The Literal and the Figurative

Thanks to my Vienna feed reader, I just encountered an Al Jazeera article that could not have been better timed after the latest Saturday Night Live. Elon Musk used his opening monologue to talk about his use of Twitter. He admitted that he tended to write a mixture of powerful insights with utter balderdash, leaving it up to viewers to decided whether he knew which was which. That seems the best context for the following sentence I just read from Al Jazeera:

Musk said on Twitter in April that SpaceX was going to put a “literal Dogecoin on the literal moon”.

This was his way of saying that Dogecoin would pay for a SpaceX moon shot scheduled for the first quarter of next year.

Needless to say, there is nothing “literal” about any cryptocurrency. It is just another artifact whose value is determined strictly by trading practices. (Those practices were exercised in “real time” during that Saturday Night Live broadcast, when the trading value of Dogecoin took a serious drop after one of Musk’s throw-away jokes.) Mind you, whatever efforts there may be to impose standards, the value of anything traded is inevitably figurative, which is why retirement plans tend to go for conservative investment strategies. Nevertheless, even the most cautious investors cannot be fully protected against the bad judgement of other investors!

An Inconvenient Truth about Making Music

I have been reading Leonard Slatkin's book Conducting Business. The other day I came across a great sentence in which Slatkin compared symphony orchestras to Major League Baseball teams:

Of course, the big leagues are about making money, whereas the orchestras are about trying to lose as little as possible.

Reading this was hardly a surprise, but it made me think. I happened to be teaching at the University of Pennsylvania when the Wharton School of Business launched their arts management program. Thanks to a friend, I had the good fortune to sit in on some of the classes being offered under this specialization. I do not think I can recall that sentence coming up in any of the classes I visited. Indeed, I would be inclined to believe than any mention of losing money violates some fundamental article of faith at Wharton, or any other business school for that matter.

I would therefore be bold enough to suggest that the management of a performing arts organization requires a mindset that differs significantly from one required to manage a leading business venture, particularly when that venture "goes public" and has to worry about shareholders more than customers or employees. Every now and then I hear some grumbling about how adding arts management to the business school curriculum has made things worse, rather than better. Perhaps it has to do with the fact that the profit motive is really out of place in the performing arts. It is not that the performing arts choose to lose money; but, because they will always appeal to a rather limited body of "consumers," the possibility of profit is, at best, very slim.

There is no doubt that every performing arts organization needs at least one bean counter, even if that person is there for the sake of "just getting by." However, counting the beans is an abstract process that has nothing to do with why people are motivated to go into the performing arts in the first place. From that point of view, I would suggest that the very concept of "arts management" is inconvenient, if not dangerous, to those work practices without which the performing arts would not exist.

Another Myopic Technology Journalist

Late yesterday and BBC News Web site put up a story by Technology Reporter Jane Wakefield entitled "Tomorrow's cities: Do you want to live in a smart city?" The bold-faced introduction read as follows:

How do you fancy living in a city with which you can interact? A city that acts more like a living organism, a city that can respond to your needs.

This was preceded by a "clickable" map of the world with hyperlinks for ten cities discussed in the article. Each link brought up a pop-up window with a flattering photograph and a few descriptive paragraphs.

However, one problem occurred to me immediately in the midst of all this high-technology pipe-dreaming. In neither the hyperlink summary nor the full text of the article was any mention of how plans for Rio de Janeiro would respond to any of the needs of the largest segment of its population, those hopelessly poor who are still stuck with the squalid conditions of favela life. Once again the Kool-Aid of technological innovation is emerging as an instrument through which the rich and mighty will become richer and mightier, resulting in a new generation of dehumanized cities in which the poor will be even more disenfranchised than they already are, all in the interest of companies like IBM providing greater and greater rewards for their shareholders.

Planning the Next Economic Catastrophe

At first I thought that Don Reisinger's column this morning for the Apple division of CNET News might be little more than a vanity piece for trends in the technology sector. That, at least, was the impression of the opening paragraphs:

For three years in a row, Apple was the most popular stock among hedge fund managers, but according to new data from Goldman Sachs, it's on the decline. 

Goldman Sachs' data, which was obtained and reported on by AppleInsider, indicates that insurance giant AIG was the most popular hedge fund pick last year, with 80 funds holding its shares. Google came in second place with 73 funds. Apple, which had previously led the space, is down to 67 funds. 

Apple's declining popularity among hedge fund managers might have something to do with its ability to deliver returns. According to Goldman Sachs data, at the end of 2012, Apple delivered a total return of negative 12 percent. AIG and Google, meanwhile, were delivering an 11 percent return on shares.

However, it was in the fourth paragraph that things begin to get interesting:

Hedge funds buy up massive amounts of company stock, believing that shares will rise. When they believe shares will fall, they reduce their positions. Over the last year, Apple's shares are down nearly 11 percent to land at $448.85. That's a far cry from Apple's 52-week high of $705.07.

Considered in the context of the third paragraph, this makes for disconcerting reading. Hedge fund logic is driven by the immediacy of the present, uncontaminated by any historical knowledge. Had it been otherwise, one would have anticipated some reluctance to let AIG back into the pool, considering the critical role they played in the economic catastrophe of the last decade. Mind you, television viewers have probably seen some of the commercials promoting the "new" AIG (strategically placed so as not to run too close to the ones promoting the "new" BP).

