, a better understanding of balance sheet effects, increased front-loading of resources in a crisis, and greater emphasis on the human costs of economic adjustment. While I would certainly not claim that all the criticisms of the IMF or bad memories have been eliminated, I will say that I was greatly encouraged that the IMF has learnt the lessons of the past and that it is time to focus on how the Fund might be an even more effective partner for Asia in the future. Our discussions helped in the sharing of a set of follow-up actions that, I believe, will significantly strengthen our relationship. I called these the “Daejeon Deliverables” and they focus on three main areas: (i) To make the IMF’s analysis more useful and available to Asia –more focused on early warning of risks, spillover effects and cross-cutting themes, and macro-financial dimensions. In addition, it is clear to me, there is a strong perception in Asia that our analysis and surveillance is not “even-handed” enough in terms of our treatment of various countries and regions. So we need to do a better job there too. (ii) To strengthen the global financial safety net. In its efforts in this area, the IMF is working closely with Asia–via Korea’s leadership of the G-20–and we are listening to Asia’s voice to help ensure that its needs will be better reflected in the way the safety net is constructed. We are currently exploring several options to strengthen our financing tools to help prevent crises and mitigate systemic shocks, including more tailored crisis prevention facilities and multi-country approaches. These tools would usefully complement countries’ own efforts at insuring themselves against shocks, and may also include cooperation with regional financing mechanisms. There was a great deal of discussion of this “global safety net” issue in Daejeon and, in my view, a great deal of support for the concept. (iii) To support the further strengthening of Asia’s role and voice in the global economy. This can be done, first of all, by completing the package of so-called “quota” reforms that will boost Asia’s voting power in the IMF. My hope is that this can be achieved by the time of the Seoul summit. In addition, the Fund plans to strengthen its collaboration with Asian regional organizations and to help facilitate–where appropriate–Asia’s rising regional and global cooperation efforts. Whilst in Korea, I had the privilege of meeting with President Lee to discuss G-20 issues. I also met with young students from all over the region–”the future of Asia.” In these discussions, as well as during the conference itself, I expressed the hope that Asia might come to feel much greater ownership of the IMF and that that the Fund is really serving Asian interests. Indeed, I said that I hoped that the Fund might be seen as a “second home” for the region–and one Asian colleague even reciprocated by saying perhaps Asia can also become a second home for the Fund! I don’t expect this to happen overnight. But from my perspective, the IMF is ready to do all we can to make it a reality and I encouraged my Asian colleagues to do likewise. Our cooperation can only be effective if it is a two-way street. The conference certainly advanced our mutual agenda in that respect. Just as there is a new Asia, there is a new IMF too. From iMFdirect blog

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David Isenberg: Who Are You Calling Objectionable?

July 14, 2010

Almost since the moment the first private security contractor (PSC) emerged , many commentators have been going to great efforts to try and stick them with the “M” word, i.e., mercenary. While there have been, and sometimes still are, connections and linkages between mercenaries and private security contractors, depending on how you define the term, the contemporary PSC is clearly not a mercenary. PSCs themselves have long resented the term and, rightfully, regard its use as a way to smear them. Bear in mind that almost all people’s thinking on mercenaries is influenced by old, and increasingly outdated, descriptions of mercenaries from the decolonization era after WWII , or mercenaries from the Middle Ages, or even worse, popular culture, where the bad guy nowadays always seems to be some thinly veiled ‘corporate mercenary a la a Blackwater- like company. All of this begs the question; were and are mercenaries a bad thing? A just published article in a British journal considers that very question and finds that under certain conditions, drawn from the Just War tradition, “there is nothing inherently objectionable about mercenarism.” If fact, the article argues that there are times when hiring a mercenary is the moral thing to do. While there are lots of arguments to be made for hiring mercenaries one does not often see the moral card being played. Of course, given Great Britain’s own tradition of the use of mercenaries (East India Company anyone?) it makes sense that this sort of argument would appear in a British journal. Cécile Fabre , a political and moral philosopher at the University of Edinburgh, has an article in the British Journal of Political Science titled ” In Defence of Mercenarism .” Note that Fabre does not say that all justifications for mercenarism are good. For example he does not agree with the justification from freedom of occupational choice, i.e., the state should not interfere with the private sector filling a need, which will doubtlessly not endear him to diehard free market advocates. But he does support enabling “just defensive killings.” In other words, the end justifies the means. There are also some definitional caveats to his analysis. First, he restricts his argument to the use of private armies by states rather than multinational corporations, and as a means for the former to defend their interests abroad, rather than as a tool for domestic policies. That, for example, would have excluded the Sandline affair , when it hired by the nation of Papua New Guinea to resolve the conflict on the island of Bouganville back in 1997 Second, there is the important question of how do you define a mercenary. Fabre means “an individual who offers his military expertise to a belligerent against payment, outside the state’s military recruitment and training procedures, either directly to a party in a conflict, or through an employment contract with a private military corporation. ” Third, in justifying the (limited) marketization of war, he believes that: individual private soldiers, private military corporations and states sometimes have the moral right, in the threefold sense of a liberty, a claim or a power, to contract with one another for the purpose of waging a war. Rights, on my account, protect their holders’ interests, so that for X to have a right to do ϕ means that X’s interest in doing ϕ is important enough to be protected in certain ways. More specifically, to say that X is at liberty to do ϕ is to say that he is morally permitted to do φ. To say that he has a claim to do ϕ is to say that third parties are under some duty to him in respect of his doing φ. To say that he has the power to do ϕ is to say that, by doing φ, he changes his moral relationship to others by transferring to them some of his claims, liberties, powers and immunities, and/or acquiring new ones. Thus, I shall argue that private soldiers, PMCs and states sometimes are morally permitted to contract with one another for the purpose of fighting a war; that their liberty is sometimes protected by a claim against third parties that they not interfere with such contracts by, for example, making them illegal; and that it is sometimes protected by a power so to transact such that the new distribution of claims, privileges, liabilities and powers which the contract establishes is recognized by third parties as binding. For terminological convenience, and unless otherwise specified, when I say that they have the right to enter into a mercenary contract, I shall say that they have a liberty, a claim and a power to do so. Finally, and probably disappointingly for PSC supporters he writes: Nothing I say in this article is meant to support the use to which nations such as the United States put private soldiers and private military corporations (PMCs) in conflicts such as the Iraq War. Nor is my argument for mercenarism in any way meant to support the well-documented exactions that have been perpetrated by private soldiers in various conflicts. To put it emphatically, my claim is that, under strict conditions (which current practices do not meet), the marketization of war is not morally wrong. Those conditions, in a nutshell, are drawn from the Just War tradition. I shall assume that a war is just if it is fought for a just cause by a belligerent which ensures, as far as possible, that the harms done by the war do not exceed the good it brings about. In addition, individual soldiers who fight in the war must also respect the principles of proportionality, necessity and non-combatant immunity when deciding when and how to mount their attacks, as well as whom to target. If, and only if, those conditions are met, there is no reason to reject marketized soldiering as morally unjustifiable. That is a lot of ifs to meet, and given everything we have learned about Iraq since the U.S. invasion of 2003 it is unlikely that anyone short of a circus contortionist can use his argument to justify the use of PSCs in other wars such as Afghanistan and other conflicts. In fact, he recognizes the perils of this line of thinking when he writes later on: In the meantime, it is worth emphasizing what this article is not claiming – that one can choose to make a living however one wishes. An argument for unbridled freedom of occupational choice would lead to the absurd conclusion that Luca Brazzi, Don Corleone’s top henchman, has the moral right to offer his killing services to the latter against shopkeepers who refuse to pay protection money, or that the Mafia has the right to procure killing services for corrupt politicians who wish to eliminate their political opponents. That conclusion would be absurd simply because, in those two examples, the acts of killing are straightforwardly impermissible. That said his arguments merit consideration. First, though, is his analysis of why mercenarism is not justified. An individual, or a group, enjoys the contractual freedom to earn a living if they are able to exchange services, money or both with some other party with a view to benefiting financially from the transaction. This supposes, at the very least, that there should be no legal ban on the provision of those specific services or financial resources. Compare now the following scenarios: (a) Blue decides to enlist into the standing professional army of his home state. He knows that he might be deployed anywhere in the world as thought fit by his superiors, and that he will kill some other human being(s). (b) White finds a job with a PMC that has successfully won a number of government contracts. He knows that he might be deployed anywhere in the world as thought fit by his employers, and that he will kill some other human being(s). (c) Red sets up a business as a freelance mercenary. He hires himself out to different kinds of belligerents for different tasks, from participating in active combat to training professional soldiers for specialized roles on the front line. Unlike White, he has considerable control over where he is deployed and for what purposes. In all three cases, the soldier knows that he will either kill or be complicitous in acts of killing, and will be paid for doing precisely that. The only difference between Blue, on the one hand, and White and Red, on the other hand, is that Blue is formally part of the state’s apparatus, whereas the latter two are not. At first glance, that difference seems irrelevant. For if one believes that freedom of occupational choice is important – a point which I take as fixed – and if one believes that it is (sometimes) permissible to exercise it by killing others, then it is hard to see why one is morally permitted to exercise it in the formal service of a state, but neither as an employee of a private corporation nor as a freelance soldier. By the same token, if Blue’s interest in joining the army is important enough to be protected by a claim, then the same applies to White’s and Red’s interests.7 Similar considerations apply to private military corporations. A PMC, as we saw, acts as an intermediary between belligerents on the one hand, and individuals willing to offer their lethal services on the other. It advertises for openings, recruits employees, trains them, offers them logistical support, oversees their career, monitors their performance, etc. These tasks are carried out by lawyers, human resources personnel, advertising personnel, administrative assistants and accountants, in just the same way as the tasks that enable individuals to join, and effectively perform in, a regular army are carried out by lawyers, human resources personnel, etc. At the bar of freedom of occupational choice, then, if someone’s interest in earning a living by, for example, working as a recruiter for the army ought to be protected by a claim and a liberty, then so should her interest in working as a human resources adviser for a PMC. And so on. As should be clear, however, a state, qua state, is not properly to be regarded as engaging in activities that would enable it to make a living. Consequently, the foregoing argument cannot support the conferral on states of a right to enter a mercenary contract, from which it follows that freedom of occupational choice cannot, on its own, support mercenary contracts. For on the account of rights which I espouse, X has a right in respect of an interest of his if that interest warrants protection. In so far as freedom of occupational choice is not an interest of a state, a state cannot have a right – and therefore cannot have a power – to enter into a mercenary contract at the bar of that particular value. Thus, freedom of occupational choice, may well support mercenaries’ and PMCs’ liberty and claim to do so; but in so far as it cannot support states’ similar power, it cannot support mercenaries’ and PMCs’ power to enter into a contract with the state. Indeed, it is a necessary condition, for A to have the power to make a transaction with B, that B also has that power – and vice versa. Suppose that A and B agree that A will sell B his car for £5,000. Assume that A’s interest in being able to divest himself of his property is important enough to confer on him a power to change his, and others’ relationship to it, by selling it. However, A cannot have the power to transfer his car to B in exchange for B’s £5,000 if B does not herself have the power to transfer £5,000 to A in exchange for his car. Accordingly, any argument to the effect that the transaction ought to be regarded as valid must show that both A and B have the power to enter into that kind of contract – and, by implication, that some interest of both A and B is important enough to be protected by the relevant power.8 As we have just seen, freedom of occupational choice is not an interest of states. In order, then, to defend the view that mercenary contracts as between a state and mercenaries (or PMCs) are legitimate, we shall have to identify some interest(s) of states that can be protected by the relevant powers. If just earning a living is not a sufficiently good reason then what is? Fabre writes: The foregoing considerations should not be taken to imply that freedom of occupational choice has no role to play in justifying states’ right to enter mercenary contracts. Indeed, it might well be in the interest of a state – call it S1 – that individuals’ freedom of occupational choice, which they exercise by hiring themselves out as mercenaries or by working in a PMC, be respected. In such a case, though, the interest which justifies S1′s right is, ultimately, that which is fulfilled by respecting individuals’ freedom of occupational choice. To illustrate: suppose that White’s employer wins a government bid to send a number of (private) soldiers to help fight a justified humanitarian war against a genocidal tyrant. White, in that war, might be assigned to combat duties; or he might be assigned to a security detail for the protection of some high-ranking official, with licence to kill if necessary. Or suppose his employer wins a bid to help a foreign government fight a war of national self-defence against an unjust act of aggression. In all those cases, White kills in defence of others: in defence of those whose lives are threatened by their own genocidal government; in defence of the high-ranking official; and in defence of the national interest of the state whose government hired his company. Now, I take it for granted that one is permitted, and has a claim, at least prima facie, to exercise one’s freedom of occupational choice by offering goods and services (against pay) in justified defence of other people’s lives, and of other states’ economic or national interests. Thus, a group of food producers surely can sell food to whatever organization will then distribute it to the starving. A doctor surely can offer his medical services, against pay, and via the state and/or medical insurance companies, to those who need them as a matter of life and death. Likewise, an aspiring diplomat surely can offer his services, again against payment, in the service of his country’s defence of its national interests, particularly in times of war. An information technician surely can offer her services to a company that is particularly vulnerable to hackers. And so on. If that is correct, as it surely is, then White too can become a private soldier in defence of third parties’ fundamental interests. To be sure, unlike White, those agents contribute to saving the lives or protecting the interests of others without thereby contributing to killing someone else. It is hard to see, however, why that should make a difference to the issue at hand. Take the case of weapons manufacturers, who sell guns to those who need them so as to defend their life or protect the national interest. If they can do so even though the assistance that they provide involves a contribution to an act of killing, then private soldiers and PMCs can (respectively) offer and procure killing services.9 I have argued that individuals can hire themselves out for killing services, as well as procure such services, in so far as, by doing so, they provide some other party with the resources it needs to rightfully defend itself against an unjust threat. The latter point – pertaining to just defensive killings – also provides a justification for conferring on states the right to hire mercenaries. Consider: states need armies and weapons, not only for the purpose of collective self-defence (to point out the obvious), but also for the purpose of defending distant strangers (when called upon to wage a war of intervention), as well as for the purpose of enforcing universally valid norms (when called upon to take part in multilateral peace-keeping forces.) Put bluntly, states need the wherewithal to have acts of killing carried out in their name and with their authorization, in self-defence as well as in defence of others. Now, if a state is at liberty to buy guns from private manufacturers for the aforementioned purposes – as it surely is – then it is also at liberty to buy soldiering services from those willing to provide them. Moreover, if a state has a right to pay for a standing army – as it surely does – then it also has a right to pay for a private army. Finally, recall my earlier point, to the effect that an individual’s interest in working as a private soldier ought to be protected by rights that neither PMCs nor states be themselves interfered with when hiring him, and that third parties recognize his employment contract with them as legally binding. Likewise, states’ interest in hiring a private army ought to be protected by similar rights as pertain to private soldiers and PMCs. In sum, whereas the argument for freedom of occupational choice failed to provide a justification for states’ power to enter into mercenary contracts (and thereby for mercenaries’ and PMCs’ similar power), the argument from just defensive killings can do so. Some of the problems I have with this analysis that it gives states far too much the benefit of a doubt. It may well be, as international relations specialists argue, that the state is the irreducible unit of sovereignty in international politics. But that is far from agreeing that everything a states does is done out of pure motives. A state can label something a just cause but that hardly makes it so. If all anyone has to do to justify being a mercenary is to say they have the state seal of approval one is simultaneous widening and diluting the definition of mercenary to the point of absurdity. One very interesting part of Fabre’s argument has to do with command responsibility, also known as the ” Yamashita standard ” that is based upon the precedent set by the United States Supreme Court in the case of Japanese General Tomoyuki Yamashita. He was prosecuted in 1945, in a still controversial trial, for atrocities committed by troops under his command in the Philippines. Yamashita was charged with “unlawfully disregarding and failing to discharge his duty as a commander to control the acts of members of his command by permitting them to commit war crimes” even though he was not there in country when the crimes were occurring. Fabre writes: So far, I have focused on individual mercenaries. Yet, the status of PMCs themselves is also at issue. If their employees are liable to being killed, are their executives similarly liable, and are their company headquarters legitimate targets for destructive bombings? If their mercenary employees are liable to being punished, are their executives similarly liable? It seems that they are. If, in times of war, the military staff of a belligerent are liable to being either killed or punished for war crimes, so should PMCs’ executives – which is to say that they ought not to be granted the protection standardly afforded to civilians. Admittedly, there is a difference between the two kinds of institution: PMC executives do not (let us assume) take the decision to go to war in the first instance; nor, once the war has started, do they make the strategic and tactical decisions that will result in enemy deaths. Yet, the fact that they, unlike high-ranking officers, do not make those decisions is irrelevant to their liability to being killed or put on trial for participating in an unjust war. For consider the case of weapons factories. As a number of Just War theorists have argued, targeting those installations and the civilians who work in them is permissible, precisely in so far as they provide direct military support to combatants, even though they might be located far away from the lines, and even though their contribution to the war effort is that of accomplices, rather than principals, in the war. But if providing support such as weapons can turn manufacturers into legitimate targets and make them liable to being tried for war crimes, then, by the same token, providing support in the form not merely of equipment but also of combatants themselves can turn PMC executives into legitimate targets and possible defendants in war crime trials. Much more needs to be said on that issue. Treated in full, it would require an account of corporate responsibility for acts committed by individual employees, as well as an account of senior officers’ liability for the acts committed by rank-and-file soldiers. My point, however, is that if one endorses the deliberate targeting of the enemy’s military headquarters (both the building and those who work in it), then one is committed to the view that the deliberate targeting of the headquarters of PMCs who supply the enemy with crucial military support is also permissible. Likewise, if one takes the view that superior officers can and ought to be held legally liable for the acts committed by their subordinates, one must accept that PMC executives can and ought to be held legally liable for the acts committed by their employees. One wonders if Eric Prince, founder of Blackwater, ever thought about this.

