Uncle Warren Explains It All to You

“Sure, sure.”

— Sidney J. Mussburger, The Hudsucker Proxy

Apparently some doddering old fart in Omaha, Nebraska published a celebratory letter yesterday in connection with an obscure anniversary some of you might have heard about. Something to do with a mid-range furniture store or failed textile mill or something. Anyway, I felt compelled to read it, if only because every financial pundit in the Western Hemisphere has been recommending its salutary virtues to me with a fervor approaching the evangelical. Personally, I found it more hokey and self-congratulatory than illuminating, but then again I tend to prefer my moral fiber to come unencumbered by six cups of refined sugar and smug self satisfaction per serving. I know, I know: I am downright un-American.

If you care about the content of this man’s nattering—and the compl(i/e)mentary nattering of his partner in cast iron cheer—I would refer you to Matt Levine, who offered a very serviceable summary unburdened by the usual encomia breathlessly showered on this duo by all and sundry. He points out that the success of the business purchasing part of this entity can be neatly reduced to the skill with which the principal buys and sells said businesses, and not hands on management and supervision thereof, which said demiurge studiously avoids. This strikes me as essentially correct. He also calls attention to an aspect of the jolly old elf’s behavior that tends to be overlooked by his cheerleaders: he is a ruthless allocator of the bounteous capital at his command. Far from his image as a genial rich uncle offering cozy and undemanding shelter from the withering blasts of shareholder capitalism to skittish families and corporate management teams in search of a few shekels to renovate their yachts, Mr. Buffett drives a hard bargain going in and, in the event the bloom comes off the rose, delivers an even harder kick in the pants going out.

Warren buys cheap, and then he owns your ass in perpetuity, unless he decides to dump you. Which is just fine, by the way: it’s what his shareholders want him to do, and he has been very successful at it. It just amuses me this incontrovertible characterization seems to elude almost everybody who has gushed about him in the past.

* * *Aaannnyhoo, Warren Buffett is a serial acquirer of companies, inter alia, and he is indisputably good at it. And this explains (if does not condone) the snarky barbs he sends my direction, railing against investment bankers, to which my response is the entire point of this peroration. Now everybody knows, your defensive correspondent included, that nobody likes investment bankers, so I do not anticipate my remarks will undermine the regard in which the Great Man is held by anybody. Nor do I begrudge a beloved financial celebrity and multibillionaire a little fun in kicking the mangy village cur everybody hates, but I do hope to persuade at least a few of you that Mr. Buffett’s critique of my industry is not disinterested.

Uncle Warren’s critiques of investment bankers are scattered throughout his missive, but probably the highest concentration is located in his section on Berkshire Hathaway as a conglomerate, starting on page 29. The money shot, so to speak, is concentrated on pages 31–32:

Berkshire has one further advantage that has become increasingly important over the years: We are now the home of choice for the owners and managers of many outstanding businesses.

Families that own successful businesses have multiple options when they contemplate sale. Frequently, the best decision is to do nothing. There are worse things in life than having a prosperous business that one understands well. But sitting tight is seldom recommended by Wall Street. (Don’t ask the barber whether you need a haircut.)

When one part of a family wishes to sell while others wish to continue, a public offering often makes sense. But, when owners wish to cash out entirely, they usually consider one of two paths.

The first is sale to a competitor who is salivating at the possibility of wringing “synergies” from the combining of the two companies. This buyer invariably contemplates getting rid of large numbers of the seller’s associates, the very people who have helped the owner build his business. A caring owner, however – and there are plenty of them – usually does not want to leave his long-time associates sadly singing the old country song: “She got the goldmine, I got the shaft.”

The second choice for sellers is the Wall Street buyer. For some years, these purchasers accurately called themselves “leveraged buyout firms.” When that term got a bad name in the early 1990s – remember RJR and Barbarians at the Gate? – these buyers hastily relabeled themselves “private-equity.”

The name may have changed but that was all: Equity is dramatically reduced and debt is piled on in virtually all private-equity purchases. Indeed, the amount that a private-equity purchaser offers to the seller is in part determined by the buyer assessing the maximum amount of debt that can be placed on the acquired company.

Later, if things go well and equity begins to build, leveraged buy-out shops will often seek to re-leverage with new borrowings. They then typically use part of the proceeds to pay a huge dividend that drives equity sharply downward, sometimes even to a negative figure.

In truth, “equity” is a dirty word for many private-equity buyers; what they love is debt. And, because debt is currently so inexpensive, these buyers can frequently pay top dollar. Later, the business will be resold, often to another leveraged buyer. In effect, the business becomes a piece of merchandise.

Berkshire offers a third choice to the business owner who wishes to sell: a permanent home, in which the company’s people and culture will be retained (though, occasionally, management changes will be needed). Beyond that, any business we acquire dramatically increases its financial strength and ability to grow. Its days of dealing with banks and Wall Street analysts are also forever ended.

Some sellers don’t care about these matters. But, when sellers do, Berkshire does not have a lot of competition.

This really is masterful trolling. In one sequence, investment bankers, corporate acquirers, and private equity firms are all depicted by the Oracle of Omaha as modern day Snidely Whiplashes, evilly twirling their mustaches as they sell unnecessary transactions, “invariably” fire trusted and loyal employees, and repeatedly ravage the sanctity and probity of the acquired company’s balance sheet with dat ole debbil Debt. In contrast, Berkshire Hathaway is characterized as a veritable lavender-scented bosom of motherly protection and comfort.

Old Warren knows his audience, and his audience in this section is family-owned businesses or professional managers of corporate subsidiaries who aspire to get off the big company hamster wheel. The former, in particular, tend to be less sophisticated when it comes to matters financial, and hence are ripe targets for terrifying with images of slick, rapacious professional rapscallions just waiting for a chance to spring upon Aunt May and ravish her repeatedly over a cracker barrel. But of course most of it is tendentious bullshit.


* * *I will not try your patience or mine by responding to each attack detailed above. Instead, I will only note that Warren is so eager to characterize non-conglomerate corporate acquirers and private equity firms in so unflattering a light because they are his competitors for buying companies. Likewise, he takes a swipe at my profession because our job and livelihood is attempting to get the best possible deal for our clients who are sellers. An important part of this for most sellers, of course, is maximizing the monetary value they receive for their companies, subject to other interests and constraints. And because Berkshire Hathaway brings no revenue or cost synergies to the table, unlike non-conglomerate corporate buyers, and can be disadvantaged against financial sponsor buyers due to their ability to pay with very cheap, tax deductible debt, Warren is often the least attractive buyer in terms of price offered. Not all potential sellers care only about receiving the highest possible price, but almost all of them are interested in price to some degree, so it is our duty as sell-side representatives to make this dynamic clear to our client. This, I am confident, does not please the Great Man.

This is also why Mr. Buffett refuses to participate in auctions for companies, since auctions are usually recommended and run by investment bankers for price discovery purposes and tend to result in higher realized prices than proprietary negotiations with one buyer. As a sophisticated serial acquirer of businesses, Warren would much prefer to deal with wet behind the ears families lacking professional representation, since the presence of the latter can end up making the terms he has to offer, if he can bring the seller to the finish line in the first place, much less attractive to Berkshire Hathaway and its shareholders than might otherwise happen. A professional advisor, even if her client decides he wants to join the warm embrace of Mother Buffett at a lower price than he could achieve in a more thorough market test with different kinds of buyers, can also help by pointing out potential pitfalls and precedents that might attend such a decision.

Personally, I thought two stories Mr. Buffett related at separate points in his letter were revealing in ways highly pertinent to a client considering selling his business to him. In the first, Warren proudly related how he beat down the family owners of See’s Candy in 1972 from their asking price of $30 million to $25 million. He later revealed that See’s subsequently generated over $1.9 billion in pre-tax earnings, cash flow which Warren diverted from growing the candy business to buy unrelated portfolio companies. It made me wonder what the poor saps in the See’s family did with what was left of the $25 million in cash Warren gave them after they paid taxes. I sure hope they used some of it to buy Berkshire Hathaway stock, because it’s undeniably true that BRK shareholders (including Mr. Buffett) are the only ones who got a good deal from that transaction. The second story, which represents a mirror image to See’s, is Dexter Shoe, in which Warren complained about buying a doomed shoe company for $433 million in 1993 for which he paid the owners BRK shares worth $5.7 billion today. Notwithstanding any present value advantage to a tax deferred sale of your company for Berkshire Hathaway stock instead of cash (consult your tax advisor), it’s clear the preferred currency for any seller to the Sage of Omaha should be BRK stock, since that is the one currency he prefers to keep to himself.

Anyway, Mr. Buffett is, among his other talents, a serial buyer of companies. Unlike the other big class of professional company buyers, however—private equity companies, who tolerate investment bankers because they need us to help finance and eventually sell their purchases—Mr. Buffett needs no help financing and never intends to sell the companies he buys. Accordingly, he despises investment bankers and employs his considerable folksy charm to scare potential business sellers away from using us for the plain and simple reason that we make his job harder and more expensive. For sellers of companies, investment banks level the playing field.

