Here there are lions

January 19, 2009

Hola One and All,

Well, we are home…sort of. We are currently at Ft. Bliss, TX going through the Army’s out-processing system. After seven years of war, the Army has this figured out. We methodically go from station to station getting cleared from medical, finance, legal, etc.

It is kind of like being on a conveyer belt.

Still, there are only smiles. We are all looking forward to resuming our lives and looking ahead into 2009.

Speaking of 2009, I am resisting the temptation to do the annual predictions missive. My 2007 predictions were remarkably accurate…not even Ms. Cleo from the Psychic Hotline could have done better. Now, because of the deployment, I did not make 2008 predictions. Thank goodness…there was no “crystal-balling” 2008.

Rather, we will start this year with a series about winners vs. losers. I will make connections between jihadists and investment bankers…the Taliban and Wall Street…detainees and hedge fund managers. This is not to say I believe that terrorists and hedge fund managers are the same. Clearly they are not…and I am not calling the scoundrels on Wall Street terrorists. However, both made poor choices that need to be understood if we are to get out of the mess we are in.

I hope you find Part 1 of this series interesting and thought provoking.

Signed Your Traded-The-Iguanas-Of-GTMO-For-The-Rattlesnakes-Of-Ft.-Bliss Soldier,

They got a name for the winners in the world,

I want a name when I lose.

They call Alabama the Crimson Tide,

They call me deacon blues.

Steely Dan from the song Deacon Blues

Thanks to my deployment to Guantanamo Bay, I learned a lot about how detained enemy combatants (detainees) think.

Thanks to 21-years in the financial services industry, I learned a lot about how Wall Street thinks.

In 2008 I came to believe that both detainees and Wall Street’s “Masters of the Universe” were failures…and remarkably for many of the same reasons.  Unfortunately, the consequences of their failures were not limited to themselves; each claimed a lot of innocent victims.

Linking Wall Street sharpies to Jihadist extremists is not usual, but the thinking and behavior of both groups is disconcertingly similar.  The holes in each’s value system doom them to failure.

Over the next few weeks we will examine how Wall Street and al Qaeda lost their way.  I will pivot off of the work of Ralph Peters who presciently wrote a piece in 1998 called “Spotting the Losers, Seven Signs of Non-competitive States” for Parameters, the US Army’s War College publication.  By way of background, Peters in a retired and respected intelligence officer who has authored 22 books.  He is a frequent contributor to US Today, Fox News, and CNN. 

Like Steely Dan, his “Loser” article differentiates the “winners” from the “losers” in the world.  He concluded that nations do not succeed or fail based on geography, climate, natural resources, or access to trade routes.  They succeed or fail based on what they value…or better said, how they behave and how they think.

For example, Hong Kong is a rock with no natural resources… and yet it succeeds.  Argentina has everything a nation needs to excel and yet it lurches from crisis to crisis.  The difference lies in what each society values.

Anyway, back to the theme of terrorists and investment bankers as losers…

Historically, terrorist groups ultimately fail because their value systems are fatally flawed.  Wall Street similarly succeeds or fails on what it values and holds dear.

And while al Qaeda/Taliban and Wall Street are not nation states in Peters’ classic model, their influence certainly rivals that of many of the world’s governments.  And because of that influence, we have lived with the consequences of al Qaeda’s failed value system since 9/11/2001.   We have also lived with the consequences of Wall Street’s failed value system since the dot com debacle unraveled in the spring of 2000. 

So, let’s peel back the onion and see what went wrong.

First, it is clear that money does not make a winner.  Over the past several decades, trillions of dollars in oil wealth have poured into the Middle East.  Yet, what do these nations have to show for it?  Where are the great technological advances?  Where are the advances in medicine?  Where are the advances in physics, chemistry, philosophy, mathematics, or biology? 

For all of that money, what did the Middle East give back to the world? 

The answer is palaces, wars, internecine battles, and discontent.  Oh yes, the elite of those societies partied hard in Paris and LA.  Great.

Sadly, living standards have actually declined in the OPEC nations as the oil revenues have risen.  It is scary to contemplate what will happen to these societies when the oil runs out.  Rebellion, violence, chaos are the most likely scenarios. 

The center won’t hold.  Things will fall apart.

Likewise on Wall Street, money did not make them winners.  Over the past several decades, trillions of dollars have poured into New York’s investment banks and brokerage firms.  Yet, what do these firms have to show for it?  What did they contribute?  Did America’s industrial base grow?  Did the wealth-production segment of the economy advance? Were Americans employed in higher paying, more secure jobs?  For all that money, what did Wall Street give back?

The answer is obscene salaries and bonuses, out-sourced jobs, a diminished industrial base, and fraud & distrust so pervasive that the entire financial system is now staring into the abyss.  But they, too, partied hard…some parties even had elephants. Really…elephants…no joke.  Great.

And, sadly, living standards are starting to fall in the West as we struggle with recession and the fallout from the self-inflicted financial crisis.  As the truth of the fraud comes out, Americans’ anger is rising.  Fortunately, Americans have a history of dealing with crisis peacefully. 

