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Tuesday, April 24, 2012

Three Profiles in Crisis Leadership

PBS is airing a four-hour summary of the causes and consequences of the financial crisis that nominally began in 2008. You can watch online at


http://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/

or read the transcript at

http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/money-power-wall-street/transcript-19/

Much of the content in the first two hours seems recycled from prior Frontline shows and other sources such as 13 Bankers (see #1) or Too Big To Fail (see #2) that covered topics such as:

* Brooksley Born's attempt to impose regulations on derivatives even before the Long Term Capital Management crisis -- an attempt squelched by Alan Greenspan and Larry Summers

* attempts by the State of Georgia to curtail predatory and fraudulent lending practices that resulted in a campaign by the financial industry to defeat the Georgia Governor in November 2002, instantly repeal those limits then get legislation passed by Congress to block ANY state from imposing similar limits on lending practices that contributed to the bubble

* the operation of the Treasury and Federal Reserve in "panic of the hour" mode throughout September and October of 2008 which telegraphed a sense of chaos and lack of principle to the markets that actually worsened the problems

* how Blythe Masters devised a financial instrument that allowed her employer, JP Morgan, to sell pieces of a giant loan it made to Exxon (to cover its potential risks after its Exxon Valdez disaster) so JP Morgan could reduce its risk exposure to an Exxon collapse, reduce JP Morgan's capital reserve requirements and make more money lending at a lower effective reserve ratio

* how Blythe Masters and those very same wizards at JP Morgan grew that concept into selling pieces of a collection of credit papers from hundreds of major name firms, only to get cold feet about the process and drastically curtail their use of the tool after the rest of the industry became addicted to the process

The biggest piece of new information is the five minute picture of what actually happened in the emergency "summit" hastily called for by John McCain as he "suspended his campaign" to focus on the financial crisis and help Congress break a deadlock after balking at the first Treasury bailout plan.

Here's an excerpt of that segment (see 42:00 to 47:00 in the Episode 2 clip)

============================
Rep. NANCY PELOSI: Senator Obama said, "Well, I’d really like to hear from Senator McCain because he’s the person who called for this meeting."

RON SUSKIND: McCain is fumbling with his cue cards. He doesn’t even barely get started. Obama kind of patronizes him, saying, “I think Senator McCain has something to say.” McCain just melts on the spot.

MATT LATIMER: Obama took charge, had authority. John McCain had no plan, no strategy. I don’t think he understood what was happening, or didn’t have a plan for what he wanted to accomplish.

JONATHAN ALTER: President Bush whispered to Nancy Pelosi, who was sitting next to him, when McCain was talking, he said, “You guys are going to miss me.” And she kind of laughed.

PETER BAKER: The meeting ends up breaking into— into a cacophony of shouting and— and screaming back and forth. And Bush stands up and says, “Well, I’ve clearly lost control of this meeting,” and he walks out.

JONATHAN ALTER: And another Republican at the table joked to the person sitting next to him, “After this, even we’re going to vote for Obama.” That was the level of Obama’s dominance in this meeting.

MATT LATIMER: It becomes a turning point because McCain started this. He suspended his campaign. Obama did not suspend his campaign. McCain promised some sort of dramatic action. He sent mixed signals and did not seem to have the authority that a commander-in-chief should have. And I don’t think he ever really quite recovered from that.
============================

Who is saying this? A Democratic party hack? No. Matt Latimer, a White House speech writer in the Bush Administration between 2007 and 2008.

People will argue for centuries about whether TARP was the right thing of the right size at the right time to attempt to plug the drain we were headed down at the time. It may have only slowed the rush of water out of the tub for a few months or years. However, just think about the stakes that WERE clear in that room at that time involving a few TRILLION dollars in household wealth and Wall Street market capitalization then compare the communication styles and composure of the players in that room.

One guy starts the meeting with "we gotta do something or this sucker's going down" then immediately punts on first down. This is the President of the United States.

One guy has the opportunity to come to the meeting and frame the discussion -- having called for the meeting thereby MAGNIFYING worldwide risk by setting expectations to "do something" -- and freezes -- literally like a deer in the headlights. This is a candidate for President from the party professing to know business, management and leadership.

One guy shows up, comes prepared with ideas having done HOURS of homework with input from advisors in government and business, and -- simply by appearing focused and informed -- dominates a meeting with the President of the United States and the heads of the Treasury and Federal Reserve at a moment of national economic peril.

Congress didn't pass the revised TARP plan immediately after that pointless meeting but one can imagine the sense of panic that would have ensued had people in that meeting left the room without seeing at least one adult show up and convey a sense of direction and reason. Barack Obama may have earned his spot in history before ever taking the oath of office based on the leadership he demonstrated in that meeting.

