Re:Balance -- Jim Peterson

Book Review: Satchel Paige - Baseball's Philosopher on the Business of Life

Satchel: The Life and Times of An American Legend, by Larry Tye, Random House, 298 pages

“Don’t look back. Something might be gaining on you.”
    -- Leroy “Satchel” Paige

I lost a dear colleague -- eleven years ago and much too soon – who, in addition to his friendship, ranked with the finest business advisors I’ve known.

He operated brilliantly at the complex intersection of law, finance and business – with a unique skill in bridging their conflicting vocabularies and cultures. In large part it was his ear and instinct for the perfect quote, citation or maxim.

His invocations, to relax a tense conference room or break an impasse in negotiations, drew on sources that were inexhaustible and encyclopedic:

• The movies: “We don’t need no stinkin’ badges” and “We’ve been on double secret probation, whatever that is” and “It’s not personal, Sonny; it’s just business.”
• The military: “Victory has a thousand fathers; defeat is an orphan” and “Once more into the breach, dear friends” and “It’s good to kill the occasional admiral, pour encourager les autres.”  
• And American novels: “Never cop another man’s plea” and, especially, “There was only one catch, and that was Catch-22.”

He was really at his best with the wisdom of sports – Red Smith and Casey Stengel, and Yoga Berra’s incomparable advice, “When you come to a fork in the road, take it.”

So he’d have devoured with delight Larry Tye’s new book, which takes to a new level the basic, long-familiar tale of one of the game’s premier figures and doubtless one of its most quotable – Paige becoming widely known as a late-arriving darling of the national media, when at the venerable age of 42 he was finally able to pitch in the newly-integrated Major leagues.

It’s the strength of Tye’s examination to expose the dark poignancy behind the entertaining laugh lines. On Paige’s extraordinary control – “throw strikes – home plate don’t move” – the back story of his accuracy with a baseball lies in the poverty of his childhood in Mobile, Alabama, where his rock-throwing skill was both his defense against gangs of hostile white boys and the weapon to fell pheasants and squirrels for the family dinner table.

As for the famous “I ain’t never had a job – I just always played baseball”: The combined physical, financial and emotional pressures of barnstorming what Tye calls “hungryball,” around the rickety Negro leagues of depression-era America, would have drained Paige of any romance or sentimentality, long before his free-spending habits forced him to keep hustling -- well beyond the sell-by dates of either his talent or his dignity.

Paige’s saga is essential to the complex story of the integration of American professional sports – both the hesitating steps that belatedly opened the doors for Jackie Robinson, Paige’s much younger and perhaps less-deserving teammate on the Kansas City Monarchs, and the immediate shift of talent and fans that doomed the Negro leagues and their separate, unequal but influential place in black American culture.

Concentrating on Paige’s own perspective, author Tye tells an outsized character’s story, freely and refreshingly drawing on the vocabulary of the times – both the hyper-ventilated synonymy of the baseball press and the crude and racist language of a rigidly segregated society.

In so doing, he illuminates the evolutionary steps towards baseball’s integration – from Paige’s play in lily-white Bismarck, North Dakota, to the high level of competition between white and black teams in the California winter league.

And eventually, the national-level proof that integrated crowds would pay to see integrated baseball, under the entrepreneurship of the Iowa-bred and racially insensitive Clevelander Bob Feller, who faced off with Paige on a 1946 barnstorming tour, the year before Robinson moved up to the Dodgers.

All were part of the social fabric about to be so dramatically re-tailored by the court decisions, civil rights actions and legislative programs of the two decades to follow.

Living both as hard and as well as conditions would allow, Paige himself fulfilled the axioms of his philosophy only enough to sustain both his remarkably durable physical abilities and his celebrity.

This summary alone would underpin his approach to a lifetime of multi-layered competition -- and is freely adaptable to the management of a personal career, a team of employees or an entire company:

“Work like you don’t need the money."
“Love like you’ve never been hurt."
“Dance like nobody’s watching.”

To readers in the business book industry: While Tye takes note of the broad press attention Paige eventually achieved, late in his playing days, there is an untapped market for a little volume on management leadership, compiling the lessons of the hundred best quotations out of my late friend’s commonplace book.

