Re:Balance -- Jim Peterson

The SEC Strikes Goldman Sachs -- Now Will Goldman Strike Out?

As the great baseball umpire Bill Klem said, about whether a pitch was a ball or a strike:

“It ain’t nothin’ ‘til I call it.”

Which, as a lesson in political science, is being taken to heart by only some of those holding forth on the April 16 charges of fraud lodged by the Securities and Exchange Commission against Goldman Sachs and one of its employees (here), alleging misstatements and omissions in the structure and marketing of a synthetic collateralized debt obligation tied to residential mortgage-backed securities.

The SEC’s enforcement director, Robert Khuzami, dealt a high fastball -- avoiding complexity in packaging his advocacy for public soundbite-scaled consumption (here):

“The product was new and complex but the deception and conflicts are old and simple.”

Goldman itself played its defensive position the same way, but to different effect (here). Its terse one-liner fouled off the pitch: “We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.”

Give Goldman points for a sense of reality, recognizing both that the judicial process will be unaffected by public posturing, and that the court of public opinion itself will not be in a mood for hand-wringing.

For it remains a mystery what inspires any claim to credibility by the typical spinners of over-played corporate protestations, when initial impassioned pleas of innocence give their inevitable way to plea bargains and outsized settlements to “put it all behind.” 

Meanwhile, the purple clouds of “I told you so” commentary from the bloggerati are as noxious as the volcanic spews from Iceland, and should only be dispersed as rapidly into inconsequence. 

Not least, the self-righteous are – as customary – conflating an initial law enforcement complaint with an adjudicated conclusion. Consider:

• ·      Much as public opinion had convicted O.J. Simpson of his wife’s murder, before his trial, the jury found otherwise – and he remained at large until the outbreak of his predictable recidivism.
• ·      It was financial and structural weakness that felled Arthur Andersen, not its indictment – remembering that procedural flaws in its conviction led to the Supreme Court’s reversal, but with no element of vindication or rehabilitation.
• ·      Even the now-jailed Bernie Madoff was presumed innocent (although charged) until the entry of his guilty plea, and entitled to bail and at least a measure of his liberty.

Respect for due process requires a measured recognition that the SEC case is at the top of the first inning – though there may well be further cases, additional claimants and private claims as well (see Kevin LaCroix’s always helpful D&O Diary). 

But Charlie Green also has it right, at Trust Matters. That is, if as Charlie suggests, the SEC’s case “resonates easily with Main Street as also being unethical,” and as corrosive to credibility, motives and trust, then the capital markets community will hold Goldman accountable for the state of its franchise in ways that the judicial process can never address.

A final constituency is yet to be heard from, about we should worry. Eight years ago, when the collapse of Enron was trailed by WorldCom, a stampeded Congress inflicted Sarbanes/Oxley and its massive demonstration of the law of unintended consequences.

Given its head, a legislature bent on retribution against the financial services sector is capable of twinning up the bankruptcy examiner’s report on Lehman Brothers (see here) with the SEC’s complaint against Goldman.

In which case, anxiety should run very high.

Because the result, in Bill Klem’s terms, will most likely be a wild pitch.

 

Thanks for sharing this dialog. Please share with friends and colleagues. And if not a subscriber, you are invited to sign on at the Main page.  

 

 

On the Midwestern Calendar for March: Two Events Addressing the Audit Profession

An alert for those in the Midwest looking to warm up the chill of late winter: I am looking forward with enthusiasm to joining Duane Kullberg, retired managing partner of Arthur Andersen, who will be the Chapman Executive-in-Residence at Carthage College in Kenosha, Wisconsin, on March 2 and 3.

 On Tuesday evening the 2^nd, Duane and I will be on a panel on the “Future of the Audit Profession,” joined by Bill Goodman, CPA and president of Schenck Business Solutions and chaired by Dennis Tomorsky, CEO of the Wisconsin Institute of CPAs. At the college’s Todd Wehr Center, 7.30 pm.