We all know Warren Buffett is a very clever, very successful investor. Warren Buffett hates level playing fields.

Related reading:
Warren Buffett and Charlie Munger, 2014 Annual Letter to the Shareholders of Berkshire Hathaway Inc. (February 28, 2015)
Matt Levine, Warren Buffett Explains His Cozy Embrace (Bloomberg View, February 28, 2015)

© 2015 The Epicurean Dealmaker. All rights reserved.

Goldman Sachs Doesn’t Care What You Think

A cat may look at a king.

— English proverb

So, in an apparent effort to raise its rank in the Most Recognized Polling Firm in America Sweepstakes, Harris Poll recently published a survey of 27,278 individuals across this fine land to determine America’s 100 most- and least-loved corporations. Bloomberg Business subsequently took time out of its busy day to gleefully report that Goldman Sachs, investment bank and über squid of the global financial markets, finished dead last:

People hate Goldman Sachs more than oil spills and the Koch brothers.

Well, far be it for me to rain on Bloomberg’s and Harris Poll’s parade, but I am here to tell you children, with complete confidence, that Goldman Sachs just doesn’t care what you think.

Now this does not mean there isn’t some poor (relatively) underpaid slob scurrying around Goldman Sachs’ Public Relations Department pulling out his or her hair, fretting that you and your Aunt Millie in Rochester think poorly of his or her employer. After all, big corporations like Goldman Sachs have to employ people like that whose job it is to care, if only for appearances’ sake. Generally conveying to the public at large that you don’t give a fuck tends not to play well and can introduce all sorts of petty annoyances and frictions in the conduct of one’s business, so spending a few otherwise forgettable millions on PR can work out to be a good investment.¹ This is common knowledge.

But deep in the bowels of Goldman’s money spinning machine and high in the corridors of the executive suite at its West Street headquarters, you may safely assume the people who matter do not give a flying fuck in a rolling donut that you don’t like them. Sorry to be harsh, but there it is.

* * *

Now I realize such indifference to negative public opinion may strike you as odd, given that our culture’s highest aspiration seems to be getting Kim Kardashian to “like” your Facebook post gushing over her latest dress, so I am happy to take a few hours from my Saturday morning to explain.

First of all, of course, there is the fact that Goldman Sachs does not sell soda pop. The Bloomberg article ventures:

A bad reputation can affect a company’s bottom line. Harris Poll says 36 percent of adults have decided not to support a business because of something questionable they learned about its conduct. And more than half of consumers now do some research on the businesses they’ve either heard about or are about to spend money on. The findings suggest that companies aren’t as immune from moral blunders—be it expired meat or toxic mortgages—as they once might have been. “The American public strongly believes reputation matters and acts on that belief,” said Carol Gstalder, Harris Poll’s reputation and public relations practice leader.

How, pray tell, do you and your Aunt Millie intend to act on your disgust with Goldman? Do you intend to boycott their supermarkets, buy your cell phone from another manufacturer, or drive a mile out of your way to get gas from a less despicable energy company? Oh, I know: you’ll refuse to invest in their mutual funds or use their mobile trading app to make $9.99 option trades, right? Fat lot of harm that’ll do Lloyd Blankfein: Goldman isn’t in any of those businesses. Goldman Sachs operates in wholesale finance—buying and selling securities and other financial instruments across global markets on behalf of itself and institutional clients, advising on mergers and acquisitions for corporations and private equity firms, and underwriting securities for issuers who want to raise money from institutional investors.² They wouldn’t recognize you or your Aunt Millie if they ran you over in a Wegman’s parking lot. You—America’s vaunted consumers, Harris Poll’s respondents—are not Goldman Sachs’ clients. Your principled pocketbook wields no power over them.

Furthermore, among Goldman Sachs’ real clients—hedge funds, large institutional investors, corporations, and private equity firms—I would suggest that the Squid’s slightly salty reputation in society at large may actually act to attract and retain the wholesale business it seeks to conduct. For one thing, many of these clients either have or are not unfamiliar with slightly disreputable public reputations themselves, and they understand that the criteria which the hoi polloi use to judge large, powerful organizations harshly are, in many if not most respects, completely beside the point. Goldman Sachs is where it is—and, frankly, recognizable to Harris Poll’s respondents—because it is and has been extremely successful at what it does. Clients who can choose tend to work with powerful, successful firms who can serve their needs effectively, whether it is raising capital, buying or selling a company, or helping them trade their investment portfolio. Success breeds success in investment banking, and choosy clients want to work with a winner. To hell with its reputation.

There is more. Goldman Sachs’ clients also understand that the markets and services in which it operates are tough, unforgiving, sharp-elbowed places. Having a bad reputation—scary, ruthless, willing to throw your weight around—is exactly the kind of banker many (most?) clients want at their side. This is the very same sort of thinking that compels common folk like us to hire flesh-eating lawyers when we get into a legal dispute, notwithstanding the fact lawyers’ reputation for probity has ranked somewhat beneath pond scum for, oh, approximately forever. Nobody wants to bring Mother Theresa to a knife fight.

Lastly, you may be surprised to learn Goldman’s appeal even extends to those institutional customers who take the position of counterparties with the Squid, rather than as clients. These are firms which trade with Goldman as principal or which purchase its structured products like CDOs and other nasty items and whose interests, you would correctly surmise, are not at all aligned with those of the Great Blue Beast. But they still do business with Goldman because it is the axe (best source of opportunities) in certain areas, because it is extremely well connected in the markets, and because it comes up with some nifty investment products that investors want to own or trade. Even during the height of the Financial Crisis, when Goldman’s public reputation for probity was in tatters over the Abacus trades and suchlike, intrepid reporters could find almost no-one in the markets who would admit they would not trade with Lloyd’s cephalopods. Goldman’s reported financial results since have demonstrated beyond doubt that it remains one of the leading trading houses in the world, notwithstanding (because of?) its fearsome reputation.

So much for consumer boycotts.

* * *

Bloomberg also advances the notion that Goldman’s naughty public reputation might degrade its ability to attract and retain bright young squids-to-be. This is more plausible, since I think we can all agree little Muffy and Bif do not want—other things being equal—to spend Christmas vacation watching Aunt Millie’s upper lip wrinkle in disgust whenever they mention their summer internship at 200 West Street. A firm’s public reputation does matter to potential new recruits, simply because it is one of the very few things most young aspirants actually know about a firm or the business it conducts before they actually start to work there.³ (I’m sorry, children: most of you graduate college without a clue.) Surely a scarlet letter from the Department of Public Opinion will scare away some of the Best and Brightest young snowflakes from the Squid’s gaping maw?

Well, let’s take a look at the data, helpfully released five days later on that very same Bloomberg Business website wherein the poll piece appeared, no doubt courtesy of the follicly-challenged Goldman PR factotum we speculated on earlier:

Goldman Sachs Group Inc. hired just 3 percent of more than 267,000 job applicants last year, as the firm told investors it’s still the top destination for bankers.

and

Fortune magazine named the New York-based bank one of the 100 best companies to work for, a citation Goldman Sachs has received every year since the list began in 1984, according to [CEO Lloyd] Blankfein’s presentation.

Huh. So, not so bad then.

Sure, there may be a few eager young beavers sporting brilliance, drive, and impeccable credentials who decline to investigate career paths to filthy lucre at the Squid, but I doubt anyone will notice. As I have banged on about repeatedly in these pages before, investment banks do not really need the Best and Brightest. (Whoever they are supposed to be. Also, who judges?) We just need smart-enough, driven, ambitious grinders in sufficient quantities to lubricate our millstones with their blood and a significantly smaller number thereof who discover or develop a talent and taste for the business to stay on and lead the troops. Let the will-o-the-wisp starfuckers—those pathetic creatures who follow every social trend pointing to the conventionally agreed upon “best” college/job/spouse/mobile dating app—enjoy their indentured servitude at Facebook, Google, and Uber. Goldman Sachs and its competitors will have plenty of talented youngsters to choose from.

Besides, as Lloyd’s PR rep pointed out, they don’t need that many:

The firm said in May 2013 that it had 17,000 applicants for 350 spots in a summer analyst program in its investment-banking division.

* * *

So let’s recap. Goldman Sachs is ranked dead last in reputation among the 100 best-known companies in America by people who do not buy its products or services and, more likely than not, don’t even know what it does. But Goldman Sachs is also ranked among the top 100 best employers for people who do add value to the firm by joining it and slaving in its salt mines. That looks like a pretty comfortable calculus to me. This is not what keeps Lloyd Blankfein up at night.

However, there is a third force at work in Lloyd’s world that does nag at his equanimity. A force which relies almost exclusively on the aggregated opinions of individuals who have little or no insight or knowledge to back them up. A force which makes enormous efforts to shape public opinion to advance their collective agendas and personal careers. A force which, while it understands that public opinion can be empty of reasoned judgment, easily swayed and manipulated by emotional appeals, and incapable of other than fickle attention, also knows that it can be shaped into a powerful force for change, good or bad. A force which empowers bureaucrats to harry and constrain banks like Goldman with the power of law.

