Category Archives: (Mis)Management

Dell and its Intel Habit

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This is lovely.

On Thursday, the Securities and Exchange Commission released some communications between Dell and Intel executives that shed more light on this matter. It shows Dell executives telling investors one thing and telling each other the exact opposite.

According to the S.E.C., Kevin Rollins, Dell’s chief executive for part of the period in question, bragged in 2004 that Dell’s ability to meet or exceed Wall Street expectations for 12 quarters in a row was “driven by our tightly controlled supply chain, highly efficient infrastructure and direct relationships with customers.”

And yet, at around the same time, Mr. Rollins wrote to Michael S. Dell, the company’s founder, that “for 3 qtrs now, Intel money has made the qtr. A bad way to run the railroad,” according to the S.E.C.

Later, Mr. Rollins wrote to Mr. Dell about Intel, saying “We are going to have to get off their drug . . . “. There was much more.

The information disgorgement came as the S.E.C. hit Dell with accounting fraud charges, and the company settled the matter with a $100 million fine and no admission of any wrongdoing.

At the heart of the S.E.C.’s complaint against Dell was the claim that Dell hid its reliance on rebates from Intel from investors. Intel rewarded Dell for not using A.M.D. chips, and Dell became more and more dependent on payments from Intel to meet quarterly financial targets, according to the S.E.C.

Dell’s management highlighted how the company was tweaking its supply chain or dealing with changes in component costs when it explained swings in quarterly results to investors. These executives, including Mr. Dell, failed to stress that Dell’s quarters were being made or broken by rebates from Intel that fluctuated depending on Dell’s financial needs and loyalty, according to the complaint.

Other e-mail messages talk about Dell needing to beg Intel for money to meet quarterly goals and show Mr. Rollins being less than direct when asked about effect Intel’s rebates had on Dell’s quarterly performance.

Interesting also how this addiction was entirely unnoticed by Tom Friedman, one chapter of whose The World is Flat: The Globalized World in the Twenty-first Century was devoted to a gripping paen of praise for Dell’s lean, mean and tightly-integrated supply chain.

Slasher Osborne and the belief that Austerity Is Good

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“When I was young and naïve”, writes Paul Krugman, “I believed that important people took positions based on careful consideration of the options. Now I know better.”

Yep. Me too. Long ago I decided that the null hypothesis should be that — in public life and management at least — Nobody Knows Anything.

“Much of what Serious People believe”, Krugman goes on, “rests on prejudices, not analysis. And these prejudices are subject to fads and fashions.”

For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts.

Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.

Which brings us to Slasher Osborne and his fag, Danny Alexander. Time and again, their mantra is our old friend TINA (There Is No Alternative). If we don’t slash public expenditure then the Bond Vigilantes will come and get us. There is, of course, no evidence that the bond market would do to the UK what it threatens to do to Greece. Nor could there be. The essence of these kinds of markets — based on that intangible thing, “confidence” — is that there’s no knowing what they might do, and you can’t base national policy on considerations as irrational as that. Otherwise you wind up with the economic counterpart of the National Security State, which can devise any rationale — no matter how absurd — for curtailing freedoms on the grounds that Al Qaede could conceivably exploit the ‘loopholes’ that such freedoms provide. (As an example, think of the obsession with stopping photographers from photographing public buildings.)

It should be obvious to the meanest intelligence that slashing public spending when the economy is on a tentative recovery from recession is a sure way of triggering another, deeper, recession. And of course Slasher knows that, as do his counterparts in the US. But here another chimera comes to their aid, namely what Krugman calls the “Confidence Fairy”.

But don’t worry: spending cuts may hurt, but the confidence fairy will take away the pain. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, the president of the European Central Bank, in a recent interview. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery.”

What’s the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? (By the way, this is precisely the doctrine expounded by Herbert Hoover in 1932.) Well, there have been historical cases of spending cuts and tax increases followed by economic growth. But as far as I can tell, every one of those examples proves, on closer examination, to be a case in which the negative effects of austerity were offset by other factors, factors not likely to be relevant today.”

Oh, and if you’re in any doubt about what really savage public spending cuts can do to an economy, then have a look at my own dear homeland, which was recently the subject of an illuminating piece in the New York Times.

Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

Now, the Irish are being warned of more pain to come.

More ‘pain’? (That word again.) Yep. Because of course the Bond Vigilantes aren’t satisfied yet.

