Wednesday, April 29, 2009

One Mistake of the First 100 Days

Here’s your assignment:  You’ve just been elected President of the United States.  Your most urgent Cabinet appointment is Treasury Secretary, the person who will lead us out of the worst financial abyss since the Depression.

Obviously, this person must have not only the leadership skills and charisma to inspire and mobilize the country’s efforts, but must understand what got us into this mess in the first place and what will get us out.  The Secretary has to have demonstrated in the last two years a record of comprehending the financial system’s (1) high risk, (2) deteriorating capital base, (3) innovation dangers, (4)soaring leverage and (5) increasing instability.

Unfortunately, you failed the assignment.  You selected a person who, judging by his own words, comprehended none of these.  But before getting to his words, consider the crescendo of disparaging commentaries from others.  Timothy Geithner hasn’t had a lot of good press since taking over as Treasury Secretary.  Now, if possible, it’s getting worse.

In my last blog post, I lamented the appointments of both the Treasury Secretary and the head of the National Economic Council, Larry Summers. Portfolio magazine just chimed in with a less-than-flattering cover story on Geithner.  And now, the New York Times weighs in with a 5,330-word front-page piece that can only be described as a public servant’s worst nightmare -- but a must read. It takes him to task for his past actions (erratic), associations (Wall Street) and record (unimpressive).

For me, the most valuable part of the article was pointing me to the speeches that Geithner delivered during 2007 when he was president of the Federal Reserve Bank of New York, by far the most important and influential of the 12 Federal Reserve regional banks. He was delivering about a speech a month.  They varied little in their optimism.  In essence, this was the message:

Despite some serious shocks to the financial system so far, don’t worry.  The system has handled it before, and can handle it again.  You’re in good hands.

Let’s look at one of these speeches, delivered on May 15, 2007, at the Financial Markets Conference of the Federal Reserve Bank of Atlanta. Remember, the subprime mortgage mess was getting into full swing and it was just over  a year before the bankruptcy of Lehman Brothers, the forced merger of Merrill Lynch into Bank of America, and the beginning of the world economic system’s falling off a cliff. Read these remarks, and then ask yourself these questions: What in the world was Obama thinking when he nominated Geithner to be Treasury Secretary, and what was the Senate thinking when it ratified him?

“…There has been a marked improvement in global economic performance, with strong growth, relatively low inflation, and less volatility in both growth and inflation. This seems to have reduced concern about future fundamental risk, in terms of the potential damage of future shocks and in the ability of governments and central banks to both avoid the policy errors of the past and to competently manage some daunting longer–term policy challenges…

“Changes in financial markets, including those that are the subject of your conference, have improved the efficiency of financial intermediation and improved our confidence in the ability of markets to absorb stress. In financial systems around the world, the capital positions of banks have improved and capital markets are becoming deeper and playing a larger role in financial intermediation. Financial innovation has improved the capacity to measure and manage risk. Risk is spread more broadly across countries and institutions…

“These changes in economic conditions reinforce each other. The long period of relative economic and financial stability has reinforced expectations of future stability, reducing implied volatility and risk premia, increasing comfort with higher leverage, and encouraging flows of capital into riskier assets…

“The dramatic changes we’ve seen in the structure of financial markets over the past decade and more seem likely to have reduced this vulnerability. The larger global financial institutions are generally stronger in terms of capital relative to risk…”

Timothy Geithner, May 15, 2007
[emphasis added]

How could one person in such a responsible position be so wrong?   He was wrong not on a few things, not on a lot of things, but on everything.  He had no clue as to the banking system’s increasing risks, vanishing capital, innovation consequences, dangerously high leverage, and impending collapse.

Given his record for perspicacity, how can we now put credence into anything Geithner says? Is there any reason to believe he understands the   unintended consequences of  subsidizing and supporting too-big-to-fail banks, insurance companies  and automobile manufacturers; of throwing trillions dollars of taxpayer money at the economic problem;  and of buying banks’ toxic assets with highly leveraged public-private purchases.