===========================

#3) http://watchingtheherd.blogspot.com/2010/04/book-review-13-bankers.html

#4) http://watchingtheherd.blogspot.com/2010/04/book-review-too-big-to-fail.html

Sunday, April 22, 2012

America Sings Daisy

The movie 2001: a space odyssey was famous for its special effects and sci-fi predictions of the technologies that would allow man to travel in space, conquer zero gravity and vast stretches of time without wasting away, all while enjoying a tasty meal and keeping in touch with a daughter's birthday via picture phone. The movie was about much more than special effects and space travel, though. Arthur C Clarke's book and Stanley Kubrick's film were really an allegory about the evolution of intelligence in mankind as reflected in the tools we use and the evil made possible by those tools.

The most memorable plot line in the movie involves the relationship between two astronauts on an extended mission to Jupiter with other "hibernating" astronauts all being monitored by the watchful eye of an advanced computerized control system named HAL 9000. The computer identifies a fault on hardware onboard which is subsequently found to be OK, pointing out to the two astronauts and mission control that HAL is malfunctioning and needs to have its higher level functions for mission planning relinquished to the astronauts and other systems. The computer, aware of the plan, views it as a threat to itself and launches its own plot to protect itself by killing everyone on board. It suggests a second extra-vehicular activity so it can kill Frank outside the ship, trigger Dave to temporarily go outside the ship to retrieve Frank, thus giving it time to halt all life support functions of the hibernating crew before locking Dave out of the ship as well.

After Dave recovers the body of Frank and returns to the ship, HAL's refusal to "open the pod bay doors" forces Dave to choose between holding on to the recovered body of his crewmate or abandoning the body so he can operate an emergency entrance lock. Dave opts to surrender his crewmate's body but, upon re-entering the ship, makes a beeline for the core computer room housing the memory modules and processors that make HAL's advanced "thinking" possible.

In the climactic scene of the movie, Dave enters the core computer room as the ever-watchful HAL talks to him. "Just what do you think you're doing, Dave? Dave... I really think I'm entitled to an answer to that question... Look Dave, I can see you are really upset about this. I honestly think you ought to sit down calmly, take a stress pill and think things over..."

http://www.youtube.com/watch?v=ZI_xGPrsZYc

Dave proceeds to disable one of man's most complicated tools -- a supercomputer capable of controlling an entire space ship and capable of human-like actions like planning, revenge and murder -- with one of man's most simple tools -- a screwdriver, symbolically equivalent a leg bone seeen at the beginning of the film as a caveman learns to use it as a tool to kill other cavemen. As Dave removes HAL's memory, the computer regresses to lower and lower levels of capability, symbolized by its lower and slower speech and its eventual attempt to sing the song "Daisy Bell":

====================================

Analogies to the battle between Dave and HAL and to HAL's progressive functional slowdown seem apropos for America right now. America exists in an extremely complex world that is tightly interconnected at economic, social and political levels. You cannot operate the world's biggest economy and the world's most costly, powerful military without relying on a multitude of organizations throughout the society to operate the physical and virtual machines of government, justice, the economy and the military.

Unfortunately, we have been bombarded since 2001 (irony?) with examples across these institutions of incompetence, outright corruption and appalling immorality:

* professional auditors who repeatedly blessed the books of publicly traded firms who were hiding billions in bogus profits and pending losses

* central bankers bailing out failed TBTF banks at the expense of the public while creating more and bigger TBTF banks

* military personnel deployed at a base specifically intended to manage the returning remains of fallen soldiers treating those remains like dinner scraps hauled away to a landfill

* military personnel generating further risk to all deployed troops by desecrating the bodies of killed enemy combatants

* corporate executives pushing profits over human and environmental safety causing a preventable oil rig disaster that poisoned hundreds of miles of coast and crippled local economies already in crisis from the 2008 economic downturn

* government accounting watchdogs operating without watchdogs on their spending that wasted hundreds of thousands of dollars PLANNING even larger conferences that wasted additional hundreds of thousands of dollars

* Secret Service personnel responsible for protecting the President and avoiding international crises by eliminating potential threats spending their time hiring hookers and breaching secured zones with "unsecure" personnel

If colossal system failures like these weren't frustrating enough, the suggestion that we "do a Dave" and pull the plug on all of these systems and return to some prior state of uncomplicated utopia is just as frustrating.