A good election to lose

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If you read nothing else this week, read John Lanchester’s terrific piece about the economic outlook in the current issue of the London Review of Books. In full. Here’s a taster:

The imminence of the general election doesn’t help. Broadly speaking, the circumstances are such that it shouldn’t much matter who wins the election, not in economic terms. The economic realities are harsh and are likely to determine most of what the new government does. Labour have promised to cut the deficit in half within four years. They haven’t spelled out how they are going to do it, and until recently Gordon Brown was talking about ‘Tory cuts versus Labour investment’ – which, given what he must know about what the figures mean, is jaw-droppingly cynical. The reality is that the budget, and the explicit promises of both parties, imply a commitment to cuts of about 11 per cent across the board. Both parties, however, have said that they will ring-fence spending on health, education and overseas development. Plug in those numbers and we are looking at cuts everywhere else of 16 per cent. (By the way, a two-year freeze in NHS spending – which is what Labour have talked about – would be its sharpest contraction in 60 years.)

Cuts of that magnitude have never been achieved in this country. Mrs Thatcher managed to cut some areas of public spending to zero growth; the difference between that and a contraction of 16 per cent is unimaginable. The Institute for Fiscal Studies – which admittedly specialises in bad news of this kind – thinks the numbers are, even in this dire prognosis, too optimistic. It makes less optimistic assumptions about the growth of the economy, preferring not to accept the Treasury’s rose-coloured figure of 2.75 per cent. Plugging these less cheerful growth estimates into its fiscal model, the guesstimate for the cuts, if the ring-fencing is enforced, is from 18 to 24 per cent. What does that mean? According to Rowena Crawford, an IFS economist, quoted in the FT: ‘For the Ministry of Defence an 18 per cent cut means something on the scale of no longer employing the army.’ The FT then extrapolates:

At the transport ministry, an 18 per cent reduction would take out more than a third of the department’s grant to Network Rail; a 24 per cent reduction is about equivalent to ending all current and capital expenditure on roads. At the Ministry of Justice an 18 per cent reduction broadly equates to closing all the courts, a 24 per cent cut to shutting two-thirds of all prisons.

This is good blood-curdling stuff. But it is, I think, impossible for anyone to believe that any British government will ever administer cuts in public spending of that order. Getting rid of the army or of the courts? I don’t think so – and yet that’s the magnitude of change promised by the promised assault on public spending. The political parties are doing everything they can to look serious about cutting the deficit, but they won’t go anywhere near specific proposals, and for good reason: to do so would be electoral suicide. That in turn means that even if they wanted to administer this order of cuts, they would have no mandate to do so.

So why all the posturing about the deficit?

Back to the future: the US Sejm

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Nice Krugman column.

We’ve always known that America’s reign as the world’s greatest nation would eventually end. But most of us imagined that our downfall, when it came, would be something grand and tragic.

What we’re getting instead is less a tragedy than a deadly farce. Instead of fraying under the strain of imperial overstretch, we’re paralyzed by procedure. Instead of re-enacting the decline and fall of Rome, we’re re-enacting the dissolution of 18th-century Poland.

A brief history lesson: In the 17th and 18th centuries, the Polish legislature, the Sejm, operated on the unanimity principle: any member could nullify legislation by shouting “I do not allow!” This made the nation largely ungovernable, and neighboring regimes began hacking off pieces of its territory. By 1795 Poland had disappeared, not to re-emerge for more than a century.

Today, the U.S. Senate seems determined to make the Sejm look good by comparison.

Last week, after nine months, the Senate finally approved Martha Johnson to head the General Services Administration, which runs government buildings and purchases supplies. It’s an essentially nonpolitical position, and nobody questioned Ms. Johnson’s qualifications: she was approved by a vote of 94 to 2. But Senator Christopher Bond, Republican of Missouri, had put a “hold” on her appointment to pressure the government into approving a building project in Kansas City.

This dubious achievement may have inspired Senator Richard Shelby, Republican of Alabama. In any case, Mr. Shelby has now placed a hold on all outstanding Obama administration nominations — about 70 high-level government positions — until his state gets a tanker contract and a counterterrorism center.

What gives individual senators this kind of power? Much of the Senate’s business relies on unanimous consent: it’s difficult to get anything done unless everyone agrees on procedure. And a tradition has grown up under which senators, in return for not gumming up everything, get the right to block nominees they don’t like.