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Ian Fletcher: Savings Are a Lousy Excuse for America’s Trade Deficit

July 13, 2010

Everyone who’s been paying attention knows by now that Americans consume too much and save too little. This is statistically true, but it has unfortunately become the basis of a mischievous lie about the cause of America’s monstrous trade deficits. That is, many orthodox economists have been claiming that our trade deficit is really a savings problem in disguise. Sometimes it is admitted that America saves too little; sometimes it is claimed that the real problem is a savings glut abroad, mainly in East Asia. Either way, this implies that trade policy is irrelevant to our massive and ongoing trade deficits, and thus that it is futile to try to bring them down through changes in trade policy, as only changes in savings rates can alter anything. For example, the China Business Forum, an American group, claimed in a 2006 report, “The China Effect,” that: The United States as a whole wants to borrow at a time when the rest of the world… wants to save. The result is a current account deficit in the United Sates with all countries, including China. This analysis is dubious on its face, as it implies that whether American cars and computers are junk or works of genius has no impact on our trade balance. (Neither, apparently, does it matter whether foreign nations erect barriers against our exports.) Nevertheless, this story is stubbornly repeated in some very high places, largely because it excuses inaction. But this analysis depends upon misunderstanding the arithmetic relationship between trade deficits and savings rates as a causal relationship. In national income accounting, our savings are simply the excess of our production over our consumption — because if we don’t consume what we produce, saving it is the only other thing we can do with it. (If we export it, we’ll get something of equivalent value in return, which we must then also consume or save, so exporting doesn’t change this equation.) And a trade deficit is simply the opposite, as if we wish to consume more than we produce, there are only two ways to get the goods: either import them, or draw down supplies (a/k/a savings) saved up in the past. As a result, trade deficits do not “cause” a low savings rate or vice-versa; they are simply the same numbers showing up on the other side of the ledger. (The decision to eat one’s cake does not cause the decision not to save one’s cake; it is that decision.) So neither our trade deficit nor our savings rate is intrinsically a lever that moves the other — or a valid excuse for the other. Sometimes, it is even argued that foreign borrowing is good for the United States, on the grounds that it enables us to have lower interest rates and higher investment than we would otherwise have. But this argument is a baseline trick. It is indeed true that if we take our low savings rate as a given, and ask whether we would be better off with foreign-financed investment or no investment at all, then foreign-financed investment is better. But our savings rate isn’t a given, it’s a choice , which means that the real choice is between foreign — and domestically-financed investment. Once one frames the problem this way, domestically-financed investment is obviously better because then Americans, rather than foreigners, will own the investments and receive the returns they generate. A related false analysis holds that our trade deficit is due to our trading partners’ failure to run sufficiently expansive monetary policies. This basically means their central banks haven’t been printing money as fast as the Fed. Some American officials, like Clinton’s Trade Representative Charlene Barshefsky and Commerce Secretary William M. Daley, have even verged on suggesting this is a form of unfair trade. Now it is indeed true that our major trading partners have not been expanding their money supplies as fast as we have. But as we have been doing so largely in order to blow up asset bubbles in order to have more assets to sell abroad to keep financing our deficit, it is not a policy sane rivals would imitate. We can hardly ask the rest of the world to join us in a race of competitive decadence. (If they did, the result would almost certainly just be global inflation anyway.) Another dubious theory holds that America’s deficit is nothing to be ashamed of because it is due to the failure of foreign nations to grow their economies as fast as ours. Thus George W. Bush’s Treasury Secretary, Henry Paulson, Jr., said in 2007 that: We run a trade deficit because our vibrant and growing economy creates a strong demand for imports, including imports of manufacturing inputs and capital goods as well as consumer goods–while our major trading partners do not have the same growth and/or have economies with relatively low levels of consumption. This analysis appeals to American pride because it carries the implication that we are merely victims of our own success and that our trade deficit is caused by the failure of foreign nations to be as vibrant as we are. It implies that somebody else ought to get his house in order. Unfortunately, it is obviously false that our deficit is caused by slow growth abroad when some of our worst deficits are with fast-growing nations such as China. As for “relatively low levels of consumption” abroad, this is true enough, but it also implies that balancing our trade will remain impossible as long as we have trading partners with low consumption levels. And indeed we do, simply because so much of the world’s population is still impoverished and not consumers in our sense of the word. It is time for America’s ruling circles to stop their endless game of seeking ever more sophisticated ways of pretending that America’s trade crisis is something other than what it is: a trade crisis , which will eventually have to be dealt with by actual trade policies like retaliatory tariffs against foreign mercantilism. The desperate attempts of the political and economic elite to frame the crisis as anything other than what it actually is merely produces policy paralysis while the clock ticks away on our unsustainable trade deficit, risking a bigger economic debacle the longer we wait. Ian Fletcher is the author of Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, 2010, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council , a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net .