Still, it is fair to wonder if our center will hold…or will things fall apart?   

So if money doesn’t make you a winner, what does?   Let’s try to spot the traits.

The first thing winners do is allow  the free flow of information.

In the Middle East, the State controls the newspapers, TV, radio, periodicals, and even the Internet. 

Common sense alone tells you that if you attempt to control communications today, you will fail.  You cannot compete with those who know more (and act more quickly) on accurate information.  I believe this is true at the macro and micro levels.

I saw this with the detainees at GTMO.  Communications inside the camps were controlled by “ranking” detainees based on age, tribe, clan, or nationality.  Only certain detainees were afforded the liberty of free communications. Others were shouted-down or told to “know their place.”  Not surprisingly, this dynamic limited the detainees’ effectiveness “inside-the-wire.”

Like Middle Eastern nations and detainees, Wall Street, too, fell into this trap. 

In the age of hedge funds, CDSs, CDOs, CLOs, leverage, & derivatives, free and open communications became a thing of the past.  Communications between Wall Street and the public became disproportionately controlled by those who told us, “Don’t worry.  These things are complicated; we’ll handle it for you.” 

Transparency was replaced with obfuscation.  Moreover, when information was communicated it was often dishonest and meant to deceive.  Unlike detainees, the public was not shouted-down; rather it was belittled and condescended to.

In fairness, there were some stubborn and inquiring members of the public who demanded to know the truth.  They sought recourse from the regulatory bodies for open and honest disclosure.  Tragically, the SEC, NYSE, CFTC, and other regulatory bodies sided with the insiders and prevaricators.   Free, open, and honest communications fell apart. 

The results were the same for investors and for Wall Street as they were for detainees at GTMO and countries in the Middle East.  Failure.

Investors lost money, but more importantly they lost their dreams.  Retirement and travel plans are now being replaced by part-time jobs and stay-cations.  The real shame is that this failure is infecting the entire economy via the recession, job losses, and a loss of confidence in our institutions. 

New York and Wall Street saw their dreams collapse as well.  Wall Street is now ceding power and control over its future to Washington…in exchange for bailouts.   Ironically, the bailouts are not transparent either.  Sigh.

Internationally, markets and exchanges that were once dominated by New York are now flexing their muscles as Shanghai, Dubai, Tokyo, and London are claiming open and honest disclosure and communications.

So, if free and open communications lead to success, why do so many eschew it?

With governments, nation-states, detainees, or investment- firms the answer is usually the same…power.  We all know that knowledge is power…and with open communication comes the loss of power to the elite.  

I believe there is incalculable gain to dispersing that power.  

Of course, with free communication comes additional risk.  For example, while the Internet allows the student from Harvard to compare ideas with the manufacturer in Prague, it also allows for fiction to be presented as fact, the wonton spread of pornography, and the propagation of hate and violence. 

Still, on balance the good will outweigh the bad.

Thus, lesson number one is…winners allow for free and open communication.

Next week, we will continue to examine what differentiates success from failure.  Now that the introduction and the “framing of the issue” parts are behind us, we will zip through the traits far more quickly. 

Until then, may you all have “winner names” like Crimson Tide instead of “loser-names” like Osama bin Laden.

January 7, 2009

This week’s missive focuses on a remarkable man from another remarkable generation…Henry Ford. There is more depth to him than most Americans know. He turned economic theory on its head 90 years ago. He was everything that Bernie Madoff wasn’t. Maybe we can learn something from the maker of the Model T.

Signed, Your Used-To-Have-Have-A-Ford-Mustang-Fastback-And-Loved-It Soldier,

Greg

—

Henry Ford has been diminished in our history.  He is either the guy who wanted all Model T’s to be black, or the guy who perfected the assembly line.  Hearing this, most people either roll their eyes (“Only black cars?!”) or yawn (“Assembly lines?  Big deal.”). 

They then move on to more important national figures…like Oprah.

Of course we all know that Ford, GM, and Chrysler are on the ropes right now; so to hearken back to Henry Ford for solutions to today’s economic woes may be a bridge too far for most.  But there are times to pay attention to those who speak to us from the grave; and this may be the time to hear some thoughts from one of America’ great captain’s of industry.   After all, Ford Motor Company was once a resounding success.

Those who have written about Henry Ford usually come to similar conclusions.  He was a good man.  He had wisdom. He saw things differently.  He believed in America and Americans.  He thought lightly of himself and deeply of the world. 

And while assembly lines and mass production were the innovations that most focus on, Henry Ford’s greatest contribution was redefining “classic” economics.  Let’s refer to Christopher Quigley for some illuminating history.