This force, of course, comprises the politicians, who have languished at the bottom of public opinion polls themselves—below lawyers and pond scum—for longer than forever.

You can bet Senator Warren and her kind enjoyed that Harris Poll.

* * *
Disclosure: I do not now nor have I ever worked at Goldman Sachs, I have no financial interest, direct or indirect, in the firm or any of its securities, and I don’t really even have any friends there. Frequent readers of this jeremiad emporium will remember that I am of the firm and repeatedly expressed opinion that, while Goldman Sachs is amazingly successful and powerful as a firm, its members and employees are often underwhelming on an individual basis. I marvel—and, as a competitor bested by Goldman bankers many more times than I care to remember or relate, chafe—at its success and can only regret that I have not had such a powerful platform from which to ply my trade during my career. So, as much as it can be, you may take this defense as a disinterested one.

Related reading:
Akane Otani, America’s Most Loved and Most Hated Companies (Bloomberg Business, February 5, 2015)
Michael J. Moore, Goldman Sachs Hired 3% of 267,000 Job Applicants Last Year (Bloomberg Business, February 10, 2015)
The Fish Stinks from the Head (July 30, 2009) – Goldman Sachs’ culture and success

¹ In the good old days, Goldman did not agree with this sentiment. In the good old days, they employed Lucas van Praag. I miss the old bugger.
² Yes, it’s true that Goldman Sachs does offer wealth management and retail brokerage services to rich individuals and families, also, so they do have a presence in retail financial services. (It is not large in the context of Goldman’s revenues.) But I venture to guess that individuals and families with tens if not hundreds of millions of dollars under management with the Squid do not have quite the same consumer preferences as the rest of us poor slobs. If your Aunt Millie is loaded, maybe she will prove me wrong.
³ You can take my word for it that the reasons Goldman’s clients and counterparties do business with the firm are the same reasons the much smaller number of lateral hires and later-stage career recruits want to join it. Almost everybody wants to work for a winner, too.

© 2015 The Epicurean Dealmaker. All rights reserved.

Nerd Intersectionality

Infancy is not what it is cracked up to be. The child seems happy all the time to the adult, because the adult knows that the child is untouched by the real problems of life; if the adult were similarly untouched he is sure that he would be happy. But children, not knowing that they are having an easy time, have a good many hard times. Growing and learning and obeying the rules of their elders, of fighting against them, are not easy things to do. Adolescence is certainly far from a uniformly pleasant period. Early manhood might be the most glorious time of all were it not that the sheer excess of life and vigor gets a fellow into continual scrapes. Of middle age the best that can be said is that a middle aged person has likely learned how to have a little fun in spite of his troubles.

It is to old age that we look for reimbursement, the most of us. And most of us look in vain. For the most of us have been wrenched and racked, in one way or another, until old age is the most trying time of all.

— Don Marquis, “The Almost Perfect State”

I was browsing the online portal for the My Emotional Wounds Are Bigger Than Your Emotional Wounds Victims’ Society¹ this morning, O Dearly Beloved, when I encountered an essay by feminist firebrand Laurie Penny in which she took MIT Professor Scott Aaronson to task for justifying nerds’ insensitivity to male privilege in the technology industry. Notwithstanding some hyperbolic posturing about what Penny calls the “disaster of heterosexuality” [sic], it reads as a sensitive and revealing first person demolition of the notion that white male nerds faced some sort of unique hell growing up that can possibly justify their current behavior. I’ll let you go ahead and read it, if that’s your sort of thing.

If it is not, or you are back already, I would prefer to direct you to an earlier essay by computer nerd Pete Warden, cited approvingly by Penny and unfamiliar to me until now. In his essay, Warden, a die-hard, early adopter hacker type übernerd, correctly points out (in inimitable nerd fashion) that technology nerds, far from being the underdogs they so painfully remember being in their adolescence, are now Kings of the Hill:

We’re still behaving like the rebel alliance, but now we’re the Empire.

This is spot on. But then Warden goes and ruins the ride when he corrects Marc Andreessen’s assertion that nerds and bros are natural enemies with this:

Sure, we used to be picked on or ignored by the bro’s, but that was when we had no money or power. Now we have status, bro’s are happy to treat us as buddies instead of victims, to the point that we’re unlikely to think of them as bro’s. I’ve pitched most VC firms in the Valley at one time or another, and a lot of the partners come from business or finance backgrounds. There are nerds in there too of course, and they do control the culture, but they also get along perfectly well with the preppy MBAs. The same holds true across the whole tech industry – they might have tried to steal our lunch money twenty years ago, but now they’re quite happy running biz-dev while we do the engineering.

This is very muddled thinking as well as remarkably tone deaf observation as to what and who constitutes a “nerd” and a “bro” and the differences between them. But what should one expect from a nerd?²

* * *

Mr. Warden seems to identify the venture capitalists (“VCs”) and business development (“biz-dev”) colleagues he interacts with as bros because they have business or finance backgrounds, MBA degrees, and/or wear “preppy” clothes. This is just dumb. I have met a number of Silicon Valley venture capitalists and BD personnel over the years, and I can tell you from personal experience most of them would only come across as bros to someone who lives in a basement cave and thinks real women look and dress like Lara Croft in Tomb Raider. These people are as nerdy as they come. Sure, they prefer to geek out over cash flow statements and Definitive Purchase Agreements rather than hexadecimal code and API protocols, but geek out they do. They are just as scary smart, obsessive compulsive, and single minded as any computer hacker/programmer, and they tend to have the same awkward social skills as everyone else on the Asperger Syndrome spectrum they share with Mr. Warden and his peers. To the casual observer they may look and dress the same as a B– average fraternity brother from a state school, but they didn’t earn summa cum laude economics degrees from Stanford or the Ivy League, get Baker Scholarships at Harvard Business School, and claw their way into a partnership on Sand Hill Road from Morgan Stanley or Goldman Sachs because they liked to drink beer and flick bottle tops at computer science majors from the porch of their frat house.

Successful venture capitalists, private equity professionals, hedge fund managers, and investment bankers are as nerdy as they come. I mean, please: look at John Doerr, David Bonderman, Bill Ackman, and Lloyd Blankfein, for chrissakes. Those were the kids the football team beat up for lunch money in high school. Apart from shorter haircuts, plaid shirts, and an unfortunate predilection for chinos as casual wear, financial professionals share remarkably few of the features of true bro culture. In fact, you’re much more likely to find them running an ultramarathon or climbing Machu Picchu in their spare time than eating nachos on the couch in front of a football game. They are weird, they are driven, and they are the same awkward misfits who spent Saturday nights in high school doing extra credit calculus problem sets while the popular kids went out to drink beer and try to get laid. That is what I did, and I guarantee you it is what most of my colleagues and counterparts did too.

Now as is the case for all such qualities (and inconveniently for our current cultural obsession with identity politics), nerd-ness and bro-ness do not fall neatly within clearly identified boundaries of specified human communities. There are individual variations, there are community sub-groupings, and there are temporarily adopted behaviors that blur the picture. Within investment banking, for example, the tendency toward bro-ness tends to be larger in the capital markets division and, within that grouping, most strong among salesmen and traders. These are often the closest you will find to the backslapping, hail-fellow-well-met stereotype of good looking, easygoing bros who would be happy to watch football on TV instead of running another ultramarathon with that nut job client Ted from Citadel. But these folks have good degrees and sharp intelligence and nontraditional pastimes, too. The days of the high school graduate or C student on the trading floor are long gone. You’ll also find derivatives structurers within large bank capital markets divisions who I wager even Messrs. Warden and Andreessen would have a hard time differentiating from hardcore hackers and computer geeks. That is because that is exactly what they are, or were, before they donned the button-down and chinos uniform of their chosen career.

There is also, at junior levels, a lot of bro-ish posturing done by male investment bankers early in their careers when they are young, single, and so overworked they couldn’t spend all the money they make if they tried. In the boom years before the Crash, this often manifested itself in the desire to live the “models and bottles” lifestyle, where 23- and 24-year-old men went hunting for pretty women and expensive booze and mostly made obnoxious fools of themselves instead. (Of course that lifestyle—or, rather, the aspiration to that lifestyle which mostly generated exaggerated stories and outright lies—is long gone.) It still takes the form of the aggressive one-upmanship and macho dick measuring³ junior bankers haze each other with when they feel insecure, which is almost always. You only have to overhear this once, however, to realize it is nothing more than a bunch of awkward, self-conscious nerds who didn’t get laid enough in high school desperately trying to convince each other they did.

Of course, for some of us, this never changes.