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Ian Fletcher: Savings Are a Lousy Excuse for America’s Trade Deficit

July 13, 2010

Everyone who’s been paying attention knows by now that Americans consume too much and save too little. This is statistically true, but it has unfortunately become the basis of a mischievous lie about the cause of America’s monstrous trade deficits. That is, many orthodox economists have been claiming that our trade deficit is really a savings problem in disguise. Sometimes it is admitted that America saves too little; sometimes it is claimed that the real problem is a savings glut abroad, mainly in East Asia. Either way, this implies that trade policy is irrelevant to our massive and ongoing trade deficits, and thus that it is futile to try to bring them down through changes in trade policy, as only changes in savings rates can alter anything. For example, the China Business Forum, an American group, claimed in a 2006 report, “The China Effect,” that: The United States as a whole wants to borrow at a time when the rest of the world… wants to save. The result is a current account deficit in the United Sates with all countries, including China. This analysis is dubious on its face, as it implies that whether American cars and computers are junk or works of genius has no impact on our trade balance. (Neither, apparently, does it matter whether foreign nations erect barriers against our exports.) Nevertheless, this story is stubbornly repeated in some very high places, largely because it excuses inaction. But this analysis depends upon misunderstanding the arithmetic relationship between trade deficits and savings rates as a causal relationship. In national income accounting, our savings are simply the excess of our production over our consumption — because if we don’t consume what we produce, saving it is the only other thing we can do with it. (If we export it, we’ll get something of equivalent value in return, which we must then also consume or save, so exporting doesn’t change this equation.) And a trade deficit is simply the opposite, as if we wish to consume more than we produce, there are only two ways to get the goods: either import them, or draw down supplies (a/k/a savings) saved up in the past. As a result, trade deficits do not “cause” a low savings rate or vice-versa; they are simply the same numbers showing up on the other side of the ledger. (The decision to eat one’s cake does not cause the decision not to save one’s cake; it is that decision.) So neither our trade deficit nor our savings rate is intrinsically a lever that moves the other — or a valid excuse for the other. Sometimes, it is even argued that foreign borrowing is good for the United States, on the grounds that it enables us to have lower interest rates and higher investment than we would otherwise have. But this argument is a baseline trick. It is indeed true that if we take our low savings rate as a given, and ask whether we would be better off with foreign-financed investment or no investment at all, then foreign-financed investment is better. But our savings rate isn’t a given, it’s a choice , which means that the real choice is between foreign — and domestically-financed investment. Once one frames the problem this way, domestically-financed investment is obviously better because then Americans, rather than foreigners, will own the investments and receive the returns they generate. A related false analysis holds that our trade deficit is due to our trading partners’ failure to run sufficiently expansive monetary policies. This basically means their central banks haven’t been printing money as fast as the Fed. Some American officials, like Clinton’s Trade Representative Charlene Barshefsky and Commerce Secretary William M. Daley, have even verged on suggesting this is a form of unfair trade. Now it is indeed true that our major trading partners have not been expanding their money supplies as fast as we have. But as we have been doing so largely in order to blow up asset bubbles in order to have more assets to sell abroad to keep financing our deficit, it is not a policy sane rivals would imitate. We can hardly ask the rest of the world to join us in a race of competitive decadence. (If they did, the result would almost certainly just be global inflation anyway.) Another dubious theory holds that America’s deficit is nothing to be ashamed of because it is due to the failure of foreign nations to grow their economies as fast as ours. Thus George W. Bush’s Treasury Secretary, Henry Paulson, Jr., said in 2007 that: We run a trade deficit because our vibrant and growing economy creates a strong demand for imports, including imports of manufacturing inputs and capital goods as well as consumer goods–while our major trading partners do not have the same growth and/or have economies with relatively low levels of consumption. This analysis appeals to American pride because it carries the implication that we are merely victims of our own success and that our trade deficit is caused by the failure of foreign nations to be as vibrant as we are. It implies that somebody else ought to get his house in order. Unfortunately, it is obviously false that our deficit is caused by slow growth abroad when some of our worst deficits are with fast-growing nations such as China. As for “relatively low levels of consumption” abroad, this is true enough, but it also implies that balancing our trade will remain impossible as long as we have trading partners with low consumption levels. And indeed we do, simply because so much of the world’s population is still impoverished and not consumers in our sense of the word. It is time for America’s ruling circles to stop their endless game of seeking ever more sophisticated ways of pretending that America’s trade crisis is something other than what it is: a trade crisis , which will eventually have to be dealt with by actual trade policies like retaliatory tariffs against foreign mercantilism. The desperate attempts of the political and economic elite to frame the crisis as anything other than what it actually is merely produces policy paralysis while the clock ticks away on our unsustainable trade deficit, risking a bigger economic debacle the longer we wait. Ian Fletcher is the author of Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, 2010, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council , a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net .

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World’s Wealthy Sitting On $10 Trillion In Investable Assets

July 11, 2010

Here’s another possible bump in road to the global recovery: the wealthy are still sitting on trillions in cash. The wealth have kept a $10 trillion pile out of the world markets, according to a new report by ealth management firm Scorpio Partnerships . The money management industry has only accessed 42 percent of the roughly $40 trillion of investable assets held by high-net worth individuals, the report notes. Here’s more from their annual benchmark report (hat-tip to Dealbook ): “The total assets under the control of the industry is now set at $16.5 trillion…However, in our analysis of market conditions the real total HNW [high-net worth] market opportunity is set at $26 trillion…Critically, this implies there is approximately $10 trillion of HNW assets that could be advised by banks but is not currently in the sector.” To capture the $10 trillion up for grabs, wealth management firms and advisers must regain the trust of wealthy clients who took big hits during the downturn. At least in the U.S. — where 31% of the world’s high-net worth individuals reside — this is no easy task. In June, the latest Spectrem Affluent Investor Confidence Index, from Chicago’s Spectrem Group, fell by the largest amount since June 2009, reports the Wall Street Journal . “The index, which measures the investment outlook of households with $500,000 or more in investable assets, is now back in in “mildly bearish” territory, according to Spectrem,” writes the Journal .

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Toyota Lashed Out At Professor David Gilbert During Big Recall

