The Next Corporate Scandal

When writing a recent article on how regulators and prosecutors were going after people farther down the authority line in corporations, a corporate lawyer and former federal prosecutor said that he expected the subprime mess to eventually turn into investigations, at least. Already there is confirmation that it has. According to an organization called the Asymmetric Threats Contingency Alliance (ATCA) - a group of government officials, business people, academics, "original thinkers," and some 250 members of major media - the FBI "has opened criminal investigations into 14 companies relating to improper subprime mortgage loans," while the SEC has started some three dozen civil investigatons.

If you think that the write-downs were bad enough, just wait, as there will be plenty of lost value when companies spend the time, money, and attention to deal with these investigations. And given that we're talking about the subprime debacle, these won't be small companies. I think we can expect them to be among the largest global financial companies. Bear Stearns, Goldman Sachs and Morgan Stanley have all said that government entities are asking about their subprime activities. Reported SEC targets include Swiss bank UBS AG; US investment banks Morgan Stanley, Merrill Lynch, Bear Stearns; and bond insurer MBIA.

Pushing a Rope

Well, looks like everyone from the president to the Fed's chairman is ready for economic stimulus. There's only one problem, as I heard Robert Reich state well on Marketplace Morning Report. I have my own way of thinking about it. A rope can be a great tool to get something moving, but only if you are pulling on it hard enough. Push, and the mass of fiber collapses.

The problem with current proposals to stimulate the economy is that the people in charge are forgetting this simple yet telling physical experience. To put a few hundred into the hands of many, given the rise in energy and food prices, means that they might almost, but probably not quite, stay where they were. That's just holding the rope, not pulling. The richest part of the populace would have more free capital, but there's only so much they can consume; there are just not enough of them to make a difference.

Trying to get businesses to invest is like pushing the rope. Companies spent 15 to 20 years relearning the lesson that it makes no sense to invest in infrastructure, capacity, and inventory that you don't need. Make the money available, and corporations won't invest money in stimulating ways because for them it is a waste. Instead, they'll look for other places to park the cash that might offer some return.

And to stimulate the economy, the government and the Fed effectively have to loosen the money supply, reducing the value of the dollar and burying the country under the weight of even more debt and unsupported currency. Better we should realize that sometimes you have to wait out unpleasant news rather than get a nasty rope burn trying to finagle your way out of it.

Wachovia Penny Wise and Billions Foolish

Although I don't bank with Wachovia, I walked into a branch the other day to cash a check that came in late from a client, wanting to deposit cash rather than wait for the instrument to clear. "There will be a five dollar charge to do that," said a teller who was remarkably unpleasant for 8:40 in the morning.

"But that's ridiculous," I said. "The bank is obligated to pay me."

"Sorry, but that's the bank's policy because you're not a customer. Do you want to cash the check or not?"

This is the type of pettiness that makes people hate banks. It's called charging people for the dubious privilege of doing business. Bad enough as a non-customer, I've heard of banks considering charging customers to use teller services. Are the branch staffs really so entirely busy without a let-up that additional people walking up will require additional staff? That certainly wasn't the case where I was, and I doubt it's really that much of a problem over all.

But then, many banks have long since decided that customers were an annoyance. We're just the little people who keep insignificant sums of money in the bank, so it can lend. No, the real important lines of business are the speculative ones - you know, the ones like those derivative investment vehicles that cause banks to write down billions upon billions of dollars of institutional value.

Wachovia wrote down $1.7 billion in its last quarter, and saw only 3 cents per share earnings. Thanks, collateralized debt obligations. Oh, and a $24 billion acquisition of Golden West Financial Corp. and its steady supply of mortgage losses.

Instead of sitting on the roller coaster of questionable profit and trying to squeeze every penny out of the public, here's a radical notion: treat customers well, get their business, see them refer others to you, and be more intelligent about taking risk. Give up the $5 here and there while stemming the grossly unnecessary losses, and it can add up to real money.

Do Rising Food Prices Add Up?

The news about rising food prices and the estimations you hear in the news have had me scratching my head. Here's something I wrote about the topic on my food blog. I suspect that the energy and exchange rate excuses, and the estimates at price growth, don't jive with what you see in the grocery stores, and I note how ADM's gross profit growth significantly outstrips its revenue growth.

