Re:Balance -- Jim Peterson

Independence Day: On The Freedoms to Choose, Use and Abuse Great Personal Wealth

The national celebration this weekend in the United States, and the coming Bastille Day celebration in France, serve as platforms for scrutiny of issues of public policy and private conduct.

Two recent personal experiences provide the context for this question: As a society how should we judge, concerning the balance between private wealth accumulation for personal consumption and its deployment for the public good?

The issues are emotion-laden and politically divisive, not least around the regulation of executive compensation. There, a pigs’ breakfast of policy choices includes salary limitations, bonus caps, use of bail-out funds, and director and shareholder responsibility – and the loftier themes of norm setting and coercive codes of conduct.

(For helpful background on the current state of play in Washington, the always-informative Edith Orenstein had this post last week on her FEI blog.)

Last Saturday I was curbside in search of a taxi when accosted by a waif-like beggar. The dollar I peeled off generated a persistent plea from the wrinkled crone, that she needed eight dollars for a bed in the shelter that night.

Influenced by reasons shortly to be told, I handed over a fistful of small bills – and was rewarded by a rainbow smile and effusive thanks when she realized that her daily quota was made. For the price of a stop at the nearest Starbucks, I had enabled a poor woman to spend a night in the safety and security that her life otherwise lacked.

The stimulus to my altruism was the party we had just left: the conclusion of what had been the most elaborate and costly family ritual ever to cross my vision. We had declined and not attended the main events -- a week of feasting and partying in a far distant venue -- said by guests to have set back the patriarch on the order of $ 8 to $ 10 million.

Recalling all the weddings and bar mitzvahs and sweet sixteen parties that at the time seemed over the top -- on the scale of this extended festival, they reduce in comparison to tea at the Ritz.

To transport the guests, private jets had filled the trans-oceanic skies. Public buildings had been closed – private castles had been opened – platoons of hostelers and caterers and entertainers had exceeded their annual revenue goals. Couturiers and florists and photographers and heavy-weight security guards had all worked overtime. Even on the pale evidence of the slideshow and videos, the maligned notion of “trickle-down” had been a frothy and multi-colored cascade. 

Thinking of the number of homeless shelters that could be supported by the cost of this extravaganza, it would be tempting to point the bony finger of self-righteous indignation – to turn up a censorious bluenose at the questionable morality of such an ostentatious display of personal consumption. 

All the more, since the paterfamilias ranks in the low digits on the Forbes scale of his country’s self-made wealthy. Only exceptional naïveté could believe that he had moved in one generation from pushcart and sweatshop to chateau and polo grounds, unless with the considerable application of both grease and muscle.

And yet: he is a reverent and devout practitioner of his religious faith, generous and philanthropic at a level beyond common contemplation. His annual benefactions are many multiples of the one-time cost of this family celebration, even at its lavish scale. As a percentage of his wealth, the outlay for this week-long party was several orders smaller than the impositions willingly incurred for a typical middle-class wedding or baby shower or graduation ceremony.

And in the end, the entrepreneurship by which he achieved the status to stage such a display of largesse would be untouchable by the debatable constraints of “say-on-pay” or narrow bonus limits – exercises in small-bore legislative vision that are of doubtful effectiveness but only stimulate hypocrisy, evasion and misdirected incentives.

The evidence of society’s broad range of behavior is far too complex and ambiguous to support facile condemnations – that the ownership classes are unexceptionally venal and corrupt, or that every bonus payment is an incentive to greed and over-reaching. Neither, symmetrically, is there any necessary correlation of virtue or magnanimity with the poverty of the ghetto or the favela.

More importantly in the quest for guidance, skepticism is certainly indicated about the potential for leadership from the politicians. In the degraded atmosphere that extends from the tawdry antics of a Berlusconi or the soap opera of a Palin to the expense fiddles of the British parliamentarians and the parade of Republican “affairs of state,” restraint is indicated in expectations for legislated morality.

Does a tithe for the poor excuse the gaudy display of the other ninety percent? Must the owner of two coats yield one to the unclothed? And is it the business of the state to compel the answers? Or if not, then whose?

Those wrapped in the luxury of this extraordinary celebration enjoyed hospitality at an unmatched level. How well they’d have slept in their silks and linens, if mindful of the beggar scratching out the price of a bare cot, is more ambiguous.

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Michael Jackson: Please Get Off the Stage

A diversion from the usual topics -- because Saturday we had the privilege again to hear the exquisite Diana Krall in live performance – maturing and better with each tour.

Unannounced, in the middle of the set, came a sonorous and dirge-like instrumental of “I’ll Be There” – a touching tribute to the late Michael Jackson, and a rare example of taste and restraint in this post-death period of media-driven frenzy.  

It may be churlish to suggest – in a time when the world’s adult challenges include on-going violence and epochal turmoil in the Middle East, financial dislocation around the globe, and political opportunities not seen for a generation in America – that the editors and producers of the channels of news should get over and beyond their voyeuristic fixation with Jackson, and get back to serious business.

All this is for what? The Neverland comparison does a disservice to Peter Pan – who exercised leadership and earned loyalty from his band of boys without drugs, inducements or molestation charges – and who faced pirates as adversaries rather than hiring them as a squad of goons and hangers-on.

The better comparison is with Benjamin Button, the eponymous, reverse-aging hero in Scott Fitzgerald’s story: Brad Pitt in the movie – manifest by Jackson in life, first as the boychild performing grown-up choreography and adult lyrics, who then did not mature but aged instead into adolescent behavior and infantile judgments.