On which subject, all readers are invited to send personal favorites from their own experiences.  

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Re-Post: The Supreme Court Targets the PCAOB: If Things Could Hardly Be Worse, Might They Perhaps Get Better?

For reasons known only to Mercury, the god of communications, this post from Thursday was not fed to most subscribers. So this re-posting, with apologies to anyone finding or receiving it a second time.

When I went to make breakfast on Tuesday, I found a tempest swirling in my teapot: the report that the United States Supreme Court is to resolve a constitutional challenge to the law establishing the Public Company Accounting Oversight Board – created by the post-Enron legislative spasm of the Sarbanes/Oxley law of 2002.

This is an abstruse squabble over the scope of the presidential authority to appoint government employees classified, without any apparent irony, as “inferior officials.”

Paying almost no attention, the mainstream American media have their priorities right, putting their focus instead on the Court’s agreement the same day to review the criminal conviction of corporate kleptocrat Conrad Black.

The news-consuming public, in other words, understandably has less interest in whether a bunch of rascals are to be thrown out, than if one should be thrown in.

I’m not generally one for wagering, for reasons I’ve spelled out – here – life already being sufficiently full of risks and hazards. But the easiest signal of the high court’s acceptance of the PCAOB’s legitimacy would have been to leave standing the lower courts’ orders. So it is a decent prediction that some time in next year’s term, the axe will fall.

And then?

And then will come the kind of grandstanding that Washington does so well. Led in the Senate by Chris Dodd (D-Conn.), chairman of the Banking Committee, and in the House by Barney Frank (D-Mass.), chairman of the Committee on Financial Services, the elected mob – of whom humorist Will Rogers sagely observed that “no man’s purse is safe while the legislature is in session” – will serve up a new kind of bail-out.

Which is, they will resuscitate the old agency in a new guise, only this time arrayed in bells and whistles reflecting their politicized reaction to the economic turmoil lately inflicted on us all.

And where will the vitally-interested accounting profession figure?

Historically, the high point of their influence lay in securing the franchise of privately supplied assurance, under the audit requirements of the securities laws of 1933 and 1934. In the following three-quarter century, sadly, the degree of attention and respect given to the auditors in the shaping of their regulatory fate has been like that in the research into shark feeding, as given to the food.

Because the Democrats control both houses of Congress and have their rock-star in the White House, the “appointment authority” issue will be repaired with the legislative equivalent of a piece of duct tape or a whack with a wrench. Making it a total non-event, the fix-up will include a wholesale re-adoption and ratification of everything wrought by the then-defunct PCAOB, so the transition will be seamless and invisible – turning the entire affair into little more than an ego exercise for those angling to get their names into the law case reports.

It’s necessary to remember that the Supreme Court’s power runs only to the narrow questions offered. It will not do a qualitative assessment of all the mischief since Sarbox was enacted – not answering, for example, the question that could be reasonably asked by, say, the battered investors in Bear or Lehman or Merrill or Citi or AIG: “Over the last seven years, has the PCAOB made the world of financial reporting and assurance a better place?”

Which means there is nothing to be served by trying to pick a winning side in this punch-up: there isn’t one, in any way that matters.

If adult perspective prevails, the accounting profession will resist the lure of friend-of-court advocacy, saving itself both large legal fees and whatever amity it might salvage for the lawmakers’ debate to come.

For there is now a window, of perhaps six to nine months, in which a blueprint might be developed for the successor agency to be enabled when the Supremes pull the PCAOB’s plug.

Avoiding the post-Enron stampede that flattened all before it in the rush to Sarbox – footnote below -- the accountants along with whatever friends they can muster have the chance to organize in support of a coherent and achievable structure – here.

Namely: federal-level chartering of auditors of US public companies could be combined holistically with standard-setting, oversight, inspection and discipline -- along with investor protection including insurance that would be industry-funded but government-backed, to relieve the firms’ current “survivability” issue – namely, the deadly overhang of life-threatening litigation exposure.

Ambitious – yes, surely. But Dodd and Frank will have their law-drafting pencils sharpened anyway. The opportunity to write on a blank page is too good for the profession to waste.