The answer is we can’t put any credence into them. But fortunately for us, throwing trillions of taxpayer dollars pell-mell at the problems will help solve them; maybe not efficiently, maybe not fairly, and maybe not rapidly; but eventually.

Meanwhile, most of the other Cabinet appointments, in my opinion, range from pretty good to superb (e.g., Steve Chu at Energy).  And almost all the bold new initiatives in infrastructure, science, energy, health, defense, international relations, et al., are laudatory and long overdue.  Kudos, indeed.

But in dealing with the economy, by far our most critical problem, why, oh why, couldn’t we have done better?

Wednesday, April 1, 2009

It's Time for a Change

On December 8, I wrote that the praise for “Obama’s initial slate of financial appointments has been almost unanimously effusive. But not from me.” I lamented “that a great opportunity was missed – the appointment of Joseph Stiglitz to either Treasury Secretary (instead of Timothy Geithner) or head of the National Economic Council (instead of Larry Summers).”

Almost four months and hundreds of billions of misdirected dollars later, I feel even stronger about what might have been. But see what you think. Consider what has been done by our crack economic team since January 20 in attempting to solve our financial mess. Then look at the results so far (by whatever metric you wish to choose). Finally, read Stiglitz’s
 op-ed piece in today’s New York Times, “Obama’s Ersatz Capitalism.”

He describes the administration’s proposal to deal with the ailing banks as one that replicates “the flawed system that the private sector used to bring the world crashing down…overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency…

“What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socialization of losses. It is a ‘partnership’ in which one partner robs the other. And such partnerships – with the private sector in control – have perverse incentives,
 worse even than the ones that got us into this mess.” [Emphasis added]

The appeal of such a proposal? He describes it as a “kind of
 Rube Goldberg device that Wall Street loves – clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets.”

As to the alternative of temporary nationalization, Stiglitz suggests that “that option would be preferable to the Geithner plan. After all, the FDIC has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).”

As I mentioned in my December piece, Stiglitz was shut out of the administration’s economic team because of longtime bad blood between him and Summers (the same issue that has kept Paul Krugman on the sidelines). But it’s not too late for the administration to admit mistakes of commission and omission. Should they make a change in our economic leadership? Yes. Will they make a change? Alas, no. In Washington, politics trumps rationality.

Wall Street and the Automobile Industry

The U.S. automotive industry is now being “overseen” by Steve Rattner, head of an leveraged-buyout firm (pardon me, private equity). Chrysler was purchased two years ago by an LBO firm (oops, there I go again) started by a former Drexel bond trader. General Motors was run for almost two decades by a former finance guy, a long tradition at GM. (At least Ford’s CEO had built something tangible before – airplanes.) However the industry emerges from its current dysfunction, is there any reason to believe that there’s anyone in charge today who knows the first thing about running a successful auto manufacturer; someone who can design and build cars that people
 want without rebate incentives; someone who can recapture the two generations of youth that have eschewed the American automobile?

There are those students of management who believe that any good manager can manage a company in any industry. Call me crazy, but I always thought that one should know
 something about the business one runs. (Come to think of it, real-estate moguls running newspaper companies haven’t been too successful, either.)

Speaking of the auto industry and of Wall Street, the then family-owned Ford Motor went public on January 17, 1956, in one of the largest IPOs ever (to that date). It was not only large in dollars, $658 million, but in the size of the underwriting syndicate. Over three hundred broker-dealers participated in the offering. (Apologies for the poor quality of the tombstone; your eyes are OK.)


Well, we know what’s happened to Ford and to the auto industry since then, and it’s not pretty. But what about all those securities firms that helped make Ford a public company? That’s not pretty a pretty sight, either.

There were seven managers of the offering: Blyth, First Boston, Goldman Sachs, Kuhn Loeb, Lehman, Merrill Lynch, and White Weld. Today, only Goldman Sachs remains; the others all died or were acquired. Of the eight firms in the next largest allocation bracket, only the name Lazard remains today as an independent entity (they’ve jettisoned the Frères from their earlier name.)

Ford UW analysis

As to the other 300 or so national and regional firms, most have long ascended into that Great Stockmarket in the Sky. It’s sure a different business today from when I was plying the Street in the 60s and 70s as a technology analyst. Very few IPOs, fewer still underwriters, and even fewer technology analysts.