Nevertheless, this provides a new angle on the proposition that businesses care more about their shareholders than they do about either their customers or their own employees (at all levels of authority). When a hedge fund makes a commitment, it does so in a big way, big enough to make all other shareholders less significant, if not irrelevant. Ultimately, this story discloses just how it is that economic catastrophes happen. In the simplest of terms, the economic fate of our country is in the hands of a small number of gamblers who play with a very large number of chips. Calvin Coolidge's motto that the business of America is business no longer carries any meaning. The real business of America has been reduced to this elite form of gambling. For the rest of us, the future lies in the hands of those gamblers; and there is not a thing that we can do about it (nor does our government seem to show any sign of imposing new regulations that would take power away from those gamblers).

The Apple Store as Prozac?

I have to assume that I am not the only one with raised eyebrows after reading Charles Cooper's account for CNET News of Tim Cook's talk to the audience of the Goldman Sachs investor forum. For those who have not seen the report, here is the relevant excerpt from Cook's remarks:

I was talking to some employees the other day -- I don't have many bad days, but if I think I'm ever dropping down from an excitement level, I go into a store and it changes right away. It's like a Prozac or something. It's unbelievable the energy in our stores and to talk to customers and team members in there...it's a feeling like no other. We're continuing to invest here.

Having had several Apple store experiences of my own, I have to wonder if Cook may be controlling his moods through some mind-altering substance (rather than Prozac), which means I have to wonder if he will be on anything when he is Michelle Obama's guest tonight! Here in San Francisco the Apple store is less of a hive of positive energy and more like a hornet's nest likely to sting anyone going in for any reason more purposeful than playing with the toys on display. When I had to make a serious decision about going over to a MacBook Pro as my primary computer, I went over to the quieter store in Stonestown; and even there I got more "What's that?" answers to some of my critical questions than I expected in my comfort zone. These days my primary cause for concern is that, when that machine starts to give up the ghost, there will no longer be any platform that is likely to be a viable productivity tool for the writing and reading I do every day.

Meanwhile, I have to wonder whether or not CNET shares my jaundiced view, having just seen the advertising placement that emerged for this report:

For Serious Capitalists, "Green" Has Only One Meaning!

Josh Lowensohn’s account of this year’s meeting of Microsoft shareholder began with the following item:

At Microsoft's annual shareholder meeting this morning, shareholders voted down a proposal that would create a board committee on environmental sustainability.

The committee, which Microsoft's board members had advised shareholders to vote against, would have put into place a group that would assess Microsoft's energy use, waste disposal, as well as take into consideration things like natural resource limitations. The committee would then share this information with both Microsoft's board and the company's shareholders.

As the rest of Lowensohn’s report indicates, there was a fair amount of grumbling about return-on-investment is a variety of agenda items;  but this makes for a useful indicator of the capitalist view of environmentalism.  Lowensohn cited other companies that have been more amenable, such as Intel and Monsanto;  so this vote may have more to do with general discontent about Microsoft performance.  Nevertheless, if Microsoft treats environmentalism as a luxury that it cannot afford, how many other major corporations are likely to make the same decision?

Sensible Thinking about Risk

There are any number of interesting things that Bill McKibben has to say in his “All Programs Considered” piece for the latest issue of The New York Review.  The most interesting one for me, however, was a quote from someone else.  That someone was Torey Malatia, the program director for WBEZ in Chicago.  This is the quote:

But you can budget for a certain amount of risk, and to recover from that risk.  The audience is forgiving of that, I think—maybe even admires it.

As far as I am concerned, this goes far beyond making bold decisions about what to put on the air.  Indeed, it may be one of the smartest observations about our economic crisis.

Investment is, after all, a risky business.  Risk is the very nature of the beast.  If you do not want to take risks, you shouldn’t be in the game in the first place.  The significance of Malatia’s sentence lies in the second part of his conjunction:  Having realistic plans for how to recover from a risk that goes south is more important than wholesale avoidance of risk.  In another world financial advisors who would deliberately steer clients away from making such plans would be accused of malpractice.

Furthermore, the precept as a whole goes beyond making risky investments.  It is also a realistic reply to those who insist that we be perfectly secure against terrorist attacks.  This is even more unrealistic that insisting that all investments be totally risk-free.  As I put it almost a year ago, you can never prevent the possibility that something will go wrong, whether at the hands of one or more terrorists or through an “act of God” (in the technical terminology of the insurance business).  However, you can at least try to assess how well-equipped you are to recover when things go wrong and then take that assessment seriously if it indicates where your resources are lacking.  Malatia’s wisdom thus extends far beyond the media business, and his words should be weighed in that broader framework.

Infrastructure Priorities

The other day I was listening to Frank Deford's comments on Morning Edition concerned primarily with the fall from grace of basketball in New York. This led to a reflection of Madison Square Garden having become a relic of history (my words, not Deford's) in an age when just about any city either had or was planning an even higher-tech arena. I forget his exact words, but they were something to the effect that such arenas had become a city's excuse for infrastructure. Regardless of the exact wording, the authorial intent really stuck with me.

I have had any number of experiences with infrastructure, both positive and negative. On the positive side I have been in any number of cities of different sizes that have been impressively accommodating to whatever my day-to-day activities happened to have been, whether they involved work or tourism. Unfortunately, very few of those cities are in the United States, which is why most of my infrastructure experiences have been negative! I had my first car when I became a graduate student in the Greater Boston Area, and there was no end of deterioration that I would encounter both within cities and along the arteries that connected them. Decades later I was living in Stamford, Connecticut, when the Mianus River Bridge on Interstate 95 collapsed. Now I live in a city with any number of socio-cultural advantages but where day-to-day life tends to bring frequent encounters with infrastructure failures, each of which, at best, is treated by trying to close the barn door after the horse has been stolen.

