Business Insight Zone

If you’re a baseball fan, you’ll know that retired slugger Mark McGwire admitted this week that he used steroids through much of his epic big-league career. Sports columnists and the blogosphere have been awash with analyses and psychoanalyses of his public statements, especially his long interview with Bob Costas. (For my money, Joe Posnanski of Sports Illustrated has written the best takes on McGwire this week.)

If you’re a political economy fan, you’ll know that Congress grilled banking titans like Bank of America CEO Brian Moynihan this week. (The best account I read was “Panel Rips Wall Street Titans” in the Wall Street Journal.) Rep. Phil Angelides compared the bigwigs to shady car dealers.

Set aside the inevitable partisan and populist politicking for a minute. Suspend your verdicts on the probity or shame of Baseball Slugger X or Bank Chief Y. And consider this:

Many of us liked it just fine at the time.

Many investors liked it just fine when Goldman and JPMorgan and BofA and the rest posted blockbuster earnings year after year. We liked it when our housing prices rose 15% every single year, even though historical precedents should have warned us that it couldn’t last. And then we (or some of us) wailed when the bill came due.

Sports fans loved it when McGwire broke Roger Maris’s single-season home run record. They — we — loved it when a fleet of hitters sailed past the once-sacred 500-homer career mark. And then we scolded and cursed those same men when we all woke up from the fever dream and realized how many of them had “tarnished the game” by injecting themselves.

Mind you, it is not true to say that “we have no one to blame but ourselves.” McGwire deserves his own full measure of blame for his own misdeeds, just as some bankers deserve their own blame for their financial legerdemain.

But we, many of us, saw that syringe full of risk and accepted it. Or, if we didn’t see it, we should have assumed its existence, at least if we had our eyes open to reality even part of the time.

Without question, the deepest guilt belongs with the central actors. But it is worth considering how many of us in the bleachers abetted them with our cheers.

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Syringe photo by Ben Matthews, used under a CC-Share Alike license.

Sorry to keep harping on this, but the issue has gotten under my skin:

New homes sales soar unexpectedly

Sales of newly constructed single-family houses spiked 11% in June to an annualized rate of 384,000 homes.

The gain over May was much greater than expected. A consensus of housing industry analysts had forecast seasonally adjusted sales of 352,000 . . .

Yes, I acknowledge that 384,000 is bigger than 352,000. But year-over-year sales — which is what we should be looking at to account for seasonality — are down 28% from June 2008 to June 2009. So while the raw number did beat experts’ projections . . . it’s still really, really bad.

New homes sales down 28% year over year

That’s the real headline.

We can do better than this. Right?

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More in the same vein:

• Innumeracy in financial reporting?
• From the Department of Actually Informative Headlines . . .
• “I want you to have expected it.”
• Beware “unexpected”!

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Not great times for the VC business, eh?

• Item: Venture Capital Fund-Raising Plunges In First Half (WSJ Venture Capital Dispatch)
• Texas venture capital funds raise zero (Dallas Morning News)

That being said, there will be good VCs (here’s one candidate, here’s another) who will come through this period stronger than ever. And, as I’ve suggested before, if the VC business collapses — and its own practitioners say that it’s “broken” — something new will rise in its place to fund innovation.

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Addendum, Thursday afternoon: You might also want to read this from the New York Times.

Venture Capitalists Look for a Return to the A B C’s

There will be “a ton of venture capitalists who disappear over the next 18 to 20 months, and it’s going to be painful for a while,” said Bryan Roberts, a partner at Venrock. “But the best thing that could have happened to V.C. is this economic crisis, because it’s lowering the flow of capital into these funds.”

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Goldman’s tower of finance in Jersey City.

What financial crisis?

The Guardian gives the skinny on Goldman Sachs:

Goldman to make record bonus payout

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm. [ . . . ]

(Hat tip: the Wall Street Journal’s indispensable MarketBeat blog.)

• Item: Looks like Warren Buffett made a really good investment in Goldman last year.
• Item: It’s not just Goldman that’s doing so well. According to the Guardian piece, Barclays, Credit Suisse, Deutsche Bank, JPMorgan, and Morgan Stanley are also reaping major rewards.
• Item: Just like two years ago, “there sits Goldman Sachs, immaculate in a tailored suit, cool as the other side of the pillow, basking in the glow of a quarter in which earnings rose [a ton] from the same period a year ago.”

