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The Audit
- June 23, 2011 07:49 PM
Audit Notes: Magnetar Misled, Anonymous But On the Record, WSJ Jet Probe
I wrote about JPMorgan's Magnetar settlement this morning, but it's important to note that it shows once and for all (if you somehow doubted it) that Magnetar has not been truthful when it's denied "choosing assets for any CDO."
Here are some quotes from the SEC's complaint:
... a hedge fund helped select the assets in the CDO portfolio...
Deny that.
a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection...
Marketing materials stated that the Squared CDO’s investment portfolio was selected by GSCP (NJ) L.P. - the investment advisory arm of GSC Capital Corp. (GSC) - which had experience analyzing CDO credit risk. Omitted from the marketing materials and unknown to investors was the fact that the Magnetar Capital LLC hedge fund played a significant role in selecting CDOs for the portfolio and stood to benefit if the CDOs defaulted....
SEC alleges that Steffelin allowed Magnetar to select and short portfolio assets...
— The Wall Street Journal has a good page one story investigating the hacking collective Anonymous. What particularly stood out to me was the number of hackers the paper got to go on the record. Like this one:
Anonymous participants say the attacks expose weaknesses in the systems of computer-security companies and large organizations. "They should be scared," said Corey Barnhill, a 23-year-old New Jersey native who uses the online nickname Xyrix and who said he took part in the attack on HB Gary Federal. "You're college-educated and you can't secure a server? How hard is it? They can't keep a kid out?"
And it shows groups turning on each other:
Mr. Barnhill said the HB Gary Federal hack was designed to teach Mr. Barr a lesson for suggesting he could unmask Anonymous. "Whacking him down a peg was pretty funny," he said.
This week, LulzSec claimed to rat out a couple of individuals it said had "tried to snitch" on it. In a document addressed to the "FBI & other law enforcement clowns," the group appeared to reveal the full names, addresses and other contact information of two U.S. men it claims were involved in some hacks. "These goons begged us for mercy after they apologized to us all night for leaking some of our affiliates' logs," according to the document, accessed via a link on LulzSec's twitter page. "There is no mercy on the Lulz Boat."
Good reporting.
— And the Journal's great investigation of corporate jet abuse continues.
Is long-retired IBM Chief Louis V. Gerstner Jr. still a frequent flier on IBM Corp.'s jets?
What did Gerstner, who retired nearly a decade ago, and IBM have to say for themselves?
The number of trips by the computer giant's jets to Stuart, Fla., and Nantucket, Mass., near where public records show Mr. Gerstner has homes, certainly would suggest so...
The IBM fleet landed 66 times in Stuart, Fla. over the four years ended last December, and 48 times on the resort island of Nantucket, according to Federal Aviation Administration flight records...
Counting travel both to and from Stuart and Nantucket, the approximate cost to IBM shareholders for those flights was $1.1 million, according to Wall Street Journal estimates.
An IBM spokesman said: "We don't comment on any plane use." Mr. Gerstner didn't respond to an email message sent to his assistant or to a phone message left at his Nantucket residence.
- June 23, 2011 02:02 PM
Fraud Without Fraudsters; Fraud Without “Fraud”
The SEC's settlement with JPMorgan Chase on a Magnetar deal
How is it possible to file a civil fraud lawsuit against a bank without filing them against a banker?
That's the reasonable question posed by both The Wall Street Journal and Bloomberg's Jonathan Weil today.
JPMorgan Chase defrauded investors including a Lutheran nonprofit by deceptively unloading toxic CDOs created for (and, essentially, by) the infamous hedge fund Magnetar earlier this week. I should note that JPMorgan "neither admitted nor denied wrongdoing" as part of its settlement—which is legalese for "guilty!"
The SEC got $154 million out of JPMorgan, which will take press favorite Jamie Dimon's too big to fail bank 2.5 days to earn back at its current rate of profit. It also sued the CDO manager Edward S. Steffelin of GSC Capital for misleading investors about Magnetar's role.
But not a single JPMorgan bankers was sued or will have to cough up a cent of ill-gotten compensation.
The Journal zeroes in on JPMorgan banker Michael R. Llodra, who worked on the CDO in question and headed the bank's asset-backed CDO operation, and has this good reporting:
The outcome is another instance of the SEC deciding it doesn't have the evidence to bring cases against individuals at financial firms blamed for triggering or worsening the financial crisis...
So that's it, huh? You can't sue the lawyers for offering "good faith" legal advice, and you can't sue the bankers for following that advice, even though they knew it was incomplete. From now on, just make sure that you don't write anything on email and that you have lawyers sign off on your documents and you'll be cool, no matter how badly you're misleading investors.
The first hurdle in bringing claims against Mr. Llodra was a lack of sufficient evidence that he intended to mislead investors, according to people familiar with the matter.
These people said the decision not to file charges against him also reflected the fact that J.P. Morgan's in-house lawyers signed off on the relevant information related to the Squared deal. That information failed to disclose that Illinois-based hedge-fund firm Magnetar Capital LLC was betting against the deal while also helping choose the underlying assets. Any suggestion Mr. Llodra was personally liable for this lack of disclosure would have to address why he was wrong to rely on the advice of the bank's legal experts, according to lawyers uninvolved in the case.
Which brings us to an important point Yves Smith makes in her book Econned, and one that you never seem to read about in the press (I don't know if it has any bearing here, I just think it's worth noting):
Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.
Weil reports that the SEC couldn't even bring itself to say JPMorgan intentionally defrauded investors:
Why did the SEC decide that JPMorgan’s actions amounted only to negligent fraud and not fraud with scienter? The head of the SEC’s enforcement division, Robert Khuzami, didn’t answer that question when I put it to him in a conference call with reporters this week.