So, between Deford's curmudgeonly dismissal of the new sports arena as an excuse for infrastructure and a residence from which I can see infrastructure deterioration just by looking out my window, I came this morning to C. W. Nevius' column in the San Francisco Chronicle. Apparently negotiations are under way to bring the Golden State Warriors back to San Francisco; and the deal involves (you guessed it) building a new ("state-of the-art," as Nevius emphasized) sports arena in Mission Bay. Needless to say, this is one of those efforts that is going to involve considerable flows of money. Just to get into the right ballpark (which seems like the appropriate metaphor for both the location and the intention), consider that it will probably cost the Warriors around $60 million to get out of the current lease with the Oakland-Alameda County Sports Authority before it expires in 2027. Think of that as a baseline for which the financial planners will have to find the right multiplier (it had better not be an exponent!) to cover everything else. Meanwhile, we have a public transportation system that progressively gets worse and costs more. Whenever possible, I tend to go for the pedestrian option, which sometimes provides an entertainment benefit in observing traffic congestion. Some of that congestion is just a matter of too many cars; but there are also the incidents of utility-related breakdowns below the surface of the streets. Those are the occasions when things really come to a screaming (considering the way people react, that usage is literal rather than figurative) halt.

The point behind Deford's swipe has to do with how rapidly any city, regardless of its size, seems to embrace a state-of-the-art arena as an instrument of development. The embrace is so passionate that no one ever bothers to ask whether there might be better ways to spend the money that would also further development but in less noticeable ways. Besides, wasn't Mission Bay supposed to be the site of a major complex that would make San Francisco a world leader in biotechnology?

Tell me Again: WHERE does that Buck Stop?

The story of negligent oversight by the Securities and Exchange Commission (SEC) just gets better and better every day. Here is the latest Reuters dispatch on the matter:

Former U.S. Securities and Exchange Commission chairmen and directors were generally unaware that staff were probing Bernard Madoff until the former financier was arrested in December 2008 for running a $65 billion Ponzi scheme, a federal watchdog said in a report released on Friday.

The report underscores the disconnection between senior officials and their employees, who often lacked the experience necessary to follow up on leads and understand the magnitude of their investigation.

Former Chairmen Christopher Cox, William Donaldson and Arthur Levitt, former director of enforcement Linda Thomsen and former director of examinations and compliance, Lori Richards, did not play any "inappropriate role" in the SEC's probes of Madoff, according to the 457-page report released late on Friday before a three-day holiday weekend.

Two days ago, the SEC released a summary of the report, which accused the regulator of never conducting a competent probe of Madoff despite complaints dating back to 1992.

SEC Inspector General David Kotz found that the SEC missed numerous red flags and did not follow up on leads that may have uncovered Madoff's investment scam years ahead of his confession in December of 2008.

Among his criticisms, Kotz said SEC compliance managers and examiners assigned to a 2003 investigation of Madoff lacked "any particular expertise or experience."

Kotz recommended that current SEC Chairman Mary Schapiro take "appropriate action" to address performance failures by employees who still work at the agency.

The good news is that the SEC has an Inspector General who takes his work seriously, which seems to be more than we can say about most of the denizens of all the little boxes in the overall SEC organization chart. However, if this really is a case of excrement flowing uphill and the senior management is just as inept as the low-level drones, can we really expect the current Chairman to take "appropriate action" or, for that matter, to figure out just what "appropriate action" is?

Even in a situation as ludicrous as this one, I am sure there are many (Republicans?) who believe that the government should keep its nose out of financial operations. These days the nose they tend to have in mind belongs to New York Senator Charles Schumer. Nevertheless, you would think that even the too-much-government types would appreciate Schumer's proposal that the government stop funding the SEC in favor the SEC funding itself through the fees it charges. That even carries the "free market" connotation that any investment firm is free to decide whether or not it wants to pay for such oversight. If it decides not to do so, then it is basically hanging a big caveat emptor sign beneath its shingle. You would think that free market advocates would be perfectly happy to have anyone who gives money to such an organization pay for their folly. This, of course, presumes that there would be a critical mass of investment firms that would pay for this kind of "seal of approval;" so perhaps I am being too optimistic!

An Unintended Consequence of Literary Ignorance?

I just read a Business & Finance report on the Reuters wire that caught my attention for its literary implications:

Cerberus Capital Management has been swamped with redemption requests with the Wall Street Journal reporting that investors are asking to pull out $5.5 billion or 71 percent of assets from its hedge funds.

Cerberus last month tried to entice investors into staying with the firm, but found that its clients overwhelmingly wanted to leave, the newspaper reported.

My immediate reaction was to wonder whether these fund managers realized how much truth-in-advertising there was behind their decision to invoke the name of Cerberus. A quick visit to the Wikipedia entry for this name should have been enough to give them pause:

Cerberus, (pronounced /sər-b(ə-)rəs/^[1]; Greek form: Κέρβερος, pronounced [kerberos]^[2]) in Greek and Roman mythology, is a multi-headed hound (usually three-headed^[1][3][4]) which guards the gates of Hades, to prevent those who have crossed the river Styx from ever escaping.