In the past, holds were used sparingly. That’s because, as a Congressional Research Service report on the practice says, the Senate used to be ruled by “traditions of comity, courtesy, reciprocity, and accommodation.” But that was then. Rules that used to be workable have become crippling now that one of the nation’s major political parties has descended into nihilism, seeing no harm — in fact, political dividends — in making the nation ungovernable.

How bad is it? It’s so bad that I miss Newt Gingrich.

Next stage in the Celtic Tiger’s downhill spiral: sovereign default?

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Professor Morgan Kelly of University College Dublin has written a terrific analysis of the banking crisis which still threatens the economic viability of my homeland. His conclusion:

By pushing itself close to, and quite possibly beyond, the limits of its fiscal capacity,the Irish state has succeeded in rescuing Irish banks from their losses on developer loans. Despite this, these banks remain as zombies entirely reliant on continued Irish government guarantees and ECB forbearance, and committed solely to reducing their own debts. While bank capital levels are, probably, adequate for the markedly smaller scale of their future lending, … even fairly modest losses on their mortgage portfolios will be sufficient to wipe out most or all of that capital. Having exhausted its resources in rescuing the Irish banks from the first wave of developer losses, the Irish state can do nothing but watch as the second wave of mortgage defaults sweeps in and drowns them.

In other words, it is starting to appear that the Irish banking system is too big to save. As mortgage losses crystallise, the Irish government’s ill conceived project of insulating bank bond-holders from any losses on their investments is sliding beyond the means of its taxpayers. The mounting losses of its banking system are facing the Irish state with a stark choice. It can attempt a NAMA II for mortgage losses that will end in a bond market strike or a sovereign default. Or it can, probably with the assistance of the IMF and EU, organise a resolution that shares property losses with bank creditors through a partial debt for equity swap.

Thanks to Gavin Sheridan and the unmissable The Story for the link.

The Noughties: the Big Zero

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Nice NYT column by Paul Krugman looking back on a wasted decade.

From an economic point of view, I’d suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true.

It was a decade with basically zero job creation. O.K., the headline employment number for December 2009 will be slightly higher than that for December 1999, but only slightly. And private-sector employment has actually declined — the first decade on record in which that happened.

It was a decade with zero economic gains for the typical family. Actually, even at the height of the alleged “Bush boom,” in 2007, median household income adjusted for inflation was lower than it had been in 1999. And you know what happened next.

It was a decade of zero gains for homeowners, even if they bought early: right now housing prices, adjusted for inflation, are roughly back to where they were at the beginning of the decade. And for those who bought in the decade’s middle years — when all the serious people ridiculed warnings that housing prices made no sense, that we were in the middle of a gigantic bubble — well, I feel your pain. Almost a quarter of all mortgages in America, and 45 percent of mortgages in Florida, are underwater, with owners owing more than their houses are worth.

Last and least for most Americans — but a big deal for retirement accounts, not to mention the talking heads on financial TV — it was a decade of zero gains for stocks, even without taking inflation into account. Remember the excitement when the Dow first topped 10,000, and best-selling books like “Dow 36,000” predicted that the good times would just keep rolling? Well, that was back in 1999. Last week the market closed at 10,520.

So there was a whole lot of nothing going on in measures of economic progress or success. Funny how that happened.

It wasn’t me, guv

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I’ve always believed that the best general philosophical null hypothesis is that nobody knows anything. This week’s Economist has a lovely tongue-in-cheek editorial about bank bosses which confirms the wisdom of my position.

Certainly, bank bosses displayed the hubris of all big corporate baddies: paying themselves loads, making nutty expense claims try an $87,000 rug and, in one case, playing bridge in Detroit as their firm collapsed. Compared with Kenneth Lay of Enron or Bernie Ebbers of WorldCom, however, they were amateurs. Most were useless rather than venal.

Far from expertly manipulating their firms’ books, many could not understand them. Citigroup’s boss reportedly learned of its $43 billion of toxic assets only in September 2007 he was told losses were unlikely. UBS’s own post mortem found that “at no stage” did managers have a decent assessment of its subprime exposure. Merrill Lynch signalled a $5 billion write-down in October 2007, only to increase it to $8 billion a mere 19 days later. Even when they had decent numbers, executives struggled to manage their mutinous staff. One ex-boss says his job was “less management, more crowd control”. Meanwhile shareholders pushed bosses to take risks. The vast majority backed RBS’s suicidal takeover of ABN AMRO.