That would be former Deutsche Bank general counsel Robert Khuzami, who "oversaw a group of lawyers at his old firm, Deutsche Bank AG, that was closely involved in developing collateralized debt obligations." Man is it baffling why that guy wouldn't want to press too hard against bankers who created CDOs and the lawyers who gave them legal cover (it's worth remembering too that an SEC whistleblower alleges Khuzami watered down Citigroup charges for a lawyer crony who represented the bank).
And that lays bare a shortcoming of the Journal's story. It's at base a defense of the SEC and "the Difficulties of Pinning Blame for Soured Deals." Which is fine if you're going to explore all the difficulties, including the self-imposed ones.
I mean, seriously. You don't have to be a cynic to guess that when the feds hire a guy from Deustche Bank who oversaw the folks developing CDOs there—and Deutsche was one of the worst churners of those toxic assets—you're not going to get very tough enforcement of the folks who churned out toxic assets. It's sort of like hiring Tom Hagen to look into corruption in the olive oil industry.
For all I know Khuzami may be a fine gent, but he shouldn't be in that position. And his history is probably worth mentioning in any story exploring the "challenges in chasing fraud."
If there's any real justice here, it's that JPMorgan couldn't unload the Squared CDO junk fast enough and got stuck with $880 million in losses itself. But it wasn't for lack of trying:
The SEC also quoted an exhortation from an unnamed J.P. Morgan employee to a sales team, which was told to offload the rapidly deteriorating assets in Squared onto investors.
Fortunately by then everybody was wising up to the scam.
"We are sooo pregnant with this deal....Let's schedule the cesarian, please!" the email, with its misspelling, said.
- June 22, 2011 08:30 PM
Audit Notes: Wall Street’s Trib Bust, Pro-Union U.S., Authoritarian Wal-Mart
David Carr looks at James O'Shea's new book on Sam Zell's Tribune Company fiasco and zooms in on O'Shea's reporting on how Wall Street helped create it:
What Mr. O’Shea focused on was how the bankers — who he said should have known the deal would render the company insolvent — seemed to be too busy counting their fees to care. Here’s a note he found buried deep in court records from Jieun Choi, an analyst at JPMorgan Chase & Company, that demonstrated a breathtaking level of cynicism and self-dealing:
That analyst no longer works for JPMorgan, naturally.
“There is wide speculation that [Tribune] might have so much debt that all of its assets aren’t gonna cover the debt in case of (knock-knock) you know what,” she wrote to a colleague, in a not very veiled reference to bankruptcy. “Well that’s what we are saying, too. But we’re doing this ‘cause it’s enough to cover our bank debt. So, lesson learned from this deal: our (here I mean JPM’s) business strategy for TRB but probably not only limited to TRB is ‘hit and run.’ ”
She then went on to explain just how far a bank will go to “suck $$$ out of the (dying or dead?) client’s pocket” in terms that are too graphic to be repeated here or most anywhere else.
— Kevin Drum of Mother Jones looks at a proposed National Labor Relations Board move to shorten union elections and gives us some numbers on unions you don't see much in the mainstream press.
There's this:
Survey research a few years ago by Harvard's Richard Freeman suggests that "if workers were provided the union representation they desired in 2005, then the unionization rate would be about 58%" — almost eight times higher than the actual private sector rate of 7.4%.
And then there's Drum's chart, which shows polling results since 1984 showing a dramatic increase in the number of respondents who would vote to join a union. Where in 1984, the ratio was roughly 65-30 against unions, it's now something like 55-40 in favor of unions.
Despite that, unionization continues to plunge:
It's true that in 2009 unions won 66% of all NLRB elections compared to 51% in 1997, but that's 66% of 1,304 elections compared to 51% of 3,261 elections. Contra Kirsanow, organizing a new workplace has gotten so hard in recent years thanks to corporate-friendly NLRB rule changes and increasingly aggressive union avoidance campaigns, that unions simply don't bother waging all that many recognition elections anymore. They know that most of them are hopeless. The result is that the net number of election wins has dropped nearly in half in just the last decade alone.
— In the wake of the Supreme Court ruling on the Wal-Mart sexual-discrimination case, author Nelson Lichtenstein writes an interesting op-ed for The New York Times on what he calls "Wal-Mart's Authoritarian Culture":
In other words, the patriarchy of old has been reconfigured into a more systematically authoritarian structure, one that deploys a communitarian ethos to sustain a high degree of corporate loyalty even as wages and working conditions are put under continual downward pressure — especially in recent years, as Wal-Mart’s same-store sales have declined. Workers of both sexes pay the price, but women, who constitute more than 70 percent of hourly employees, pay more. There are tens of thousands of experienced Wal-Mart women who would like to be promoted to the first managerial rung, salaried assistant store manager. But Wal-Mart makes it impossible for many of them to take that post, because its ruthless management style structures the job itself as one that most women, and especially those with young children or a relative to care for, would find difficult to accept.
Why? Because, for all the change that has swept over the company, at the store level there is still a fair amount of the old communal sociability. Recognizing that workers steeped in that culture make poor candidates for assistant managers, who are the front lines in enforcing labor discipline, Wal-Mart insists that almost all workers promoted to the managerial ranks move to a new store, often hundreds of miles away.
For young men in a hurry, that’s an inconvenience; for middle-aged women caring for families, this corporate reassignment policy amounts to sex discrimination. True, Wal-Mart is hardly alone in demanding that rising managers sacrifice family life, but few companies make relocation such a fixed policy, and few have employment rolls even a third the size. - June 22, 2011 01:42 AM
Gannett’s Multimillionaires Regret to Inform 700 Workers of Their Layoffs
Imagine if these six execs scrapped the "multi" and took low seven figures
Gannett says "we need to take further steps to align our costs with the current revenue trends," so it's laying off 700 employees in its newspaper division—about 2 percent of the company's total workforce.
Poynter's Jim Romenesko is good to note that Bob Dickey, the guy who announced the "extremely difficult and painful decisions," got paid $3.4 million last year.
And he's not even the CEO.
That's Craig Dubow, who raked in $9.4 million.