This entry also includes a cute photograph of an ancient Roman statue depicting this beast:

Later on in the entry, we encounter a prescient sentence that has all sorts of implications for the world of hedge fund investment:

Each of Cerberus' heads is said to have an appetite only for live meat and thus allow the spirits of the dead to freely enter the underworld, but allow none to leave.^[12]

I have to wonder whether or not it was the prospect of an encounter with Cerberus that would later inspire the immortal words of Dante Alighieri:

Lasciate ogni speranza, voi ch'entrate.

[All hope abandon, ye who enter here.]

Those certainly strike me as words to the wise where hedge fund investing is concerned these days. From a literary point of view, the name of this fund was just a fancy way of saying "Roach Motel for Investments!"

The "Real Recovery" Question

In spite of the temptations to expend my personal time and cognitive effort on online trading, I continue to leave my portfolios in the hands of an individual whose judgment I trust more than my own. I feel that the best I can do is monitor what is happening on a monthly basis; and, if any questions arise during my monitoring, I raise them with my personal broker. The monitoring takes place when I receive my monthly statement, which I download as a PDF file from the Web page for my accounts.

My electronic mail notification that my monthly statement was ready appeared in my morning Inbox. After many dismal months it was nice to see some numbers that were a bit more positive; but, born worrier that I am, I found myself wondering if some of those double-digit gain percentages were a little too positive. Comparing recent performance against current prices helped by reminding me that my overall losses were still far from being recovered; but had the markets actually embarked on a "rush to recovery?"

I continue to live by the basic law of investing, which is that anything too good to be true probably isn't. Therefore, I took some comfort in reading Jamie Robertson's monthly market report this morning on the BBC NEWS Web site. The best way to consider your own monthly review is to compare it with at least one other! This month Robertson introduced the report with the title "Is real recovery on its way?;" and that was incentive enough for me to read further.

As almost always seems to be the case, the report was front-loaded with metaphors, most of which have been used too many times. First we got the medical:

The company earning season has rebuffed the pessimists and while not flat on its back, the corporate patient is at least sitting up, managing a smile or two and taking light fluids.

Then we got the lemmings:

The problem is that we may be mistaking the bottom for a recovery. Just because the economy is no longer falling off a cliff does not mean that we are leaping, climbing or even crawling back up it.

Indeed, there was a fair amount of "insider talk" to deal with before I could get at the material that interested me the most, an attempt to translate the artefactual numbers of analysis into some educated guesses about the "real economy." Getting past the metaphor Robertson hauled out for this portion of his report ("Really motoring?"), I found some interesting observations:

Heartening stories of bankers making shed loads of money do not reflect what's going on in the "real economy".

Almost without exception banks' said bad loans were on the increase.

If the recovery doesn't start to motor, those bad loans are only going to get worse.

But there is some evidence that the "real economy" is turning the corner.

Much of it is down to restocking of inventories.

Last year, companies savagely cut back on stocks, and only recently have they started to refill the shelves.

Others have been boxing clever. Hyundai has made the most of tax cuts and incentives in its domestic markets, and in the US has offered new buyers low fuel prices for new Hyundai vehicles at $1.49 a gallon for a year.

Hyundai pays for any balance between $1.49 and market prices. Hyundai profits hit record levels.

Apple profits also soared: it sold more than 5.2 million iPhones in the quarter, more than seven times what it sold in the 2008 quarter, much of the interest generated by the new iPhone.

Meanwhile Microsoft saw sales fall for the first time in over 30 years.

The consumer hasn't disappeared altogether, but he and she are being awfully canny with their cash.

So Robertson's "evidence" basically came from two companies. One was concerned with the manufacturing of a durable good, the automobile; and what Robertson described as "boxing clever" had less to do with the manufacturing itself (and therefore its impact on employment) and more to do with a marketing strategy, whose economic impact depends heavily on what will happen to the price of gasoline over the next year. However, the Apple example is even more confusing. Regardless of whether or not an iPhone counts as a "durable good" (I would assume that it does not), it would be interesting to see how much of Apple's profits came from the device itself and how much came from the software people are buying for that device. My guess is that most of the money comes from the device, but I am curious as to whether there has been any change in the percentage of the profits due to the software.

The reason for my curiosity is that, for all the propaganda we may hear about how the United States has moved from a manufacturing economy to a service economy (or, worse yet, a "knowledge economy"), talk about the "real economy" always seems to fall back on manufacturing. This is true not only for analysts like Robertson but also for the folks who phone in to the morning broadcast of Washington Journal on C-SPAN (which I usually follow on my XM radio, rather than my television) whenever the economy is the focus of the discussion. (This morning was a particularly interesting case in point. The "open mike" on the state of the economy followed a segment on health care reform; and it was telling how many of the callers linked the question of economic well-being to the problem of affordable health care.)

This raises another percentage question. What is the percentage of jobs lost in the manufacturing sector, and what is the percentage in the service sector? (I have my doubts as to whether or not the "knowledge sector," if it really exists, figures in the statistics that are gathered, at least in any significant way. This, in itself, would say something about the extent to which some of our economic planners and forecasters may be trying to sustain themselves with nourishment from "Jonestown Kool-Aid.") If those in the manufacturing sector have been hit the hardest and if we face a future in which the sector itself will continue to implode, what will happen to those for whom that sector was their life's work? The "Report on the First 100 Days" from our Department of Labor gives some signs that this division of the Obama Administration recognizes the importance of this question; but it remains to be seen if the question will receive anything more than self-gratifying lip service.