* * *

Stepping back a little, I think I can assert without meaningful contradiction that, far from being limited to nerds or geeks or some other subculture, having a traumatic adolescence is almost universal. Everybody who makes their way through high school is, in some more or less meaningful way, faking it. Everybody wants to belong, be liked, fit in, and be popular. Everybody. It is human nature at that age, when we are still trying to define who we are. Why shouldn’t we look to our peers and popular culture for affirmation? But very few of us get it, to our satisfaction, so we channel our energy and ambition and hurt into schoolwork, or programming, or geeky hobbies instead. And many of us turn that sublimated effort into meaningful careers in geeky, nerdy fields like technology or finance, and find ourselves many years later, grown up, to be the socioeconomic successes we never dreamed we could be when we looked longingly at the cheerleaders and football players we could never have or be.

There is no cure for adolescence but to grow up. There is, however, a cure for adolescent trauma: get over it. And don’t use it as an excuse to oppress or traumatize others.

Unless, of course, you are Carl Icahn.

Related reading:
Laurie Penny, On Nerd Entitlement (New Statesman, December 29, 2014)
Pete Warden, Why nerd culture must die (Pete Warden’s Blog, October 5, 2014)
Taxonomy (January 14, 2007)

¹ Also known as the internet.
² Please, before you embarrass yourself, let me stop you before you argue there are very specific definitions for terms such as “nerd,” “geek,” “bro,” and the like. Really? You want to go there? Trust me: you don’t. Go back to arguing about lightsaber construction methods on the Star Wars wiki instead.
³ About pivot tables in Excel and PowerPoint formatting, no less. I ask you.

© 2015 The Epicurean Dealmaker. All rights reserved.

The Plural of Anecdote Is Bullet Point

Giovanni Tiepolo, The Glorification of the Barbaro Family, ca. 1750

Who have you offended, masters, that you are thus
bound to your answer? this learned constable is
too cunning to be understood: what’s your offence?

— William Shakespeare, Much Ado About Nothing

I suppose I should feel bad, Dear Readers, that Famous Economist and Man About Town Tyler Cowen had to interrupt his gustatory survey of Oaxacan tamale stands and their culinary influence on Ethiopian Yirgacheffe coffee growers recently in order to phone in a brief but blistering PowerPoint takedown of my recent critique of two paragraphs of his work. After all, who am I, an obscure, tendentious, financial parasite and peanut gallery denizen, to deprive the grateful masses of even one iota of Professor Cowen’s penetrating insight into all things economic, cultural, and quotidian? He is already famously cutting into his enormous backlog of polymathic munificence in order to mount a sustained, comprehensive attack on creeping inequality-ism being foisted upon an unwitting public by that current media darling and French Communist pest, Thomas Piketty. The last thing he needs is to take even ten minutes of his precious time to dash off crushing telegraphic responses to putzes like me. For shame, ED, for shame. Fie upon me.

But since he did, I suppose it would be the height of irresponsibility and moral turpitude for me not to reply, howsoever briefly I am able, in kind.¹ I wish for your benefit as well as mine, O Long-Suffering Readers, that I knew what the hell he was talking about.

* * *

Since Professor Cowen addresses my cheeky presumption with his famously Delphic and opaque bullet points, let me follow form:

1. He opens his piece with praise for my writing skill. Since this is a compliment, I should thank Professor Cowen, although I suspect it belongs rather more to a species of damning with faint praise—or praising with faint damns—than genuine appreciation, given what follows. Nevertheless, I will plumb the depths of my magnanimous soul and take it at face value. Thank you, Professor.

2. He blasts my piece as blinkered by my “framing of the problem in terms of inequality and inequality alone.” He claims I have, in his own scare quotes, “inequality on the brain.” This I find odd for two reasons:

3. One, given that my original response was to a two paragraph tangent in a lengthy review and critique by Dr. Cowen of Thomas Piketty’s Capital—a work the fundamental premise of which, arguable or not, seems to be universally agreed upon by everyone in Western Civilization and beyond except Tyler Cowen to be the history, causes, and effects of unequal distribution of wealth in capitalist society—I would pose the key question: What the fuck are we supposed to be talking about when we talk about Piketty? Isn’t that the entire point of the culture-wide discussion we seem to be having about this work? It’s like he blasted me for having Plato on the brain while discussing The Republic. I don’t get it.

4. Two, my original reading of the Tyler Cowen passage in question interpreted his remarks to say that certain 19th Century (primarily visual and literary) artists benefited and were able to pursue their work by virtue of inherited wealth or the support of bequests and wealthy family members. His “static blocks of wealth” promoted, in my terms, “cultural dynamism,” which, in the context of his remarks, seems to carry positive connotations, howsoever he fails to explain or describe what he means by it. He seems to chastise Piketty for overlooking that wealth can promote artistic and intellectual activity which enriches society at large. Upon careful rereading, I cannot perceive that my reading of this passage is notably idiosyncratic or egregiously wrong. And yet I challenged it, claiming, inter alia, that

• Cowen never defines what he means by the dynamism he claims for 19th Century European society, and how these artists and their like promoted it. Cultures can be rich, complex, and lasting without exhibiting qualities which the average person would claim to be “dynamic” (viz., Ancient Egypt). Slapping such a label on an entire century without deigning to justify it to the cheap seats is just sloppy argumentation.
  
• Cowen does not justify, by focusing on this particular period of French and European history—presumably to contradict Piketty’s negative characterization of the other socioeconomic effects of increased wealth inequality—why the wealth which purportedly funded these artists’ and writers’ cultural production was particularly notable or different from the sources of wealth and income in different periods of history, when wealth inequality was lower or higher, or why or indeed whether cultural production supported by other peoples’ money in 19th Century France was any more dynamic, complex, interesting, or long lasting than cultural production which has taken place in other, similar or very different (from a wealth inequality point of view) periods of history. (In contrast I claim that, compared to what came before and after, it was nothing unusually dynamic or distinctive from an artistic, literary, or cultural point of view.)
  
• Cowen does not even approach an acknowledgment of the key fact which I assert: that artists, writers, and other laborers in the mines of culture throughout history have almost always been reliant upon monetary patronage of some sort to fund their life and work. This is particularly true of visual artists, with which I am most familiar, and who from time immemorial have mostly carried on their trade in the service of kings, pharaohs, Popes, aristocrats, feudal lords, and other rich and powerful bigwigs who commissioned their work to glorify themselves and the sources of their socioeconomic power. I have no idea whence Professor Cowen derives the assertion my arguments are intemperate, wrong, doubtful, or exaggerated, and he makes no effort in turn to document this, other than to default to an argument from authority (his own, natch) based on five books he claims to have published on the subject. The one book he does cite directly—we may presume to most directly contradict my arguments—does nothing of the kind, arguing principally that market economies and their encouragement of popular culture have salutary effects on high culture. I did not think we were talking about markets, Professor Cowen. I thought we were talking about “static blocks of wealth.” Oops.
  

5. Oh, and while we’re at it, cooking is not an art. Period.

* * *

In fact, if I interpret the opacity of Dr. Cowen’s prose and arguments correctly, we do not now and did not then disagree on one fundamental point: historically, accumulated wealth—whether of rulers, family, or solicitous strangers—has been a huge support to the legions of fine artists, musicians, and writers, and intellectuals who have labored to enrich our culture. With extraordinarily few exceptions, artists have not been wealthy themselves, but rather have had to rely on the kindness of strangers and family to support them as they strive to produce meaningful art. (I am not talking about popular artists, who are another species entirely.)

But this, I would posit to you, is neither an indictment nor an endorsement of equal or unequal wealth distribution. It just is. This is the key point of my previous post, that fine art is fundamentally superfluous and irrelevant to the core activities and economic structures which drive a society. It is a parasite, a lichen or Spanish Moss which clings to the tree of society, lives off it and, if we spectators are lucky, makes the tree more attractive or at least picturesque, without killing it or stunting its growth. Artists will find a way to fund themselves in any society. If artists cannot support themselves, they will find someone else to do so, or they will give up their brushes and pens and get a real job. In many respects, it is easier to be an artist when there are lots of silly rich people around to fund your painting, poems, or plays. In many respects, it is better for culture if there are large, static blocks of concentrated wealth which can be tapped via flattery, boredom, vanity, guilt, or a sense of social gratitude or obligation to fund luxury activities like painting, sculpture, fine music, plays, and the like. Andrew Carnegie’s philanthropic legacy is just one example among many.

But I take exception to the argument, which I sense Professor Cowen is making, howsoever he would squirm to deny it,² that art and culture justify the existence of concentrated blocks of wealth; i.e., wealth inequality. I am a huge supporter of the arts, and I would fight hard to preserve their vitality and dynamism, even at the cost of many other valuable things, like improved economic security and opportunity for broader swathes of society than we seem to accommodate at present. But they must be weighed in the balance, and debated, with a clear eye to the facts, and without prejudging the outcome.

Overall, I think Dr. Cowen’s rebuttal is a good example of how easily and quickly one can go awry by an obsession with justifying the status quo by whatever means necessary. It also shows the drawbacks of a relative unfamiliarity with the actual arguments of your opponent, including for that matter the recent post by Yours Truly.

* * *

I trust Professor Cowen can now put the minor inconvenience of my interference behind him, and resume dazzling us with oracular pronouncements of exquisite incomprehensibility. I would not want to deprive my fellow members of society of this boundless font of cultural dynamism.