“Under “normal” theory it was assumed that a corporation could only increase profits by increasing price and limiting supply. Ford did the opposite because he had a more holistic view of the role of the corporation in society. He doubled the wages of his workers, decreased the price of the Model T and remade America. How did this happen. It was axiomatic. With Ford’s workers now able to make a good living, their financial anxiety ceased and staff turnover dropped by a multiple of five in one year. This dramatically decreased management expense and increased efficiency. Workers finally had peace of mind. With the increased disposable income in the Detroit area the economy boomed. All classes of economic sectors expanded. As a result more workers, new business owners, company managers, insurance brokers, real estate brokers, bankers, salesmen, craftsmen, delivery men, builders, farmers and retailers could afford Ford cars. Demand for the model T doubled and with increased buying powers and efficiencies the profits of the Ford Company dramatically increased as a result of the innovative policy.” 

What Henry Ford did was move dividends and profits from management to the workers…and counter intuitively he prospered the management, the company, and the nation exponentially.  Why he did this is also instructive.

“The fact that the commercial success of the Ford Motor Company has been most unusual is important only because it serves to demonstrate, in a way which no one can fail to understand, that the theory to date is right… If I merely want money the present system is all right; it gives money in plenty to me. But I am thinking of service.”  (Henry Ford, “My Life and Work”)

Now before all my gentle capitalist readers go apoplectic and start screaming, “Zanetti has become a namby-pamby, union sympathizing, soft-headed, socialist!” I want you to consider how capitalism functions without a conscious. 

When CEOs and CFOs pay themselves billions (yes, billions) in bonuses while their companies swirl into the abyss of bankruptcy and workers are laid off by the thousands, capitalism becomes a destructive and not creative power.

When caveat emptor (buyer beware) becomes the mantra in the derivatives-trading world because no one tells the truth about leverage and risk, capitalism becomes a perversion that punishes the innocent and unaware as much as the sophisticated and elite. 

When Gordon Gecko’s “Greed is good,” comment is received with north-south head nods indicative of the norm, capitalism has been tortured and distorted beyond all recognition.

For capitalism to succeed it must be rooted in a moral foundation.  Many on Wall Street and in corporate America have lost sight of this fact…witness Enron, WorldCom, FNMA, IndyMac, Lehman Bros., Bear Sterns, Goldman, Madoff, et al.

Every system holds the seeds of its own growth and the seeds of its own destruction.   Capitalism’s growth seeds are innovation, transparency, and trust.  Capitalism’s destructive seeds are deceit, obfuscation, and greed.  Henry Ford understood this and chose to emphasize the positive…but he also knew something else.

He knew that for his theory to work, he had to create wealth.   He had to add value.  He had to make the whole worth more than the component parts.  He had to make an honest product at an honest price and an honest profit.  And sometimes the definitions of honest-price and an honest-profit are determined by judgment and fairness and not by an often manipulated market.

But, back to my point…

The wealth creation part is key, because there are some in America who think they can replicate Henry Ford’s model via the government.  Well intentioned people say, “Let’s do as Henry did!  Raise everyone’s wage!  Boost the minimum wage to $15/hour and prosperity will follow.”  Others say,   “Stimulate the economy by paying for defaulting mortgages or sending rebate checks.”

The problem is government can’t do what Henry and his employees at Ford Motor Company did.  Government can print money but, government can not create wealth.  Government makes no product.  Government does not add value. Government can, however, redistribute wealth…albeit inefficiently.

Government can only be generous to one group by taking from another.  Government can tax…but as Supreme Court Justice, John Marshall, so aptly said in 1819 in McCulloch vs. Maryland, “The “power to tax is the power to destroy.” Taxation doesn’t create wealth.  

Government can borrow, but borrowing doesn’t create wealth either.  Government can print money, but printing money doesn’t create wealth.  Hmmmmm. 

In reality, taxing, borrowing, and printing destroys wealth.  It destroys wealth now and for future generations. President-elect Obama said as much earlier this week when he said our children and grandchildren would pay for his proposed stimulus package.

But, wealth destruction isn’t limited to what government can do, but how it does it.

You see, the other piece of Henry Ford’s model that government cannot replicate is the voluntary nature of Henry Ford’s vision.  Henry Ford’s corporate model was uplifting and encouraging.  At its root was service to, and appreciation of, others. 

He chose to change the rules and was willing to accept the consequences.   It must have taken tremendous leadership to get his Board of Directors to go along with such a bold and risky plan.

Government does not have to go to such lengths.  Governments do things by force.  It can be no other way.  Taxation is always forced extraction of money from the people.  Borrowing is forced extraction of future money from future revenues and future generations.  Debasement is the hidden tax of inflation that fewer than one in 1000 understand.  Onerous rules and regulation force behaviors that free people wouldn’t normally undertake.

Beyond this, when people do things voluntarily, and in a spirit of service, good things happen.  Compulsory anything…even for the “greater good”…rarely engenders positive feelings.

Don’t misread the above.  I am not an anarchist.  Some taxation, borrowing, and regulation are necessary for the orderly function of society.  I do believe, however as Thomas Paine believed that the government that governs least governs best…and we have drifted far from that mentality over the past 230 years.

So, as Ford Motor Company makes the news in the coming months, remember good old Henry…many Americans lived better lives because his capitalism was rooted in morality and service.