And $3.4 million Dickey isn't even No. 2 in the Gannett lottery. Chief Operating Officer Gracia Martore took home a whopping $8.2 million. Plus, the struggling newspaper company (redundant, I know) had at least three other multimillionaires on the payroll: CFO Paul Saleh, who made $2.9 million; USA Today publisher David Hunke, who got $2.5 million; and president of broadcasting Dave Lougee, who got a mere $2.2 million. These folks are kidding, right?
Those are the only million-dollar-plus paydays disclosed in the company's 2010 proxy. There may be more.
Look, running Gannett Company Incorporated isn't easy these days, but it isn't the roughest thing in the world, and I haven't heard anything that makes these folks seem like they've got any kind of grasp on where to go in the splintered media age. And those salaries are awfully high for a company barely hanging on to its Fortune 500 status and dropping fast.
Hmm, how could we preserve more value for long-suffering Gannett shareholders (not to mention longer-suffering Gannett readers, but really—who cares about them?) both in the near and the long terms?
Here’s a thought experiment: If all six of these Gannett executives worked for a million bucks a year would they work less hard? I doubt it. That’s still a whole lot of money. So why not try it and take the money saved and hire some of those workers back? Heck, we'll even give the CEO $2 million to salve his ego and pay for whatever it is he needs so badly to make it through the day. That will keep quality from deteriorating further at already gutted Gannett papers and perhaps even retain some of the energy, experience, and ideas that are needed to help find a way out of this morass. Might even give morale a shot in the arm, too. What’s the alternative? Throwing it down the executive-suite sinkhole? No, thanks.
I'm not a Gannett shareholder, thank God. But if shareholders had exercised their say-on-pay (Just kidding. I know that doesn’t work, but bear with me!) and reined in executive pay along the lines I’m talking about, that would net us $22 million. How many jobs could generous Gannett execs save by making their paychecks somewhat less obscene?
Let's guess that Gannett's cost-per-employee it's laying off is about $75,000 each. That's $53 million. So Dubow & Co. could fund the salaries of 40 percent of the fired by becoming lowlier millionaires.
But that presumes they’re interested in stewardship. If so, time's running out. This carcass is getting mighty lean.
- June 21, 2011 12:19 PM
Stock Market Chart of the Day: Socialism vs. Cowboy Capitalism
In the appendix of that report on executive compensation and inequality that the Washington Post wrote about the other day, there's an interesting chart comparing stock market indexes for the U.S., France, and Japan from 1981 to 2006. Check it out (figure 3, page 74):
First, applaud the fact that the authors adjusted stock prices for inflation. That's almost never done. They did it here by prices for each respective country.
The authors cut off the stock chart at 2006 because that coincides with the tax data they were studying. Since then, the U.S. stock market has done a little less worse than French stocks. And it seems as if the researchers just used index averages and not dividends in their calculations, which could change the (while I can't seem to find historical data on French dividend yields, I'd guess they're at least comparable to American ones).
But the point is, the ascent of laissez-faire economic policies in the U.S. during the first quarter century following the Reagan Revolution wasn't enough to outdo French stocks, which faced the heavy hand of government.
Take it for what a single datapoint is worth, but it's interesting, non? You don't and won't hear much about this one in the American business press. And you don't even want to look at truly socialist Sweden's stock returns, which have outpaced even France's.
Want to push back further, to the start of the Nixon administration? Here you go (note that I don't believe these are apparently not adjusted for native country's inflation unlike the previous chart):
The Markets Are God crowd always likes to tell us that the markets are telling us what we ought to do. What do they think the markets are telling us about "socialism"?
- June 21, 2011 10:31 AM
Nocera vs Sorkin, Bank Capital Edition
One of the consequences of Joe Nocera's move to the NYT op-ed page is that his column now appears on the same day as that of Andrew Ross Sorkin. Which can sometimes result in a great lesson on the difference between how Wall Street is viewed from the outside and how it is viewed from the inside.
Nocera devotes his column today to Basel III, which is of course fantastic—he's quite right that the fight over capital standards is much more important than any wrangling over Dodd-Frank, or derivatives, or the Consumer Financial Protection Bureau. Capital is crucial, it's insufficient at present, and Nocera's right that asking too-big-to-fail banks to hold as much as 14% of their assets as equity is a very good idea.
(One point I'd add: these capital standards have to be progressive, a bit like income tax. The last thing we want is a situation where too-big-to-fail banks have an incentive to get even bigger, on the grounds that if they're going to be socked with the highest capital surcharge anyway, they might as well just get as big as they possibly can. So my suggestion is for the SIFI surcharge to range between 3% and 7%, giving banks an incentive to shrink and thereby get a lower rate.)
Nocera also links to the smart analysis of Anat Admati, who explains that there's no good reason for banks to minimize the amount of equity they hold:
JPM's overall funding costs, averaging the required return on the various debt claims it issues (some of which might decline if JPM is better capitalized) and the required return on equity, need not change just because more equity is used.
In other words, it's a really bad idea to encourage banks to minimize the amount of equity they have, or to look at banks' profits solely as a percentage of their total equity, rather than in relation to their entire funding structure. If you want to look at profitability, then return on assets is a much smarter place to start than return on equity.
Which brings me to Sorkin:
Wall Street is facing a new reality that it has yet to come to grips with. “Return on equity,” perhaps the best metric for considering the health of the Wall Street, fell to 8.2 percent in 2010, according to Nomura. That is down from 17.5 percent in 2005, before the crisis.
Andrew is, simply, wrong on this. Return on equity is not "the best metric for considering the health of the Wall Street", precisely because it makes equity seem like a bad thing which should be minimized, rather than a good thing which should be maximized.
By comparison, total compensation has hardly fallen at all. At Goldman Sachs, for example, compensation and benefit expenses fell 5 percent in the first quarter... And its annualized return on equity fell to 12.2 percent from 20.1 percent in the period a year earlier.
