Great Observer column by Simon Caulkin.

What's been lost over the last three decades is only now becoming clear. Some of the warning signs were already visible in the succession of increasingly frequent panics and scandals of the last decade and a half – Enron, the dotcom boom, LTCM. Less obviously, the last 30 years have seen a steady erosion of balance between stakeholders. While layoffs of staff – "the most important asset" – were once a last resort for employers, they are now the first option. Outsourcing is so prevalent that it needs no justification. And the company's welfare role is now so attenuated that it barely exists. First to go was the notion of career; more recently, the tearing-up of company pension obligations is another unilateral recasting of the conditions of work – a historic step backwards – that has aroused barely a ripple of objection.

The justification for this behaviour is, of course, the pressure of the market. But this is to disguise a betrayal. As a class, ever since the separation of ownership and management in the 19th century, managers have always occupied a neutral position at the heart of the enterprise – neither labour nor capital, but charged with combining the two for the benefit of both the company and society itself.

Everything changed in the 1980s, however, with the advent of Reagan, Thatcher and Chicago School economists who preached the alignment of management with shareholders in the name of "efficiency". In effect, "efficiency" came to mean short-term earnings to the detriment of long-term organisation-building; what was touted as "wealth creation" was actually "wealth capture", from suppliers, clients and employees as well as competitors, on the grandest scale since the robber barons. Its purest expression was private equity.

Managers never looked back. As late as the 1980s, a multiple of 20 times the earnings of the average worker was perfectly adequate CEO pay. But under the compliant gaze of shareholders and remuneration committees, performance-pay contracts boosted the ratio to 275 times by 2007.

As we now know, "performance pay" was a misnomer, an incentive for financial engineering that has destroyed value on a heroic scale. But it's not just shareholder value that has suffered. By severing any common interest between top managers and the rest of the workforce, fake performance pay has fatally undermined the internal compact that makes organisations thrive in the long term.

This morning’s Observer column about inane email disclaimers.

A friend sends you an email saying "How about lunch?" and it comes with this implicit threat that if you so much as breathe a word of it to any living being the massed litigators of Messrs Sue, Grabbit and Runne will descend upon you. The practice is now so widespread that most of us have become inured to it. We treat it as a penance to be borne – like muzak in lifts and the "we really value your call, please hold" mantra of customer "help" lines.

The funny thing is that the practice is, at best, legally dubious…

I’m collecting examples of this idiotic legalese. Here’s one that came in this morning:

This email and any files transmitted with it are confidential, and may be subject to legal privilege, and are intended solely for the use of the individual or entity to whom they are addressed. If you have received this email in error or think you may have done so, you may not peruse, use, disseminate, distribute or copy this message. Please notify the sender immediately and delete the original e-mail from your system. The contents, comments and views contained or expressed within this correspondence do not necessarily reflect those of [sending organisation] and are not intended to create legal relations with the recipient.

LATER: A comment on cearte.ie says:

But don’t forget that, in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, [1963] UKHL 4 (28 May 1963), the case that established liability in principle for negligent misrepresentation, a disclaimer was effective!

Nice reproof by Charles Arthur of the Culture Secretary’s potty proposals for ‘regulating’ web content.

The cluelessness of so many of these ideas hasn't been lost on all ministers, however. Tom Watson, of the Cabinet Office, is inviting views about Burnham's comments on his personal blog. As he points out,

Internet regulation is not in my policy area but I promise you I will forward your views to Andy Burnham and Lord Carter.

One would have to say that the comments aren't really running in Burnham's favour so far, but possibly the Daily Mail's commenters haven't been alerted about the blogpost's existence. Except even they don't think it's workable.

I think, Mr Burnham, that if even the Daily Mail's commenters don't think it's worth trying to do, then it's not worth trying to do.

(We should point out, by the way, that Watson emphatically does get the net. Perhaps Andy Burnham should drop by for a quick briefing.)

The New York Times today runs an extraordinary article analysing how Washington Mutual, the largest failed bank in American history, went about lending money. The piece is based on interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers and reveals the relentless pressure to churn out loans that produced the company’s meltdown. The reporters (Peter Goodman and Gretchen Morgenson) claim that their interviewees’ accounts are consistent with those of 89 other former employees who are confidential witnesses in a class action filed against WaMu in federal court in Seattle by former shareholders. The article is worth reading in full, but here are some of the juiciest quotes:

“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

— Kerry K. Killinger, chief executive of Washington Mutual, 2003

“It was just disheartening,” said Sherri Zaback, a mortgage screener for Washington Mutual. “Just spit it out and get it done. That’s they wanted us to do. Garbage in, garbage out.”

As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

On the other end of the country, at WaMu’s San Diego processing office, Ms. Zaback’s job was to take loan applications from branches in Southern California and make sure they passed muster. Most of the loans she said she handled merely required borrowers to provide an address and Social Security number, and to state their income and assets.

