Tuesday, February 10, 2009

Psychos Amongst Us!

For the last several months, the sordid tales of Wall Street's greed and deception have read like the story line from a riveting suspense thriller. But the most recent tales are so unbelievably gruesome that they resemble something more macabre, like the story line from a documentary about Jeffrey Dahmer or John Wayne Gacy.
Each subsequent act is more grisly and disturbing than the one before. So as the body count rises, and Lower Manhattan becomes a vast crime scene, your editors become increasingly fearful of leaving through their Wall Street Journals at night, even with the doors locked and all the lights on. The news is simply too terrifying. Even more terrifying is the fact that financial predators continue to roam freely among us and continue to occupy positions of power.
Late last week, for example, we learned that AIG, Citigroup and several other struggling financial institutions duped the U.S. government out of billions of dollars, even as the government was trying to rescue them.
According to a report from the Congressional Oversight Panel, the U.S. Treasury overpaid by about $78 billion for toxic assets from American banks. "The report showed," a Reuters news story relates, "that the Treasury got the worst [of its many bad deals] on second-round investments in American International Group for $40 billion and Citigroup for $20 billion under special aid programs tailored for the two institutions. For each $100 spent on these two companies, the Treasury received securities worth $41."
In other words, for those readers who do not have an abacus handy, taxpayers lost $35.4 billion dollars the second they drove their toxic securities off the lot at AIG and Citigroup.
Who do you suppose would have had the best idea about the true value of the securities the government purchased from AIG? The government employees who purchased them or the sellers at AIG? We'll go out on a limb here and guess that the folks at AIG knew better.
So if the sellers had an inkling that the assets were worth far less than the government was paying, didn't the sellers also have an obligation to divulge that information to the government?
And since the sellers at AIG did not divulge accurate values to the government, didn't the sellers commit a kind of fraud? And if they did commit a kind of fraud, don't they also deserve a kind of prison sentence?
But let's not rush to judgment. If AIG executives legitimately had no idea that the prices the government was paying for AIG's securities were light-years away from real-world prices, they would not have been guilty of fraud. Instead, the executives would have been guilty of extreme incompetence…again.
Criminal or moronic. It's one or the other. Either way, they deserve dismissal.
The chilling storyline that is unfolding from Wall Street's corner offices prompts an obvious question that never seems to produce the obvious answer. Why does the government conduct bailouts at the top of America's socio-economic pyramid, where the perpetrators of the crisis reside, rather then at the bottom of the pyramid, where the victims reside? Why, in other words, do we taxpayers continue to throw good money after bad?
An alarming report by Mark Pittman and Bob Ivry of Bloomberg News emphasizes the point.
"The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed," the Bloomberg duo reveal… These enormous pledges, Pittman and Ivry point out, would almost be enough to "pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve."
Despite this deluge of bailouts and guarantees that has rained down upon American financial institutions, the economy continues to atrophy and the finance sector remains comatose. So why continue the ruse? Why not squander taxpayer money to help families stay in their homes, rather than to help psychopaths stay in their Armani suits?
Maybe its time to try something different, like revising the most popular destinations for corporate retreats from Aspen and St. Barts to Sing Sing and San Quentin. But lest you think we are kicking America's corporate chieftains while they are down – or as close to down as we have seen them in a long time, which is actually not very down at all – we would remind you that your editors also kicked the corporate chieftains (often) while they were riding high.
Nearly four years ago, we remarked:
"A corporate culture of well-mannered avarice restrains the mighty American economy. Many public companies labor under a Soviet-style central planning - the sort of planning that arranges things very nicely for the planners themselves, but much less well for the proletariat…
"'In 2003, the ratio between CEO Pay and worker pay reached 301 to 1, up from 282 to 1 in 2002' according to a report from United for a Fair Economy. 'If the minimum wage had increased as quickly as CEO pay has since 1990, it would today be $15.76 per hour, rather than the current $5.15 per hour.' [Editor's note: United for a Fair Economy now reports that CEO pay has soared to 344 times that of hourly workers.]
"'By any standard, many of today's executive compensation packages are excessive,' BusinessWeek asserts. 'Too often, directors have awarded compensation packages that go well beyond what is required to attract and retain executives and have rewarded even poorly performing CEOs...Moreover, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company, its shareholders and employees.'"
Shortly after airing these remarks, we followed up with a column entitled "Pinstriped Psychopaths." Regrettably, the observations within that column proved to be much more prescient and relevant than we could have ever imagined