More generally, looking at total compensation as a percentage of total equity is rather silly. What direction does Sorkin want that ratio to move in? He seems to think it a bad thing that it's going down—but isn't a world where bankers are less overpaid and equity is more abundant exactly what we want?
Sorkin's bigger point is that higher base salaries (to make up for lower bonuses) are "perverting Wall Street’s calculus during periods of weakness." Which rather forgets that Wall Street's calculus was pretty perverted before. The current system is definitely an improvement: it forces banks to hire people for the long-term value they create, rather than for the short-term quarterly profits they can generate before cashing their eight-digit bonus checks and quitting for a life of leisure.
And, since when is this a "period of weakness" for Wall Street? Hasn't the banking sector been wallowing in cash dropped from Ben Bernanke's helicopters for the past couple of years? This is a period of strength for Wall Street, and the biggest banks are making record profits. If they're firing people, maybe that's a good sign that they reckon they can get by without employing quite as many of America's best and brightest. And that in turn is a development to be welcomed, rather than criticized for its perversity.
- June 20, 2011 05:51 PM
Executive Compensation As the Driver of Inequality
A well reported Washington Post story makes a solid case
The Washington Post leads off its new series on inequality with a killer anecdote:
It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale.
The Post uses Dean Foods to illustrate the story of how skyrocketing executive compensation has been the primary cause—at the top, anyway—of the fast-growing gap between rich and poor over the last three or four decades. That gap has the U.S. closer to the third world than to its rich peers in inequality.
Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal.
Peter Whoriskey backs this all up by relying on academic research out last year that examined tax filings by those in the top 0.1 percent of earners to find out how they made their money—something that apparently hadn't been studied. It found that about 60 percent were executives or managers.
The Post misses a bit by not telling us how much or whether that percentage is up. In fact, it's not different. In 2005, 61 percent of top one-thousandth of earners were executives or managers, barely changed from 60 percent in 1979, according to the paper by Jon Bakija, Adam Cole and Bradley T. Heim. But in keeping with the financialization of the economy since then, today's best-paid executives are much more likely to be in the financial industry. Non-finance execs and managers in the top 0.1 percent decreased from 49 percent in 1979 to 43 percent in 2005, while finance execs and managers jumped from 11 percent to 18 percent.
The flipside of the compensation eruption at the top is what's happened to those executives' workers. The Post notes that income has gone nowhere for 90 percent of the country and shows it through the workers at Dean Foods:
Over the period from the ’70s until today, while pay for Dean Foods chief executives was rising 10 times over, wages for the unionized workers actually declined slightly. The hourly wage rate for the people who process, pasteurize and package the milk at the company’s dairies declined by 9 percent in real terms, according to union contract records. It is now about $23 an hour.
That's smart reporting to go digging through union records to figure out how much workers have made over the years.
The paper sets aside room to go to 30,000 feet too:
Inequality, economists have noted, is an essential part of capitalism. At least in theory, “the invisible hand,” or market system, sets compensation levels to lead workers into pursuits that are the most productive to society. This produces inequality but leads to a more efficient economy.
And it asks the big question and attempts to answer it:
As a result, economists have noted, there is an inherent tension in market-oriented democracies because while society aims to endow each person with equal political rights, it allows very unequal economic outcomes.
“American society proclaims the worth of every human being,” economist Arthur M. Okun, former chairman of the Council of Economic Advisers, wrote in his 1975 book on the subject, “Equality and Efficiency.’’ But the economy awards “prizes that allow the big winners to feed their pets better than the losers can feed their children.”
So what happened since the ’70s that has sent executive pay upward?...
The Post reports that back in the day, Dean Foods CEO Kenneth Douglas thought he was overpaid making what would now be a million bucks a year. He turned down raises from his board. The paper quotes a 1975 Forbes interview with ITT's CEO who talks about the social pressure keeping his pay in check.
The case of Dean Foods appears to bolster the argument that executive compensation moves with company size: The profits for Dean Foods in 2009 were roughly 10 times what they were in 1979, adjusted for constant dollars. Engles’s compensation has averaged 10 times that of Douglas.
“It’s a different company today,” company spokesman Jamaison Schuler said. He declined to comment further.
But some economists have offered an alternative, difficult-to-quantify explanation: that the social norms that once reined in executive pay have disappeared.
If you need further evidence of the amount of reporting that went into this piece, look at how Whoriskey tracked down Dean Foods board members from the 1970s to talk about Douglas:
“He would object to the pay we gave him sometimes — not because he thought it was too little; he thought it was too much,” said Alexander J. Vogl, a members of the Dean Foods board at the time and the chair of its compensation committee. “He was afraid it would be bad for morale, him getting a big bump like that.”
“He believed the reward went to the shareholders, not to any one man,” said John P. Frazee, another former board member. “Today we get cults of personality around the CEO, but then there was not a cult of personality.”
It's worth noting for our audience that those cults of personality were created in large part by the media, particularly the business press, and particularly business magazines.
While the Dean Foods anecdote is tremendous, this piece could have been made even better by adding another example or two.
And I probably would have also zeroed in on the fact that despite falling 9 percent over thirty-five or so years, Dean Foods workers are still averaging $23 an hour. That's about $46,000 a year, what we consider a very good wage these days, particularly for blue-collar workers.
That shows that Dean workers have been some of the few lucky ones, even while its benevolent and paternal leadership turned into one that held its wages in check while lining its pockets. Unlike a lot of other things, it's hard to offshore milk production, packaging, and distribution to folks making fifty cents an hour. And that's where the anecdote comes up missing: The Dean workers aren't representative of what's happened to American workers over the last thirty-plus years.
Maybe that's coming. Here's looking forward to the rest of this series.
- June 20, 2011 11:23 AM
The Hamster Wheel and the AOL Way
Audit Chief Dean Starkman's "Hamster Wheel" piece has now been enshrined in the lexicon of the bureaucracy with the release of the FCC's big report on "The Information Needs of Communities."