The paper notes that, faced with the catastrophe, corporate-governance gurus are “scraping around, like scholars of jurisprudence in a state of nature”, and suggests some common-sense measures instead:

What firms need is a culture of excellence—but that is like saying all football teams should be like Manchester United. Perhaps the clearest lesson is that big banks are as close as businesses can get to being unmanageable. Bank of America’s assets are now ten times those of Exxon Mobil, America’s most valuable firm. A balance-sheet of $2.3 trillion is beyond the ken of mere mortals. Even firms staffed only by all-knowing deities—such as Goldman Sachs—look like giant black boxes to outsiders. If the new bank bosses want to be in charge, they must shrink and simplify their firms. That way, next time round, they really can be blamed for everything.

America’s Last Counterinsurgent?

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As an armchair (well, Aeron-chair) General, I’ve long regarded the adventure in Afghanistan as futile, for reasons that anyone who knows the history of that extraordinary country will understand. What I didn’t expect was that a major US military figure would set out the problem clearly in public. Yet that is exactly what Obama’s appointee, General McChrystal, has done. Here’s a useful summary from Foreign Policy of what he told Congress:

McChrystal’s report describes what must change in Afghanistan to increase the odds of success. However, neither the U.S. military nor the rest of the government can hope to do much about these problems before the political clock runs out in the United States. The problems McChrystal discusses include:

1. The need to elect a president Afghans (and Americans) will accept as legitimate

2. Corrupt and ineffective Afghan governance at the national and local levels

3. U.S. soldiers’ lack of facility with Afghanistan’s languages,

4. The U.S. military’s inability to gain trust and credibility with the population,

5. The difficulty expanding the size and quality of Afghanistan’s security forces,

6. The requirement to significantly disrupt Taliban and al Qaeda sanctuaries in Pakistan,

7. The requirement for U.S. and NATO countries to accept higher casualty rates over the medium term as they attempt to protect Afghanistan’s population.

Foreign Policy‘s inference is that

McChrystal’s report will have unwittingly rendered a fatal blow to Western counterinsurgency doctrine. It will be hard for anyone to seriously recommend counterinsurgency elsewhere after it was abandoned in Afghanistan. McChrystal will be America’s last counterinsurgency general for a long while. The United States will still have to endure a long era of irregular warfare. It just needs a new military doctrine for this era, and fast.

At least the Americans are being relatively open about the fiasco in Afhganistan. (And there are voices there now muttering openly about a “twenty-year war”.) Over here there’s only official hypocrisy and psychological denial. What really gets my goat is the cynical nonsense spouted by British ministers as the list of British casualties lengthens almost by the day. We’re now in the kind of position that the US got into in Vietnam — fighting a war that we cannot win, yet (allegedly) cannot afford to lose.

Lest we forget

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This picture of Gordon Brown sucking up to Richard S. Fuld, CEO of Lehman Bros, just after opening Lehman’s new London HQ, is a still from a Channel 4 ‘Dispatches’ film about the banking collapse. It’s a useful reminder of how much the British and US administrations were in thrall to the bankers who engineered the meltdown of the financial services industry.

The first anniversary of the Lehman collapse is a deeply depressing one, because I see little evidence that anything has changed, or that any real lessons have been learned. But who am I to say? — I don’t have any expertise in the area. Joe Stiglitz, however, does. (He has a Nobel Prize in economics.) And here’s what he has to say in today’s Guardian:

Unquestionably we should not have allowed banks to become so big and so intertwined that their failure would cause a crisis. But the Obama administration has created a new concept: institutions too big to be resolved, too big for capital markets to provide the necessary discipline. The perverse incentives for excessive risk-taking at taxpayers’ expense are even worse with the too-big-to-be-resolved banks than they are at the too-big-to-fail institutions. We have signed a blank cheque on the public purse. We have not circumscribed their gambling – indeed, they have access to funds from the Fed at close to zero interest rates, and it appears that “trading profits” have (besides “accounting” changes) become the major source of returns.

Last night Barack Obama defended his administration’s response to the financial crisis, but the reality is that a year on from Lehmans’ collapse, it has failed to take adequate steps to restrict institutions’ size, their risk-taking, and their interconnectedness. Indeed, it has allowed the big banks to become even bigger – just as it has failed to stem the flow of profligate executive bonuses. Obama’s call on Wall Street yesterday to support “the most ambitious overhaul of the financial system since the Great Depression” is welcome – but the devil, as ever, will be in the detail.

