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Archive for the ‘Business’ Category

With each financial scam/hoax/fraud, we hear people decry capitalists not acting as they once did — with honor and so forth. David Rhode has a new short piece for the Atlantic about this topic regarding the Libor scandal. In summary, bankers are behaving unethically and their lack of ethics hurts all of us. And I basically agree with that.

I do take issue, however, with the idea that somehow the past was better. Remember that time when Jay Gould tried to corner the gold market? Remember that time when rampant speculation and poorly regulated credit markets led to the Great Depression? (Oh yeah, did I mention that a bunch of financial wizards tried to overthrow the government?) The amorality of the S&L is on par with the amorality of today.

Capitalists have always pursued profit above all. That’s the point. It would be folly to expect them to do otherwise. That’s exactly why blunt, dumb regulations, rather than public scoldings, are needed to hold the line.

 

David Rohde

David Rohde – David Rohde is a columnist for Reuters, two-time winner of the Pulitzer Prize, and a former reporter for The New York Times. His forthcoming book, Beyond War: Technology, Economic Growth and American Influence in the New Middle East will be published in March 2013. More

The Libor Scandal and Capitalism’s Moral Decay

By David Rohde

Jul 13 2012, 2:45 PM ET 181

The scandal engulfing the financial industry is yet another sign that our business leaders no longer respect the rule of law. 

615_Scales_of_Justice.jpg

Reuters

Maybe the acronym at the heart of the scandal is too confusing. Or Americans are simply tired of hearing about greedy bankers. By any measure, though, the Libor bank scandal is an extraordinary example of the 1 percent stealing from the 99 percent – and our crumbling ethics.

If an organized crime group was accused of breaking into the Nassau County Treasurer’s Office on New York’s Long Island and stealing $13 million, outrage would be widespread. And if the same group was accused of stealing millions from the City of Baltimore and other struggling municipalities, they would emerge as an issue in the presidential campaign.

Instead, the Libor scandal is emerging in dribs and drabs and drawing little public attention. The middle class is being victimized, and there is little protest.

Last month, the British bank Barclays agreed to pay $453 million to American and British authorities to settle allegations that it manipulated key interest rates for profit between 2005 and 2009, specifically the London Interbank Offered Rate, or Libor. American and British investigators are now examining whether traders at a dozen other banks — including the “too-big-to-fail” U.S. banks JPMorgan, Citibank and Bank of America — also manipulated rates.

It is hard to overstate the impact of the Libor benchmark, which is used to value some $360 trillion in loans and financial contracts worldwide. It affects lending to governments, businesses and consumers, and even student loan and credit card rates.

So Barclays’ victims weren’t just other banks and traders. They included taxpayers in dozens of communities who are believed to have paid millions more in interest than they should have at the height of the financial crisis. Teachers and other public servants may have been laid off because of bankers’ pursuit of ever-higher profits.

Lawsuits filed by the City of Baltimore and dozens of other parties against Barclays, JP Morgan, Bank of America, Citibank and Deutsche Bank have been consolidated into a single case in a New York federal court. Banks are denying any wrongdoing, and the true scope of the losses — and the role of American banks — is expected to emerge in the complex legal battles ahead.

I do not believe all bankers are evil. I admire business owners who innovate, create jobs and strengthen communities. But theft — whether the perpetrator is clad in a business suit or blue jeans — is theft.

And let’s not kid ourselves. Our ethical decay stretches beyond Wall Street. It spans industries, political parties and groups. In April, systematic bribery by executives of the U.S.’s second-largest company – Walmart – was reported across Mexico. In June, American sports officials accused cyclist Lance Armstrong of engaging in a massive doping conspiracy. And Jesse Jackson Jr. appears to be the fifth member of Congress to be embroiled in an ethics scandal in two years.

Around the world, a globalized economy is creating planetary-sized profits — and relentless pressure. A May survey by Ernst & Young of 400 chief financial officers around the world found that a growing number of them were willing to pay bribes and falsify their firm’s financial performance to survive the financial downturn.

The number of chief financial officers who said they would engage in bribery to stay in business grew from 9 percent in 2011 to 15 percent in 2012. And the number who said they would misstate their company’s financial health to get though a downturn rose from 3 percent in 2011 to 5 percent in 2012.