Note: As I wrote back in July 2002 about the Senate’s passage of Sarbox, “any legislation receiving the bipartisan margin of 97-0 is bound to be fundamentally defective.” You’ll have to trust me, though; as the International Herald Tribune for whom I was then writing in Paris moves closer to full absorption by its parent, the New York Times, its archive has somehow disappeared from internet accessibility – here.

Thanks for joining this discussion. Please share with your friends and colleagues. And if not a subscriber, you are invited to join at the Main page

The Supreme Court Targets the PCAOB: If Things Could Hardly Be Worse, Might They Perhaps Get Better?

When I went to make breakfast on Tuesday, I found a tempest swirling in my teapot: the report that the United States Supreme Court is to resolve a constitutional challenge to the law establishing the Public Company Accounting Oversight Board – created by the post-Enron legislative spasm of the Sarbanes/Oxley law of 2002.

This is an abstruse squabble over the scope of the presidential authority to appoint government employees classified, without any apparent irony, as “inferior officials.”

Paying almost no attention, the mainstream American media have their priorities right, putting their focus instead on the Court’s agreement the same day to review the criminal conviction of corporate kleptocrat Conrad Black.

The news-consuming public, in other words, understandably has less interest in whether a bunch of rascals are to be thrown out, than if one should be thrown in.

I’m not generally one for wagering, for reasons I’ve spelled out – here – life already being sufficiently full of risks and hazards. But the easiest signal of the high court’s acceptance of the PCAOB’s legitimacy would have been to leave standing the lower courts’ orders. So it is a decent prediction that some time in next year’s term, the axe will fall.

And then?

And then will come the kind of grandstanding that Washington does so well. Led in the Senate by Chris Dodd (D-Conn.), chairman of the Banking Committee, and in the House by Barney Frank (D-Mass.), chairman of the Committee on Financial Services, the elected mob – of whom humorist Will Rogers sagely observed that “no man’s purse is safe while the legislature is in session” – will serve up a new kind of bail-out.

Which is, they will resuscitate the old agency in a new guise, only this time arrayed in bells and whistles reflecting their politicized reaction to the economic turmoil lately inflicted on us all.

And where will the vitally-interested accounting profession figure?

Historically, the high point of their influence lay in securing the franchise of privately supplied assurance, under the audit requirements of the securities laws of 1933 and 1934. In the following three-quarter century, sadly, the degree of attention and respect given to the auditors in the shaping of their regulatory fate has been like that in the research into shark feeding, as given to the food.

Because the Democrats control both houses of Congress and have their rock-star in the White House, the “appointment authority” issue will be repaired with the legislative equivalent of a piece of duct tape or a whack with a wrench. Making it a total non-event, the fix-up will include a wholesale re-adoption and ratification of everything wrought by the then-defunct PCAOB, so the transition will be seamless and invisible – turning the entire affair into little more than an ego exercise for those angling to get their names into the law case reports.

It’s necessary to remember that the Supreme Court’s power runs only to the narrow questions offered. It will not do a qualitative assessment of all the mischief since Sarbox was enacted – not answering, for example, the question that could be reasonably asked by, say, the battered investors in Bear or Lehman or Merrill or Citi or AIG: “Over the last seven years, has the PCAOB made the world of financial reporting and assurance a better place?”

Which means there is nothing to be served by trying to pick a winning side in this punch-up: there isn’t one, in any way that matters.

If adult perspective prevails, the accounting profession will resist the lure of friend-of-court advocacy, saving itself both large legal fees and whatever amity it might salvage for the lawmakers’ debate to come.

For there is now a window, of perhaps six to nine months, in which a blueprint might be developed for the successor agency to be enabled when the Supremes pull the PCAOB’s plug.

Avoiding the post-Enron stampede that flattened all before it in the rush to Sarbox – footnote below -- the accountants along with whatever friends they can muster have the chance to organize in support of a coherent and achievable structure – here.

Namely: federal-level chartering of auditors of US public companies could be combined holistically with standard-setting, oversight, inspection and discipline -- along with investor protection including insurance that would be industry-funded but government-backed, to relieve the firms’ current “survivability” issue – namely, the deadly overhang of life-threatening litigation exposure.