She ran applications through WaMu’s computer system for approval. If she needed more information, she had to consult with a loan officer — which she described as an unpleasant experience. “They would be furious,” Ms. Zaback said. “They would put it on you, that they weren’t going to get paid if you stood in the way.”

On one loan application in 2005, a borrower identified himself as a gardener and listed his monthly income at $12,000, Ms. Zaback recalled. She could not verify his business license, so she took the file to her boss, Mr. Parsons.

He used the mariachi singer as inspiration: a photo of the borrower’s truck emblazoned with the name of his landscaping business went into the file. Approved.

On another occasion, Ms. Zaback asked a loan officer for verification of an applicant’s assets. The officer sent a letter from a bank showing a balance of about $150,000 in the borrower’s account, she recalled. But when Ms. Zaback called the bank to confirm, she was told the balance was only $5,000.

The loan officer yelled at her, Ms. Zaback recalled. “She said, ‘We don’t call the bank to verify.’ ” Ms. Zaback said she told Mr. Parsons that she no longer wanted to work with that loan officer, but he replied: “Too bad.”

Shortly thereafter, Mr. Parsons disappeared from the office. Ms. Zaback later learned of his arrest for burglary and drug possession.

The sheer workload at WaMu ensured that loan reviews were limited. Ms. Zaback’s office had 108 people, and several hundred new files a day. She was required to process at least 10 files daily.

“I’d typically spend a maximum of 35 minutes per file,” she said. “It was just disheartening. Just spit it out and get it done. That’s what they wanted us to do. Garbage in, and garbage out.”

By 2005, the word was out that WaMu would accept applications with a mere statement of the borrower’s income and assets — often with no documentation required — so long as credit scores were adequate, according to Ms. Zaback and other underwriters.

“We had a flier that said, ‘A thin file is a good file,’ ” recalled Michele Culbertson, a wholesale sales agent with WaMu.

Martine Lado, an agent in the Irvine, Calif., office, said she coached brokers to leave parts of applications blank to avoid prompting verification if the borrower’s job or income was sketchy.

“We were looking for people who understood how to do loans at WaMu,” Ms. Lado said.

Top producers became heroes. Craig Clark, called the “king of the option ARM” by colleagues, closed loans totaling about $1 billion in 2005, according to four of his former coworkers, a tally he amassed in part by challenging anyone who doubted him.

Christine Crocker, who managed WaMu’s wholesale underwriting division in Irvine, recalled one mortgage to an elderly couple from a broker on Mr. Clark’s team.

With a fixed income of about $3,200 a month, the couple needed a fixed-rate loan. But their broker earned a commission of three percentage points by arranging an option ARM for them, and did so by listing their income as $7,000 a month. Soon, their payment jumped from roughly $1,000 a month to about $3,000, causing them to fall behind.

I could go on, but you will get the point. One didn’t have to be a rocket scientist to know that this was madness. So how come the regulators didn’t spot it? And who is going to do a similar job on our own Northern Rock?

Intriguing piece by Anne Applebaum in Slate.

Reading the accounts of the collapse of Bernard L. Madoff Investment Securities, it is impossible not to conclude that it will. The scale of this fraud stretches far beyond anything a car dealer or even the purchaser of an apartment might commit, of course: Among the victims of Madoff’s extraordinary pyramid scheme are major banks (BNP Parisbas, Nomura Securities), famous people (Mort Zuckerman), and Madoff’s friends from the Palm Beach Country Club. In the wake of Madoff’s arrest, charities are going to close, and previously rich people will become poor. Worst of all, everyone who invests anywhere will think just that much harder, take that much longer, demand that much more documentation. And they will do so not only because of Madoff, but because of the subprime lenders, Wall Street investment banks, and Enron fraudsters who have worked so hard to erode our faith in the reliability of our system.

The deeper irony here is that all these schemes were only possible in the first place precisely because we have, until now, lived in a culture with such extraordinarily high levels of trust, a culture in which a customer’s bona fides are accepted without question and wealthy people are thought to have earned their money. In our culture, someone like Madoff was trusted precisely because he was rich; because he was a member of the Palm Beach Country Club; because his company worked out of expensive Manhattan offices, most of which were occupied by people doing real jobs. It occurred to no one that a small group of select insiders was also operating a massive fraud scheme on the 17th floor.

In other cultures—maybe most other cultures—very rich people are suspect by definition. Recently, I met a wealthy Russian and automatically assumed he was the beneficiary of some shady scheme: How else would someone from that part of the world get rich? In fact, he turned out to be the CEO of a Western-owned company in Kiev, Ukraine, and totally above board. But I know why I made the mistake: I still remember—and Russians still remember—the fraudulent “privatization” deals and complex money-laundering operations that created so many Russian billionaires over the last two decades. I also remember the extraordinary saga of the MMM company, which in the 1990s defrauded some 2 million Russians of $1.5 billion, using what will now surely be known as the second-largest pyramid scheme of all time. Back then, we thought such blatant fraud could only take place in the lawlessness of the post-Soviet world.