What Part of "Guilty" Don't You Understand?

Bernard Madoff has not made the cut for any of my Chutzpah of the Week awards basically because, regardless of the magnitude of his fraud, there was a certain banality (or, perhaps, to avoid connotations of Hannah Arendt, I should turn to Daniel Mendelsohn's latest New York Review piece and call it banalisé, as in "rendered quotidian, everyday, normal") about his actions. It has only been with the rendering of a verdict that his true capacity for chutzpah has surfaced. Here is how the story broke on the BBC NEWS Web site:

Last week, Madoff, 70, pleaded guilty to all 11 charges against him when he appeared in a New York court last week

He was remanded to jail until his sentencing in June.

But Madoff's lawyers have argued to a US appeals court he should be released as he had not fled while under house arrest at his Manhattan penthouse.

This bears some family resemblance to one of the classic paradigms of chutzpah: the man who kills both his parents and then throws himself at the mercy of the Court on the grounds that he is an orphan. It goes without saying that, having been found guilty, Madoff should not take the comfort of his penthouse for granted. However, that penthouse offers more than comfort; it also offers virtually uncontrolled connectivity. As prosecutors try to investigate who else (including immediate family) may have been involved in Madoff's scheme, we have been treated with accounts of his efforts to move around large assets through his computer without ever having to leave the penthouse. Having established Madoff's guilt, the Court has a certain responsibility to his victims to make sure that he does not do further damage; and confining him in a way that deprives him of his connectivity resources seems like a step in the right direction. The Appeals Court probably appreciates this factor by replying that they will make a decision "in due course." Meanwhile, Madoff finally gets his Chutzpah of the Week Award for his last-minute ploy to maintain business as usual in the face of his guilty verdict!

Chief Apology Officer

Would you buy a used insurance policy from this man? For those who do not recognize the face, he is Edward Liddy, Chief Executive Officer (CEO) of the American International Group (AIG); and today he will be in Washington facing members of Congress who will most likely provide faithful representation of the "tidal wave of rage" of American voters over his company's business practices. Needless to say, he will begin by delivering a prepared statement, which can be previewed on the BBC NEWS Web site:

The chief executive of AIG has admitted that fundamental mistakes were made at the US insurance giant.

"Mistakes were made at AIG on a scale that few could have imagined possible," Edward Liddy will tell a Congressional hearing later on Wednesday.

He will also admit that AIG is "too complex, too unwieldy and too opaque".

Mr Liddy also calls the $165m (£119m) bonuses paid by AIG "distasteful" after the insurer took about $170bn of aid from the US government.

…

In a prepared testimony, Mr Liddy says the company "strayed from its core competencies in the insurance business".

Nowhere was this more evident than in "the creation of what grew to become an internal hedge fund, which then became substantially overexposed to market risk," he adds.

He also addresses the contentious issue of excessive bonuses.

"I am mindful of the outrage of the American public and of the president's call for a more restrained compensation system," he says.

Mr Liddy said that he would never have approved the $165m bonuses if he had been chief executive at the time the contracts were signed.

"It was distasteful to have to make these payments," he says.

Since Liddy only became CEO last September, I am not surprised to see that he plans to fall back on a not-on-my-watch defense. More to the point, however, is whether it had occurred to him that, in a time of crisis for so many businesses in the financial sector, it would make some sense to do some "due diligence investigation" of what he might face in his new job. Had that been the case, such "due diligence" would have benefited from a conversation with Robert J. Arvanitis as serious as the one Joe Nocera had conducted in preparing his recent Talking Business column for The New York Times. I am thinking particularly of the internal view of AIG business practices, of which, as I documented in my own recent analysis, Arvanitis said, "they never thought of it as abuse."

I got a sampling of some of the wrath that Liddy is likely to face by watching a bit of C-SPAN yesterday. As a matter of fact, the specific wrath I encountered was a Republican suggestion that it might be a good idea to let AIG fail after all. So much for "the party of big business" (although it is a nice reminder that laissez-faire has a dark side, too)! My guess is that Congressional decorum will prevail over preparing any tar and feathers and then riding Liddy out of town on a rail; but I would hope that Liddy is smart enough to realize that heartfelt apologies are not going to get him very far (particularly among any who doubt that he has a heart at all).

The real benefit of having the text of his prepared statement is that those who will question him will have a point of departure for more productive conversation. I, for one, want to hear someone ask, "The buck now stops at your desk; what are you doing to clean up the mess, even if that mess happens to be inherited?" As we used to say in the Sixties, if Liddy cannot make a clear case that he is part of the solution, then he is just another part of the problem. Perhaps a faint whiff of boiling tar in the Committee Chambers might help inspire him to shift from apologies to productive proposals!

Today's Mess

Continuing the theme of oracles, Joe Nocera seems to have done a fairly good job of prediction in his Talking Business column for Saturday's New York Times:

Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions.

Sure enough, this morning my Google Reader abounds with headlines about that "sorry status" of A.I.G. and its desperate need for more bailout money. I suspect Nocera takes little satisfaction in the thoroughness of the analysis in his column, which was assembled under the dire headline "Propping Up a House of Cards." Ironically, much of Nocera's effort to reduce this mess to terms that we could all understand was assisted by Robert J. Arvanitis, who has been all too willing to facilitate explanation from his vantage point as a former A.I.G. executive. The resulting analysis is fascinating. To appeal to Nocera's metaphor, every "card" in the "house" ultimately involves a violation of Warren Buffett's little witticism about "geeks bearing formulas." It all came down to investing heavily in instruments understood so poorly that they have yet to be managed by a suitable regulatory framework, all on such an enormous scale that Nocera concluded:

It would be funny if it weren’t so awful.