My Favorite Bank Advertisement of the Month

Bank of America ran a full-page in newspapers around the country with this opening line:

“We’re taking the trust and faith that America has put in us and getting to work…”

The “trust and faith” that we put into you? As John McEnroe might say, “Are you kidding me?”

This rather presumptuous claim almost rivals the one in Bernie Madoff’s pre-incarceration letter to fellow apartment owners at 133 E. 64th St. apologizing for the media frenzy in front of the building

Dear neighbors,

Please accept my profound apologies for the terrible inconvenience that I have caused over the past few weeks. Ruth and I appreciate the support we have received.

Best Regards,


“Support we have received?” "Trust and faith put into us?"

Bizarre, or what?

Where Maureen Gets Her Material

With this economy, as William Goldman famously said of Hollywood, “Nobody knows anything.” [Emphasis added.]
Maureen Dowd, New York Times, February 21, 2009

In 1983, screenwriter William Goldman (Butch Cassidy, Marathon Man, All the President’s Men, Princess Bride, et al.) wrote Adventures in the Screen Trade, a brilliant and entertaining analysis of the movie industry. His unforgettable takeaway line that summarized the entire 436-page book, the phrase that captured the essence of Hollywood, and now the single best explanation of why we’re in such an economic mess: “Nobody knows anything.”
Through Rosen-colored Glasses, September 24, 2008 

By the way, Maureen, just to pick a grammatical nit, Bill Goldman didn’t famouslysay “nobody knows anything.” He happened to coin a phrase that became famous.

And another BTW: There is somebody who does know something: Joe Stiglitz. He just happens not to be where we need him.

Tuesday, March 10, 2009

Healthcare, Academia, Perps


Much of the discussion – and trepidation – about reforming our healthcare system has been based on the idea that to reform it, the system has to be blown up and rebuilt from scratch with an entirely new model. Advocates of a universal healthcare system actually look forward to scrapping what we have and creating a new “perfect” system. Detractors argue that we would thereby destroy a top-notch, if flawed system, and would in effect be throwing out the baby with the bathwater.

As it turns out, it appears possible to fabricate an all-inclusive healthcare system
without starting at zero, without attempting the politically impossible task of building a brand new model. (See Clinton, Hillary, circa 1993.) In a perceptive essay by Atul Gawande in the Jan. 26 New Yorker, the writer makes the case for building a new system on top of what we already have. Indeed, as he points out, this is way that Britain, France and now Massachusetts have reformed their health care systems. Each started with a different set of circumstances. But each ended up with a system that has come very close to providing health insurance and care to all their constituents.

“Every industrialized nation in the world except the United States has a national system that guarantees affordable health care for all its citizens. Nearly all have been popular and successful. But each has taken a drastically different form, and the reason has rarely been ideology. Rather, each country has built on its own history, however imperfect, unusual, and untidy.”

In Britain and France, the socialized health care systems came about directly from the roles the governments were forced to play in World War II and shortly thereafter, when the entire populations of their ravaged countries were already being cared for out of necessity by the central government.

Dr. Gawande describes in his essay how health care in Britain and France evolved from prewar private models to postwar public ones. He continues, as both a physician and a Massachusetts resident, to describe how the Mitt Romney-sponsored system has progressed:

“Massachusetts, where I live and work, recently became the first state to adopt a system of universal health coverage for its residents. It didn’t organize a government takeover of the state’s hospitals or insurance companies, or force people into a new system of state run clinics. It builds on what existed. On July 1, 2007, the state began offering an online choice of four private insurance plans for people without health coverage. The cost is zero for the poor; for the rest, it is limited to build more than about 8% of income. The vast majority of families, who had insurance through work, didn’t notice a thing when the program was launched. But those who had no coverage had to enroll in a plan or incur a tax penalty.

“The results have been remarkable. After a year, 97.4% of Massachusetts residents had coverage, and the remaining gap continues to close. Despite the requirement that individuals buy insurance and that employers either provide coverage or pay a tax, the program has remained fixed extremely popular.