But, you know, the big wheel keeps on turnin', and though periodically hamsters tire and fly off into the wood shavings, they're replaced by fresh hamsters from whom at least six months to a year worth of hard digital labor can be squeezed.
In a sense, this has long been the Way of Journalism, which should never be mistaken for an ocean cruise. In the newspaper era now ending, that meant something like this, according to my completely unscientific observation: Of print journalism majors, about a third managed to work for the college paper. Of them, roughly a third—so, asixthninth—went on to work for a real newspaper. A goodly number burned out five years in and went to law school to be burned out but have nice things. Fifteen or twenty years in, half of the rest had gone to the dark side, PR or some such. A hefty percentage of those remaining do okay; some do very well; others are brain-fried after decades of daily deadlines but they make it.
The demands of the Internet have just speeded up the winnowing process. Where hard-pressed reporters on small-town papers used to get eight or ten bylines a week on cop stories and school-board meetings, sometimes a few more, sometimes a lot less, content farmers are writing eight or ten things a day on stuff like this:
I was given eight to ten article assignments a night, writing about television shows that I had never seen before. AOL would send me short video clips, ranging from one-to-two minutes in length — clips from “Law & Order,” “Family Guy,” “Dancing With the Stars,” the Grammys, and so on and so forth… My job was then to write about them. But really, my job was to lie. My job was to write about random, out-of-context video clips, while pretending to the reader that I had watched the actual show in question. AOL knew I hadn’t watched the show. The rate at which they would send me clips and then expect articles about them made it impossible to watch all the shows — or to watch any of them, really.
That's Oliver Miller, who used to work at AOL, in a harrowing piece in The Faster Times on what it's like to work as a content slave, as he puts it, making $35,000 a year putting in 60-plus hour weeks to churn out, wait for it, more than 350,000 words a year. That’s two-thirds of the way to War and Peace, people.
That alone was unethical. But what happened next was painful. My “ideal” turn-around time to produce a column started at thirty-five minutes, then was gradually reduced to half an hour, then twenty-five minutes. Twenty-five minutes to research and write about a show I had never seen — and this twenty-five minute period included time for formatting the article in the AOL blogging system, and choosing and editing a photograph for the article. Errors were inevitably the result. But errors didn’t matter; or rather, they didn’t matter for my bosses.
Much of Miller's scorn is reserved for the infamous AOL Way document that Business Insider (neatly enough) scooped up earlier this year*, and which revealed to Miller the "why" of his suffering:
“The AOL Way,” as the document is called, lays the whole plan bare — long flowcharts, an insane number of meaningless buzzwords… the works. One slide is titled “Decide What Topics to Cover.” It then lists “Considerations” from top to bottom. “Traffic Potential” is the top consideration, followed by “Revenue/Profit” and then “Turnaround Time.” “Editorial Integrity” is at the bottom.
Lest you think that the prioritization of those bullet points was a Power Point foulup, Miller is here to tell you it was not:
I still have a saved IM conversation with my boss, written after 10 months of employment, when I was reaching the breaking point:
This is roughly what internal communications at The Audit are like. Me: "Please, Sir, might we interface for a few moments sometime soon to share ideas and exchange views about the large issues of the day? You know, chew the fat, blue-sky about this and that, run things up the old flag pole, perhaps think a bit?" Dean: "Think? About what? Keep typing, helot.”
“Do you guys even CARE what I write? Does it make any difference if it’s good or bad?” I said.
“Not really,” was the reply.
And so I type. But my lame jokes aren’t so amusing in light of the growing body of mini-memoirs sprouting up around the Web about life down on the content farm, including Nicholas Spangler's piece last year for CJR and Jessanne Collins's for The Awl, which pulled this gem from Demand Media's manifesto:
“We aren’t here to break news, lay out editorial opinion, or investigate the latest controversy. Our audience tells us they want incredibly specific information and we deliver exactly that —in a style that the average consumer appreciates and understands.”
The Demand Medias and AOLs are the logical result of a digital arms race triggered by the harsh realities of a Web marketplace that makes it all but impossible to make money doing serious journalism. The Awl and a few others are trying to fight the race to the bottom, but that Demand quote shows what we're all up against.
* I added "earlier this year" here to answer a reader comment on when The AOL Way document came to light
- June 17, 2011 08:40 PM
Audit Notes: Cash Giveaway, Bloomberg Views (in the WSJ), Lede of the Week
Jeff Amy of the Mobile Press-Register has some good reporting on corporate welfare in Alabama.
He writes that businesses aren't profitable enough to take advantage of all the corporate tax credits available for new capital investment in the state. So the governor is proposing to let companies sell off their unused tax credits and keep the cash.
So the bill allows a firm to make a one-time transfer of unused credits.
Indeed.
That means the company can sell the write-off to a firm that owes taxes, making it more likely that credits will be used...
Mazerov called such sales an unfortunate trend. "It just makes it clearer that they are more of a cash giveaway," he said.
— Bloomberg News chief Matt Winkler has a shiny new website called Bloomberg Views, meant to be a sort of sane counterpart to The Wall Street Journal's dodgy editorial page. (Fun fact: It's also supposed to be "consistent with the values and beliefs of the founder — even if he happens to be mayor of New York City.") It even has voice of God editorials nowadays.
So where does Winkler go when he wants to be heard on why the European Central Bank should release documents related to the Greek bailouts?
The Wall Street Journal op-ed page, of course.
— Lede of the week goes to Dana Mattioli and The Wall Street Journal on a piece about Scotts Miracle-Gro trying to put the pot in potting soil.
Scotts Miracle-Gro Co. has long sold weed killer. Now, it's hoping to help people grow killer weed.
What kind of a CEO goes after the marijuana growers market?