The final blow, however, came when, in search of a good coda, Nocera returned to Arvanitis for his insider's point of view:

I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”

That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.

That would be us, the taxpayers.

Now we the taxpayers are reading about it in this morning's headlines.

Common Sense Trumps the Oracle

According to his Wikipedia entry, Warren Buffett was endowed with his "Oracle of Omaha" sobriquet by Alex Markels of U. S. News & World Report in a story that appeared in the August 6, 2007 issue. In our present circumstances it is easy enough to say that anything published on such an auspicious date in history would be fated to blow up in our faces; but it would be more productive to recognize that, in this year's annual letter to investors in Berkshire Hathaway, Buffett not only dispensed with the oracular but also owned up to his own errors, being direct enough to declare:

During 2008, I did some dumb things in investments.

While Buffett seemed to be as disposed to seek out targets for blame as the rest of the rich and mighty have been, he also recognized that this was a letter whose readers would benefit more from commonsense lessons learned, rather than the latest proclamations inspired by inhaling the fumes at Delphi. Indeed, one of Buffett's better punch lines came not from the Delphic Oracle but from the Trojan priest Laocoön, to whom Virgil (Aeneid, II, 49) attributed the famous warning about the Trojan horse:

Equo ne credite, Teucri! Quidquid id est, timeo Danaos et dona ferentes.

translated in its Wikipedia entry as:

Do not trust the horse, Trojans! Whatever it is, I fear the Danaans even [if] bearing gifts.

Buffett translated this into:

Beware of geeks bearing formulas.

This is certainly sound advice, even if we remember what happened to Laocoön when he threw his spear at the Trojan Horse. Personally, I would have preferred to dispense with the literary and boil it down to slightly more aggressive plain speaking:

If you don't understand it and no one can explain it so you do understand it, don't put money in it!

Unfortunately, my guess is that most Berkshire Hathaway investors really do not understand what Buffett does with the money they give him, no more than those victimized by Bernie Madoff understood what he was doing. The only real difference seems to be that Buffett can own up to circumstances when the news is bad (which was easier because Buffett only had to own up to making poor investment decisions, while it appears that the only thing Madoff did with the money he received was keep it for his personal use).

The Buffett lesson I most enjoyed, however, was the one about real estate investment:

Enjoyment and utility should be the primary motives for purchase, not profit.

My wife and I have tried to live by this rule for every real estate purchase we have made. (For that matter, in better financial times when we made some investments in art, the only thing that mattered, beyond whether we could realistically afford it, was whether or not we liked a piece well enough to live with it; and we have yet to sell anything we purchased, although one piece has been "banished" to my personal work-room!) Even our current place in San Francisco, purchased when our primary residence was still in Palo Alto, was selected for "enjoyment and utility" with an eye toward being a good place for our retirement years. That is basically what it has now become, and we did not need an oracle to endorse our decisions!

Nigerians Learn from Bernie Madoff

Nigerian efforts towards fraud through electronic mail are now so commonplace that they are more a source of humor than victimization. (The "Annual Nigerian EMail Conference" is now in its third year!) However, fraud is still a serious problem; and this morning's BBC NEWS Web site has a report on just how serious it can get:

Justice Secretary Jack Straw has been the victim of Nigerian fraudsters who sent out hundreds of e-mails in his name asking for money.

The e-mails claimed he had lost his wallet on charity work in Africa and needed 3,500 US dollars to get home.

Messages headed the Right Hon Jack Straw MP were sent to council bosses, government chiefs and others.

The fraudsters are thought to have hacked into computers at Mr Straw's Blackburn constituency office.

Mr Straw has confirmed the e-mails had been sent to a "significant number of people" in his address book but he said there were no security issues as it was his Blackburn e-mail address rather than his ministerial account that was targeted.

I would like to suggest that this new "advance" into fraud be called "the Madoff effect." Bernard Madoff could not have perpetrated his fraud of epic proportions without working from a solid base of personal trust. This trust had as much to do with how he was viewed in specific social circles as it had to do with his professional reputation. Straw was a victim of those who appreciated the level of trust that he had established and could mine his address book for those who trusted him the most. What the fraudsters overlooked, however, was that their targets knew Straw well enough to ring him up (presumably on his cell phone) and ask if he really needed that help!

Admittedly, this strategy would probably not have saved Madoff's victims from their current predicament. Clearly, the most important question was, "Will my investment really return those promised results?" Unfortunately, the only person they could ask was Madoff himself; so they had to fall back on relying on their trust in him. Straw avoided his own victimization because the trust of his friends included checking up on him.

Blaming the Victim (Again)

Henry Blodget's latest blog post on The Huffington Post, "US Homeowners Still Living in Dreamland," may well be living in a dreamland of its own. It is short enough to be reproduced in its entirety to make sure that its argument is fairly analyzed:

When will our economy begin to recover? Not until US homeowners wake up and realize that their houses are worth what all assets are worth: what someone will pay for them.