July 10, 2010

CARBONDALE, Ill. — It’s the kind of publicity any university might dream about: An instructor uncovers a possible flaw that’s causing some of the world’s most popular cars to accelerate suddenly. His ground-breaking work attracts interest from Congress and reporters worldwide. But as Southern Illinois University’s David Gilbert sought to show that electronics might be to blame for the problem in Toyotas, the world’s largest automaker tried to cast doubt on his findings. One Toyota employee even questioned whether he should be employed by the school, which has long been a recipient of company donations. Electronic messages obtained by The Associated Press show the automaker grew increasingly frustrated with Gilbert’s work and made its displeasure clear to his bosses at the 20,000-student school. “It did kind of catch us off-guard,” university spokesman Rod Sievers said. So did the fallout. Two Toyota employees quickly resigned from an advisory board of the school’s auto-technology program, and the company withdrew offers to fund two spring-break internships. “I didn’t really set out to take on Toyota. I set out to tell the truth, and I felt very strongly about that,” said Gilbert, who was among the first to suggest that electronics, not sticky gas pedals or badly designed floor mats, caused the acceleration that required the Japanese automaker to recall millions of vehicles. Toyota insists its relationship with the school remains “strong,” and company officials say they have no plans to stop contributing to SIU. They also say the two Toyota representatives who stepped down from the advisory board did so merely to avoid any appearance that the company was exerting influence over Gilbert’s testimony. “We have absolutely no issues with SIU and retain an excellent relationship. That won’t change,” Toyota spokeswoman Celeste Migliore said. Driven by his own curiosity, Gilbert in January found he could manipulate the electronics in a Toyota Avalon to recreate the acceleration without triggering any trouble codes in the vehicle’s computer. Such codes send the vehicle’s computer into a fail-safe mode that allows the brake to override the gas. Gilbert said he reported his “startling discovery” to Toyota, and the automaker “listened attentively.” But Gilbert said he never heard back from the company, which has steadfastly maintained the problems were mechanical, not electronic. Next, Gilbert told the National Highway Traffic Safety Administration, then made plans to tell Congress. “I didn’t feel I could just be passive in this,” he said. Along the way, Gilbert told the university in writing that he had been tapped as a consultant for a company called Safety Research & Strategies Inc., which asked him to study the safety of electronic throttle controls. Gilbert’s boss, Terry Owens, wished him well: “Good luck in your investigation,” Owens wrote in a Feb. 10 e-mail. “I hope it leads to public safety and publications.” One of Gilbert’s research partners, an assistant professor named Omar Trinidad, nervously asked Owens whether the findings would “negatively affect my tenure track or even jeopardize my tenure with SIUC? If you have any reservations on what we are doing, please do not hesitate to inform me.” Owens tried to reassure Trinidad: “If your investigations are upheld and have major impact resulting in papers, presentations, and national recognition of expertise, these are all factors that will benefit your research productivity.” Hours later, on the eve of his congressional testimony, Gilbert appeared in an ABC News “World News” report showing correspondent Brian Ross driving a Toyota rigged to quickly accelerate. When it did, a shaken Ross said he had a hard time getting the car to come to a stop. ABC News later acknowledged that a picture in the segment showing a tachometer with its needle zooming forward was taken from a separate instance in which a short-circuit was induced in a parked car. But almost immediately after the ABC report, media outlets began calling the school looking for Gilbert. By then, he was headed to Washington – without a cell phone. Hardly anyone at the university knew Gilbert was going to Washington to testify, Sievers said. The next day, Gilbert made his case to the House Energy and Commerce Committee, and lawmakers seized on the testimony as proof Toyota engineers missed a potential problem with the electronics. Gilbert’s appearance unleashed a publicity firestorm that Southern Illinois scrambled to control. E-mail chatter among administrators talked of the need to tout Toyota’s “very productive relationship” with the university. Within days, a product-liability attorney representing Toyota said company attorneys wanted to meet with Gilbert and university officials to discuss Gilbert’s use of donated Toyota vehicles and “related matters.” “We would like to explain our analysis of the situation and what we believe is a reasonable solution,” Vincent Galvin wrote. At the meeting four days later, Gilbert said, the visitors pressed him to justify his testimony – something he refused to do, saying he stood by his sworn statements to Congress. Gilbert, who owns a Toyota Tundra pickup, believes the meeting “was meant to maybe intimidate me.” The university asked Gilbert and Jack Greer – director of the auto-technology program – to fly to California to see a demonstration at Exponent Inc., a consulting firm hired by Toyota. “I wasn’t really sure what the point of the trip was, but to keep the peace, I agreed to go,” Gilbert said. Toyota did not wait for that visit to fire back. Six days later, a group of experts assembled by Toyota to refute Gilbert’s findings told reporters his experiments were done under conditions that would never happen on the road. Gilbert’s work “could result in misguided policy and unwarranted fear,” Chris Gerdes, director of Stanford University’s Center for Automotive Research, told reporters. His organization is funded by a group of auto companies that include Toyota. To Gilbert, “it seemed like an awful large amount of effort to be extended by a company to dispel something.” He was unswayed by what he saw in California. The pressure on him continued to build. On March 8, Mark Thompson – identifying himself as an SIU alum and, without elaboration, a Toyota Motor Sales employee – voiced in an e-mail to the university’s then-chancellor, Sam Goldman, his “great concern and disappointment” about Gilbert. Thompson said he was “deeply disturbed” by what he called Gilbert’s false accusations about the automaker. Thompson reminded Goldman that he and Toyota regularly contributed to the university – including a $100,000 check to the auto-tech program in late 2008 – and “due to the outstanding reputation your automotive technology program has, we donate much more than money,” including cars. “I ask you why your organization allows such activities to be performed by one of your professors and most importantly allowed to be reported to the media in a false manner,” Thompson wrote. “I believe he should not be an employee of our fine university.” Goldman later assured Thompson that “we are taking this matter very seriously for the reasons you cite in your e-mail and for our very strong desire to maintain our relationship with Toyota.” As a research university, Goldman added, faculty are allowed to research independently and publish their findings, while observing ethical and conflict-of-interest guidelines. Gilbert insists he never felt his job was threatened, though “there were some moments where I kind of felt I was standing alone.” Still, he said, if his work “can somehow make a car safer in the very narrow scope of electronic throttle controls … then to me it’s worth it. Because that could be someone’s life that I could be saving.”

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Fred Whelan and Gladys Stone: How to Find Out If the Company’s Culture Is Right for You

July 9, 2010

You’re looking for your next career opportunity and have made a list of the “must haves”. One thing you know for sure is that you don’t want to work in a bureaucratic or political environment. Been there and done that. The problem is how are you going to find out in an interview whether the culture is right for you or not? One of the mistakes candidates often make is to ask general questions about the company, job, people, etc. They may ask, “Is this a bureaucratic environment?” and get relieved to hear that it’s not. Only to take the job and find out it is! They asked the question but wonder why they didn’t get the real picture. The key is to ask specific questions that will give you the details. Asking broad questions leads to subjective answers. Here’s what to ask to find out if the culture is right for you: What kinds of people (personality traits, working style, etc.) typically succeed at your company? Listen carefully to the responses that are given. If the person tells you that people who “burn the midnight oil” are successful, or that they like to joke that “if you don’t come in on Saturday, don’t bother coming in on Monday”, you’ll know that this environment is one in which putting in a lot of hours is the norm and expected. If you are trying to find balance in your life between work and personal, this should be a red flag for you. Some organizations value people who win at all costs. As long as the deal gets done, they don’t care about the process or if people were alienated along the way. Ideally, the types of people who succeed are those who develop their teams, deliver results and work collaboratively. Which department is the most influential? This will tell you what drives the company. If you’re in marketing and you hear engineering, you might find this a frustrating environment. Dig a little deeper and ask from what department the CEO came from. If s/he came from the finance department, that may be a clue as to where the emphasis is for the company. Similarly, if the CEO came from marketing or manufacturing, that may be an indication of the perspective they would take on growing the company. How are conflicts resolved? This is a very important question to ask, because it gets at the heart of how a company runs and the culture it fosters. Preferably things are resolved between parties and then escalated if needed. If, however, the response you are given indicates that there are ongoing powers struggles between departments and that the battles are fought with the intent of determining which department is stronger (versus doing what is best for the company), be aware that you may be stepping into a volatile environment. And if you don’t like frequent conflict, better stay away from this company! How are ideas presented? Companies are always looking for good ideas. Is there a forum for presenting ideas, or is it less formal? How do ideas from all levels get funneled through the organization? In some companies formal written recommendations/ideas are channeled up through the organization, with modifications and changes being made by various people in senior management as the document works its way to the CEO. Ultimately, that recommendation may be presented to the CEO by the EVP, even though the idea came from a lower level management (or non-management) person. In other companies, an idea may be presented directly to the CEO from whoever came up with the idea, and it may be presented verbally without all the analysis having been completed. Which format are you more comfortable with? How are decisions made? Some companies are command and control. All decisions are made at the top and get pushed down to middle management. Other companies are consensus driven, which means decisions can drag out in the process of getting everyone to agree. Other companies empower people at multiple levels to make decisions that affect their area. During the course of your interviews, ferret out how decisions are made and ask about how the smaller decisions are made versus the larger, more strategic ones. This will be an indication of whether top management sets the strategy and then lets lower level management make the tactical decisions or whether all decisions are made through top management. Be honest with yourself about the type and style of company management you are most comfortable working in. How does the company deal with people who are not performing? Do they try to work with that individual to help them raise their performance to an acceptable level or do they very quickly attempt to weed out the underperformers and transition them out of the company? Or, do they try and determine what skills the person has and then find another place for them in the organization? This is an important element of a company’s culture, as it gets at the heart of how they view the individual and the success of the company. Are you the type of manager who wants to work with an underperforming employee and try to bring them “up to speed” or are you more comfortable cutting your losses more quickly and transitioning that person out of the company? How your interviewers respond to this question will provide excellent insight into the culture of the company. As recruiters, we know that the cultural fit for a candidate with a company is critical to long term success. Candidates and companies owe it to themselves to do their due diligence on the issue of cultural compatibility during the interview process. It’s worth the effort! Fred & Gladys Whelan Stone Executive Search and Coaching Authors of GOAL! Your 30 Day Career Plan for Business & Career Success

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‘The Real Answer’ For Private Banking Recovery: Scorpio Partnerships

July 9, 2010

British wealth manager Scorpio Partnerships claims they’ve uncovered the “real answer” to the recovery of the private banking industry: capture the $10 trillion of investable assets that high-net worth individuals are holding back from money managers. “The wealth management engine is still misfiring for many,” says Sebastian Dovey, a managing partner at Scorpio. “New clients are still holding back from opening accounts with the industry.” The private banking industry only manages 42 percent of the roughly $40 trillion of investable assets that belong to rich customers, Scorpio’s annual benchmark reports. From the report (hat tip to New York Times Dealbook ): “The total assets under the control of the industry is now set at $16.5 trillion…However, in our analysis of market conditions the real total HNW [high-net worth] market opportunity is set at $26 trillion…Critically, this implies there is approximately $10 trillion of HNW assets that could be advised by banks but is not currently in the sector.” The report adds: “Capturing these assets is the real answer for industry recovery.”

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Danny Schechter: Is the Depression Coming? Or Is It Here?

July 1, 2010

Lying and Spying: The Economy is Sinking, Confidence is Down Along With the Market. Is a Depression Coming? The FBI arrests 1,200 Americans for mortgage fraud in the largest crackdown of its kind in history. There is no media focus on the companies that securitized and insured their toxic loans. This white-collar crime sweep is, at best, a one-day story with most of the reports carried by local outlets. Clearly the FBI did not get the media punch it had hoped for. The issue of financial industry fraud did not even register on the media’s Richter scale. Two weeks later, the FBI tried again, this time with an ill-timed, years in the making bust of 11 alleged Russian spies accused, so it seems, of impersonating Americans with no sign that they carried out successful espionage missions. The story grew legs, in several senses, after it was discovered that one of the “spies” posted sexy pictures of herself on Facebook and other sites. Ooo la-la: Predictably, she has now become the story. No one knows what to think about the FBI’s motives in pumping up this cold war like drama. Their big spy-catch was questioned in both the US and Russia. Now watch for payback in the form of arrests of Americans in Moscow. Meanwhile, the financial “reform” bill may go down after the lobbyists persuaded, cajoled and paid off legislators to water it down, and defang it. If it passes, the Wall Street lobby is already working to insure any proposed regulations are as weak as can be. Did you know that firms such as Citigroup and Goldman Sachs could exploit loopholes until 2022 before withdrawing from “illiquid” funds such as private equity? The long gestation period is an example of the degree of compromise inserted into the package following months of lobbying on Capitol Hill by powerful banks, according to Bloomberg News. This is a scandal that has yet to be fully disclosed as Amped Status reported: A devastating report in the NY Times documents how Tim Geithner’s New York Fed worked tirelessly to make sure that AIG was forced to pay banks such as Goldman Sachs 100 percent on dubious contracts that might otherwise have been slashed or subjected to lawsuits. Geithner, of course, was promoted for his efforts to run the rest of the nation’s economy. The article is full of revelations that would be mind-numbing if we weren’t so used to reading about how taxpayers have been fleeced in the meltdown. At the same time, the economy is heading for a dive. Reports the Washington Post : The recession has directly hit more than half of the nation’s working adults, pushing them into unemployment, pay cuts, reduced hours at work or part-time jobs, according to a new Pew Research Center survey. The economic shock has jolted many Americans into a new, more austere reality, which is likely to have lasting consequences for an economy fueled mostly by consumer spending. More than six in 10 Americans say they have cut down on borrowing and spending, the survey found. The reason: Nearly half of the survey’s respondents say they are in worse financial shape as a result of the downturn, which destroyed 20 percent of Americans’ wealth. And who is going to fix it? The New York Times doubts that the private sector can or will: In cutting spending to rein in deficits, governments are effectively betting that the private sector can make up for lost stimulus spending — and the markets are skeptical. It’s worse than that. The markets have been turbulent and volatile. Explains the AP, “Investors have been so burned by the financial crisis of 2008-09 that they fear any hint of a slowdown means the economy will start tanking again.” The quarter, which ended June 30th, was at the lowest level in a year. Paul Farrell offers this analysis on Marketwatch: Tragically for future generations of Americans the guidance system of capitalism’s Invisible Hand has been replaced by the guiding hand of Wall Street: With no public conscience, no soul, no ethics, no moral values, nothing other than the addict’s obsession to get as rich as possible, fast as possible.” At the same time, the focus by governments on “austerity” in the name of containing deficits will bring enormous pain to working people but is unlikely to generate jobs or economic stability. Economist Paul Krugman — and others — fears the onset of a depression. Some like Mish’s Global Economic Trends analysis say it is already here, writing: “By the way, a depression is not coming, we are clearly in one, a deflationary one at that. Once again, those chanting hyperinflation all missed the boat by light-years. Various safety nets like food stamps, unemployment insurance, and of course people no longer paying their mortgage and living in their houses for free all mask over the depression.” But, whether its here or coming, the once unthinkable idea of a depression is being taken seriously as the Columbia Journalism Review observes, “What with Washington still unable to get its act together on a new round of stimulus spending, warnings about the consequences of inaction are taking on a much more serious tone, and the word “depression” is starting to creep into the coverage.” And what about international cooperation and regulation some hoped would emerge in this age of globalization? No one at the G20 even wanted to talk about that. The German Parliament killed a tough measure to ban naked short selling. The G 20 would not consider called for a global regime of needed regulations. “It’s the responsibility of government to make the world financial system less dangerous. Judging from the G20 summit this weekend, we are making no progress at all in that direction,” writes Economist Simon Johnson on Baseline Scenario. 