 On Wednesday the 3^rd, the Kenosha/Racine area Business and Professional Coalition’s regular luncheon will feature Duane’s presentation and our taking questions on the “Rise and Fall of Arthur Andersen.”  Noon, also at the Todd Wehr Center.

 Any further details will be forthcoming, so drop me a line to be advised, or are available through David Brunn, Carthage’s Rogers Palmer Professor of Business Administration (tel: 847-256-2287 or e-mail: dbrunn@Carthage.edu).

Measuring Corporate Stewardship by the Century -- A Lesson from the Oak Groves

"I know a bank where the wild thymes blow" --

    Oberon, Shakespeare's "Midsummer Night's Dream," II,i

A few words further (after these of November 10th and 17th), on corporate stewardship, and the ability to assess management's commitment to long-term sustainability.

The context is the measure of dysfunctionality in the dialog, with Lloyd Blankfein’s year-end bonus at Goldman Sachs expected to establish a compensation benchmark for the entire financial services sector.

Despite his vilification for both Goldman’s off-message diversion of $500 million to the aid of small businesses, and his own tone-deaf joke about “doing God’s work,” there is no other banking CEO being publicly fitted for a halo. And his company’s record is compelling, even though unless poor Blankfein suddenly develops the political savvy to foreswear all pay for this year, he is going to catch media hell no matter what take-home figure he tries to justify.

To take a long step back in history, consider the vision, commitment and behavior of the great canal-building companies of Victorian England.

These innovators not only joined with the newly-constructed railroads in making possible the Industrial Age, by achieving the first inland transport break-throughs in human history – re-writing the limits of bulk and speed that had been constrained by the capacity of an ox-cart and the pace of a horse and rider.

Knowing that the great oaken beams and timbers in the intricate gates of their lock systems would eventually require replacement, the canal developers had the foresight to plant groves of oak saplings around the huts of the lock-keepers – not for the shade and the aesthetics, but to assure a ready supply of mature trees when needed, many decades into the future.

That their legacy is now picturesque rather than practical owes only to the unforeseeable over-taking of technologies based on electricity, internal combustion, silicon and rocketry.

But sadly, it is no less unthinkable that their modern successors – the chief executives of the large airlines or trucking companies – or their counter-parts in banking, industry and professional services -- should invest and manage for their future based on such long-range planning.

Instead, there is a disconnection between managements’ incentives and long-term sustainability strategies -- as laid out by the guru of game theory, Bruce Buena de Mesquita, in his provocative and challenging new book, “The Predictioneer’s Game.” (For reviews, see the book's website. For the lite version, see his September 28 appearance on John Stewart’s Daily Show.)

His chilling example is the loss of vision of the Arthur Andersen leadership in the period leading up to the Enron debacle:

As he puts it -- under the grim caption, “Incentivizing Ignorance” (pages 116 et seq.) -- Andersen’s senior management “helped foster their own demise by not erecting a good monitoring system to protect their business from the misbehavior of their audit clients,” chiefly because ”Andersen’s most senior management genuinely did not seem to understand the risks they were taking.”

And why? Because as he puts it, “costly litigation … would not be settled until ten or so years after the initial prediction of risk.” But by that time “the engagement partner who brought in the business in his early to mid-fifties was retired and enjoying the benefits of his pension.”

Which creates the disconnection: by then, “the money for the defense was coming out of the pockets of future partners,” so “the financial incentive to know was weak indeed.” 

Recent years have shown the pervasively destructive influence of short-term incentives – from the exploding volumes of unsustainable subprime mortgages, to the proliferation of incomprehensibly risky financial instruments, to the current stripping of seasoned employees for the sake of expense reductions -- putting at risk the retention of expertise and capacity as the economic cycle turns.

It’s a sorry statement on leadership that Lloyd Blankfein is one of the few left standing, when so many short-visioned leaders have been shown unwilling to show the kind of commitment to maintenance and stewardship of the 19^th century canal builders.   