Waiting For the Shoe to Drop

We usually hear that we should wait for the other shoe to drop - that one event has happened, and its completion will catch up with us as certainly as reading glasses chase the middle-aged. But there is an assumption that people are cognizant enough to recognize that forces beyond their control are at work. This comes from experience and an interest in avoiding as much pain and suffering as possible.

Unfortunately, business has become an area where people prefer to remain blissfully unaware becasue they're after the Big Kill. They think that some things are too good to be true, but they want them anyway, and so plunge head first and will hear nothing of the rocks sitting at the bottom of the shallow pool below.

It would seem foolish that all these people with a library of degrees among them and more money than people can conceive of move on in such ways. But we are all creatures of emotion, and the dark side that drives greed and desire is exactly the part that harbors other weaknesses. So they ignore reason and move ahead, no matter what their experience tells them.

That's why we're waiting for the first shoe to drop - or at least for the echoes to catch up with us. Everyone seems to be watching each other for a clue. The US market is down, so Asia and Europe reacts, but then the US says, "Well, maybe it's not that bad after all." But Bank of America's earnings are down something like 95%. This is not the sign of a mild recession, but rather the a sign that something is seriously wrong. The banks have made unbelievably foolish mistakes and they now want to hide under a rock and not take chances. However, if the financial institutions that form the foundation of our economic system are cracking, what are the chances that everyone else will be if not well, then only mildly affected? Just how big a shoe - or boot - is waiting for its time to fall?

Has AT&T Gone Daft?

I know that AT&T was taken over by new management when acquired by Cingular a few years ago. But you'd think that the people running any major telecommunications company would have some grasp on the essentials of the business, and of its legal underpinnings.

For years, telecom carriers have gone out of their way to avoid looking at traffic passing over their networks. But AT&T has decided to end that trend, as this C/NET report shows:

For the past several months, AT&T executives have said the company is testing technology to filter traffic on its network to look for copyrighted material that is being illegally distributed. James Cicconi, senior executive vice president for external and legislative affairs for AT&T, reiterated the carrier's plans last week during a panel discussion at the Consumer Electronics Show in Las Vegas.

In other words, AT&T would play Internet traffic cop for some reason or another. But why? This has to be the biggest mudhole a corporation could want to sink in.

The customer service problems are obvious. How many complaints can one organization field from outraged customers who are sure that what they are trying to send, receive, or view online is perfect legal? Many of them might even be right...

But the big problem is not even customers, but legal liability, as Tim Wu wrote in Slate. AT&T was one of the prime forces behind the Digital Millennium Copyright Act of 1998, which, among other things, shielded telecoms from liability of copyright infringement, et. al., so long as they didn't poke into the content they carried and selectively choose what they would and wouldn't allow to pass.

Once a company starts sticking its nose into the content and making transmission decisions based on it, however, the protection pretty much disappears. And that's exactly the pit AT&T is about to enter. Now the recording industry can sue not only people who download illegal copies of songs, but potentially AT&T if its networks are carrying the traffic. And as the company has perhaps the biggest single share of Internet traffic, and as technology is never perfect and always screws up, chances are that AT&T will find itself liable in this and many other situations.

What did the "new" AT&T do? Fire anyone at the old AT&T who might have had a clue about risk and liability? Or were they just people with "old fashioned" views who obviously couldn't be as smart as those that acquired the company? At least the lawyers will be happy.

The Recession Slide

Everyone seems to be using the term these days. Greenspan says we're doing it. Pundits say we're doing it. I understand that those who feel in a position to influence the economy - generally those who make a profit off how the public perceives it - are loathe to use the R word, lest they create a general perception that creates the condition it describes. But people I know have been tightening their belts for some time, now. Gas has been pretty far up for over a year, heating a house in winter is expensive, people fear losing their jobs, foreclosures are at a high, and everything gets more expensive. What the hell did the experts think about public perception? That everything was fine and dandy? People badly want things to be better, and yet see a greater and greater share of the common wealth being held by the relatively few. To play into fear and hope for your own purposes is a dangerous and dirty business. Those who are at the top of the economic food chain should remember that there have been periods of reckoning, whether a depression or heavy-handed regulatory interference, because politicians are even more scared of the public than the well-to-do. You can win for a long time at some games, but eventually your number comes up and you have to pay. Better to deal more honestly with things than to try putting a bright face on for too long.