Ambitious – yes, surely. But Dodd and Frank will have their law-drafting pencils sharpened anyway. The opportunity to write on a blank page is too good for the profession to waste.

Note: As I wrote back in July 2002 about the Senate’s passage of Sarbox, “any legislation receiving the bipartisan margin of 97-0 is bound to be fundamentally defective.” You’ll have to trust me, though; as the International Herald Tribune for whom I was then writing in Paris moves closer to full absorption by its parent, the New York Times, its archive has somehow disappeared from internet accessibility – here.

Thanks for joining this discussion. Please share with your friends and colleagues. And if not a subscriber, you are invited to join at the Main page – easy, free and non-commercial.

 

Which Large Accounting Firm Will Be "Next to Fail"? It's the Wrong Question

When was there ever so concentrated a burst of public speculation on “which Big 4 audit firm is the next to fail”?

Within a single week, Accountancy Age predicted it would be Ernst & Young; in the blogosphere, Francine McKenna’s wager with Dennis Howlett fingered her ex-employer and bête noire, PwC; and ProPublica reached into the remains of the second tier to round on McGladrey and BDO.

All for very serious reasons, ample to cause sleepless nights among the profession’s leaders. But the voyeuristic speculation as to “which one” is a pointless and mis-directed exercise, because each of these firms – but also Deloitte and KPMG, and Grants too, for good measure – faces multiple overhanging threats on a mortal scale.

All the chambers are loaded in this losers’ game of Russian roulette. So it is an unanswerable question, where the weapon may be pointing when the hammer falls next. It’s also an irrelevant query, too – because it depends entirely on the judges’ docket management on Parmalat, Satyam, New Century, AIG, Bankest, Refco, Sentinel, the Madoff feeders and all the other ticking time bombs.

Instead, the real question should be, “What next?”

On this, for grown-up dialog to occur, two fundamental misconceptions – both lurking in the Accountancy Age article – have to be killed off, once-for-all:

The first is that the large firms’ survival will somehow be assured by government, on the assertion that global-scale companies “will invariably have a legal requirement for an audit.”

If there is any logic here, it is seriously inverted. The regulators long ago conceded that they would be powerless to stop the disintegration of a large firm that reached a tipping point – here and here. Further, when that next step takes down the other three, and unravels the entire suppliers’ market, legislative mandates that there be audits would be as futile as a requirement that all trains be hauled by steam locomotives. No more suppliers: no delivery. Period.

The second fallacy, conspicuous even in an article that displays a truly stunning lack of comprehension of the profession’s structural issues, is that a Big Three would survive the loss of a fourth.

Won’t happen. The uneven concentrations of industry expertise around the world’s large economies, the politically-imposed constraints on auditor choice, and the post-Andersen fragility of the international networks are alone sufficient to show that the Big Four are already down to an irreducible tipping point. One more, and they all go.

While no insider will say so in public, senior risk managers acknowledge that in the coming turmoil of another Big Four failure, the prospect that three survivors would stay in today’s business by accepting further concentration of exposure and liability will be untenable.

That a fundamental re-structuring of the profession will occur is beyond debate – and is nothing new – although answers will only lie in the readiness of all interested parties to get past the posturing to offer constructive, achievable solutions.

Trouble is, none of the critics have either the vision or the authority to lead. There is no available government intervention, to “save” a privately-capitalized Big Four partnership once slipped into a death spiral – here. Nor can the large firms’ collective survival be enabled by statutory requirements that there be audits; if a firm goes down and takes the others, it is as futile as King Canute’s attempt to order the tides, to require delivery of an audit report when the providers are all out of business.

The only alternative to a highly-disruptive disintegration of the large firm networks – and a long shot wager indeed, requiring the most wild optimism to imagine – would be the emergence of Big Four leadership prepared to engage, for the sake of their future, in the “creative destruction” brought forward in 1942 by economist Joseph Schumpeter:

•    To forswear the currently outmoded auditors’ report, which provides no value to the market and is toxic to the sustainability of the firms’ business model.

•    To cut to the heart of the critics’ animosity, by the deep finesse of voluntarily turning the task of issuing low-value “compliance assurance” over to nationalized agencies.