“For years, about one in 10 of my patients – I specialize in cancer surgery – had no insurance. Even though I waived my fee, they struggled to pay for their tests, medications, and hospital stay.

“For the past year, I haven’t had a single Massachusetts patient who has had to ask how much the necessary tests will cost; not one who has told me he needed to put off his cancer operation until he found a job that provided insurance coverage. And that’s a remarkable change: a glimpse of American health care without the routine cruelty.

“It will be no Utopia. People will still face co-payments and premiums. There may still be agonizing disputes over coverage for nonstandard treatments. Whatever the system’s contours, we will still find it exasperating, even disappointing. We’re not going to get perfection. But we can have transformation – which is to say, a healthcare system that works. And there are ways to get there that start from where we are.”

Read the
 entire piece. It’s an important contribution to the healthcare dialog.


: Following Katrina’s devastating blow to New Orleans in August 2005, Tulane University was able to resume operations by early 2006. But the extended period of campus interruption and the widespread physical damage created a huge financial problem. After analyzing the trade-offs, the board chose as one of its principal cost-savings initiatives to close the engineering school (only bioengineering was spared).

To me, an erstwhile engineer, this seemed overly harsh, for both the university and New Orleans. In a city that three and a half years later still has to be rebuilt, and in a city that must attract new industry to get above water (so to speak) economically, losing its largest and best engineering school was certainly not helpful. And Tulane was a top-notch engineering school. (One example from among its many illustrious graduates: My brother Harold, father of the geostationary communications satellite, who received his undergraduate degree there.)

Yet there was surprisingly little hue and cry in the community. Perhaps it’s because when you’ve been nearly destroyed by a hundred-year hurricane, the closing of one school within a university tends to get subsumed by the enormity of losing 80% of a city’s housing stock and two-thirds its population (now one-third).

Brandeis: Fast forward to Jan. 26, 2009, when the Brandeis board of trustees, facing budget deficits and an imploding endowment, voted to sell the 7,180 pieces of art in the university’s Rose Museum and close the museum. The collection was appraised in 2006 at about $350 million, an amount of huge import to the university – it’s about two-thirds the size of the now-shrunken endowment.

Well, all hell broke loose in the art community. Everyone was appalled – museum directors, curators, critics, reporters. You’d think the board was destroying the art, rather than using its sale to allow the university to continue academic programs with cutting back any of them, such as the visual arts curriculum, which will continue.

My guess is that without the art sales or other extraordinary revenue sources, Brandeis would have to do what Tulane did – cut into the core of its academic mission and close a school or two. So what’s more important for Brandeis, to have degree-granting schools and to retain its faculty, or to have a museum? The board decided on the former. On what basis can we say they were wrong?

Most of the criticism focused on the importance of the museum to the university; it was a
 necessity. I beg to differ. The museum is a nicety, a luxury, but not a necessity. Brandeis students, located in Waltham, Mass., are not without convenient – and superior -- museum resources in the neighborhood. A stone’s throw away from the campus are some pretty decent museums in the greater Boston area – Museum of Fine Arts, Institute of Contemporary Art, Fogg Art Museum, Isabella Stewart Gardner Museum, et al.

To me, the strident criticism from those who see just one side of the issue reminds me of the hunting dog vs. kennel dog comparison that Defense Secretary Charles Wilson evoked in 1957 in a different context. The hunting dog goes out in the world and does something useful, while the kennel dog just sits around, does nothing, and yelps. Well, there’s a lot of yelping in the art community, but that yelping doesn’t help solve the problem of how do one run a university and fulfill its academic mission when a force majeure has struck, the budget is hemorrhaging red ink, donors are wounded, and the endowment has collapsed.

Tulane, with no pricey works of art to sell, had few options other than to close one of its prized academic programs. Brandeis has the luxury, if you will, of another option, one it has said it will exercise it in order to keep its academic programs extant. I cannot fault them.