 No wonder consumer confidence is said to be “dipping.” “Americans, worried about jobs and the sluggish economic recovery, had another relapse in confidence, causing a widely watched barometer to tumble in June, reported AP. The Conference Board, a private research group based in New York, said Tuesday that its Consumer Confidence Index dropped almost 10 points to 52.9, down from the revised 62.7 in May. Economists surveyed by Thomson Reuters had been expecting the reading to dip slightly to 62.8.” So where are we? Nowhere at all! The next jobs report is already said to be bad. The Republicans blame Democrats and vice versa. Wall Street has shifted the blame away from them. Why aren’t people in the streets? No wonder it’s more fun to read about sexy Russian spies or even Sarah Palin spying on Russia from her front porch. News Dissector Danny Schechter directed Plunder The Crime of Our Time . You can read about his investigation of the crisis as a crime story on Plunderthecrimeofourtime.com. Comments to dissector@mediachannel.o rg

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Jack Myers: 2010 Broadcast and Cable Network TV Upfront Marketplace Returns to 2008 Level

June 29, 2010

Myers National Television 2010/2011 Upfront Marketplace Report

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Boeing 787 Withstands First Lightning Strike as Tests Reach Halfway Point

June 17, 2010

By Susanna Ray June 17 (Bloomberg) — Boeing Co. ’s new composite-plastic 787 Dreamliner survived its first lightning strike with no damage as the plane approaches the halfway point in flight testing, program manager Scott Fancher said. The jet was flying last month above Puget Sound, near Seattle’s Boeing Field, when it was hit unexpectedly by a lightning bolt during a rare thunderstorm in the area, Fancher said yesterday in a telephone interview. The aircraft’s systems, fuselage and wings all appeared to be unscathed, he said. “Post-flight inspections revealed absolutely no damage,” said Fancher, who took over the Dreamliner testing program in December 2008. “I walked around the airplane an hour after it landed and you couldn’t tell a thing had happened.” Engineers are still studying how lightning affects the 787, the first jetliner to be built from composite materials instead of traditional aluminum. The Dreamliner is more dependent on electricity for controls and other systems, with power levels five times higher than on Boeing ’s 767. Scheduled lightning-strike simulations and tests, mostly on the ground, are planned later this year as Chicago-based Boeing completes the U.S. certification for the plane to carry passengers, Fancher said. Crews have finished 40 percent of the so-called test points needed for U.S. Federal Aviation Administration approval during more than 1,000 hours of flying since the plane’s maiden flight in December, Fancher said. The first delivery, to Japan’s All Nippon Airways Co. , is on target for year-end, he said. Plane’s Delays The 787 is more than two years behind schedule amid Boeing’s struggles with new materials, parts shortages, redesign work and a new manufacturing process that relies more on suppliers. The plane’s 860 orders valued at $148 billion have made the Dreamliner Boeing’s best-selling new model. Lightning poses a threat in flight because it can damage a plane’s structure or internal controls. In 1998, a US Airways Group Inc. Fokker F-28 had to make an emergency landing after a strike caused electrical arcing that melted holes in the plane’s hydraulic system. The National Transportation Safety Board concluded the plane needed better lightning protection. The Dreamliner struck by lightning last month was the first of five 787s in the flight-test program, Fancher said. The sixth and final jet will fly next month, he said. GE Engines The first model with General Electric Co. ’s GEnx engines made its debut flight yesterday, staying aloft for 3 hours and 48 minutes above Washington state, home to Boeing’s commercial manufacturing hub. Previous planes were equipped with engines from Rolls-Royce Group Plc . Boeing has promised that the 787 will be 20 percent more fuel-efficient than comparable jets, thanks to the lighter- weight carbon-fiber construction of the fuselage and wings, new engines and the greater use of electricity for power. Engineers are starting to collect performance data from the test flights and will release details “fairly soon,” after independent reviews verify the analysis, Fancher said. “We have found almost no areas where the airplane has performed any different than we expected,” said Fancher, who led four major military flight-test programs for Boeing before taking on the Dreamliner. “It’s meeting our modeling predictions very accurately.” Boeing test pilots, who are now flying under FAA supervision, have taken the 787 as high as 43,000 feet (13,106 meters) and traveled as fast as 98 percent of the speed of sound during a dive, Fancher said. The Dreamliner may make its public debut next month, at the Farnborough air show in England, provided the tests are going well enough that a plane can be spared, Fancher said. To contact the reporter on this story: Susanna Ray in Boston at sray7@bloomberg.net .

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Currency Collapse May Stimulate a Resumption of Economic Growth, BIS Says

June 13, 2010

By Matthew Brown June 14 (Bloomberg) — Currency collapses tend to spur a resumption of economic growth rather than fueling a decline in gross domestic product, according to the Bank for International Settlements. Currency collapses are associated with permanent output losses of about 6 percent of GDP, on average, though the drop tends to appear beforehand, the Basel, Switzerland-based BIS said in its quarterly review yesterday. “This suggests that it may not be the currency collapse that reduces output, but rather the factors that led to the depreciation,” Camilo E. Tovar wrote in the study. “To gain a full understanding of the implications of currency collapses on economic activity it is important to carefully examine the full circle of events surrounding the episode.” The positive effects of a weaker currency on GDP, including making local products cheaper than imported goods, may outweigh the negative ones, such as rising inflation. Currency collapses occur when the annual exchange rate drops by about 22 percent, according to the BIS, which identified 79 such episodes, “more commonly in Africa than in Asia or Latin America,” since 1960, Tovar said. “They also occurred under all types of currency regimes, except possible floating-exchange-rate regimes, where there are simply too few observations to obtain meaningful estimates,” the BIS said. Economic Contraction The euro tumbled about 20 percent against the dollar between Nov. 25, 2009, and last week as investor concern over record budget deficits in countries including Greece spurred speculation the 16-nation currency union may split. The European Union in May crafted a 750 billion-euro ($908 billion) rescue package to stem the crisis. Greece’s economy will contract 3.9 percent this year and 1.2 percent in 2011, after shrinking 2 percent in 2009, according to the median of eight economist estimates compiled by Bloomberg. The euro-region will expand by 1.1 percent this year and 1.5 percent in 2011, after falling 4.1 percent last year, median forecasts show. Hans-Werner Sinn , president of Germany’s Ifo economic institute, said on June 3 that it would be best for Greece to leave the euro instead of implementing an austerity program to reduce its deficit. Greek Prime Minister George Papandreou pledged budget cuts worth almost 14 percent of GDP to bring the deficit within the EU limit of 3 percent by the end of 2014. “The real solution for Greece would be to leave the euro followed by a depreciation” of the new currency, Sinn said in an interview at a conference in Interlaken, Switzerland. Growth May ‘Dominate’ European Central Bank Executive Board member Lorenzo Bini Smaghi said on May 28 that there are “no alternatives” for Greece beyond following the austerity program. “Before drawing policy conclusions we should emphasise that these results are subject to a number of caveats,” the BIS said in the report. “Most importantly, the analysis does not address the reasons why currency collapses occur in the first place. Our analysis also has little to say about the mechanisms involved after the currency collapse takes place. While we cannot disentangle the various factors, our results do suggest that expansionary mechanisms tend to dominate.” To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

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Klarman Tops Griffin as Hedge-Fund Investors Hunt for `Margin of Safety’