The NYT's David Leonhardt chronicles the dreamworld inhabited by most US homeowners, a bright cartoon-land in which the value of their neighbor's house has dropped by 30% but theirs is still worth more than they paid for it at the 2006 bubble peak. These homeowners refuse to move or sell until they can "at least break even," which means they'll stay in their depreciating assets for years while skyrocketing inflation reduces the value of whatever they eventually get by about 4% a year.

Of course, those who inhabit only the digital world shouldn't cackle too loudly: As Fabrice Grinda observes on Silicon Alley Insider, start-up owners behave just the same way--refusing to sell a dollar of equity as prices drop...right up until they run out of cash.

In any event, our economy won't truly recover until house prices adjust. And in the housing market, at least, price-to-income and price-to-rent ratios suggest that that "adjustment" is likely to be down.

As often seems to be the case with my analyses, I would assert that the best way to uncover the flaw in Blodget's reasoning is through a scrupulous examination of his text. The problem in this case is that his argument trips over a conflation of two separate motives for "investing" (by which I mean the commitment of financial resources, whether "hard" or "soft," as in loaned or otherwise promised). The simpler motive is "acquisition for use;" and the other is "speculation." Most of us buy real estate because we want to live in it. Some of us can even afford a second property for use. (While living in Palo Alto, we purchased a condominium in San Francisco for weekend use, primarily for its proximity to three of the major performing arts spaces in the City. We also saw it as a good retirement residence, which is what it became when we sold the Palo Alto property.) My point, however, is that "acquisition for use" has been normative probably since the end of World War II, when having your own place became a fixture in the American dream.

Speculative investing is another matter, since it is basically a gamble on Blodget's fundamental premise: assets are worth "what someone will pay for them." Think of it as a "gamble on the future tense," which means that it is just like any other gamble, whether it involves which horse wins the race or what the price of Google will be at the end of the calendar year. Most gambles thrive on the premise that "anyone can play;" and those who run the gambles profit because, when anyone plays, most of them are going to lose. In other words investing in real estate for its future value is no different than buying stock for its "anticipated growth." It is risky, but it is promoted by those who do everything they can to get you to ignore the risk.

Whether or not homeowners are "still living in dreamland" is not the real issue. The real problem is that their dreamworld was imposed upon them by predatory lenders, who forced them into a speculative investment to support acquisition-for-use. When the speculation went south (as most speculations do), the victims no longer had what they thought they had acquired for use. The current response of our Administration appears to be that these victims should have remembered the caveat emptor rule; but to what extent can this rule be imposed upon those who have been force-fed under pressure with deceptive information? I suspect that economic recovery is going to depend less upon a readjustment of housing prices and more on a general readjustment of the "rules of the game" under which the majority of our population can engage in acquisition for use.

Return on Identity

When I last visited the concept of identity in conjunction with the world the Internet has made, it was to explore the pathological implications engendered by that world. I had been reacting against discussions over at confused of calcutta that were trying to resolve the specific pathology of the death threats against Kathy Sierra by reducing them to questions of identity. However, in light of a more recent conversation over the question of how to measure return on investment (ROI) in IT, I realize that the question of professional identity deserves some attention. Since these are thoughts that definitely need "rehearsing" and since JP Rangaswamy seems to have indicated that he expects to find them in my "studio," I shall now try to oblige.

Several years ago Jacques Derrida gave a talk at Stanford that, if memory serves me correctly, was entitled "The Nature of the Profession." Needless to say, he was not talking about IT. However, his exploration of the academic profession (to the extent that I was able to understand it, no easy matter when trying to deal with a Derrida text in "real time") struck me as relevant to the technical world as to his own philosophical and literary domains. With his gift for trying to tease meaning out of the words we use, he left me with a feeling that his major point was our failure to confront one key question regarding the nature of professional behavior: What is the "professional" trying to profess to whom?

Back when the ink was barely dry on my PhD diploma and I was just beginning to hone my polemical skills, I took great interest in the literature that was accumulating in the name of "software engineering." My polemical conclusion at the time was that "computer science" was a smoke-screen to justify creating new academic positions and that, if software development was to "make it" as a profession, it would do so in an environment of apprenticeship, rather than the environment of the college or university. I then admitted that my proposal would most likely be trashed, just because "Master Programmer" would never command the same social respect as "Professor of Computer Science."

I am not sure how much respect "Professor of Computer Science" commands these days; but "Master Programmer" is still out of fashion, perhaps because it has no place on the "career path" that leads to a Chief Information Officer or a Chief Knowledge (shudder) Officer. Nevertheless, even if most of the IT world has chosen to ignore it, it continues to haunt me, now drawing strength from Derrida's question, which may have just originated from playing around with a noun. My point is that, when we start playing fast and loose in our conversations about ROI, we seem to lose sight on the fact that the "investment" is basically a commitment of resources to some "community of professionals;" but that investment is made by investors (call them budget planners, if you prefer) who have a very poor (if any) understanding of what those professionals profess! When he wrote Up the Organization (back before most of my readers were born, I suppose), Robert Townsend called these "professionals" high priests, voice the frustration that just about every senior executive had with the IT department of his (not very many "hers" in those days) enterprise.

These days, as I tried to point out yesterday, we are beginning to recognize that rendering a service differs from producing a widget in some major qualitative ways, even if we cannot always express clearly what those ways are. Continuing in my polemical tradition, yesterday's argument departed from my previous professional framework of the "Master Programmer" and instead explored the proposition that IT management be budgeted as part of Site Services. Put another way, what the IT professional professes is not that different from what the plumber who unclogs the toilets professes; they just render their services over different artifacts!