•    To allow the capital and investor markets to ascribe to “compliance audits,” performed by huge cadres of conscripted civil servants, the nominal value they would deserve.

•    To empower the surviving firms to invent, sell and deliver new forms of assurance that companies will buy, and the markets will pay for, under sustainable limits on liability and free of the life-threatening legal exposures as wielded by the class action plaintiffs.

•    To break the antiquated shackles of the compliance-driven limitations of “independence,” so as to build or acquire whatever professional services capabilities may be congruent with the new forms of assurance – whether in systems or technology consulting, finance, law or otherwise.

Starting down such a road would require envisioning an entirely new set of directions for the profession – beginning with the acknowledgment that the current race is going around a one-way track to a dead end. 

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The Indian Regulators Pronounce on Satyam -- And a False Dawn is Promised

Is corporate India now vaccinated against an outbreak of white-collar financial fraud?

The great and the good of the country’s regulators would think it – taking at face value their prideful descriptions of the investigative scrutiny of scandal-ridden Satyam Computer Services Ltd.

The former chairman of the Securities and Exchange Board of India, Meleveetil Damodaran, is quoted – here -- as calling the fraud at Satyam “unique,” and “an isolated case, not reflective of the state of affairs of India Inc.”

He would say so, of course, as a current board member of Tech Mahindra, the successful bidder now grasping the handle of the poisoned Satyam chalice. But the annoying question persists: on what basis could he possibly make such an over-reaching claim?

Not from the work of the Central Bureau of Investigation, which invokes its use of “cyberforensics” – here -- in order to “uncover how in-house computer systems (at Satyam) were exploited to generate false invoices.”

Please. Spare us another exaggerated claim on behalf of the “forensics” of post-exposure inquiry.

A sewer worker can unplug a cesspool, too, if given a shovel and told – pointing to the clogged hole – “Dig here.” Admirable are the muscles involved. But the worker is not thereby qualified to engineer the waste plant, nor to monitor the flow through its twisted pipes and drains.

The forensic program to illuminate a revenue statement inflated by bogus business would start – and typically would end – with a single sharp finger pointed to the designer of the information system:

“Will you please show me the back-door technique by which alternative invoices – authorized or not – can be entered into the system? And for good measure, would not such an entry be concealed from the mainstream reporting process?”

That’s it. Not the stuff of brilliance or epiphany.

It does remain to be revealed, probably in court, whether such simple and direct questions were ever asked in the normal course of Satyam’s risk management process – under audit or otherwise. But conceiving them after the fact is hardly the matter of revelation now being publicized by the Indian regulators.

As for the excessive enthusiasm of the good Mr. Damodaran. Nassim Nicholas Taleb’s “Black Swan” presents the two lessons essential to avoid the “induction trap” into which the SEBI veteran falls headlong:

•    First, no number of observations of white swans can disprove the existence of a black one. Likewise, however superficially successful may appear the historical performance of a financial reporting and assurance structure, the past can give no comfort that a catastrophic failure will not suddenly emerge.

•    Second, the single observation of a black swan not only destroys the baseless over-confidence that the species does not exist – it must also contemplate the prospect of other like specimens. More directly, Satyam as one mega-fraud not only establishes that it can happen in India, but supports the necessary expectation that others exist, only as yet undiscovered.  

Or in more folksy terms – the first appearance of a cockroach, in a kitchen thought to be pest-free, both disproves any assumption of health-code compliance, and also reasonably alerts the chef – since vermin are not known to be solitary – to the unpleasant presence of more.

The Institute of Chartered Accountants in India, meanwhile, is off on a wild-goose-chase of its own – here and still here -- chasing after the details of the international affiliations among the only accounting firms globally established enough to participate in the delivery of audit services in a true cross-border involvement.

As if agreements as to name-sharing, letterheads and business cards had anything to do with the defalcation at Satyam. Or, either, with the provincial stature of India’s locally-biased profession – flailing away in back-footed defensiveness as it confronts the reality that it is at least a generation behind the modernization required to participate in a globalized economy.

Rather than take comfort that a black pot of India Inc has been bleached to lily white, in other words, prudent investors and gate-keepers alike would do well to view the pronouncements of naïve regulators as a symptom that the country’s environment for financial chicanery remains fertile and inviting. 