“One of the most troubling findings of the survey is the widespread acceptance of unethical business practices,” Ernst & Young said in a statement. “It is particularly alarming that respondents are increasingly willing to make cash payments.”

Corporate boards and other overseers, meanwhile, appear to be looking the other way. Eighty-one percent of those surveyed worldwide by Ernst & Young said anti-bribery and anti-corruption codes of conduct were in place in their companies. But nearly half said they did not believe employees had been punished for violating those polices.

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The Summer Olympics are almost upon us, which means Olympic fever the world over. Soon, people will be glued to their TV sets to watch feats of human athleticism. I’ll admit that I enjoy watching many of the events, particularly track and field, gymnastics, swimming, and judo.

Unfortunately, the Olympics represent much that is wrong with the modern sports and entertainment apparatus, and a troubling blend of nationalist jingoism, shortened attention span, and corporate exploitation. Rather than a celebration of human achievement, they are increasingly a competition of sponsors, heavily subsidized national training programs, and unpaid labor.

Why do the Olympics suck so much?

  1. The athletes get hosed: Today, the Olympics no longer cares about only admitting amateur, non-professional athletes, which is fine, I guess. Unlike professional meets, the Olympic-organized events do not offer a purse for winners (some countries, like the U.S. do), which means that unless you’re Michael Phelps, you’re not getting steady income. Meanwhile, corporate sponsors for the Olympics (not to mention the highly corrupt IOC… which is such a foregone conclusion that it doesn’t even warrant its own bullet point) make tons of money off of the Olympics ($4B for the 2001-04 quadrennium), along with the various ancillary businesses that surround the Olympics. The only people not making money on the billions in revenue are the people competing. “OK,” you say, “but isn’t it great that the athletes are motivated by more than money?” I do, indeed! But that is all the more reason to making it easier to do what they love, rather than forcing them to beg for sponsorships to continue competing for our benefit.
  2. No one cares about these sports outside of the Olympics: Outside of, say, basketball, tennis, and maybe boxing, no one cares about these sports. They are amazing feats of stretching human achievement to the limit, but we pretend to enjoy them once every four years anyways. And why? Because they are “our” team, or because we like the way they look, or because they have a great narrative. But once the lights dim, our attention flits elsewhere. It’s a great international corporate lovefest, but it’s all a short-term fling, one that vanishes as quickly as it appeared.
  3. It professes apolitical ideals, yet encourages jingoism: Yeah, so I’m a big party pooper. Yelling “USA!” at the screen is half the fun! But I’m bothered by the fact that politics is carefully managed at the Olympics in a way that encourages only a certain kind of nationalism. These days we just gleefully cheer for our colors–the ones we had no part in supporting in a game we don’t care that much about. The narrative of triumphalism in athletics as triumphalism in foreign policy leads to all sorts of unfortunate ties between athletes and the countries they represent, as if someone’s most important identity were the flag over their head rather than their personal achievements. Meanwhile, when the “wrong” type of politics makes an appearance at the Olympics, there is always hell to pay. It’s a white-washed version of the world that not only ignores, but denigrates those who dare to speak out. Making an statement of protest = bad; kow-towing to nation-states and stereotypes = good.

Watch this (somewhat melodramatic) documentary on the 1968 Olympics’ black power salute to get an idea:

And if you think this kind of thing is over, Peter Norman, the silver medalist Australian who shared the podium with John Carlos and Tommie Smith, was not even invited to the 2000 Sydney Olympics. Last year, these clowns still won a silver medal.

In short, the Olympics exploit athletes, have only fleeting connection to its “fans,” and obsessively censor any sign of political unrest or turmoil. No wonder totalitarians everywhere have always loved them.

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A look at the latest market cap numbers for Facebook’s IPO suggest that Facebook’s total shares are worth >$100 million–more than Amazon, Visa, and McDonald’s. This seems fucking crazy.

Consider Facebook’s price-to-earnings ratio. At $100 billion/($205 million*4 quarters), that’s a P/E ratio of 100. (Yes, I know P/E ratio is not a great indicator of true stock value, but it is a great comparison of how a company is doing compared to how stock speculators think the stock is doing.) Which means that everyone thinks Facebook’s profits are going to skyrocket:

Sundaram says judging from this price these investors seem to believe that the company’s profits will double, and then double again, and then double again — all within the next few years.