Related reading:
Tyler Cowen, 19th century inequality and the arts (Marginal Revolution, May 7, 2014)
Ozymandias at the Art Gallery (May 3, 2014)

¹ You know, of course, if you are regular readers of this site, how completely and utterly I will fail to do so. (Be brief, that is.)
² And if I have misread him, and he is not arguing this, I am arguing against those who would read his remarks to do so. It is not that hard to imagine.

© 2014 The Epicurean Dealmaker. All rights reserved.

Assume a Can Opener

Once upon a time, O Dearly Beloved, a cruise ship carrying a convention of scientists and social scientists collided somewhere in the South Pacific with a floating shipping container full of remaindered Greg Mankiw textbooks. The textbooks had been bound for the newly founded Jack Welch School of Neverending Business in Shenzhou before the container fell off a freighter during a storm. Sadly, the cruise ship foundered and sank to the bottom with almost all hands and passengers on board, with the exception of one physicist, one chemist, and four economists.

Being practical, quick-acting folk, the physicist and chemist salvaged a shrink wrapped pallet full of Principles of Economics (4th ed.) from the open container to float upon in the open sea, where they were shortly joined by one of the economists. The other three economists swam to another pallet floating nearby, which happened to contain Denver Broncos Super Bowl XLVIII Champion t-shirts, and were able to climb onto that. Eventually, the drifting current separated our two little bands of survivors, and a few days later they each washed up on small, isolated atolls about five miles apart.

Upon their atoll, as luck would have it, the three economists found a large cache of perfectly preserved canned food, left no doubt by local fishermen for just such an eventuality. Unfortunately, however, the fishermen had forgotten to provide can openers or indeed tools of any kind to open the food, and of course the survivors had carried nothing off the ship with them but their clothes. After considering the situation, the three economists agreed to separate and come up with solutions to their predicament which they could discuss and agree upon. The economists spent some time wandering the beach in thought. Then they reconvened to discuss their ideas.

The first economist stated that, based on his calculations, the joint probability of the three of them surviving the shipwreck, landing on a habitable atoll in the middle of thousands of square miles of empty ocean, and finding a cache of edible foodstuffs was so infinitesimal they might as well curl up and starve to death, content in the knowledge they had beaten the odds spectacularly so far. The second economist countered that, based on his proprietary DSGE model, the normalized incidence of unopened canned foodstuffs in an economy in equilibrium should comprise no more than 17.2% of all available consumables. He therefore proposed a thorough exploration of the 500 square meter atoll to find the remaining edibles—theoretically consisting of canned goods already opened and uncanned foods edible without the aid of openers—which his model predicted were just waiting to be discovered. The third economist demurred, contending that, even if they were able to find some means of opening and cooking the canned food, eventually the stores would run out and they would starve to death. He argued that expending tremendous amounts of effort trying to extend their lives in the face of certain death was foolish. Instead, he proposed the three spend their remaining days in relative ease and comfort, arguing about Paul Krugman’s latest op ed in The New York Times.

Naturally, being economists, the three could not agree on which solution to follow, so they parted company and went their separate ways. The first economist, true to his word, curled up under a palm tree and waited to die, taking comfort in his distress from the even more unlikely fact he could shelter under a blanket made of Denver Broncos Super Bowl shirts. The second economist set off on an expedition around the atoll to look for the missing food his model predicted. Within minutes, he stumbled into a sinkhole and broke his neck. The third decided that, since he was now alone, going for a pleasant swim would be easier than attempting to discuss a Krugman piece with himself, so he waded into the ocean and was promptly eaten by a large shark.

* * *

Meanwhile, five miles away, the physicist and the chemist killed the fourth economist with a rock, roasted and ate his body over a bonfire of economics textbooks, and waited for a ship to respond to their smoke beacon. After they were rescued, they got married, got tenure, and lived happily ever after.

So who said economists are useless?¹

Related reading:
Bryan Caplan, Try Harder or Do Something Easier? (EconLog, April 16, 2014)


¹ As someone who has made giving advice his living, this kind of nonsense irritates me no end. Advising people to take or forgo risks based on averages isn’t good advice. It’s lazy advice. Good advice includes a clear discussion of the odds of success—or what you think might be the odds (which are normally not quite so clear cut in most instances)—but it doesn’t stop there. You discuss the risks, the odds, and the special talents and resources your advisee intends to bring to the situation to come to a specific, tailored recommendation. “Don’t start a restaurant, because 60% of them fail” is lousy advice. “You realize on average 60% of new restaurants fail, right? What makes you think you can succeed?” is a better start to advice that might actually do the advisee some good. Notwithstanding many economists’ predilection to think in aggregates and averages, virtually nobody lives an average life. And a hell of a lot of outliers contribute to socioeconomic averages.

Consider the quincunx.

© 2014 The Epicurean Dealmaker. All rights reserved.

We Have Met the Enemy, and He Is Us

Creditocracy and the Case for Debt Refusal by Andrew Ross¹
OR Books, 280 pp, $17, February 2014, ISBN 978-1-939293-38-1

“Creditocracy (n.)
1. governance or the holding of power in the interests of a creditor class
2. a society where access to vital needs is financed through debt”

— Andrew Ross

If the book currently under review is any indication, Andrew Ross, a professor of social and cultural analysis at New York University, has never (or very, very rarely) met a creditor he really liked. This reader, no stranger to debt or creditors himself, is quite certain that similar attitudes are held by approximately 99.27% of all human beings extant who have undergone the experience of borrowing money. Accordingly, Professor Ross, a social activist who was instrumental to the creation of Occupy Student Debt and the Strike Debt forgiveness program, should have a very receptive audience for his message, which basically boils down to the assertion that debt is very, very bad.

What makes Ross’s tome different from advice dispensed by Suze Orman and dozens of other personal-finance mavens of greater or lesser credibility is his characterization of the socioeconomic institution of credit and his prescription for it. With respect to the former, he spends a great deal of time and effort outlining how debt and credit are inextricably intertwined with our lives and society, including personal consumption, housing, labor, climate, and long-term growth. As for his prescription for it, his message is bracingly simple: repudiate it.

Did I mention that Professor Ross thinks debt is very, very bad?

For if I did not, or if you forget between reading this article and picking up the book, you will recall it very quickly once you do. Ross is no fan of debt. He sees the current pervasiveness and economic and political power of what he has termed the creditocracy to be corrosive of our social fabric, destructive of participatory democracy, and particularly oppressive of the working poor. For the latter, he contends the current system of consumer and personal debt is but the newest incarnation of compulsory social and economic indebtedness for the poor that extends from and encompasses feudalism, indentured servitude, slavery, sharecropping, company scrip, and loan sharking. He has bad things to say about Wall Street, banks, hedge funds, payday lenders, the IMF, the World Bank, the Troika, the Club of Paris, advocates of austerity, politicians, lobbyists, Sallie Mae, Fannie Mae, college administrators, unpaid internships, student debt, revolving credit, compound interest, economic growth, Kenneth Orr, for-profit higher education, securitization, and colonialism. Did I mention debt?

Now lest you think I sport with Professor Ross or your intelligence, let me reassure you I found his book an interesting and, in places, a compelling read. He takes pains to declare that he is neither an economist nor an expert in all things credit or financial, and he makes no effort to offer up specific policy prescriptions or economic analysis to back up his arguments. He does cite reasonably extensive secondary sources throughout, which should enable diligent readers to check his facts and draw their own conclusions about his evidence. He leavens his narrative with the occasional fact or figure, some of which are well chosen to drive home his point. He employs a serviceable and not unpleasant writing style, which makes his book more readable than a run-of-the-mill polemic. He does shoehorn the intermittent left-wing shibboleth like “monopoly capitalism,” “high interest loans,” “high carbon industrialists” (the Koch brothers), and “Wall Street” into the flow of his text, but, as one would expect, these throwaway non sequiturs seem mostly placed to remind his readers of his (and their) political bona fides rather than carry any argumentative weight.

Ross also offers up interesting historical background on the use of debt as an instrument of political control by the IMF and the World Bank in developing economies, the development of the housing mortgage market in the United States after World War II, and the source and growth of the student loan market for higher education. He avoids many basic mistakes of fact or emphasis, and the occasional slip—like the comparison of stocks (bank assets) to economic flows (GDP)—is usually not so serious as to derail his arguments. He flubs the central premise of his chapter contra economic growth, contending that lending requires growth to function. (That this is not so can be illustrated with a simple auto loan.)² He offers an entire chapter on what he titles climate debt to those of you who find such topics interesting. Sadly, this reviewer is not one of them.

However, he does make a compelling argument that the struggle between debtors and creditors has, for most people, replaced or superseded the struggle between labor and capital:

in societies that are heavily financialized, the struggle over debt is increasingly the frontline conflict. Not because wage conflict is over (it never will be), but because debts, for most people, are the wages of the future, to which creditors lay claim far in advance. Each new surrender of a part of our lives to debt- financing further consumes the fruit of labor we have not yet performed in the form of compensation we have not yet earned. Now that this condition has become inescapable, it is easier to imagine that the struggle between creditor and debtor is much older than the face-off between capital and labor that Marx proposed as a common sense explanation for economic life. After all, exploitation through debt long predates the era of wage tyranny, and its recent restoration as the most efficient means of wealth accumulation suggests that credit is a more enduring, all-weather organ of economic power.