The 55-year-old Mr. Hagedorn isn't a typical suit-wearing CEO. A former F-16 fighter pilot, he flies his Cessna to and from meetings in Port Washington, N.Y., where he grew up, and the company's headquarters in Ohio, much to the chagrin of his board. He also peppers his language with swear words and military references, and he showed up at the office on a recent June day in jeans and sneakers.
Mr. Hagedorn took over Miracle-Gro from his father, who co-founded the company. The idea to merge with Scotts dawned on him after he looked at the company's market value in 1995, he said, so he called his father's tax lawyer to vet the idea. "I said, 'Bob, I got this f— crazy idea. Do you think it'd be f— possible to take over Scotts?'" he recalls, sitting in the Port Washington office that his father once occupied. - June 17, 2011 12:28 PM
SEC Scooplets From the WSJ
The Wall Street Journal reports this morning that the SEC is finally considering charging the credit raters—critical components of the securitization fraud machine—with civil fraud.
The question I have when reading these scooplets is always "What took so long?" It has, after all, been nearly four years since Moody's and S&P started saying "my bad" about hundreds of billions of dollars of mortgage assets they'd given AAA ratings. But why the investigations take so long to unfold or even to start is almost never explored, much less answered. Is it a resources issue or is it a priorities issue? Or is it just about basic competence?
After all, the press has done some good spadework in this field, and there was an April 2010 Senate report, that in the words of McClatchy's Kevin G. Hall, found that "credit-ratings agencies knowingly gave inflated ratings to complex deals backed by shaky U.S. mortgages in exchange for lucrative fees."
In other words, there's been a lot of low-hanging fruit out there for some time now.
The Journal today:
Now, SEC officials are focusing on the question of whether the ratings companies committed fraud by failing to do enough research to be able to rate adequately the pools of subprime mortgages and other loans that underpinned the mortgage-bond deals, according to people familiar with the matter.
The paper doesn't say anything about the third wheel here, Fitch Ratings. It is it facing civil charges, and if it isn't, then why not?
It is a common tactic for regulators to accuse financial firms of fraud for allegedly misrepresenting information to investors, either recklessly or intentionally, according to lawyers. In the case of the rating companies, the firms could face allegations from the SEC that they relied on incomplete or out-of-date information supplied to them on the pools of loans in the mortgage-bond deals or ignored clear signs of problems among subprime loans and so gave unduly high ratings to slices of the deals that were then sold to investors, say people familiar with the matter.
The SEC is looking closely at the conduct of Standard & Poor's, a unit of McGraw-Hill Cos., said people familiar with the matter. They said the agency is also reviewing the role played by Moody's Investors Service, owned by Moody's Corp., in relation to at least two mortgage-bond deals.
Of course, as the WSJ points out, the credit raters will try to use the First Amendment as a shield for their corruption. They say they're just offering "opinions," and courts have upheld that nonsense. The SEC faces a higher bar here than it would with a normal case.
The Journal has some other scooplets here too, including that press favorite Jamie Dimon's JPMorgan Chase is about to settle for defrauding investors:
A new wave of cases involving fraud allegations against banks and other financial firms related to the deals is expected shortly, say people familiar with the matter. They said the agency is aiming for a second wave of settlements in the fall, with a third and final group possible by the end of the year.
JPMorgan makes about $275 million in profit every four or five days.
J.P. Morgan Chase & Co. is among the first banks in line for a settlement of charges expected by the SEC, people familiar with the matter said. The New York investment bank is expected within weeks to settle these allegations related to its sale of a $1.1 billion mortgage-bond investment, called Squared, as the housing market was collapsing in early 2007. J.P. Morgan and most of the other banks that are expected to face allegations of fraud in relation to mortgage-bond deals are expected to agree to pay about half or less than the $550 million Goldman paid to settle the SEC charges, according to people familiar with the matter.
- June 16, 2011 05:47 PM
The Press Notes the Euro Crisis Threatens the U.S. Too
It's beginning to dawn on the U.S. press that the slow-motion crash of the European Union just might have some nasty effects here at home, an angle I'd been noticing has been missing a lot lately. How nasty will depend on just how calamitously the project collapses—or whether the Europeans manage to muddle through the mess.
If there's one thing capital markets don't like, it's revolution on the streets of a European democracy, particularly one like Greece, a domino temporarily propped up by plan that used more debt to bail it out of a debt crisis. Combine that with an already weakening (and already weak) U.S. economy, house prices that continue to plunge, and incompetent and captured political leadership, and the realization that extend and pretend isn't the way to get out of a jam, and markets are beginning to get the jits again. When that happens, the business press snaps to.
Bloomberg conveys the gravity of the situation in its headline:
Europe’s ‘Lehman Moment’ Looms as Greek Debt Unravels Markets
The Wall Street Journal gives huge play to its Greece/euro story, bannering it in large type across page one:
Fresh Greek Shock Waves
The New York Times puts it above the fold on page one:
Violent Street Protests in Athens Shake Government, Spark Global Market Woes
Markets Falter as Worry Rises in Greek Crisis
It was just Monday that The Wall Street Journal could write a story on "What It Would Take to Do a Double Dip" without once mentioning the words Greece or Europe.
Today its lede page one story is dramatic:
Greece shook global markets, intensifying fears of a default, as tens of thousands of demonstrators protested a new round of budget-cutting plans and its prime minister offered to step down to try to preserve them.
Greek bond prices are pointing toward a default (prices point to a 75 percent likelihood, according to this WSJ story on the U.S. angle) and other weak European financial systems are seeing their bond yields soar too.
Protests across the capital sometimes turned violent as Prime Minister George Papandreou sought an agreement with opposition parties on austerity measures demanded as the price of a new bailout by euro-zone nations and the International Monetary Fund.
When his offer to step down in favor of a unity government failed, he instead announced in a late-night televised address that he would reorganize his cabinet Thursday and then call for a vote of confidence in Parliament.