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Spreading the Wealth: Manure Exchanges as a Model for Fertilizing the Green Shoots

To have a real chance at saving the banks, the policy wonks need to get out of town a little more – beyond the urban cinch of the Washington Beltway or the City of London.

If they would shed their bankers’ grey suits and cordovans for a weekend in rubber boots and overalls, they’d learn that to nourish the “green shoots” of economic recovery – optimistically foreseen in mid-March by Federal Reserve Chairman Ben Bernanke – they need to spread some fertilizer around.

Even as potential buyers of toxic financial assets are balking at committing their funds, and bankers themselves are reluctant to sell troubled assets into the rescue programs, models for success are in place all over America -- literally at the grass roots.

These are the Manure Exchange programs – sponsored by soil and water conservation districts around the US, from Virginia and Illinois and Wisconsin down to Texas and up to Washington and Oregon.

Their mission, to quote this example from the Pacific Northwest, is to “bring gardeners searching for free organic fertilizer in contact with livestock owners that have excess composted manure.”

Just as the toxic asset programs aspire at the national level to scrub the ordure from the balance sheets of the troubled banks, the barn-cleansing function of the Manure Exchanges is to “remove the composted manure from farms that do not have the acreage to adequately utilize its nutrients.”

Symmetrically, toxic asset investors who seek opportunities to acquire troubled assets at attractive prices resemble the “gardeners and landowners searching for sources of local, free, organic fertilizer.”

And while classical literature does not reveal whether Hercules had the appropriate waste-disposal permits when he hosed out the stables of King Augeas, the Manure Exchanges achieve a two-fold sustainability dividend, by “enhancing the natural environment while protecting … cultural, social and economic values.”

No fees are charged under the Manure Exchange programs, thus aligning financial incentives in ways the banking industry could well study. And administration is simplicity itself: farmers who “wish to share their manure” – how delicately put is that – need only sign up with details of times and places for available pick-up.

Just as subprime mortgage portfolios were sliced by type, the rural raw material is divided out by degree of ripeness – fresh or composted – and categorized by livestock of origin – horse, pig, goat or llama.

Here lies a business opportunity for the rating agencies: Moody's or S&P could, by employing the agricultural expertise of a local Four-H student or Future Farmer, learn to divide and rate the piles into separately graded tranches.

Arbitrage opportunities also abound – a vegetable gardener’s need for cattle waste being tradable against a farmer’s excess of chicken droppings.

In the rural programs’ composting guidance -- which prescribes turning and aeration to convert raw excrement to richly nutrient gardening material, bucolically praised as “evenly textured and crumbly like soil” -- there even lies a solution to the financial markets’ inability to solve its asset valuation and recording issues.

That is, just as with a portfolio of distressed mortgage securities, Mark-to-Manure accounting would clearly require the write-down of a wagonful of untreated horse poop. But with time, patience, and diligent wielding of a pitchfork, those willing to hold their noses and tend the heap to maturity will stay the course and realize the benefits of Marking-to-Compost.

There is one serious disclosure issue with the Manure Exchanges, although it pales in comparison to the black-box opacity of the now-failed markets for exotic financial derivatives – namely, the explicit warning that without conducting tests “to determine weed seed viability,” the output should be assumed simply to be “raw organic material.”

Oh, would that Bear or Lehman or Merrill had been so candid: “If it looks like sh*t and smells like sh*t, buyers should assume it is sh*t.”

Foot-dragging bankers, holding back from participation in the “yes, we can” spirit of the White House’s new occupant, should take inspiration from the exuberance of the program in Jackson County, Oregon: where else could a composted pile of horse manure be re-packaged as “a great way for gardeners and landscapers to find black gold!”  

There is an obvious program title: the Community Recovery Asset Plan.

It’s a stirring patriotic call. President Obama should don a baseball cap in eco-friendly John Deere green, enlist Al Gore and Barney Frank, and march arm-in-arm to the offices of Treasury Secretary Geithner and Fed Chairman Bernanke, to demand:

“Hey, pull on your boots and gloves. Get out there and start shoveling.”

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