His description of the endless treadmill of high interest, predatory lending suffered by the poor and less fortunate is believable and harrowing, and his description of the student loan market and its parasitic for-profit segment is eye-opening, and not in a good way. There is much to praise here.

* * *

And yet, given all these positives, this reviewer cannot help but feel that Ross has missed the mark. His foreground focus on the instruments and practices of debt has blinded him to an essential, incontrovertible fact: Debt is merely an instrument of economic interrelationships. A careful reader can see that Ross dances around this revelation every now and then, and even nods in its direction and alludes to its implications, but he retreats too soon to tackle the thorny fact directly. Missing this fact puts too much emphasis on the mechanism and history of the use of debt to sustain consumption in the face of stagnant or declining real wages for the majority of Americans, rather than the reason for it. Which, this reviewer believes, is ineluctably tied up with the issues and mechanisms of income distribution in the past several decades. (But that is another essay for another time.)

Ross is also not the first to confuse banks, which have increasingly taken on the role of intermediaries and originators of loans, with the holders of wealth who actually lend it out. But this is not true. Look at any bank’s balance sheet, and you will observe—as Ross correctly does at other places in his text—that banks borrow the lion’s share of what they lend out from other people: depositors, bondholders, other banks, the Federal Reserve. It’s not their money. Banks are conduits for transforming certain kinds of assets (money, investable funds) into others (loans, securities). More often than not, they transform short-term loans they borrow from their creditors into long-term loans to their debtors. This key bank function is called maturity transformation, and it is a critical, highly valuable socioeconomic service lending banks perform.

The real holders of wealth in the economy are not banks, which are only servants. The real holders of wealth are rich individuals, corporations, and institutional investors which manage trillions of dollars of their own and others’ wealth. The lion’s share of such wealth is and has always been invested in the fixed-income markets: sovereign debt, corporate loans, high-yield debt, municipal debt, and, yes, individual consumer debt in the form of securitized credit-card, auto, and student loans and mortgages. The complication, which Ross ignores, is that much of the institutional investment in fixed income is done by and on behalf of pension funds, retirement accounts, and mutual funds managed for individuals. Individuals—people, us—are the creditors we fear and loathe. Even someone with a simple passbook savings account is a lender: first directly to the bank she deposits at, and second indirectly to the debtors who borrow from her bank.

This is a critical point to understand. For it means that it’s not always so clear just whose ox is going to get gored if we go about repudiating debt wholesale. Ross makes a big deal about the retired city workers of Detroit being asked to reduce their pension benefits in the restructuring of the city’s debt. But Detroit’s municipal debt has been bought for years by, among others, professional fund managers on behalf of firefighters, policemen, nurses, and other public and private workers to support their pensions. By the same token, non-wealthy individuals have directly and indirectly purchased the loans and securitized debt of other individuals—i.e., made loans—to provide sources of income for their own futures. Who gets screwed if we start repudiating our credit card debt, student loans, home mortgages, and auto loans? Firefighters? Teachers? Our parents? Ourselves?

And waving one’s hands and saying the government should pick up the tab—as Ross suggests in the case of debt incurred for public higher education—just begs the question in another way. For who both lends money to government and pays taxes to pay its bills? We do, of course, directly and indirectly, in a thousand ways. Of course, we all have different exposures, both as creditors and debtors, to our governments. That, plus the fact we have different economic and political interests and preferences means we will have different opinions as to what debt, if any, should be repudiated and for whom. In other words, by focusing on the allegedly inherent evil of debt instruments, Ross elides the critical point that what needs to happen in our society is a political debate about power and inequality, not a technical debate about the mechanics of a debt jubilee.

This is the Gordian Knot we face when it comes to the problem of debt. I am sympathetic to the plight of the poor, I am outraged at the behavior of predatory lenders, and I am a firm believer in heavy regulation of consumer finance and a much heavier hand in prosecution of financial chicanery than we have yet seen. But the threads of debt shoot through our society and economy in such myriad patterns and interlinkages that it would be practically impossible for anyone to trace them all. Ross wants citizens to audit lenders for “bad” or “illegitimate” debt. But is he truly sure he or we can tell the difference? Is he truly certain repudiating “bad” debt will be good for everyone except lenders? Does he truly know who the lenders are? Who is going to pick up the tab?

Ross states he wants a “moral economy of debt.” He wants the privatization and financialization of basic human wants and needs—shelter, education, health care—reversed and taken out of the hands of private lenders, presumably to be put in the hands of government or, what is another word for the same thing, our common hands. But this is not a moral decision. This is a political decision.

And the last time I checked, we made those decisions through the ballot box. If Ross intends his book to be a call to action and a spur to political discussion of the transformation of our economy, all the better. We need more individual citizens involved. But he and they might find the answers they seek are not quite as obvious or acceptable to the rest of us as he contends they are.


¹ This review first appeared in The New Inquiry “Money” issue, published April 2014. It differs in minor cosmetic details from the published article, the online version of which can be found here. Any unexpected clarity and concision which has crept into my writing in this piece can be attributed to the excellent work of TNI’s editors. By the by, I recommend those among you who enjoy challenging your assumptions about the proper role of finance in society go check out the other thought-provoking articles therein by Steve Randy Waldman, Izabella Kaminska, Mike Konczal, and others. As is usual and proper among such econoblogospherical heavyweights, my piece was included for comic relief.
² Should, for example, Ross decide to purchase a new Honda Accord for $22,000, he could finance it for 48 months at 4% interest for 48 level monthly payments of $495 each. Self-amortizing debt at fixed interest rates—which comprises a very large percentage of consumer and housing debt—does not require or depend on incomes or anything else growing. In fact, in general creditors tend to prefer a static or even deflationary economic environment, since inflation, which is usually associated with growth, erodes the real value of their fixed claims.

© 2014 The Epicurean Dealmaker. All rights reserved.

Mr. Indispensable

“The cemeteries are full of indispensable men.”

— Attributed to several indispensable men

Fire Jamie Dimon.

There, that got your attention, didn’t it?

Seriously, folks, the brouhaha surrounding the upcoming nonbinding shareholder vote to separate the Chairman and Chief Executive Officer roles at J.P. Morgan is getting a bit silly. People are marshaling all sorts of weak, irrelevant, and disingenuous reasons on both sides to argue for and against the resolution. Hence we get ludicrous examples of access journalists asking a gaggle of powerful white men whether another powerful white man should lose his power. Gee, I wonder how that turned out, don’t you?

I will not bore you with a demolition of the flyweight reasons the pros are using, including envy, spite, ad hominem vitriol, and gleeful detestation of Mr. Dimon as an avatar of hated “banksters” everywhere. On the other side, however, the cons have assembled all sorts of arguments against stripping Mr. Dimon of his Chairmanship which woefully fail to address the central point of the exercise, which is good corporate governance. Some say Jamie shepherded the House of Morgan through the dark days of the financial crisis with nary a scratch, and hence should be rewarded by keeping his seat at the head of the boardroom table. Yes he did, and a boffo job at that. So what? I got really good scores on my SATs. Did that mean I didn’t have to take tests or submit papers in college? Of course not: the past is the past. Besides, J.P. Morgan sailed into the Panic of 2008 in the best shape of any of its peers, with the possible exception of much smaller Goldman Sachs, which also came out smelling like a (relative) rose. It’s not like Jamie excavated a pile of shit and turned it into gold. He started with a pile of gold and mostly kept the tarnish off. No superhero he.

Some say the evidence of outperformance by companies with bifurcated Chairman/CEO roles is lacking. Part of that is due to the all-too notable reluctance of powerful men to give up power (viz. supra), which has led to a remarkable paucity of such structures among large publicly-traded corporations. Hence, the sample set from which one can draw financial performance data is unhelpfully small. Even so, this is a remarkably lame argument, equivalent to the contention that the fact that most people who wear seatbelts never get into accidents (and, contrariwise, wearing a seatbelt does not prevent accidents) means that seatbelts are useless. Go ahead and pull the other one.

Still other FOJs contend Mr. Dimon’s delivery of $21 billion in record profits last year should silence his critics and put the kibosh on this petty attempt to strip him of rightful powers and duties. But I say the man or woman at the helm of a $2.4 trillion colossus which employs over a quarter of a million people around the globe damn well better produce some pretty amazing results, especially when so many of its largest competitors remain in disarray, the cost of funds for financial firms could not be cheaper if Ben Bernanke were backing up a dump truck full of dead presidents into J.P. Morgan’s lobby, and his privately held bank is implicitly backed by the full faith and credit of the United States government (and perhaps the European Union, too).¹ The man is a CEO. He is supposed to create good results with the awe inspiring assets he has at his disposal. He did. Big whoop. Give the man a fucking fruitcake.²

* * *

But all this is smoke and mirrors.