Bloomberg has some alarming quotes:
“The probability of a eurozone Lehman moment is increasing,” said Neil Mackinnon, an economist at VTB Capital in London and a former U.K. Treasury official. “The markets have moved from simply pricing in a high probability of a Greek debt default to looking at a scenario of it becoming disorderly and of contagion spreading to other economies like Portugal, like Ireland, and maybe Spain, Italy and Belgium"... “This is by no means the end of the story, but based on current majority, such a motion should pass,” Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London, wrote in a note to clients yesterday. “If not, then Armageddon scenarios come into play, which include default and potentially the whole contagion scenario plays out.”
Ahh, sounds like 2008 all over again.
The Times reports on the contagion prospect:
he fear that a default by Greece could lead to broader European problems were fanned by Moody’s Investors Service, which on Wednesday put the credit ratings of three of France’s largest banks on review for a possible downgrade because of their exposure to Greek debt.
Even if the Europeans get it together to push Greece (and Ireland, and Portugal, and Spain, etc.) through the short term, it's unclear that the political will exists to fix the problem instead of just patching it. That will weigh on the global economy in the medium term, as will the threat that some unforeseen circumstance will plunge the world back into financial crisis.
Moody’s cited concerns about the exposure of the three banks, BNP Paribas, Société Générale and Crédit Agricole to the Greek economy, either through holdings of government bonds or loans to the private sector there, directly or through subsidiaries operating in Greece.
- June 16, 2011 01:34 PM
An Excellent WSJ Probe Finds Corporate Jet Abuse
The Wall Street Journal has a terrific investigation into executive abuse of corporate jets and shows that companies are violating the law by misleading investors about it.
How did Mark Maremont and Tom McGinty get the story?
To analyze corporate flying patterns, the Journal obtained, via a Freedom of Information Act request, records of every private aircraft flight recorded in the FAA's air-traffic system from 2007 through 2010. These included flights previously blocked from public view.
This is smart stuff, and if the Journal had stopped there and written its story, it would have been a very good one. What makes it great is that they took it a step further, calculating the cost of personal trips and comparing that to what companies disclosed to investors. And whaddya know? They found that some companies are giving their executives far more $5,000 an hour luxury jet time than they're telling investors.
The Journal calculated the percentage of each plane's flights to a list of 300 locales it determined were more likely to be leisure destinations than business. That excluded major cities such as Miami, New York and Paris, and included spots like Palm Beach, Aspen, Colo., and the Bahamas. The list wasn't exhaustive, and was meant to serve as a rough proxy for potential leisure travel.
Because personal jet use is a lucrative form of executive compensation, the law says companies have to disclose how much it cost the company to fly its execs around when it's not business-related.
The Journal has one of its classic ledes—it's understated and all-the-more damning for it:
Computer-storage giant EMC Corp. has a fleet of five jets that it says it uses for business travel across the globe. In addition, CEO Joseph Tucci is allowed "limited" personal use of the aircraft.
Again, that would have been very good, but the Journal went further:
Federal Aviation Administration flight records for EMC's planes suggest such personal trips may be more frequent. Over the four years ended last December, EMC jets landed a total of 393 times at three resort locations where Mr. Tucci has vacation homes: Cape Cod, Mass.; the New Jersey shore; and the Florida keys.
One of EMC's jets devoted 46% of its flights going to or from these and other vacation spots over the four years. Fleet-wide, 31% of EMC flights were to or from resorts.
EMC pegged the cost to shareholders of Mr. Tucci's personal flying at $664,079 over the four-year period, which represented 97% of all personal-aircraft usage for its executives. The Journal's estimate of the cost of EMC's flights to or from just the airports near the CEO's homes was closer to $3.1 million.
Busted.
But wait a second. Think about that 393 number for a minute and how many times you'd have to fly to hit that. It works out to an average 98 flights a year over the four-year period to Tucci's vacation homes. That's nearly two a week. To put it another way: There are only 52 weekends a year. What's up with that? Can one person really fly that much to three vacation spots? Probably not. Who else was flying there?
The Journal has other good anecdotes, including this one:
In 2009, Leucadia National Corp., a New York City-based conglomerate, reported less than $30,000 on personal flying for Chairman Ian Cumming. FAA records show Leucadia's four jets that year spent 220 hours flying to or from Jackson Hole, Wyo., and New York's Hamptons, both locations where Mr. Cumming owns homes. Those flights alone would have cost $708,000, according to Journal calculations using hourly operating-cost estimates provided by Conklin & de Decker Aviation Information, a consulting firm.
To top it all off, Maremont and McGinty land the Quote of the Day from this guy (emphasis mine):
Stewart Reifler, an attorney at Vedder Price in New York who represents executives in negotiating pay packages, said the cost of truly personal trips should be reported, but said it is hard to distinguish a CEO's work time from his leisure time. "Even if they go to a resort," he said, "they're still reviewing papers, looking at their BlackBerrys and talking on the phone. You just can't compartmentalize these guys' lives."
Right. I guess I should bill CJR for breakfast and lunch because I read the business papers while I eat. What do you think, Dean?
You just can't compartmentalize these guys' corporate looting. One thing I wish the Journal would have reported here is the size of these CEOs' total compensation packages. Tucci, for instance, made an average $9 million (PDF, see page 56) a year in cash and stock from 2008 to 2010. That's helpful context when talking about these guys not paying their way to the Keys and whatnot.
But that's a quibble. This is a great piece. And the cherry on top is that the Journal has set up a tool that anybody can use to search its database for corporate jet flights. It didn't have to do that, and it could have hoarded its info for future stories. It's a sweet example of the Journal using the Internet to perform a public service.
Bravo!
- June 15, 2011 09:01 PM
Dealbook’s Goldman Debate
It’s the big Dealbook debate! In the red corner, there’s Andrew Ross Sorkin, defending Goldman Sachs from Senator Carl Levin’s accusations of egregious behavior during the financial crisis. Sorkin’s main point: that depending on how you measure it, Goldman might not have been quite as short mortgages as Levin suggests. And now, in the blue corner, we have Jesse Eisinger, saying that it really doesn’t matter how big or small Goldman’s short was: the real problem, as has been clear from the day the SEC filed charges against Goldman over a year ago, is that it lied to its clients.