For that to happen, Facebook will need to attract 10 percent of all advertising dollars spent on the planet “across all media – print, billboards, radio, television, Internet,” Sundaram says. While this is theoretically possible, Sundaram says it’s “an extremely low probability.”

Last year, Facebook had just over $3 billion in global ad sales. TV ad sales in the U.S. alone last year were $68 billion.

Facebook has convinced investors that its 1 billion users and deep data mining on its users will make it an advertising gold mine. Unfortunately for Facebook, it’s not a fledgling start-up with lots of room to grow. Instead, Facebook is plateauing, without a clear vision of how advertising will expand at a dramatic rate.

I’m not saying that buying Facebook stock is a bad bet. It may well be a good bet, as everyone else seems to be betting the same thing, thus raising stock prices. Irrational exuberance is all part of the game. But I am wondering why people consider Facebook such a “sure thing.” As far as I can tell, Facebook doesn’t actually make that much money, which doesn’t seem to be a recipe for long-term success.

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Part of the business-inspired charter school model that I find strange is the attempt to equate schools with businesses generally. Certainly there are similarities between organizations, and paths to success may be similar, but they are organizations aimed at fundamentally different goals with very different social roles. So when I see an article like “Why School Principals Need More Authority,” well, I’m not so sure.

In the article, Finn notes that unlike CEOs, principals don’t have much control over schools. But in the business world, where CEOs do have a fair amount of control, small businesses fail all the time! OK, so maybe not a fair comparison. Surely, there would still be power from the district to mandate certain curriculum, standards, etc. But if that’s the case, in what sense is the principal really more like a “CEO”? Principal autonomy sounds like it frees principals of crippling mandates and regulations, but it also releases them from a variety of obligations that we might want to keep. Really, a principal more resembles a branch manager of a franchise or maybe a franchisee, where the company/district sets out some set of standards, and the individual managers/principals attempt to meet those standards within constraints set by both market and central office.

Yet, even here, it’s worth wondering whether simply increasing autonomy does anything to boost performance. Historically, budget control has zinged back and forth between schools, district offices, and increasingly, federal grant money. Yet, there are always movements to pull it back the other way. When people worried about the quality of schools within a district, they clamored for district offices to take more control of the pursestrings. When people worried about the bureaucracy of the central office, they clamored for schools to have more control. Schools are torn in two directions — in one, reformers try to create autonomous schools (as with Joel Klein in New York or John White in New Orleans); in the other, reformers try to create reforms from the top-down by attaching them to district, state, or federal funding.

Giving principals more autonomy vs less autonomy doesn’t solve a lot of fundamental problems. If you think that by tweaking their budgets a bit and wriggling out of regulations, principals can turn their schools into successes, then by all means, go for it. But I doubt the managerial capacity of most principals, the sufficiency of resources to actually meet loftier goals, and the efficacy of “creativity” to overcome big budget gaps. For a corporate analogy (which seems to be all the rage), with or without restrictions, branch manager success depends on a lot more than mere autonomy. And failure of a branch for a corporation has a lot fewer negative third-party effects than, say, the failure of a school for multiple years.

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Yes. Yes, they will.

Before Apple unveiled the new iPad today, Yglesias asked a few questions over at Slate. The third of them was: “Will reviewers underestimate the value of incremental change?

And my answer is that, yes, they always do. As Yglesias writes: “The iPhone 4S was roundly panned on its release, since it was “only” an iPhone 4 box with a faster chip and a better camera and upgraded software. And yet it turned out that a better version of an already successful product was a recipe for … a huge sales success!” This is exactly right. The people who review new Apple products tend to be tech-inclined people who already own all the previous products, anyway. And for them the key question is whether the new product is worth shelling out another few hundred dollars for the incremental improvements. But that’s not why so many people buy these new products.

Take me, for example. I had no smart phone, but had been considering getting one. I had eyed the iPhone 4 for a while, and had slowly convinced myself that it was worth getting. Then, the iPhone 4S came out. And all of the sudden, I could get a new iPhone with a faster chip, better camera, Siri, and all for the same price I had nearly already convinced myself to pay for the old one. All of the sudden, it felt like a no-brainer.