And if there were virtue or ennobling in the pitiable story's end, wrought by physical and emotional family violence and indulgently enabled substance abuse, it would be no more for a talented escapee from the underclass shacks of Gary, Indiana, than for the less fortunate multitudes who suffer and die of the same causes without escaping those oppressive venues.

As for the career. Somewhere at least, there was surely business genius in securing control over the Beatles’ songbook. Less clear is the weight of all that against decades of profligacy and waste.

I plead a generational gap that impedes my “getting it” on Jackson’s music. Under the blazing arc at the end of the ‘60’s that extended from the Beatles and the Rolling Stones across the Atlantic to the post-Woodstock generation, the Jackson Five looked to be a bubble-gum machine, engineered to prop up Berry Gordy’s Motown after the best years of Smokey Robinson, Diana Ross, Stevie Wonder and Marvin Gaye.

In that context, even “Thriller” had its weirder side, foreshadowing – but who knew – the Wacko Jacko to come.

Members of a news-deprived minority who would plead “enough” will have their own candidates for the moments of gag-me excess in this week’s saturation coverage. My own -- so far -- is the self-promoting sycophancy of Larry King’s photo op with Jackson – reminiscent of Richard Nixon’s nausea-inducing drape over the slight but accommodating shoulders of Sammy Davis, Jr.

Relief, for God’s sake! There are serious and real subjects to address. This is, not least, the week we are to learn the sentence to be given to Bernie Madoff. Let’s keep things in perspective.

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BDO's Liability for the Bankest Verdict Against Seidman: Whose Side to Take?

Ham-and-eggs for breakfast? To the hen, the choice is a matter of interest. To the pig, it’s life or death.

On the complexities of auditor liability and accounting firm survival, a reader last week had a subtle question. It concerned the Miami state court outcome in the Bankest litigation – where the BDO international firm was held not liable for any part of the $521 million jury verdict imposed in June 2007 against its US component, the Seidman accounting firm.

For the American partners of Seidman, the dispute now moves to its penultimate phases of appeal and possible enforcement of ruinous damages -- $170 million plus an additional punitive assessment of $351 million -- with this question:

As interested spectators of the trial just ended, which sought to hold BDO liable along with the Seidman firm, which side would they have been rooting for?

That is, facing financial devastation (for the calculations, see the Note below) – would they have preferred that their international brethren be put under judicial fiat to share their pain? Or are they better off standing alone – facing ruin, and hoping to rely on the strength of their network and the readiness of their colleagues to provide succor on the basis only of network agreements and business solidarity?

And in the end, will it matter? 

Those whose work is with the assessment and management of disputes look with envy on their counterparts who deal with allocating good and positive economic outcomes. Business lawyers, for example, thrive on the deals and contracts that include mutually shared profits, repeat business with counter-parties and the nurturing of on-going relationships.

The supporting literature of game theory and decision strategy offers exquisite exercises in dividing the results of negotiations -- heavily biased toward optimistic scenarios. Case studies on shared outcomes focus on happy conditions: the division between two strangers who find a wallet full of money, or how and whether to share the pay-off of a winning lottery ticket received as a gift.

The outcomes under dispute scenarios go the other way: typically they are zero-sum between one-time antagonists; lawsuits involve wasting assets and the steady bleeding of costs, legal fees and business pressures.

And the impositions of shared punishments or detriments are not the subject of useful scrutiny: litigation lawyers suffer the scholars who default to the platitudes of “re-framing for a ‘win-win’,” or “finding a way to ‘yes’.”

The real world doesn’t work that way. In the Bankest case, the impending next steps include the plaintiff’s pursuit of finality and collection of a half-billion dollars, the challenged viability of BDO as an international enterprise and the careers of its several thousand professionals, and – considering that Bankest is only a smaller version of the much bigger cases hanging over the Big Four – a clarion warning on the survivability of privately provided, large-company audit services.

Either way – whether BDO was formally held liable or not -- the final chapter for Seidman and BDO is ominous. The collapse of the Andersen network in 2002, within weeks of the indictment of its US firm – through the flight of clients, partners, personnel and the international entities – showed the fragility of the wealthiest and most cohesive of the large accounting structures.

Just as Andersen’s ex-US practices voted their local interests with their feet, it remains to be seen how the business and integrity of the BDO network could withstand the drain needed to sustain its vital US member firm.

And whether a Miami court judgment might affect BDO’s strategic choice between its own disintegration and collapse, and massive sacrifice for the sake of its US member firm, will be a matter not of legal enforceability but of corporate behavioral psychology at the highest level.

The graduate students in my MBA class on risk management and decision-making are always in need of good assignments. As the Seidman/BDO dynamic plays along, it will provide a rich if depressing study.

Please let me know – for whom would you have cheered, and why?  

Note: A model to calculate how big a “litigation hit” would disintegrate a large accounting firm was done by a UK consultancy for EU Markets Commissioner Charlie McCreevy – here. I have applied it to the Big Four’s American and global practices – here and here. The topic is anathema to the large firms, but they have not voiced public disagreement with either the approach or the frighteningly small numbers.

Based on Seidman’s reported 2008 revenue of $ 659 million and the BDO networks’ global figure of $ 5,145 million, the model indicates breakup thresholds of around $ 100 million for the US firm of Seidman on its own, and perhaps $ 750 million for the BDO network as a whole. Look on the Bankest verdict at $521 million – and despair.

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