There was the lie that Goldman peddled to potential buyers of Hudson Mezzanine, that “Goldman Sachs has aligned incentives with the Hudson program”. In fact, Goldman had a huge net short against Hudson. There was the lie that the Hudson assets had been “sourced from the Street,” when in fact they were sourced from the festering pile of nuclear waste that was stinking up Goldman’s own balance sheet. There was Lloyd Blankfein’s lie that Goldman was simply acting as a market-maker in these securities, when in fact it was aggressively trying to sell them and had no interest at all in buying them at any point. There was the lie seen by the Israeli bank which bought Timberwolf assets at 78.25 cents on the dollar, presumably on the understanding that Goldman was making markets in such assets and that their value was in that ballpark. (In fact, Goldman had marked those assets at just 55 cents.)
And then there was the way in which Goldman gratuitously maximized the total mortgage losses in the global financial system by creating new mortgage-backed assets out of thin air:
Goldman’s techniques harmed the capital markets. Goldman brought something into the world that didn’t exist before. Instead of selling something — thereby decreasing the price or supply of it — and giving the market a signal that it was less desirable, Goldman did the opposite. The firm created more mortgage investments and gave the world the signal that there was more demand, for C.D.O.’s and for the mortgages that backed them.
Jesse concludes:
By shorting C.D.O.’s, Goldman also distorted the pricing of the underlying assets. The bank could have taken the securities it owned and sold them en masse in a fairly negotiated sale, though it likely would have gotten less for them than it was able to make by shorting the C.D.O.’s it created.
Because of Goldman’s actions, the financial system took greater losses than there otherwise would have been. Goldman’s form of shorting prolonged the boom and made the crisis that followed much worse.
Goldman executives surely hope to change the subject from the firm’s specific actions to a more general discussion of how much and when it shorted. We shouldn’t let them.
One of the problems here is that it’s easy to get caught up in endless discussions about whether Goldman’s actions were illegal or not. Best to leave that to the prosecutors, I think. But Goldman’s actions were undoubtedly harmful: to its clients, to the financial markets generally, and to its reputation as an honest broker. Goldman’s trying to revisit those days and persuade us that it wasn’t that bad after all. Jesse’s right: if they’re raising the subject like this, it’s incumbent upon us all to remember exactly what they did, rather than letting them snow us with revisionism.
- June 15, 2011 08:18 PM
Organizing via Facebook in the Age of Union-Busting
The New York Times's Steven Greenhouse has an interesting report today on a group of Walmart workers who are organizing—just not in the traditional sense.
The vehemently anti-union Walmart crushes any attempt to unionize (at least in the U.S. and Canada), so a group called OUR Walmart is starting a social networking presence intended to pressure Walmart for better wages and treatment. But it won't try to collectively bargain on behalf of its members.
It's trying to emulate other groups formed at places like IBM that have been hard to organize.
Walmart has so destroyed any possibility of unionizing its stores, and the political climate has shifted so much against labor, that unions, and people who hope to create them, are reduced to using Facebook and PR campaigns as tools to "negotiate" with Walmart. That's pretty pathetic when you think about it.
They can't strike, so they'll push "like." (And don't get me wrong, I'm not denigrating their efforts, I'm just saying it shows what they're up against.)
The Times is good to point to signs of astroturf:
Although the Web site of OUR Walmart depicts the organization as a grass-roots effort by Wal-Mart workers, the United Food and Commercial Workers has provided a sizable sum — the union will not say how much — to help the group get started. The union has also paid hundreds of its members to go door to door to urge Wal-Mart workers to join the group.
But what really makes the story are the great quotes the Times gets from some awfully brave workers:
In addition, the organizers are receiving help from ASGK Public Strategies, a consulting firm long associated with David Axelrod, President Obama’s top political strategist.
“I’m hoping that OUR Walmart will make a difference in the long run,” said Margaret Van Ness, an overnight stocker at a Wal-Mart store in Lancaster, Calif., about 60 miles north of Los Angeles. Ms. Van Ness earns $11.40 an hour after four years of working there. “The managers at our store and others are running over their associates as if they didn’t exist,” she said. “They treat them like cattle. They don’t seem to care about respect for the individuals. We need to bring back respect.”
And this:
“Someone has to stand up to say something,” said Deondra Thomas, a shoe department employee at a Dallas Wal-Mart, who earns $8.90 an hour after three years there. “So many people have been quiet for so long. A lot of us think Wal-Mart is an awesome company, but as far as the employees, they treat us like dirt.”
As a journalist, sometimes it's good to stop and admire the willingness and bravery of sources who consent to be on the record. These women make $23,000 and $18,000 a year, respectively (assuming they get forty hours a week, and that's a big assumption), and they don't have union protection, but they're willing to go on the record in The New York Times to speak truth to power.
Put it this way: I was in a newspaper union for nearly six years, and I don't think there were more than two or three brave souls who ever went on the record on our many fights with management. There were plenty of anonymous snipes made it into the press, though.
Let's hope Van Ness and Thomas still have jobs after this story, something that would be worth Greenhouse keeping an eye on.
Good work by him and the Times.
Audit Feature
The Story So Far: What We Know About the Business of Digital Journalism
A report from the Columbia University Graduate School of Journalism
To download the complete version of “The Story So Far: What We Know About the Business of Digital Journalism,” a new report on digital news economics from the Columbia University Graduate School of Journalism, click here.
Continue reading To download the complete version of “The Story So Far: What We Know About the Business of Digital Journalism,” a new report on digital news economics from the Columbia University Graduate School of Journalism, click here.
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Audit Arbiter is CJR's Ombudsman for the business press: if you feel you've been wronged, write us and we'll weigh in on the matter.More
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