June 10, 2010

By Charles Stein June 11 (Bloomberg) — Seth Klarman almost doubled his hedge fund’s assets to $22 billion in the past two years as the industry shrank by sticking with the off-the-beaten-path investments he’s pursued since starting out in 1983. Unlike John Paulson , who made $15 billion by betting against home mortgages, Klarman didn’t see one big trade that would profit as markets began to collapse. The founder of Baupost Group LLC focused on corporate bonds he calculated would yield solid returns even if the economy got worse. “We didn’t have the degree of conviction Paulson had,” said Klarman, whose views are so closely watched by investors that his out-of-print book, “The Margin of Safety,” is offered on Amazon.com for more than $1,700. “We don’t deal in absolutes. We deal in probabilities,” he said in an interview at his Boston office. While Klarman didn’t post the gains that made Paulson famous, he was able to raise almost $4 billion in 2008 when firms including D.B. Zwirn & Co. and Peloton Partners LLP liquidated funds. Baupost was the ninth-largest hedge-fund firm as of Jan. 1, according to AR magazine, Pensions & Investments magazine and data compiled by Bloomberg. He oversees more money than better-known managers such as Ken Griffin and Steven Cohen . A value investor who looks for securities he considers underpriced, Klarman, 53, said he’s best at “complicated” situations where fewer investors compete for assets. Over the years, Baupost has invested in Parisian office buildings, Russian oil companies and real estate that the U.S. government disposed of following the savings and loan crisis of the early 1990s, said Thomas Russo , a partner in the Lancaster, Pennsylvania-based investment firm of Gardner Russo and Gardner. ‘Complex Assets’ “He specializes in illiquid, complex assets,” said Russo, who has known Klarman since 1984. Baupost gained an average of 17 percent annually in the 10 years ended in December, a period in which the Standard & Poor’s 500 Index fell 1 percent a year. The hedge fund has returned 19 percent a year since it was started, even as it held more than 40 percent of its assets in cash at times. In February 2008, when Baupost accepted new investors after being closed for eight years, Klarman bought distressed corporate and mortgage debt. The fund lost 12 percent that year, its second annual decline since inception, because it bought some of the debt too early, Klarman said. It returned 23 percent in 2009 and was up 4.4 percent through April. “It was a wonderful time to put money to work,” said Klarman. Hedge funds on average lost 19 percent in 2008, gained 20 percent in 2009 and were up 3.6 percent through April, according to data from Chicago-based Hedge Fund Research Inc . JPMorgan, CIT Among the money-making bonds Baupost purchased, according to an October 2008 shareholder letter, was debt issued by Washington Mutual Inc., whose bank unit failed in 2008 and was bought by New York-based JPMorgan Chase & Co . Baupost also acquired bonds of CIT Group Inc ., a New York-based lender that emerged from bankruptcy in 2009. The fund was part of a group of creditors that made a $3 billion loan to CIT in July 2009. Klarman, in a May 18 talk to financial advisers in Boston, cited another Baupost purchase during the crisis to illustrate the way he thinks about investing. In a series of “what if” exercises, the firm calculated how much bonds of Ford Motor Credit Co. would be worth under different scenarios, including an economic depression in which loan defaults rose eightfold. The conclusion: the bonds, then selling for about 40 cents on a dollar, would still be worth 60 cents. Real Estate Ford Credit had net income of $1.3 billion in 2009, compared with a $1.5 billion loss in 2008. Some of its bonds have more than doubled in price since reaching lows in March 2009, Bloomberg data show. More recently, the fund has been looking to buy privately held commercial real estate. While the fundamentals for much of that property are “terrible,” Klarman said, such investments may pay off for those willing to wait long enough. Prices of publicly traded real estate securities have run up too far, he said in the interview. If the firm can’t come up with enough opportunities, it may return cash to investors, Klarman said. “At this point, the clients don’t seem to want their money back,” he added. Baupost, whose investors are wealthy individuals and institutions such as Harvard University’s endowment, currently has about 30 percent of its assets in cash. Graham and Dodd Klarman is a disciple of Benjamin Graham and David Dodd, whose 1934 book, “Security Analysis,” is considered the bible for value investors. Graham taught finance at New York’s Columbia University where Berkshire Hathaway Inc. Chairman Warren Buffett was his student. Klarman wrote the preface to the sixth edition of “Security Analysis,” which was published in 2008. His own book, subtitled ‘Risk-Averse Value Investing Strategies for the Thoughtful Investor,” has become a collector’s item. Chris Ely, portfolio manager at Nichols Asset Management LLC in Boston, tried to get the book through his suburban library system. He was the 18th person on the waiting list and after six months still hadn’t gotten a copy, he said in a telephone interview. “Seth writes about investing better than anyone ever has, bar none,” Michael Price , the longtime value investor, said in a telephone interview. Price, who sold his former firm, Heine Securities Corp., to Franklin Resources Inc. of San Mateo, California, in 1996 for more than $600 million, is now managing partner of New York-based MFP Investors LLC. Red Sox Partner Klarman, who was born in New York and grew up in Baltimore, worked for Price before and after graduating in 1979 from Cornell University in Ithaca, New York. He later earned a master of business administration at Harvard Business School in Boston. Klarman is a limited partner of Major League Baseball’s Boston Red Sox, whose principal owner is commodities fund trader John Henry . He is chairman of the board of Facing History and Ourselves, a nonprofit that encourages the study of racism and anti-Semitism in schools. As early as January 2006, Klarman warned in a letter to shareholders about “tremendous leverage,” “untested” products such as credit derivatives, low interest rates and “a housing bubble that is starting to burst.” ‘Perennially Bearish’ Today, Klarman says he worries that the dollar could lose value and interest rates and inflation may rise. Stocks will probably provide poor returns for the next 10 years, he said. “We are perennially on the bearish side of things,” he said in the interview. Baupost held $1.7 billion of U.S. listed stocks at the end of March, according to its latest filing with the Securities and Exchange Commission. “We are not against owning stocks,” Klarman said in the interview. The problem, he said, is that except for a brief time in March 2009, “stocks haven’t been at bargain prices for most of the last two decades.” U.S. stocks reached a 12-year low in March 2009. Klarman’s views on the U.S. stock market echo those of Jeremy Grantham , chief investment strategist at Boston-based Grantham Mayo Van Otterloo & Co., who recommended investors buy stocks in March 2009 after more than a decade of saying they were overvalued. Grantham’s latest forecast, posted on the firm’s website , predicted U.S. large cap stocks would return 0.3 percent a year, adjusted for inflation, over the next seven years. Klarman called Grantham “a very smart person” whose forecasts he watches carefully. In an e-mail, Grantham called Klarman “just about the smartest guy around.” Credit-Default Swaps Klarman buys put options and credit-default swaps, which he calls “cheap insurance,” to protect Baupost against risks such as a steep fall in the stock market or a surge in inflation. He currently has a put, or an option to sell a set amount of a security by a specific date, that will pay off only if interest rates go dramatically higher, he said in his Boston speech. In an October 2008 letter to shareholders the firm said it benefited from credit-default swaps, without saying what the swaps were meant to protect against. When Klarman can’t find investments he likes, he holds cash. “We prefer the risk of lost opportunity to that of lost capital,” he wrote in his 2004 yearend letter to shareholders. In 2007, Baupost gained more than 50 percent, even as it held more than 40 percent of its assets in cash. Bruce Berkowitz , named Morningstar Inc.’s domestic stock manager of the decade and a contributor to the latest edition of the Graham and Dodd book, said Klarman stands out among fund managers because he’s able to make money while holding cash and avoiding leverage. “If he isn’t Elvis, he’s pretty close,” Berkowitz said. To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

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Manhattan Drug Costs Outpace Every Other Place in U.S. in Medicare Study

June 9, 2010

By Drew Armstrong June 9 (Bloomberg) — Medicare, the U.S. health program for the elderly and disabled, spends more per patient on medicine in New York City, in Anchorage, Alaska, and in Great Falls, Montana, than anywhere else, a study found. The program pays 60 percent more on each beneficiary for prescription drugs in the most-expensive area, Manhattan, compared with the least costly area, in Hudson, Florida, researchers said today in the New England Journal of Medicine. Studies from the Dartmouth Atlas of Healthcare , in Lebanon, New Hampshire, had shown regional differences in Medicare payouts for doctor visits and hospital care since 1996. The authors of today’s research said their analysis is the first to plumb spending for Medicare’s drug benefit, which took effect in 2006. Doctors in high-cost regions prescribe “both more drugs and more expensive drugs,” wrote the authors, led by Yuting Zhang, an assistant professor of health policy and management at the University of Pittsburgh . The cost in Hudson, an area in Pasco County, near Tampa, was $1,854 in 2007 for each Medicare beneficiary, while the figure in New York City’s Manhattan borough was $2,973. Other low-spending areas include Dubuque, Iowa; and Detroit. There is little connection between Medicare’s drug spending in parts of the country and its outlays on hospital care or doctors, the study found. Low-spending hospital areas weren’t compensating for lost revenue by treating patients with more prescription drugs, according to the analysis. Lawmakers and members of the Obama administration focused on the variation in hospital spending as part of the health-care overhaul signed in March, looking to save money by making the most-expensive parts of the country more like the least expensive. To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net .

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Electric Helmet Slows Brain Tumors Without Chemotherapy’s Side Effects

June 5, 2010

June 5 (Bloomberg) — Doctors treating brain cancer have a limited toolkit. They can cut tumors out with a knife, burn them with radiation or try to poison them with drugs. NovoCure Ltd., a closely held Israeli company, has added a fourth option for hard-to-treat tumors. It’s an array of electrodes resembling a tight-fitting helmet that bathes the cancer in a faint electric field, scrambling the inner workings of the rampaging cells and preventing them from multiplying. The helmet, powered by a 6-pound battery pack, is designed to zap deadly glioblastomas, the malignancy that killed U.S. Senator Ted Kennedy in August 2009. In a study reported today, it helped patients with recurrent tumors live 7.8 months, compared with a median 6.1 months for patients given the best available chemotherapies or Roche AG’s Avastin. The technology is so different from other treatments, it was difficult to convince patients and doctors to try it, said Philip Gutin , primary investigator for the study. “This new data actually shows that it’s effective,” said Gutin, the chair of neurosurgery at Memorial Sloan-Kettering Cancer Center in New York. “People will ask for this now.” The electric fields resonate at a frequency designed to do no harm to healthy brain tissue. In the test, the only side effect was mild scalp irritation, Gutin said. “If it continues to look as good as it does, it will be used in lots of different treatments. There’s no downside to it.” The study, reported at the American Society of Clinical Oncology in Chicago, followed 237 very sick patients whose cancers had returned after prior treatment and whose tumors, on average, were 4 centimeters (1.57 inches) in diameter. Topping Chemotherapy The study was designed to show that patients using the helmet fared significantly better than those taking chemotherapy and Avastin. On this basis, it was a failure. That’s because more than 50 patients either died or dropped out before they completed the first round of treatment, said Eilon Kirson, head of NovoCure’s research and development. When those patients are excluded from both arms of the analysis, the helmet performed better than other treatments, Kirson said. Under either analysis, the trial found the helmet to be at least as good as other approaches, but without the vomiting, fatigue and infections associated with chemotherapy. While shooting electricity through the brain conjures images of Mary Shelley’s “ Frankenstein ,” or the involuntary electroshock therapy in Ken Kesey ’s “ One Flew Over the Cuckoo’s Nest ,” Kirson emphasized that NovoCure’s technology is new. The helmet is the first cancer therapy to use alternating polarities in electric fields as a way to disrupt the cell division process known as mitosis. “Bad Name” “Electricity has gotten a bad name in medicine in the last century or two,” Kirson said in a telephone interview. “People hear ‘electric fields’ and of course they are skeptical. In order to cross that barrier into biology and medicine, we had to start at the end. The end is glioblastoma.” NovoCure, based in Haifa, was started by Yoram Palti, a professor of electrophysiology and biophysics at Technion-Israel Institute of Technology. Early funding came from Bill Doyle , founder of investment firm WFD Ventures and now chairman of NovoCure. Pfizer Inc. and Johnson & Johnson are also investors, according to a NovoCure statement. Early prototypes were cumbersome for patients, weighing about 15 pounds, Kirson said. The current battery pack looks like a white laptop computer that slips into a shoulder bag, and the company plans to shrink the device further. Patients wore NovoCure’s helmet for about 20 hours a day, shaving their heads twice weekly before reapplying the electrode patches. The patients were able to conduct most of their usual routine with the machine and took occasional breaks for athletic or social events. “A Nice Shower” “We have a patient who plays tennis,” Kirson said. “Whenever she replaces her electrodes, she goes and plays tennis for a couple of hours, she has a nice shower, she goes into the sauna, and when she gets out she’ll put it back on and keep going.” Now NovoCure is testing the helmet simultaneously with chemotherapy in early cases of glioblastoma with hope that a combination will enhance the effectiveness of both treatments. NovoCure is using today’s trial to apply for U.S. marketing approval, and the company seeks to begin U.S. sales next year, Kirson said. The helmet is already approved for use in Europe, though health plans there won’t currently pay the $10,000 to $15,000 a month it costs to wear it. NovoCure is testing similar devices for other types of hard-to-treat cancer. The results of a test in 42 lung cancer patients will likely be released at the European Society of Medical Oncology meeting in September, Kirson said. “I must admit that when I first saw this I thought it was complete and utter trash — I’m being that honest about it,” Kirson said. “It’s such a novel technology, you have to show that you are the real thing. The real reason I went into this was because I had worked with Professor Palti, and I believed in him. I thought he was a brilliant man, and I still do.” For Related News and Information: Health stories from the U.S.: TNI US HEA BN Top stories about science: TNI SCIENCE WWTOP Stories by this author: BIO TOM RANDALL Top health stories: HTOP