(Old-fashioned) STOCKS TO THE RESCUE

Shortly after Donna and I returned from Pyongyang a year ago, we learned through news reports of how the extraordinarily repressive government there punishes offenders of the state. In March 2008, a group of 15 North Korean citizens, mostly women, were publicly executed by firing squad in a town center near the Yalu River. Their crime? Attempting to leave the country, or abetting others who tried.

This draconian punishment hasn’t ended the flow of defectors from this Stalinist state, but it has undoubtedly reduced the number significantly.

I bring this up because over the past year of the world economic crisis, I’ve been searching for an appropriate punishment for the perpetrators of the crisis. Yes, there were perpetrators. The crisis didn’t happen in a vacuum; it was not a product of spontaneous combustion. People did things, and stuff happened.

Who are the perps? Everyone has his favorite list of who the bad guys are. Many of the lists overlap names. But it’s not that important that the list be precisely accurate or complete. We just need a highly publicized public punishment of
 someone. By so doing, it will have a really chilling effect on any future excesses or wrong-doing by charlatans, opportunists, legislators, business executives, legislators, regulators, et al.

OK, so how do we punish them? At first I thought, Aha! Emulate Kim Jong Il. Set up a firing squad on Wall St. Or in D.C. Or in some foreclosed real estate development. Or in Reykjavik. (It’s a crisis without borders.)

But then I changed my mind. Instead of a quick execution, there should be a form of punishment at least as long and painful as the disaster they foisted upon us. As Gilbert & Sullivan’s Mikado suggested:

My object all sublime
I shall achieve in time
To let the punishment fit the crime
The punishment fit the crime.
And make each prisoner pent
Unwillingly represent
A source of innocent merriment!
Of innocent merriment.

Then I stumbled upon a
 piece by Paul Begala in the Huffington Post, and I have to admit, he had a terrific idea. Begala proposed that we bring back the stocks. No, not GM, Citi and AIG, but the wooden devices used hundreds of years ago for punishment and for public humiliation.
stock 3


stocks 5

Ah, the shame of it all. Imagine seeing former Masters of the Universe, government officials, business executives, unscrupulous developers, and Ponzi-fund managers with their heads and hands immobilized in wooden stocks, for weeks, months, years? With an occasional ripe tomato or rotten egg thrown at them. Not as lethal as a bullet, and not as much fun for them as Club Fed, but oh boy, wouldn’t that have a great deterrent effect?

Stocks to the rescue! Just as in healthcare, prevention is a lot less costly than curing a disease.

Wednesday, March 4, 2009

Fear of Flying

For several days in mid-February, the news was dominated by the airline crash near Buffalo that killed all 50 passengers and crew. Hours of live television coverage of the crash site and days of newspaper articles forced the economic crisis off the front pages. Though it was the first fatal domestic airline crash in 2½ years, it still served to reignite fears in those who view flying as unnatural and dangerous.

How safe flying is: But instead of evoking hysteria, it should have served as a reminder of how safe flying is – both absolutely and relative to other forms of transportation. Since 2006, the year of the last U.S. airline crash, almost 30 million flights, averaging over a hundred passengers each, had safely taken off and landed.

Compared with vehicular transportation, about which no one seems to have much trepidation, airline flying is extraordinarily safe. Yet no one fears getting into a car. I cannot recall that anyone has written a book entitled “Fear of Driving” (apologies to Erica Jong).

How dangerous taxis are: So I’m astonished that we still have acquaintances who are white-knuckle fliers, friends who blithely get into New York City taxicabs with impunity. What’s more, they refuse to buckle up despite the dangers inherent in these vehicles usually driven by angry, less-than-competent drivers who weave at too-high speeds in chaotic traffic.


What’s more, the passengers’ jeopardy is exacerbated by the hard plastic “security” panels just a foot away from their noses – a panel that means certain plastic surgery, or worse, in a sudden stop or collision. No matter. It’s a car. It’s safe.

There is no denying the tragedy of the Buffalo crash. But there is a case to be made for putting it – and the risk of flying – into perspective. Yes, 50 people died suddenly and tragically in that airplane. Yet on that same day in February, a hundred other Americans died in automobile crashes, but these deaths received no TV coverage and no front-page newspaper articles. No one said, “That’s it. I’m never getting in a car again.”