The more things change, the more some things stay the same.

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Related:

• Must-read: Michael Lewis on the Meltdown
• Keep your powder dry in business.
• Good context on Goldman Sachs.
• Company of the Day [21 September 2007]: Goldman Sachs.

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Photo by Aby Jose, used under a Creative Commons license.

They do it to drive me crazy.

I love FORTUNE magazine and have been reading it for ages, but this item makes me grind my teeth:

The 10 largest U.S. bankruptcies

To save you from paging through the whole thing, here’s their list, with asset values in billions of dollars:

1. Lehman Brothers — $691  — 2008
2. Washington Mutual — $327.9 — 2008
3. WorldCom — $103.9 — 2002
4. General Motors — $91 — today
5. Enron — $65.5 — 2001
6. Conseco — $61 — 2002
7. Chrysler — $39 — 2009
8. Thornburg Mortgage — $36.5 — 2009
9. PG&E — $36 — 2001
10. Texaco — $34.9 — 1987

(Note that the links for WorldCom and Texaco are to historical records, which are available to Hoover’s subscribers.)

There are two major problems here:

I. Nominal figures. Freshman economics students have it drilled into them that when you compare nominal figures across a range of years, you’re not comparing apples to apples. Yet this list ranks all of these bankruptcies by nominal dollars without a caveat (or, if FORTUNE is using real figures, the article doesn’t say so).

Here’s the same list with everything converted into billions of 1987 dollars:

1. Lehman Brothers — $413.2
2. Washington Mutual — $196.1
3. WorldCom — $73
4. GM — $54.4
5. Enron — $46.8
6. Conseco — $42.9
7. Texaco — $34.9
8. PG&E — $25.7
9. Chrysler — $23.3
10. Thornburg Mortgage — $21.8

(Note that the calculator I used only went through 2008, so I used that year for 2009 bankruptcies.)

Granted, this doesn’t change the order of the top six companies on the list, but (a) innumeracy about real and nominal values is common enough that it ought to be opposed at every turn; and (b) this listing at least compares apples to apples in terms of scale.

II. Financial assets. Banks, mortgage companies, and other financial services companies are in the business of holding assets. I ran a search on our Build a List tool for companies with more than $100 billion in assets, and what do you know? — it was dominated by banks, insurers, and the like for page after page.

In other words, it doesn’t work to suggest that the Lehman Brothers bankruptcy is seven times as big as the General Motors because Lehman held seven times as much in assets. We could compare revenue ($19 billion to $181 billion for fiscal 2007) or employees (28,600 to 266,000) or something else, but grading on assets alone gives us a false picture.

Or am I just missing something? Bankruptcy experts, economists, et al. feel free to weigh in — the floor is open for comments.

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Photo by Ed Yourdon, used under a CC-Share Alike license.

. . . are now available to subscribers of the San Antonio Business Journal at this link.

The short version, for non-subscribers or those in a hurry: not as bad as the U.S. economy in general, and not nearly as bad as it could be for Texas.

If I understand correctly, the story will be free for anyone to read next month — I’ll try to remember to tell you when that happens.

Many thanks to Donna Tuttle of the SABJ — whom I met at the San Antonio Social Media Breakfast in January — for giving me the opportunity to write the column.

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Postcard image of Fort Worth’s Farmer’s and Merchant’s National Bank by Janice Waltzer, used under a Creative Commons license.

The pokey. The joint. “Inside.” The ol’ Graybar Hotel.

Call it what you will — it’s where Bernard Madoff belongs, for the rest of his life. No bail arrangement should be made, despite his lawyer’s pleas.

This isn’t a legal argument (which is good, since I’m not a lawyer), but an ethical one.

Madoff has confessed to swindling as much as $65 billion from a host of people and institutions who trusted him. This list includes one of the world’s great voices of conscience, plus many nonprofits that fund all sorts of good works.

If Madoff had used a physical weapon to rob a store of 1/10,000,000th as much money, no conversation about bail would be held. We’d say he’s a menace to society and keep him behind bars until sentencing. Even if he never planned to use the weapon, even if he never meant to hurt anyone, we’d keep him inside — and rightly so.

Madoff’s weapons weren’t tangible. He was much more sophisticated than your typical gunsel. It doesn’t mean the harm he did was any less real, or that his punishment — for stealing ten million times as much money — shouldn’t be equally severe.