Pinstriped Psychopaths, Revisited

By Eric J. Fry
Some psychopaths occupy a prison cell. Others occupy a corner office. Both are dangerous.
Psychopaths possess a profound lack of empathy. They use other people callously and remorselessly for their own ends. Psychopathic CEOs are no different. By advancing their own interests, with little regard for the agony they might inflict on others, they jeopardize the welfare of employees and investors alike.
In short, psychopathy is bad business.
It's true that heartless managers can achieve statistically heroic corporate triumphs. But it is also true that the garlands of such victories often contain the pink slips (and sufferings) of thousands of employees.
But before we proceed to condemn America's self-serving CEOs, allow us to give credit where credit is due, both to Prof. Robert Hare for linking psychopathy to corporate behavior and to Alan Deutscheman for explaining the topic in a fascinating essay.
"One day in 2002," Mr. Deutscheman begins, "a 71-year-old professor emeritus from the University of British Columbia, Robert Hare, gave a talk on psychopathy to about 150 police and law-enforcement officials. He was a legendary figure to that crowd. The FBI and the British justice system had long relied on his advice.
"According to the Canadian Press and Toronto Sun reporters who rescued the moment from obscurity, Hare began by talking about Mafia hit men and sex offenders, whose photos were projected on a large screen behind him. But then those images were replaced by pictures of top executives from WorldCom, which had just declared bankruptcy, and Enron, which imploded only months earlier."
"These are callous, cold-blooded individuals," Hare scowled. "They don't care that you have thoughts and feelings. They have no sense of guilt or remorse...I always said that if I wasn't studying psychopaths in prison, I'd do it at the stock exchange."
Collectively, corporate psychopaths inflict pain on hundreds of thousands – if not millions – of employees and shareholders. The senseless sufferings include lost livelihoods, lost life savings and sometimes even broken families or suicides.
And all the while that these CEOs sow agony, they reap riches for themselves.
In 2004 the CEOs of 179 major companies were paid an average of $9.84 million, up 12 percent from 2003, according to a survey by Pearl Meyer & Partners. By contrast, average labor compensation rose only 4.5 percent. (Unless a guy can hit a baseball 400 feet, or create misogynistic rap lyrics, he doesn't deserve that kind of money!)
But these highly compensated – and sometimes brutal – corporate executives, as implements of financial Darwinism, can produce a greater good, according to Robert J. Samuelson in a recent article for the Washington Post. "The obsessive drive to improve profits, though cold-blooded, also creates often-overlooked social benefits," he asserts. "It's not simply that growing profits bolster the stock market or finance new investment. The broader point is that advancing productivity - a fancy term for efficiency and a byproduct of the quest for profits - is the wellspring of higher living standards."
Maybe so. Or maybe we have simply baptized a social evil, in the process canonizing villains. There is a very fine line between "creative destruction" and creative annihilation. But morality is not our beat here at the Rude Awakening. We, too, pursue a profit motive that is morally ambiguous.
But even from a rabidly capitalistic perspective, investing in psychopathic management can be very bad business. Folks like Enron's Andrew Fastow, Sunbeam's "Chainsaw" Al Dunlap and Worldcom's Bernie Ebbers have demonstrated the destructive capacity of corporate psychopathy.
When in doubt, therefore, the prudent investor might opt to invest in companies that do NOT promote psychopaths to positions of influence.
Given the power that CEOs wield, Prof. Hare suggests that we screen them for psychopathic behavior. "Why wouldn't we want to screen them?" he asks. "We screen police officers, teachers. Why not people who are going to handle billions of dollars?"
The professor may have a point. Several big-name CEOs would score "mildly psychopathic" on Hare's corporate Psychopathy Checklist, according to Deutschman.
"'Chainsaw' Al Dunlap [would] score impressively," Deutschman relates. "What do you say about a guy who didn't attend his own parents' funerals? He allegedly threatened his first wife with guns and knives. She charged that he left her with no food and no access to their money while he was away for days. His divorce was granted on grounds of 'extreme cruelty.' That's the characteristic that endeared him to Wall Street, which applauded when he fired 11,000 workers at Scott Paper, then another 6,000 (half the labor force) at Sunbeam...His plant closings kept up his reputation for ruthlessness but made no sense economically, and Sunbeam's financial gains were really the result of Dunlap's alleged book cooking."
We would not be opposed to "CEO screening," but we'd prefer to allow market forces to eradicate the scoundrels. Specifically, we'd prefer that the lessons of the past govern the investor behavior of the future. Now that we have observed the downside of corporate psychopathy, we individual investors should have learned to avoid buying into companies run by self-serving lunatics.
We cannot always know, of course, who is psychopathic and who is merely "tough." But perhaps the time has come to attempt to discern the difference. For too long, we have revered executives who seemed charismatic, visionary, and tough...as long as they were lifting profits and share prices. We did not care about mass job layoffs, provider that they occurred as remotely and silently as a lethal injection
"We were willing to overlook the fact that CEOs could also be callous, conning, manipulative, deceitful, verbally and psychologically abusive, remorseless, exploitative, self-delusional, irresponsible, and megalomaniacal," Deutschman sums up.
"So we colluded in the elevation of leaders who were sadly insensitive to hurting others and society at large."
But we individual investors seem to be repenting of our complicity. In general, we no longer revere "tough CEOs," and we no longer look the other way while psychopathic corporate managers abuse the companies they purport to lead. Morgan Stanley's Philip Purcell was recently "shown the door," mostly because he excelled at producing vitriol, rather then profitability. We will not miss Philip J. Purcell, and neither will Morgan Stanley Deane Whitter's shareholders.
Psychopathy is destructive, no matter whether it roams the back streets or roams on Wall Street.

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