The real killer -- car crashes: The next day, more than a hundred more died in car crashes. And the next day, and the next day, and, in fact, every day since. The fact is, we lose a lot of people in auto accidents, and very few in airplane crashes. In 2007, there were 37, 248 fatalities in auto crashes. In 1997, the total was 37,324 – not a lot of progress during the decade in vehicular safety, was there? (Actually, there was some – the number of vehicle miles increased about 20% during that stretch.)

For the ten years ending in 2007, a total of 380,195 American lives were lost in vehicular accidents. By contrast, over the same period, 728 people died in plane crashes, and that includes 524 in the 9/11 terrorist attack.

The incredible odds: Here’s the bottom line, as illustrated in the chart below. You’re 40 times as likely to die driving in a car than flying in a plane for the same distance. So the next time you fly, relax. The next time you drive (or are driven), well, buckle up.

AutoAirline JPEG

Motorcycles -- incredibly dangerous: Well, if I’ve convinced you that cars are muchmore dangerous than planes, let me now tell you about an even more perilous way to get from Point A to Point B – drive a motorcycle. While driving has 40 times the fatality rate of flying, riding a motorcycle increases your fatality rate another 40 times over that of a car. And it’s getting worse. In the last 10 years, the motorcycle fatality rate has almost doubled, from extremely unsafe to kamikaze levels.

Moto tiff

Let’s put it this way: You can take the shuttle flight from New York to Boston with a high degree of confidence of getting there alive. Or, you can hop on your motorcycle and increase your probability of dying along the way by a factor of 1,600. Clearly, it’s more fun to get on your Hog with your chick than it is to suffer the indignities of commercial air travel, but remember, there is a price.

Also, consider this motorcycle downer: About 80 percent of reported motorcycle crashes result in injury or death; a comparable figure for automobiles is 20 percent.

[Full disclosure: When touring France and Spain in 1959, I drove a Vespa for 3,000 miles. (Scooters are even more lethal than motorcycles because of the smaller wheels that are intimidated by potholes). I had two accidents -- a car collision and a slippery road tumble -- and luckily survived both with minor bodily injury.]

The drama of multiple simultaneous death: Well, we all know that group tragedies are bigger news than an equivalent number of fatalities spread geographically. For a variety of reasons, a group of people killed at one place and one time is a big event. The same number killed separately, even at the same time, is a non-event. The media, and indeed we who watch and read the media, are more impressed by dramaticcalamities. Planes dropping out of the sky! Fiery crashes! Unexplained causes!

Look at this typical photo that accompanied the Buffalo crash:

crash tiff

That’s the stuff of drama. It gets everyone’s attention – TV, newspapers, us.

It certainly is more arresting that the following photo of a car accident that occurred about the same time as the Buffalo crash:

Car wreck TIFF

That photo made neither the 11 o’clock news nor the newspaper’s front page. Too common. Too everyday.

But instead, just suppose the following collage of 100-plus photos and caption were published:

100 Americans Killed Today in Fiery Car Crashes
Hundreds More Seriously Injured

And suppose a similar mosaic were published the next day. And the next. And the next. Would that make people more afraid of driving a car? I doubt it. Would it instead make them less afraid of flying? Nah.

As we’ve learned painfully from this economic crisis, risk is rarely given the respect it deserves in making what should be rational decisions and inferences. Cars are riskier, much riskier, than flying commercially, but we drive as if we’re immortal. We drive after having had alcohol. We drive unbelted. We drive when sleepy. We drive while texting (well, some do). Those aren’t rational actions. For these and other reasons, tens of thousands die every year in cars, but it doesn’t seem to bother us one bit. It’s a certifiable epidemic, but there’s no outrage. We accept it as an acceptable tradeoff for the benefits of the car.

Planes are safer, much safer, but some of us board a plane with the feeling that this is our last day on Earth. And on those rare occurrences when a fatal plane crash occurs, it immediately is blown way out of statistical significance, resulting in a reinforcement of the fear of flying. Instead, it should remind us of not how dangerous flying is, but how safe.