Let his family talk to him through a pane of glass.

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Photo by Ben, used under a CC-Share Alike license.

“When innovation is used to disguise risk, as it often has been of late, it really can have disastrous consequences.”

Read this l-o-n-g and good-humored Atlantic interview of Michael Lewis, if only so that you will at last understand the true mechanism of credit-default swaps and the perverse incentives that made some Wall Streeters get buried so deeply in them.

Two more choice tidbits about the financial markets and the regulation thereof:

“Goldman and Morgan Stanley and Lehman Brothers: their returns were increasingly generated by these smart traders making complicated gambles. But that’s ended. The complicated gambles require, one, people to trust them, and two, the ability to borrow large sums of money to make the gambles. And both those things have ended.”

“What’s the risk that the backlash will go too far? Well, everything overshoots, so you can be sure that whatever the reaction is, it will be excessive.”

And one more on the future of long-form journalism — in which field, as will be clear by now, Michael Lewis is one of my heroes:

“[M]y sense is, there’ll always be a hunger for long-form journalism, and that it’s just a question of how it’s packaged. And that people will always figure out how to make it sort of viable. It’s never going to be a hugely profitable business: it’s more like the movie business or the car business in that there are all sorts of good non-economic reasons to be involved in it. The economic returns will always probably be driven down by too many people wanting to be in it.”

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Related:

• Must-read: Michael Lewis on the Meltdown
• A Subprime Primer

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No, Thain didn’t add a convertible Mustang to his list of Merrill-funded expenditures, as far as I’m aware, and I don’t have much to add about Thain to what’s been ably said by Floyd Norris, Heidi Moore, and others.

But Thain’s sad departure did get me thinking of a story a friend of mine told me years ago. He was working in a small business, and the company needed a new company car to make client calls and deliveries. The company president, who might have been feeling the pangs of midlife crisis, settled on the idea that the right car for them was a convertible Mustang.

Nothing wrong with a Mustang, mind you — but it’s hardly designed as a utility vehicle, right? That’s what my friend thought, and he made his case to the boss. They should get something with more cargo room, something with better mileage. Maybe a minivan? A small station wagon? But his arguments fell on deaf ears: the boss wanted that Mustang, and so he got it.

No, it’s not as fancy as the $88,000 pair of armchairs or the $87,000 carpet that Thain spent Merrill’s money for when he refurbished his office. But the principle’s the same, and in the case of the small business, the wrongly directed expenditure on the Mustang meant even more. As silly as Thain’s million-dollar office remodeling was, a million dollars was a rounding error in the scheme of Merrill’s budget, even under the past year’s horrid conditions. But the misspent money for the Mustang . . . it really hurt a small outfit trying to make ends meet.

That little business ultimately went under. It never could have gotten the fanfare that Merrill did, even though, in this one regard, the two chief executives showed similar bad judgment.

The moral of this story: It’s easy to point fingers at the big shots. Thain’s overspending on furniture practically satirizes itself — not to mention making a hash of my verdict, when he was hired, that he was the right man for the job.

But little ol’ you and me, out here in the big middle of American business, we make mistakes like this, too. It’s just that they look like a convertible Mustang parked in a no-name industrial park instead of a fancy cabinet in a fancy office in a downtown New York skyscraper.

So go ahead and make fun of Thain — but take a look around your little corner of the business world, too. The same mistakes might be lurking there.

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Related:

• Merrill taps the right man.
• John Thain lands on his feet.

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Image by Michael Spiller, used under a CC-Share Alike license.

My esteem for Dimon is obvious. It only grows as I read this item:

Along the way, he said, he learned that being effective in the top job has less to do with brains than with other less tangible skills. “It’s not how smart you are,” he said, “or even your communication skills. It’s your clarity of thinking, your work ethic and your effectiveness. Those are management traits that are non-negotiable — if you don’t have them you will fail.”

[Via Peter Galuszka.]

It’s funny, just yesterday I was talking with a friend about a former manager we both knew. The manager was plenty smart, and had crackerjack communication skills — too good, in fact, because this person could make nonsense sound good, convince people to do things against their better judgment, and use beautiful words to duck responsibility.

What was missing was “clarity of thinking,” “work ethic,” and “effectiveness.”

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Related:

• Company of the Day: JPMorgan Chase.
• Jamie Dimon is smart.

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