Is this undermining the identity of the IT profession? As I suggested yesterday, it certainly involved thinking out of a box that most IT people would have preferred to let sit just where it is. However, in a broader sense, that box is the box of the overall world of work; and it is that broader world that demands more scrutiny, particularly where real-world questions of "investment" are concerned. When Derrida chose to talk about "the profession," he exposed just how sloppy we all were every time we invoked that noun (just as I have explored the sloppiness in our use of the noun "content"). His strategy was to get beyond sloppy thinking by stripping the word down to its bare essentials, confronting us with what it was really saying. My argument is that he did not go far enough. Having broken the ground with the noun "profession," it is now time for us to take on the verb "work." It will not be easy; but, unless we are up to the task, the very ways in which money is exchanged over what we do may spiral into meaninglessness as we weave more and more "fictions of convenience" around the investments we make. On the other hand, if we do rise to the occasion, we may also finally resolve the question of professional identity as a corollary of the proposition that "you are what you do."

Mopping up the Bits

JP Rangaswami's latest agonizing over at confused of calcutta seems to be raking up the familiar coals of the value of IT to the firm or, more specifically, the return on the firm's investment (ROI) in its IT budget. As Leporello sings in the second act of Don Giovanni, "Questa poi la conosco pur troppo." I know this bit all too well, but I was not prepared for David Butler's attempt to invoke a metaphor for how thoughts about IT may be changing:

A similar transformation has taken place in literary criticism, where canonical Leavisite judgments have given to way to Iser and reader response theory. The overthrow of supposedly authoritative doctrine.

I like David’s literary metaphor because it provides an interesting lens for viewing the distinction between product economy and service economy. One of the key problems is that all of the that JP raised in his "musings" were about production, which implies that we are talking about products. Indeed, the very ROI model is product-oriented: If I lay out X dollars today to purchase widget W, then can I measure how much richer I shall be after, say, a year’s time than I would have been had I not purchased W? There are probably plenty of widgets that can be subjected to that kind of reasoning, but I do not think they account for a substantial portion of the IT economy.

So let us consider a modest proposal (in the Swiftest sense of the word): The proper place for IT management is under Site Services! (Before everyone gets indignant about “professional values,” one of my friends from the UK told me that, during the Second World War, the shortage of medical help was so drastic that the military did its own training for emergency medical services; and, unless I am mistaken, the best trainees were the ones who had experience as garage mechanics. So let’s talk about the work, rather than the masks!) Now I have to confess that I have no idea how any large business budgets for Site Services and even less idea of whether the corporate bean counters even ask about the return on those particular expenditures; but I think there may be a useful object lesson there, even if it is not a very dignified one.

To think out of the box, you have to get out of the box. I have yet to encounter anyone involved with Site Services at the “CxO” level (for the usual values of x: I, K, F, E, etc.). Yet the “value that matters” from IT, whether internally or externally, keeps coming back to rendering or facilitating services; and Site Services tends to be the only part of the budget systematically examined in terms of paying for services rendered.

This is why we should examine that literary metaphor, at least in passing. Leavisite criticism concentrates on the text as product, as an object for evaluation. Iser introduced the idea of reading as a relationship between author and reader (which may even extend beyond completing the reading of any particular text). Leave it to a good literary critic to understand a service relationship better than the economists and technicians!

Things are Still Black and White at Google

Google seems to have joined Fidelity and Berkshire Hathaway in addressing the question of what happens when shareholders discover their social conscience. According to Sumner Lemon of IDG News Service, whose report appeared on the InfoWorld Web site, the annual meeting will include a vote on "a proposal that would require the company to legally resist government censorship efforts and to notify users when the company is required by governments to censor search results." As may be guessed, this proposal originated with shareholders:

The proposal was submitted by New York City's Office of the Comptroller, which helps oversee the New York City Employees’ Retirement System, the New York City Teachers’ Retirement System, the New York City Police Pension Fund, and the New York City Fire Department Pension Fund, and is a custodian of the New York City Board of Education Retirement System.

Combined, these funds hold 486,617 shares of Google stock, a stake worth about $228.2 million.

However, if we are to go by Lemon's report, Eric Schmidt does not share Warren Buffett's taste for open debate:

Censorship has been a sore point for Google. The company -- which uses "don't be evil" as its corporate mantra -- was widely criticized last year for launching a Chinese search engine that censored results. defense of the company's decision to launch the Google.cn search engine, Chairman and CEO Eric Schmidt said the company had weighed the pros and cons of censorship.

"We concluded that although we weren't wild about the restrictions, it was even worse to not try to serve those users at all," Schmidt said, speaking at the 2006 World Economic Forum (WEF) in Davos, Switzerland. "We actually did an evil scale and decided not to serve at all was worse evil."

So, apparently, Google makes their ethical decisions on the basis of an "evil scale," whose computations are about as transparent as those used by the Motion Picture Association of America when it comes to assigning film ratings. This may yet make this week's Chutzpah of the Week award; but the week is still young (not to mention lively). I still subscribe to the principle behind the title of a post I wrote back in March: "If You Reduce it All to a Single Number, that Number is Almost Certainly Wrong!" I have derived more than a little impish pleasure in pointing out what happens when Schmidt's tendency to reduce everything to algorithms bumps into the subtleties of the real world, but it would probably be too much to suggest that Schmidt might consider looking to Buffett as a new role model!