 

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

Congress Looks at the Fall of Lehman Brothers: Was it a Sequel to Arthur Andersen?

For low-grade political theater, Monday in Washington was sadly typical: Richard Fuld, ex-CEO of the bankrupt Lehman Brothers, spent two hours under ritual excoriation by a panel of self-righteous legislators.

The play ran in several predictable acts:

•    The outlandish and unseemly “fairness” of Fuld’s nine-figure compensation history, in context of the firm’s disintegration and the erasure of equity value for public shareholders and trapped employees alike.
•    The absence of timely leadership responsibility and Fuld’s finger-pointing at exterior forces -- the rumor-mongers and the short sellers.
•    The whining over Lehman’s solitary fate, while the government supported “rescues” – if such they can be called – of such fallen institutions as Bear Stearns, Fannie Mae, Merrill Lynch and AIG.

Melodramatic scenes of tearfully innocent ex-employees hauling off boxes of personal effects and the pathetic invocation of antagonistic government treatment invite comparison of Lehman’s downfall with Arthur Andersen’s speedy demise in 2002.

They’re equally unfortunate, especially in the personal and systemic disruptions caused by the disintegration of once-noble institutions, but neither fits well the classic model of tragic definition.

Just as with the failure of Fuld’s leadership to admit the mounting evidence of compelling weakness in Lehman’s business model, the belated calls for stabilizing steps at Andersen came too late to escape its death spiral of departing personnel, fleeing clients and global structural break-up.

Likewise, Fuld’s invocation of the influence of darker forces corresponds with the self-inflicted aspects of Andersen’s demise, despite the clinging among members of Andersen’s alumni and sympathizers to a sinister plot line driven by vengeful prosecutors.

That is, while Fuld is chargeable with denial and delayed recognition of reality and a lack of credibility in his case for last-minute rescue, Andersen was reportedly perceived by the government prosecutors as a firm of arrogant and unrepentant recidivists and repeat offenders – not a tactful attitude conducive to amiable treatment by agents holding the power of indictment.

Finally, while the enterprise value of Lehman and Andersen alike rested critically on the continued repose of trust and confidence by both clients and personnel alike, neither management saw on a timely basis the fraying of the fragile fabric of reputation which -- once torn -- was damaged beyond repair.

The Lehman / Andersen comparison should not be pushed too far – Lehman became its own house of cards, for one thing, while Enron as a business fiction served that role for Andersen.

More to the point are differences as to the treatment of successor institutions. Last week’s US bail-out legislation and the programs emerging daily from other governments around the world amply demonstrate that “too big to fail” has broad resonance for the world’s trading and financial systems – for the benefit of troubled enterprises trailing in the wreckage of Lehman.

But for the surviving large accounting firms, confidence in their assured future viability remains a goal that has eluded the limits of their political and lobbying skills.

And in any event, the break-up and migration of the bankers’ brands, corporate structures and business teams – whether Lehman or any of the others – has no correspondence in the ability to preserve the Big Four’s private partnership organizations or their requirement for global presence to serve their large-company clients. 

Richard Fuld may be the least appealing villain of that name since Shakespeare’s king – who at his end at least had the consistency of character to go down in battle, crying, “My kingdom for a horse!” rather than “I’ll keep my millions – now where was my bail-out?”

But he was not redeemed either by the windy pontifications of the likes of Congressmen Henry Waxman or Dennis Kucinich – whose own troubled constituents might well have watched Monday’s posturings while wondering about their public guardians soundly asleep at the switches.

Meanwhile, the fates of both Lehman and Andersen make clear that vitality based on trust and loyalty will not survive the evaporation of either – in which case, it’s curtains.

Special thanks on this one for the advice and support of Charlie Green – whose general wisdom on these matters is at Trust Matters.

Thanks to readers for joining this dialog; your comments are welcome, and if not a subscriber you are invited to sign on at the Home page – easy, free and non-commercial.