The entire point of separating the roles of Chairman of the Board and Chief Executive Officer is that they have different responsibilities and duties. They are different jobs. Now, perhaps at smaller companies with simple business models and uncomplicated objectives (grow revenues fast enough to meet payroll and pay the bank on time), there is no practical need to separate them. But the bigger a company gets—and I think we can all agree J.P. Morgan is about as big as a firm can get—the breadth and scope of duties each role properly possesses expands dramatically. The CEO is supposed to be the chief employee, leading his or her organization to deliver on the agenda and objectives the Board of Directors has set. The CEO is an operating executive.

The Chairman, on the other hand, is supposed to lead the Board of Directors in setting the agenda, strategy, and objectives of the corporation, in response to its employers, the shareholders, and all the other myriad stakeholders (employees, regulators, government officials, vendors, community members, and customers) which have a say or a stake in the activity of the firm. The Chairman and other directors of the corporation are stewards. They are not supposed to get down in the weeds, day to day, operating the various parts of the business. That is the CEO’s job. But as stewards they are supposed to think about the what-ifs, the perils and opportunities that may or may not confront the firm in the future, and the problems and threats which may be festering beneath the glittering surface of excellent corporate performance. A properly engaged CEO doesn’t have time to worry about such matters. He has a day job to perform.

The other key duty of the Board, with the Chairman at its head, is oversight. The Board is supposed to monitor the performance of the CEO and his or her key executives: guide, correct, discipline, and incentivize him or her to perform in a way which achieves the objectives they have set and satisfies the other constraints the firm must operate under. Even the meanest intelligence can see that having the Chairman and CEO of a firm be the same person collapses this crucial function into irrelevance:

“Gee, Jamie, do you think you’re performing adequately in the public relations part of your job?”
“Why, yes, Jamie, I think I’m doing a great job, don’t you?”
“Sure I do! Have a cigar.”

Of course, a soi-disant superman CEO could surely set his own agenda and monitor his own performance—just as his lesser peers can certainly contribute their valuable perspectives on such matters to their Boards—but such arrangements diminish the patently obvious benefit of involving more than one person’s perspective in the issue. Not to mention short-circuiting the potential for meaningful criticism and disagreement over firm challenges, issues, and threats which merit serious discussion. I don’t care how big your head is, two heads (or more) are always better than one.

The role of the Board as stewards of the firm and monitors of the CEO and his or her executive team naturally introduces a healthy tension into the governance of a large organization. A Board which is properly performing these duties will have occasion to challenge, correct, punish, reward, and occasionally fire a CEO. Find me a person who could legitimately do this to him or herself and I will show you a person who is temperamentally unsuited to the role of CEO. They just don’t make psychopaths that way.

* * *

So much for principle and common sense.

The real reason to strip Jamie Dimon of his Chairmanship is that he has done a shitty job at it. He has failed to accomplish one of the most important, difficult, and basic tasks a Chairman is supposed to do: establish a succession plan for the CEO. Each and every Board worth its perks and compensation should make finding and grooming successors to the firm’s current senior executives—especially the CEO—its most important agenda item. Not only has Jamie failed at this, he has actively fired key lieutenants and potential successors like Bill Winters and Steve Black, apparently on the basis that they posed too credible a threat to his own power.

The fact that certain people find Jamie’s petulant whining that he may quit if shareholders vote to strip him of the Chairman role a credible threat is proof positive that the current Chairman of J.P. Morgan has done a lousy job preparing for the inevitable eventuality that Dimon will have to be replaced. The current Chairman has also done a lousy job cajoling the current CEO to delegate more of the minutiae of running a place as gigantic and complex as J.P. Morgan to trusted lieutenants, and to train and mentor those lieutenants into a position where they can ultimately replace him. That these are related issues, and practices which strike at the very heart of the purported indispensability of any Chief Executive Officer, is highly revealing.

Finally, the current Chairman has done a lousy job selecting his other Board members, particularly in the all-important area of audit and risk management. The risk oversight and monitoring function at a gigantic, staggeringly complex lending and trading bank like J.P. Morgan is arguably the most important one—after CEO succession—a Board has. Yet Jamie stacked his risk committee with a former lawyer and professional board member previously on the risk committee at AIG who currently heads a natural history museum, a rich kid whose life experience consists of managing grandad’s money, and the CEO of a a flight controls company. I will wander way out on a limb here and bet these people couldn’t evaluate the financial risks of a childrens’ lemonade stand, much less one of the largest banks on the planet.

The current Chairman of J.P. Morgan has done a crappy job in almost every dimension that can be measured. And don’t point me to his lead director Tweety Bird, either. I don’t care how fearsome Lee Raymond’s reputation as a former imperial Chairman and CEO was, it is clear he can’t get Jamie Dimon to return his phone calls, much less address the critical areas of underperformance I have identified.

The agenda is clear: the current Chairman of J.P. Morgan should be run out of town on a rail. The current CEO can stay, assuming a new, effective, powerful Chairman thinks he’s up to snuff. Clearly somebody needs to smack that knucklehead around a little.

Fortunately, Jamie, you will be relieved to hear I am not available.

Related reading:
To Catch a Thief (February 13, 2009)
J.P. Morgan and the Marlboro Man (May 20, 2012)


¹ Want to deny this? Envision, if you can, whether the US government would let anything happen to all of $2.4 trillion, 256,000 people strong J.P. Morgan if it got into serious trouble. Do you for a minute think they would let it crater like Lehman Brothers? That they would even consider it? I didn’t think so.
² Or, say, $20 million.

© 2013 The Epicurean Dealmaker. All rights reserved.

In Praise of Jargon

CHAKOBSA: the so-called “magnetic language” derived in part from the ancient Bhotani (Bhotani Jib—Jib meaning dialect). A collection of ancient dialects modified by needs of secrecy, but chiefly the hunting language of the Bhotani, the hired assassins of the first Wars of Assassins.

— Frank Herbert, Dune

Normally, O Dearly Beloved, I am a fan of author and commentator Steven Poole’s witty takedowns of the silly, pretentious behavior humans get up to on occasion. I think I discovered him in medias res, skinning, gutting, and flambéing the “foodie” culture while it yet lived, and the amusing screams of pain and outrage emanating from his victims still echo satisfyingly in this non-foodie’s ears.

But his latest screed on what he calls “management-speak”—the jargon common to corporate businesses and their environs—falls rather more clangingly and less persuasively from his pen. In fact, it comes across rather like Mr. Poole and his pals from the Drones Explorers Club just burst through the forest wall into some Papua New Guinea clearing in 1920 and are pointing and jeering at the bewildered natives in ceremonial costumes:

“My God, Bertie, that chap has painted his entire body with mud! And the Missus isn’t wearing any clothes! Ahahahahaha!!”

It is perhaps fortunate that the corporate world is widely understood to hold a position of social and economic power, else Mr. Poole’s little exercise in cross-cultural satire might get slapped with a libel suit and be investigated for evidence of a hate crime against the underprivileged.

For it is blindingly clear that not only does Mr. Poole beg the question of the purportedly stultifying and spirit-sapping nature of management-speak—stipulating it as true rather than demonstrating it—but also that he has a remarkably ill-informed grasp of the jargon he criticizes, a desperately poor understanding of the way such language is used, and a surprisingly tin ear to boot. If I were a less charitable man, I might suggest that Mr. Poole is a culturally blinkered scrivener who has never set foot inside an actual business meeting or participated in business communication beyond giggling at press releases¹ and watching satiric corporate soap operas on the BBC. If I really wanted to score points, I might accuse him of flogging sloppy, tendentious nonsense designed to provoke the anti-business and anti-elitist prejudices of a certain class of fellow Brits so they will go out and buy his new book. But I wouldn’t want to be accused of being culturally insensitive to the species Homo authoriensis, so I won’t even mention it.

* * *

So, in the spirit of cross-cultural understanding, let me reach my hand across the gaping divide between those who work for a living and those who cannot understand why they have to to proffer a little gentle education. Mr. Poole’s list of the ten worst offenders among management-speak will stand as a serviceable roadmap for my purposes.

1. Going forward
Yes, this phrase does indeed stand in for “from now on” or “in future,”² as Mr. Poole suggests. But while he catches its rhetorical intent—which by the way is common to much management-speak and business jargon—he is too busy alleging progress can never be made in business to notice the source of its rhetorical power. For, unlike the anodyne, directionless vagueness of “in future,” going forward implies motion, action, and, most importantly, direction. There’s a reason the preferred coinage is not “going backward.” While I do not mean to freight this modest phrase with unwarranted profundity, the idea of purposeful action and progress is central to most management and business communications, for even the dullest businessperson realizes the biggest risk in any large organization is inertia. “In future” implies no imperative. “Going forward” does.