There remain many institutions willing and able to engage in gambling, trading and speculation. There is no justification for this to be done by institutions underwritten by the public. The implicit guarantee distorts the market, providing them a competitive advantage and giving rise to a dynamic of ever-increasing size and concentration. Only their own managerial competence, demonstrated amply by a few institutions, provides a check on the whole process.

At the moment, there seems to be little evidence that people in the financial services industry accept responsibility for the catastrophe they created. An interesting report from the IPPR think-tank puts it nicely:

Financial institutions have also discovered they are not as clever as they thought they were. Keynes said, ‘Practical men,who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist’. In this instance, bankers, hedge funds and the rest were slaves to the economists who told them that people were rational and financial markets efficient. They built complex risk measurement systems, based on these theories, which told them that their positions were safe because they were well-diversified and they ignored the sceptics, such as Nassim Taleb (2007), who warned that these models could not cope with extreme outcomes and, crucially, that these extreme outcomes tend to happen more frequently than statistical models would suggest. However, events have proved Taleb right and the combined wisdom of the financial system wrong.

It seems obvious, therefore, that tomorrow’s capitalism requires a transformation of culture in the City as well as enhanced regulation, as much to save the financial system from itself as to stop it creating another crisis for the rest of the economy. However, it will be very difficult to change this culture. Although there has clearly been a breakdown in trust between the banks and the rest of the economy, there is little to suggest that the City accepts it was responsible and that it has a major role to play in restoring trust. For example, after Goldman Sachs reported a $3.44 billion profit for the second quarter of 2009, there was speculation that average pay␣(salary and bonuses) at the firm would be $1 million this year.

However, City practitioners are not solely to blame. There has also been a massive failure of accountability, which allowed bankers to do what they did. Remuneration committees did not control bank executives through appropriate packages. Auditors did not sound alarm bells over what banks were doing. Institutional shareholders failed to question banks’ behaviour — indeed they egged them on, for example supporting the RBS board’s decision to buy ABN Amro. And regulators failed to appreciate the scale of systemic risk that was developing. The City’s friends were just as culpable as the bankers themselves.

If the City and its supporters are unwilling, or unable, to alter its culture from within, change will have to be imposed on it from without. Some changes seem obvious. Limits should be placed on remuneration packages to ensure they only reward long-term success, not short- term (and unsustainable) gains. And institutional investors, such as pension funds, should think about how they can encourage the City away from its trading mentality and back to a longer-term buy and hold approach.

There will also have to be changes in regulation, since the old rules have been demonstrated to be clearly inadequate. This does not necessarily mean more regulation — the US already has the most heavily regulated financial sector, but this did not stop financial crises developing there. What is needed is better regulation.

Quite. But will we get it? Don’t hold your breath. Obama has already chickened out.

What is happening to us?

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Wonderful, impassioned Boing Boing post by Cory. I’m reproducing it in full.

The Philadelphia Free Library system is broke, and they’re shutting it down, including cancelling “all branch and regional library programs, programs for children and teens, after school programs, computer classes, and programs for adults”; and “all children programs, programs to support small businesses and job seekers, computer classes and after school programs”; and “all library visits to schools, day care centers, senior centers and other community centers”; and “all community meetings”; and “all GED, ABE and ESL program.”

Just look at that list of all the things libraries do for our communities, all the ways they help the least among us, the vulnerable, the children, the elderly. Think of every wonderful thing that happened to you among the shelves of a library. Think of the millions of lifelong love-affairs with literacy sparked in the collections of those libraries. Think of every person whose life was forever changed for the better in those buildings.

Think of the nobility of libraries and librarianship, the great scar that the Burning of Alexandria gouged in human history. Think of the archivists who barricaded themselves in the Hermitage during the Siege of Leningrad, slowly starving and freezing to death but refusing to desert their posts for fear that the collections they guarded would become firewood.

Think of the librarians who took a stand during the darkest years of the PATRIOT Act and refused to turn over patron records. Think of the moral unimpeachability of those whose trade is universal access to all human knowledge.

Picture an entire city, a modern, wealthy place, in the richest country in the world, in which the vital services provided by libraries are withdrawn due to political brinksmanship and an unwillingness to spare one banker’s bonus worth of tax-dollars to sustain an entire region’s connection with human culture and knowledge and community.

Think of it and ask yourself what the hell has happened to us.

Amen.