We were wrong. Madoff’s pyramid scheme, far broader than anything MMM dreamed up, was made possible by our own tradition of lawfulness. And now he will help bring that tradition down. Here’s a prediction: In the coming years, American capitalism will become slower, more cautious, less productive, and less entrepreneurial. We’re still a long way from Eastern Europe of the 1990s or from the Latin America or Russia of the present. But maybe not as far as we think.

And while we’re on the subject…

… it turns out that Madoff’s annual audit was carried out by a three-person, out-of-town accountancy firm. How, one wonders, did his investors’ ‘due diligence’ inquiries miss that fact?

If you’ve even been the subject of a due diligence inquiry (as I and my colleagues have) then you might be forgiven for thinking that investors are very careful about where they put their money. Well, it looks as though the more money you have the less careful you are. Here’s the NYT reporting today on the Bernard Madoff scam.

The epicenter of what may be the largest Ponzi scheme* in history was the 17th floor of the Lipstick Building, an oval red-granite building rising 34 floors above Third Avenue in Midtown Manhattan.

A busy stock-trading operation occupied the 19th floor, and the computers and paperwork of Bernard L. Madoff Investment Securities filled the 18th floor.

But the 17th floor was Bernie Madoff’s sanctum, occupied by fewer than two dozen staff members and rarely visited by other employees. It was called the “hedge fund” floor, but federal prosecutors now say the work Mr. Madoff did there was actually a fraud scheme whose losses Mr. Madoff himself estimates at $50 billion.

The tally of reported losses climbed through the weekend to nearly $20 billion, with a giant Spanish bank, Banco Santander, reporting on Sunday that clients of one of its Swiss subsidiaries have lost $3 billion. Some of the biggest losers were members of the Palm Beach Country Club, where many of Mr. Madoff’s wealthy clients were recruited.

The list of prominent fraud victims grew as well. According to a person familiar with the business of the real estate and publishing magnate Mort Zuckerman, he is also on a list of victims that already included the owners of the New York Mets, a former owner of the Philadelphia Eagles and the chairman of GMAC.

And the 17th floor is now an occupied zone, as investigators and forensic auditors try to piece together what Mr. Madoff did with the billions entrusted to him by individuals, banks and hedge funds around the world.

Source: NYTimes.com.

As a United States Senator once observed: “A billion here, a billion there and pretty soon you’re talking serious money”.

*Footnote: Ponzi scheme.

LATER: This touching dispatch from the Palm Beach club. Excerpt:

Just days after the collapse of Bernard L. Madoff’s suspected $50 billion Ponzi scheme, two of his emissaries returned to the epicenter of the financial disaster to face some of the hardest-hit investors, many of them old friends whom they had recruited to invest in Mr. Madoff’s firm.

As Carl J. Shapiro and Robert M. Jaffe sat down at the Men’s Grill of the Palm Beach Country Club they scanned an awkwardly quiet room, seemingly looking for friendly faces and reassuring nods.

The moment was a stark reversal for two men whom people used to trip over themselves to meet in hopes of a chance to invest with Mr. Madoff.

“You doing O.K.?” asked one of the several club members who approached the men in a show of support. “We’re here for you.”

While the fallout from Mr. Madoff’s suspected con game shook investors around the world, perhaps nowhere was there a higher concentration of victims than in this room. Investors were said to have paid hundreds of thousands of dollars a year to remain members of this club in hopes of an introduction to Mr. Madoff, usually by Mr. Jaffe or Mr. Shapiro. Mr. Madoff has been a member since 1996.

But more than wealth, these people seemed to have lost a sense of trust and prestige. During a visit to the club on Saturday, many members, asked for their reactions, requested not to be named because they did not want to ruin their standing among friends.

But wait! — there’s more:

Everywhere at the club, it was the topic of conversation.

Upstairs in the women’s dining room, a woman joked that she now knew the proper way to pronounce his name.

“Made off,” she said. “You know, like he made off with all our money.”

Even off the island, many investors said they were impressed with how careful Mr. Madoff had seemed.

“He just didn’t make mistakes,” said Richard Spring, 73, from Boca Raton. “He was just a sound, smart, reasonable guy.”

Mr. Spring recounted meeting Mr. Madoff in the early 1970s when they shared a helicopter each day commuting from Long Island to Wall Street.

He said he vividly recalled one commute when Mr. Madoff “bawled out” one of his traders for sloppy work, not protecting against a downturn.

Impressed, he later invested with Mr. Madoff, over time putting more than $11 million into the firm, virtually every cent of his savings, he said.

“I’m taking care of my sick mother-in-law. My wife has cancer. I just can’t deal with it,” Mr. Spring said, only barely choking back tears. “I’m cooked.”