If five percent of large public corporations are manipulating earnings and falsifying tax records to avoid $300 billion in taxes per year, will eliminating public auditing requirements make the problem better? Will ADDING more rules and formulas to the tax code make the problem better? Of course not. However, eliminating complexity and altering legal and financial incentives for auditors MIGHT improve collections and compliance without increasing private or public headcount dedicated to compliance and enforcement.

If we can't be bothered training military commanders to more effectively recognize the psychological incapacitation of the young men and women we've sent into 24x7x365 war zones with repeated tours with a mission of "drive around and avoid the bombs and snipers", maybe we should we just "outsource" our wars to the private sector. Oh wait, we did that in Iraq. Didn't work out too well. The word Blackwater rings a bell for some reason.

On the April 22, 2012 edition of This Week (see #1), ABC commentator George Will opined:

----------------------------------
It is unfair to blame Barack Obama for the GSA or any of these things because although people THINK he controls the executive branch, NO ONE controls the executive branch, that's part of the problem with big government -- there's no leash strong enough to hold it. But beyond that, this is going to have a political ramification because the party in power believes that the federal government needs more money, should control our lives more, should be trusted with more and more of the gross national product of the country whereas what you see with the GSA is that there is few pleasures as intense as spending other people's money, that's why people run for Congress.
----------------------------------

The first flaw in Will's argument involves the straw man of the executive branch controlling all spending (check your Constitution, all bills to appropriate funds for expenditures must originate in the House) while ending his comment by pointing out the attraction of people running for Congress, not taking up careers as regulatory bureaucrats. The second flaw is more hyperbolic. Is Will recommending we downsize the Secret Service and simply pack the President and White House senior staff on a corporate Gulf Stream and let the President "stand his ground"?

Will's cohort in conservative commentary, Peggy Noonan, got a bit closer to the truth earlier in the discussion with this comment

-----------------------------------
You look at the stories of the last week, the GSA, You have to wonder what is going on with those adults in serious, responsible, publicly paid for positions who have, it seems to me, less and less of a sense of probity, responsibility, the sort of basic adultness, the maintaining of standards that we ought to be used to. It seems to me we have big slip going on there and these two stories are part of it.
-----------------------------------

but she still fouled off the pitch. Does anyone think this deficit in professional decency has only affected public sector workers? It seems crystal clear that professionals in the private sector have rubber-stamped trillions of dollars in fraud which continued for YEARS solely because of those "certifications" from would-be professionals who were, in reality, no less bought-and-paid-for than the hookers in Columbia.

The overly simplistic and cynical philosophies espoused by columnists like Will and Noonan which either prescribe a solution of just eliminating the machine entirely or limiting their consternation to narrow ranges of politically expedient bogeymen (incompetent regulators, teachers, firemen, policemen) is leading the country to cripple or dismantle entirely critical functions within our collective "machine" proven to prevent the very problems we are encountering. By fixating on the conflicts of interest, incompetence and corruption of people operating in the public sector, we are abandoning huge swaths of the gross national product George Will worries about so much to the conflicts of interest, incompetence and corruption of mega-millionaires and billionaires in the private sector.

The results of this cynical strategy are already readily apparent:

* citizens frustrated by local crime putting themselves in the position of local sheriff with zero appreciation of the adrenaline rush and panic officers are trained to manage while performing their duties

* regulatory bodies staffed with industry insiders to provide the illusion of "regulation" while in fact providing NO regulation thus missing billions in fraud while giving "regulation" a bad name when in fact there WAS no actual regulation being performed

* billion dollar corporations complaining of a lack of engineers and manufacturing expertise while dodging hundreds of billions in earnings taxes that could better fund the education of the next generation of chemists, biologists, computer scientists and engineers that could make tomorrow's products here in America

It's like listening to the same machine that built Hooover Dam, designed the 747, put men on the moon and put a telescope into space capable of looking at echoes from the Big Bang suddenly crawling to a halt while singing...

Daaiiiiissssyyy, Daaaaiiiiiisssssyyyy
Giiivvvveeee mmmeeee yoooouuur annnsssswwwwer, doooo
I'mmmm haaaalllllf crrrrraaaaazzzzzzy, all foooorrrrr the loooovvvve offff yoooouuu
It wooonnnn't beeeee a styyyyyyliiiiiish maaaaarrrrrrriaaaaaage
I caaaaaan't affoooorrrrrrd a caaaarrrrrriaaaaaage
But yooooouuuuu'llllll looooooook sweeeeeeeet upoooooon the seeeeeeeaaaaat
Of a bicyyyyyclllle buuuuillllllt fooooor twoooooo


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#1) http://abcnews.go.com/ThisWeek/video/roundtable-secret-service-scandal-16189791?tab=9482931