I predict a similar huge success for Apple with the new iPad. The early reviews sound similar to the disappointment that greeted the new iPhone. But this new iPad isn’t for them. It’s for the people who were on the verge of spending $500 for an iPad 2. Now all of the sudden they can spend the same amount of money for an iPad with way better resolution, a faster chip, and a better camera. I never worshiped at the temple of Jobs, but Apple is damn good at this stuff.

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I am generally of the opinion that big money will not matter that much in determining the winners in American presidential politics. Because each party wins about half the time, we would expect rational people (and corporations, although I guess they are now people too) to support both parties; higher spending overall will not necessarily mean higher spending by one party relative to the other. Plus, because presidential politics rely on so many macro issues, and the candidates become very well known by the time the election comes around, the benefits of the extra marginal dollar become quite small.

And yet, I can’t ignore Mitt Romney’s ad blitz in Florida and its effectiveness. After reading the piece in the NYTimes this weekend following Romney’s campaign, you would think that the reason Romney is doing better in Florida is because his campaign told him to “unleash” his aggressive side and start attacking Gingrich. But actually, it just means he outspent Gingrich 5:1. We can look at isolated examples where the bigger money candidate lost (Boxer in CA, Kerry in 2004). But the asymmetry of the Florida election suggests that the age of superspending is just beginning and it will have consequences. It also suggests that because the Establishment can’t rally around a candidate in the way they used to (for fear of incurring Tea Party wrath), their circling of the wagons will just involve tens of millions of dollars.

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I was thinking about buying a probe thermometer because I would like to better assess the doneness of my meat, so I went to Amazon to take a look. I typed in “probe thermometer” and Amazon returned a set of thermometers. They vary in price and functionality, but they all have one thing in common: 3.5 stars.

The other day, I decided I wanted to try a new Indian restaurant in my area other than the few I always frequent. Lo and behold, they all have 3.5 stars on Yelp.

It seems obvious that, given enough reviewers, customer reviews should tend to mellow out around, well, 3.5 stars. But there are notable exceptions (consider, for example, IMDB).

What is it about product/service reviews in particular that seems to promote the averaging out around 3.5 stars? Let’s take one heavily reviewed Amazon product — an excellent book that I recently read called The Art of Fielding (in my opinion, the best book ever written about baseball):

5 star: (100)
4 star: (34)
3 star: (35)
2 star: (29)
1 star: (50)

It’s an odd distribution to say the least, but it highlights perhaps the problem of people who write online reviews. They are overwhelmingly very high — I enjoyed this book so much that it warranted a review — or overwhelmingly low — this book was so bad that I decided to review it. Compare this with the reviews for the digital probe thermometers and the effect is similar:

5 star: (41)
4 star: (23)
3 star: (10)
2 star: (12)
1 star: (28)

Again, lots of 5 star reviews and lots of 1 star reviews. Again, though, this points to the kind of person willing to write a review for the product. In buying the product you already analyzed it and expected it to be worth your money. If you were extremely impressed or disappointed, you reviewed it. If you were meh, why bother reviewing?

Thus, all popular products inevitably end up in the meh bin.

Weirdly, this does not apply to non-book pop culture. For example, Adele’s 21 sports a shocking 4.5-star rating, but again, this has to do with the ability to sample the wares before you buy the product (same with movies). Before listening to an album, you have heard the songs enough to know whether you like it enough to buy it.

What’s unnerving about this tyranny of the 3.5-star review is that it then makes the customer reviews essentially worthless. The whole promise of crowd-sourced reviews was that they would remove the monopoly of product-reviewers and open everything up to the masses. Instead, the incentives for responses make it such that the reviews provide little to no value to the consumer.

Whether it’s recipes or Zadie Smith novels, the “pretty good” averaging out of reviews has hurt their ability to tell us much about the product we’re buying. In the end, we either end up trusting the qualitative reviews over the quantitative (a bad proposition, if you ask me) or we buy the product and hope for a generous return policy.

Just as with a lot of the new information-heavy world does not make our decisions any easier, these reviews are just more information without any understanding of what they really mean.

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