2. Drill down
I hope Mr. Poole’s other writing is not as drab and inventionless as his literal equation of “drill down” with “look at in detail” implies. If so, I’d probably find reading Her Majesty’s Government’s telephone directory more thrilling. Drill down is a wonderful metaphor, incorporating geological and investigatory overtones of impressive metaphorical power. Drill down implies there are layers to penetrate, mysteries to uncover, complexities to map. Drilling down requires energy, focus, and effort, and drilling attempts to uncover both buried history and the structure under the surface. Drill down is a term of due diligence, where the intent and practice is to gain a deeper understanding of a business or other phenomenon you do not already understand. Drilling down is not what some passive paper pusher with an eye on the clock does; drilling down is what an explorer does. Mr. Poole’s puerile metaphor of drilling as sexual penetration doesn’t even come close. Nobody I know who has used the term has ever used it with such a leer in their voice.

3. Action
I cannot disagree with Mr. Poole that “verbings” are anathema. My personal bête noire is that horrid specimen “to impact.” (As far as I am concerned, only teeth get impacted.) But I would note that verbings are not restricted to business. And, unlike many forms of jargon or specialized argot, verbings do nothing to enrich language with metaphor or rhetorical power, and the real English phrases they replace are not much longer, if at all, so they provide no useful economy or speed of expression. In almost every instance, they are just evidence of linguistic (and mental) laziness. A pox on them, I say.

4. End of play
Not being a native of the Sceptered Isle who learned what bubble and squeak was at Mary Poppins’ knee, I cannot say whether “end of play” is truly a corporate Britishism or merely a phrase Mr. Poole misheard from his friend in the steno pool at British Land. In any event, it sounds much more to me like a phrase from sport, which, if Mr. Poole had ever spent time in a corporate environment, he would recognize as one of the prevailing metaphors of business. While I myself am skeptical that sport provides useful or revealing metaphors for business, I find it odd to associate it with childhood or “infantilized workers.” Unless Mr. Poole thinks the billions of pounds at stake in the Premier League are somehow childs’ play.

5. Deliver
Honestly, what does Mr. Poole have against delivery? Was his uncle a disgruntled Royal Mail employee? Delivery, while itself being inoffensive to most human beings, carries the useful implication that the person delivering the goods is often not the person responsible for their production, which many times takes place at different places at the hands of different individuals. And yet—as we may surmise by the fact that real individuals, including non-businesspersons, pay real money to postal services and parcel express carriers to deliver items they themselves did not produce to arrive on time and in good condition—the act of delivery itself carries value and merits attention. Finally, as service providers such as Yours Truly occasionally use the term, “deliverables” is a useful abbreviation for all sorts of preliminary, interim, and finished work products (yes, I went there) that are due at specified times in specified sequence in a complex process involving multiple parties over an extended period of time. I would much prefer to use the all-encompassing abbreviation “Deliverables” than an exhaustive laundry list like “Teaser, Non-Disclosure Agreement, Confidential Information Memorandum, Buyers List, Process Letter, Definitive Agreement, and Closing Schedules, if, as, and when appropriate” in everyday communications with an M&A client, for instance. Can you blame me?

6. Issues
How typical for a Brit to identify the generous, inclusive, and expansive term “issues” with “problems.” I remember how revelatory I found it early in my career to discover that many natives of Old Blighty would respond to the proposal of almost any new business idea or process with the prefatory throat clearing, “Ah. The problem is...” It could be the national anthem. Yes, “issues” can be euphemism for problems, but it can also mean consequences, implications, outcomes, preconditions, or almost anything else upon which there might be differing opinions or which should be discussed. Business is complex, business is riven by ineluctable uncertainty, and business is riddled with myriad issues. Not every issue is a problem, but, by its very nature as an issue, every issue must be addressed. This, by the way, is what the quotidian practice of the business world consists of: the identification, discussion, and resolution of issues. “Problems.” Pshaw.

7. Leverage
Yes, I suppose I and my fellow baby seal murderers in the financial profession are responsible for the glamorization of “leverage,” if not directly for its introduction into non-financial contexts. What can I say? Leverage is indeed a powerful concept, based, strangely enough, on the mechanism of the lever (to which Mr. Poole alludes), which the last time I checked my high school physics text meant a hell of a lot more than “use” or “exploit.” Application of a lever—like a corporate capability, say—in certain contexts can generate far more powerful outcomes than the application of brute force. It depends on the context, specifically the presence of a fulcrum. In certain circumstances, certain corporate attributes can be far more effective and powerful than a simple evaluation of their standalone properties might suggest. Of course, in finance the identification of the lever and the fulcrum is simple and comes prepackaged in the capital structure (where the presence of debt enables a much smaller quantity or force of equity to perform much more effectively than by itself). I suspect the identification and exploitation of coherent levers and fulcrums is more problematic outside of finance than in, but is that not why they pay corporate executives the big bucks?

8. Stakeholders
Bleeding heart anti-business lefties should be delighted that businesses at least pay lip service to the notion of stakeholders. The concept really means all those individuals and organizations who have an ongoing stake in the performance and actions of a corporation, including employees, customers, vendors, suppliers, governments, and yes, even security holders. The concept that a firm has obligations to all of its stakeholders is real and serious enough that the gimlet-eyed archons of capitalism on the Delaware Court of Chancery have specifically enjoined corporations to support it and protected them from ravening shareholders and plaintiffs attorneys when they have. “Stakeholders,” of course, replaces the archaic notion that only the interests of equity shareholders—the nominal “owners” of a corporation—matter to the conduct of a firm. It’s a good word, and an important concept. The fact that certain firms use it as a smokescreen for less savory behavior is less a criticism of the neologism than one of bad actors.

9. Competencies
Okay, I concede this one. “Competencies” is just lame.

10. Sunset
Again, Mr. Poole projects a monochrome shadow of a living word on a blackboard and complains the image is flat and uninteresting. Sunsets are slow, gradual, and predictable. Sunset implies that a project will tail off gradually over time, dying a slow and natural death as resources are consumed or withdrawn. Sunsets are not sudden and violent deaths. Only a business tyro would think that every business project either continues full strength or is taken out behind the chemical sheds and shot. Business projects have life cycles. Pace its deplorable construction as a verbing, sunset is a perfectly acceptable and descriptive metaphor for a common business action. We are not all Mother Teresa or the Terminator.

* * *

In fact, Mr. Poole’s jeremiad is in general a deplorable exercise in sneering incomprehension. He seems to have no insight or understanding whatsoever that the metaphors embedded in management-speak are not incidental but rather central to their purpose and continued usefulness. He glances passingly at the notion that they might be primarily rhetorical devices, but then he ignores this key insight for childish cheap shot-taking. His principal objection to the professional argot of an occupation he does not share seems to be that it offends his sense of linguistic and literary propriety.

Sure, like any language—English, for example—management-speak can be used “to deflect blame, complicate simple ideas, obscure problems, and perpetuate power relations.” But that is a function of language. And make no mistake: bureaucratese is its own language. Or, to be more precise, its own idiom. Idioms evolve organically among the members of a group sharing common interests and concerns to better communicate those very interests and concerns. This can take the form of abbreviation, where a commonly understood word or phrase can convey an entire sentence or conversation; motivation, where a word or phrase is understood to inspire action; or community-building, where the word or phrase triggers thoughts and actions of allegiance and commonality among its audience. These all necessarily exclude people outside the in-group, but this does not need to be a sinister thing. Try to follow a conversation among particle physicists in the Cal Tech lunchroom one day if you doubt me.

Human society is complex and highly specialized. It should be no surprise that we have erected our own Tower of Babel of mutually incomprehensible idioms, even within the English language, in order to cope. If nothing else, management-speak and other specialized idioms thrive because they are efficient: they save lots of time which conversationalists would otherwise waste in trivial itemizing and explication of concepts, notions, beliefs, and the like which they already share and understand. Business speak, like many other idioms, shares the additional motivation that it is primarily a rhetorical device, designed to summon and direct the energies of hundreds, thousands, or even hundreds of thousands toward the pursuit and execution of common goals which the rest of society does not necessarily share. Its practitioners really don’t care what unwashed outsiders think about it.

Perhaps Mr. Poole fails to understand that management-speak is not directed at him, nor at any other person not invested in the success of the organization which uses it (which probably includes many of the clock-watching wage slaves in its employ). Like the costume of the Papua New Guinean mud man to Bertie Wooster, our argot may appear harsh, awkward, even ridiculous to him, but that is simply because he cannot understand its true import and meaning. Saying business jargon is awkward is like complaining that white lies are untrue: accurate, as far as it goes, but it misses the entire point.

Besides, Steven, we all have our little communications quirks, innit?

Related reading:
Steven Poole, 10 of the worst examples of management-speak (The Guardian, April 25, 2013)
Hail Mary, Full of Grace (May 26, 2011)


¹ An easy and deserving target, I am careful to admit.
² I would not dream of criticizing the eccentric British tendency to drop prepositions and definite articles willy nilly from common phrases for some inexplicable classist motive of their own: “go down [to] the pub,” “in [the] future.” So I will just move on, silently.

© 2013 The Epicurean Dealmaker. All rights reserved.