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Dan Ariely: The Irrational Side of Corporate Bonuses

May 27, 2010

In light of the financial crisis of 2008 and the subsequent outrage over the continuing bonuses paid to many of those deemed responsible for it, many people wonder how incentives really affect CEOs and Wall Street executives. Corporate boards generally assume that very large performance- based bonuses will motivate CEOs to invest more effort in their jobs and that the increased effort will result in higher- quality output.* But is this really the case? Through experiments we conducted, all of which can be found in much more depth in my new book, The Upside of Irrationality , we discovered that using money to motivate people can be a double-edged sword. For tasks that require cognitive ability, low to moderate performance-based incentives can help. But when the incentive level is very high, it can command too much attention and thereby distract the person’s mind with thoughts about the reward. This can create stress and ultimately reduce the level of performance. A few years ago, before the financial crisis, I was invited to give a talk to a select group of bankers. The meeting took place in a well-appointed conference room at a large investment company’s office in New York City. The food and wine were delicious and the views from the windows spectacular. I told the audience about different projects I was working on, including the experiments on high bonuses in India and MIT. They all nodded their heads in agreement with the theory that high bonuses might backfire — until I suggested that the same psychological effects might also apply to the people in the room. They were clearly offended by the suggestion. The idea that their bonuses could negatively influence their work performance was preposterous, they claimed. I tried another approach and asked for a volunteer from the audience to describe how the work atmosphere at his firm changes at the end of the year. “During November and December,” the fellow said, “very little work gets done. People mostly think about their bonuses and about what they will be able to afford.” In response, I asked the audience to try on the idea that the focus on their upcoming bonuses might have a negative effect on their performance, but they refused to see my point. Maybe it was the alcohol, but I suspect that those folks simply didn’t want to acknowledge the possibility that their bonuses were vastly oversized. (As the prolific author and journalist Upton Sinclair once noted, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”) Somewhat unsurprisingly, when presented with the results of these experiments, the bankers also maintained that they were, apparently, super special individuals; unlike most people, they insisted, they work better under stress. It didn’t seem to me that they were really so different from other people, but I conceded that perhaps they were right. I invited them to come to the lab so that we could run an experiment to find out for sure. But, given how busy bankers are and the size of their paychecks, it was impossible to tempt them to take part in our experiments or to offer them a bonus that would have been large enough to be meaningful for them. Without the ability to test bankers, Racheli Barkan (a professor at Ben-Gurion University in Israel) and I looked for another source of data that could help us understand how highly paid, highly specialized professionals perform under great pressure. I know nothing about basketball, but Racheli is an expert, and she suggested that we look at clutch players — the basketball heroes who sink a basket just as the buzzer sounds. Clutch players are paid much more than other players, and are presumed to perform especially brilliantly during the last few minutes or seconds of a game, when stress and pressure are highest. With the help of Duke University men’s basketball Coach Mike Krzyzewski (“Coach K”), we got a group of professional coaches to identify clutch players in the NBA (the coaches agreed, to a large extent, about who is and who is not a clutch player). Next, we watched videos of the twenty most crucial games for each clutch player in an entire NBA season (by most crucial, we meant that the score difference at the end of the game did not exceed three points). For each of those games, we measured how many points the clutch players had shot in the last five minutes of the first half of each game, when pressure was relatively low. Then we compared that number to the number of points scored during the last five minutes of the game, when the outcome was hanging by a thread and stress was at its peak. We also noted the same measures for all the other “nonclutch” players who were playing in the same games. We found that the non-clutch players scored more or less the same in the low-stress and high-stress moments, whereas there was actually a substantial improvement for clutch players during the last five minutes of the games. So far it looked good for the clutch players and, by analogy, the bankers, as it seemed that some highly qualified people could, in fact, perform better under pressure. But — and I’m sure you expected a “but” — there are two ways to gain more points in the last five minutes of the game. An NBA clutch player can either improve his percentage success (which would indicate a sharpening of performance) or shoot more often with the same percentage (which suggests no improvement in skill but rather a change in the number of attempts). So we looked separately at whether the clutch players actually shot better or just more often. As it turned out, the clutch players did not improve their skill; they just tried many more times. Their field goal percentage did not increase in the last five minutes (meaning that their shots were no more accurate); neither was it the case that non- clutch players got worse. At this point you probably think that clutch players are guarded more heavily during the end of the game and this is why they don’t show the expected increase in performance. To see if this were indeed the case, we counted how many times they were fouled and also looked at their free throws. We found the same pattern: the heavily guarded clutch players were fouled more and got to shoot from the free-throw line more frequently, but their scoring percentage was unchanged. Certainly, clutch players are very good players, but our analysis showed that, contrary to common belief, their performance doesn’t improve in the last, most important part of the game. Obviously, NBA players are not bankers. The NBA is much more selective than the financial industry; very few people are sufficiently skilled to play professional basketball, while many, many people work as professional bankers. As we’ve seen, it’s also easier to get positive returns from high incentives when we’re talking about physical rather than cognitive skills. NBA players use both, but playing basketball is more of a physical than a mental activity (at least relative to banking). So it would be far more challenging for the bankers to demonstrate “clutch” abilities when the task is less physical and demands more gray matter. Also, since the basketball players don’t actually improve under pressure, it’s even more unlikely that bankers would be able to perform to a higher degree when they are under the gun. Could all this mean that sometimes we might actually behave less rationally when we try harder? If that’s so, what is the correct way to pay people without overstressing them? One simple solution is to keep bonuses low — something those bankers I met with might not appreciate. Another approach might be to pay employees on a straight salary basis. Though it would eliminate the consequences of over-motivation, it would also eradicate some of the benefits of performance-based payment. A better approach might be to keep the motivating element of performance-based payment but eliminate some of the nonproductive stress it creates. To achieve this, we could, for example, offer employees smaller and more frequent bonuses. Another approach might be to offer employees a performance-based payment that is averaged over time — say, the previous five years, rather than only the last year. This way, employees in their fifth year would know 80 percent of their bonus in advance (based on the previous four years), and the immediate effect of the present year’s performance would matter less. Whatever approach we take to optimize performance, it should be clear that we need a better understanding of the links between compensation, motivation, stress, and performance. And we need to take our peculiarities and irrationalities into account. Dan Ariely is the author of The Upside of Irrationality .

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Exporting Profits Imports U.S. Tax Reductions for Pfizer, Lilly, Oracle