Wolfgang Münchau on the Current Financial Crisis

The Financial Times has a good column by Wolfgang Münchau, noting that if the current credit crisis were just about sub prime mortgages, it would already be over. The problem is that there is way more money tied up in other ventures that are find so long as defaults and insolvencies stay at reasonably low levels. Combine that with a recession - and it seems pretty clear that economies are slowing - and the results could be really bad.

Sometimes Companies Just Say Yes

I've seen so many companies in which managers put on a false face of bravado, but secretly cower. They are afraid of making any mistake, disrupting their comfortable existence, and avoiding any effort out of the ordinary. The theory is that if you don't do the unusual, you cannot get pilloried for it.

But business is risk, and companies must shake off the dust and try something new at times just to keep from being moribund. Today, IKEA is an example. A comedian and filmmaker, Mark Malkoff, had to have his New York apartment fumigated, so he decided it would be an interesting video to literally move into an IKEA store for the week. He asked - and they said yes. So he's in the store in Paramus, NJ at the moment, having fun and creating an enormous opportunity for positive PR and viral marketing. You can see the ongoing video series here. Realistically, there was little downside for the chain, much potential benefit, but saying no is so easy. Management there didn't, to their credit.

Some Airlines Try To Force Better Profits

The New York Times today has a story about some major airlines considering a cut in their capacity to force higher seat prices:

The miserably full flights of 2007 might seem like a good reason for airlines to roll out a few more planes and ease the crowding.

But passengers should expect just the opposite: some big airlines are planning to reduce domestic capacity in 2008 with the hope of driving fares higher to offset rising fuel costs. Barring a recession that reduces demand for air travel, travelers can expect flying to be more crowded and more expensive than it was in 2007.

If competition and their own operational models are combining with higher fuel prices to cause problems, I'd suggest that trying to improve margins by making customers even more misery is probably the wrong strategy. Why not go the opposite way - raise prices by 15 to 20 percent for a class of flight that restores comfort and pleasure to the experience? It's a lot easier to get more money when people are motivated by their self interest to do business with you. The result would be a true, not artificial, seat shortage.

McDonalds and Starbucks Square Off?

An NPR piece recently discussed how Starbucks and McDonalds are each trying to cut into the other's market: the former introducing breakfast sandwiches and the latter introducing coffee bars in its 14,000 locations. I could see some potential conflict here - yesterday, while en route to Manhattan, I got off the road, noted a Starbucks, got a sweet coffee drink, and added a breakfast sandwich when I noticed that they were available and would only take "30 seconds or a minute" as the worker said - or longer, by my watch.

But for the most part, are the companies and the business press nuts? The two have distinctly different atmospheres and roles to play. People who go to one might go to the other, but under significantly different circumstances. Expecting people to head to Starbucks instead of McDonalds for breakfast is absurd - good luck getting what you want instantly. (And no hash browns?) And expecting people to bring in a laptop and hang out with a McLatte is equally wishful thinking. The people covering business should see this and not take the all too easy angle of "they're out for each other." Even if they are, notice that they're both going to trip and hit the ground face-first, not running, in the process. Or could this be the beginning of the new secret advertising campaign: Have It Their Way?

Dollar Problems Become Self-Fulfilling Prophecy

As the Financial Times is reporting, oil topped $100 a barrel and gold hit an all-time high of $861.10 an ounce because investors are spooked over the dollar's weakness. The currency dropped against the euro and yen after a report that US manufacturing is at a five-year low. Investors think that means the Fed will lower interest rates - and mint more money - to compensate, and so they head to buy commodities that you can at least use to heat your home or adorn your wrist. The manufacturing report came from the Institute of Supply Management and is in the "contracting" range, a potential sign of a recession. And it's certianly a lot less messy than reading the entrails of some unfortunate bird. Of course, as oil goes up, pressure on peopel and businesses in this country continues, meaning that additional contraction in spending is likely, which will drive further currency weakness, resulting in even more flight to the gold cost - whether the conventional type or black gold. Confidence in the economy is sounding ever more forced, but I don't see that any presidential candidate will have a solution.