May 13, 2010

By Jesse Drucker May 14 (Bloomberg) — Over the past three years, Pfizer Inc . was an earner without profit in its own country. The maker of the cholesterol medication Lipitor, the world’s top-selling prescription drug, reported almost half its revenues in the U.S. for 2007 through 2009, while booking domestic pretax losses totaling $5.2 billion. Abroad, it was another story. A Dutch subsidiary more than made up for New York-based Pfizer’s American losses. It reported pretax profits totaling $20.4 billion in 2007 and 2008 — with a tax expense of 5 percent, a seventh of the top U.S. rate. Overseas tax savings increased the drugmaker’s net income by $1 billion last year, according to Robert Willens , a tax consultant in New York. Pfizer is one of thousands of American companies that bolster their profits by attributing income to subsidiaries in countries with lower income tax rates, legally cutting their tax bills. Eli Lilly & Co . and Oracle Corp. were among other big companies that helped drive a 70 percent increase in accumulated earnings abroad that weren’t taxed in the U.S. from 2006 to 2009, according to data compiled by Bloomberg. “An inordinate concentration of profits in a low-tax country, way out of proportion to actual economic activity, is a sure sign of aggressive tax planning,” said Martin Sullivan , a tax economist who formerly worked for the U.S. Treasury and Arthur Andersen LLP. Earnings Increased Willens, the president of Robert Willens LLC, a consulting firm in New York that advises investors on tax issues, analyzed financial filings for last year by Pfizer, Lilly and Oracle and found: — Pfizer increased net income by 13 percent compared with what it would have been without the tax benefit from foreign earnings. The company’s $8.6 billion in net income would have been $7.6 billion, Willens said. — Lilly increased its 2009 net income by 21 percent to $4.3 billion from $3.6 billion, Willens found. — Oracle reported $5.6 billion in net income last year, 14 percent more than it would have reported without foreign earnings taxed at lower rates, according to the analysis. To be sure, each of those companies has actual sales abroad, although often in countries with tax rates similar to the U.S., which has an average combined state and federal corporate income tax rate of about 39 percent. Oracle, which reported 44 percent of its sales in the U.S., had 16 percent in Germany, Japan, Canada and France, countries with rates ranging from 30 percent to 39 percent last year. Intellectual Property Dozens of U.S. companies attributed income to foreign subsidiaries in 2008 that exceeded their share of actual sales abroad, according to offshore corporate records and U.S. securities filings compiled by Standard & Poor’s Capital IQ. In some cases, the foreign units employ few or no workers. For pharmaceutical and technology companies it’s relatively easy to shift ownership of patents and other intellectual property abroad, said Sheldon S. Cohen , a former IRS commissioner who is now a director at the investment firm Farr, Miller & Washington LLC in Washington. In a typical arrangement, a company will license the overseas rights for a patent developed in the U.S. to a subsidiary in a low-tax country, said Michael C. Durst, special counsel at Steptoe & Johnson LLP, in Washington. That permits income from foreign sales to be attributed to the low-tax country. Treasury Department regulations require that prices paid between subsidiaries, such as licensing fees, be based on what unaffiliated companies would pay. Payments among Pfizer’s subsidiaries are supported by economic studies of similar third- party transactions, said Joan Campion , a company spokeswoman. Arm’s Length “All our transactions satisfy all arm’s-length requirements,” Campion said. Charges related to cost-cutting and mergers helped lower Pfizer’s U.S. income, she said. The company manufactures Lipitor in Ireland, among other countries. An Irish subsidiary of Oracle that has no employees and paid no income tax in 2006 and 2007 was responsible for roughly a quarter of the parent’s pretax income of $10.8 billion in those years, according to Irish records and Oracle’s U.S. securities filings. The unit distributes products “primarily in the European market” that were developed by the Redwood City, California-based company and “jointly funded under a cost sharing arrangement,” according to its annual report from 2007, the most recent year available. Following the Laws Ken Glueck , a senior vice president for Oracle, declined to answer questions about the company’s use of transfer pricing. In an e-mail, he compared transfer pricing to the mortgage-interest deduction that individuals can claim. “Can someone please explain to me how following the tax laws of the United States became a reportable issue for Bloomberg News?” Glueck wrote. In each of the past seven years, Lilly has reported more than half its sales in the U.S. yet more than half its profits overseas. In 2007, a Swiss subsidiary booked pretax income of $3.2 billion — more than 80 percent of the $3.9 billion the parent company reported that year. The Swiss holding company has an Irish manufacturing branch that produces drugs and sells them to affiliated companies, according to its annual report. “Lilly takes great care to ensure that we have properly determined our income and assessed our tax obligations to each jurisdiction in which we do business,” said Mark E. Taylor , a company spokesman, in an e-mail. In some years, U.S. profits were reduced by merger-related costs, he said. To contact the reporter on this story: Jesse Drucker in New York at jdrucker4@bloomberg.net .

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Robert Greene: Google and the Napoleonic Model: Business in Revolutionary Times

May 6, 2010

In my book The 33 Strategies of War , I tried to determine what made Napoleon Bonaparte such a strategic genius. After much research, the answer I came up with was not what I had expected. Napoleon was essentially a brilliant organizer. Living in revolutionary times, he determined that what would make an army unbeatable was its speed and mobility–the capacity to adapt faster than the enemy to changing circumstances. To do so he needed a new organizational model, something that had never been tried before in warfare. He would break his large army up into small, fast-moving divisions. He would give the field marshals who led these divisions complete freedom to make decisions in the moment, without having to consult him. This could lead to some chaos, but he enjoyed the room for creativity that came with it. He encouraged soldiers on all levels to show initiative, and gave them the chance to rise from the bottom to the top–as he had done. This army was now fighting for an idea–to spread the French revolution throughout Europe. This mobile, highly motivated fighting force completely overwhelmed its opponents in one major battle after another, utilizing a new strategy–maneuver warfare. Instead of marching to a prescribed place to meet the enemy, Napoleon would throw his divisions into a scattered pattern and depending on how the enemy reacted, he would close in on it from several directions. The gist of the Napoleonic revolution in warfare was not technological, but strategic. He had a superior idea and exploited it to the maximum–until 1806, when age and too much power weighed him down and he came to prefer size to fluidity. I saw in Napoleon a model for success for any group operating in a transitional period in history, where speed and mobility is the key. This means paying supreme attention to how your group is organized and creating a structure that fits the times. While I was doing research for The 33 Strategies of War , I became intrigued by a company that seemed to exemplify–in an almost uncanny way–the Napoleonic model. That company was Google . I initiated an informal study–gathering as much material and contacts within the company as possible. And as I went deeper into this subject, I saw more and more connections. The following is the gist of my analysis: Like Napoleon (who had risen from the bottom of the French army), the two founders of Google, Sergey Brin and Larry Page, came from a radically different background than your average CEO. They were scientists at Stanford, their field being statistics and probability. In founding Google in the late 1990s, based around their innovations in the field of search engines, they came to several important conclusions: the Internet is going to radically alter the business environment. The world is entering a new era–the Information Age. They wanted their company to reflect these changes. They needed to create their own business and organizational model. And so they studied in depth how other businesses operated, particularly in technology, to see if there were lessons to be learned. Most of these companies, like Microsoft, had intense layers of bureaucracy. They would have a giant staff of software engineers to create new products. But before such products could be launched, they had to be integrated with everything else, and they had to be as close to perfect as possible. Once the product was ready, large-scale sales and marketing teams would go into action, making sure they saturated the public. If these companies were creating any kind of content, there was an editorial staff. To keep this all running smoothly, they had to have a very large management staff. To roll out any new product would take years, as this machinery was slow and lumbering. All of the different departments and layers of bureaucracy had to be brought into the process. By the time the product came out, competitors had already appeared, but it was too late to adapt to what was evolving. The sheer size of the company made it difficult to maintain close ties to the public; better to make perfect products and sell them hard than respond to public feedback. Everything was geared towards market domination–using vast resources and muscle to maintain that. All of this bureaucracy created small power bases from within the company, increasing the political games being played and adding to the slowness. A company like IBM once dominated the computer field, but completely lost ground in the 1980s, mostly because it did not believe in the personal computer. There were some from within the company that thought differently, but they could not get their voices heard or influence the entrenched culture. All of the resources that IBM had were useless in the face of such rigidity–proving that structure, strategy and ideas are more important than money and technology. (In war, a similar example would be the Blitzkrieg of 1941 : the French had superior equipment and technology, but their ideas on how to use them were completely outmoded and they collapsed in the face of a superior strategy.) To Page and Brin, a company in this new environment had to be lean and fast, able to stay ahead of the innovation cycle and adapt quickly to trends. They had to build a new kind of structure. This governed most of their key organizational decisions. They would not produce any content; Google would serve as a platform for others to create or move content, enhancing the flow of information. They would have no editorial staff. To make money, they would sell advertising space, but all of this would be automated. Customers would buy through a self-serve platform. This allowed Google to have a minimal sales staff. Any kind of feedback or data on advertising sales could flow directly and immediately to anyone within the company–there were no bottlenecks from within to slow down the flow of information. Google would have a relatively small staff of engineers. They would hire the best but keep the numbers down. They predicated this all on their philosophy of release often, release early. They would not spend months perfecting their latest product–in fact they would release it in a beta version and let the customers help improve it with their feedback. This meant no marketing or sales team to push the new product. This would also help them to develop close ties to their client base and make people feel involved in the process. As a result of all this, the company would need far fewer managers to keep Google running. As far as possible, employees would be self-managed. It is this remarkable lightness of Google that has allowed them to move, adapt and expand at such a rapid rate. This mobility is the foundation of their power, as it was for Napoleon. To ignore this simple truth is to ignore a fundamental principle of strategy. In addition, Google created a completely different culture. The company was broken down into small units that could be self-managed. They created the 20% rule: all employees must devote 20% of their time to creating something of their own–a pet project, an innovative idea that could later fit into Google or, if not, could be taken elsewhere. Periodically small teams of peers would review these projects and critique them. It became possible to rise fast within the company and make a fortune. The culture was centered around the idea that Google was the spearhead of a revolution: this was the company that was going to give the world access to information, to everything going on in the world and allowing people to make what they wanted with it. This sense of being part of a cause created an extremely motivated workforce that does not need to be policed by teams of managers. A degree of chaos is allowed for and even encouraged. With such an organization in place, Google could practice a kind of maneuver warfare. Most companies focus on dominating a particular position in the marketplace, like armies that marched to meet the enemy at a set point. This is old style warfare and business–linear and predictable. In the new environment what matters is putting your company in a position in which it can quickly adapt to the latest trend and get a toehold there before others. To do so, you have to be built for that. As a company that focused on primarily having a search engine as its center, Google could quickly move to other areas– Gmail or Google News , et al–all with the aim of creating a kind of operating system for the Internet. If some new trend appears on the horizon, they are ready to pounce and exploit it. For instance, they saw great potential for YouTube , tried to produce their own version of it and when that failed, they simply bought YouTube. This kind of fluidity is unheard of in business and devastatingly powerful. As opposed to past models, Google does not invent something they think is clever and then figure out how to market it to the masses, with all of the time and money that requires. They work on what is already there–the demand that is palpable. As opposed to the traditional business practice as it evolved in the era of mass consumption, their ideal is to create less and less distance between themselves and their customers. I focus on Google because to me they are the most radical version of a new business model that has succeeded on a large scale. I could also bring in other companies that have experimented as well and had success. A company like Zara, which has adapted brilliantly to the new environment, has based its model on the speed with which it can produce items that respond to the latest trends, giving consumers a much wider choice. The company is structured in a similar loose fashion to Google. There are many other examples as well on smaller scales all around the world. As the tsunami of the global meltdown is receding, these are the companies that are poised to take over. I do not mean to imply that Google is infallible and already we see signs of their limitations. Like Napoleon, they could slowly morph into the enemy, into a slightly more mobile version of Microsoft. This was merely to point out the radical departure they made in the initial structure of the company and the power that brought them. If they are smart, they could dominate the scene for years to come, but nothing is certain. This then is the point that we have reached: What is really changing in the world is not technology, or the globalization of capital, but the relationships between people–relationships that were once hierarchical and based on the force of authority. This has been radically flattened. What matters most now are the connections between people, the interdependencies and networks that can be formed and the unimpeded flow of information. Any kind of obstruction to that flow will be seen as something from the past, someone or some group trying to halt the course of an historic fatality. We are in the midst of a countercurrent. As the new is flowing in, the tide of the old is still there. We see signs of this decrepitude everywhere. Looking at large businesses with their big marketing campaigns, often tied around celebrities, we are simply seeing dinosaurs making a lot of noise before they disappear. The signs of this old order clinging to power are everywhere, and it will be quite a spectacle to see them become extinct in the years to come. Without grasping this wider perspective of what is happening in the world, the crest of a change that began millennia ago but greatly accelerated by the advent of the Information Age, nothing you do will have any kind of lasting effect or power.

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