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Month: August 2012

How Does Amazon Avoid Creating It’s Own Mini-Depression? ($AMZN, #economics)

How Does Amazon Avoid Creating It’s Own Mini-Depression? ($AMZN, #economics)

According to a new article at Slate, Amazon will soon (within the next 12 months) be offering it’s Kindle e-reader device for “free.” Here’s the part of the story that interested me the most:

Every time Amazon drops the price of the Kindle, sales of the device and sales of Kindle books increase dramatically.

This is curious. According to conventional economic views of the business-cycle, depressions occur when nominal price shocks occur in the economy which reduce the amount of aggregate spending, promoting further price decreases by businesses, which lead to even more reductions in spending as consumers become convinced that if they just wait a little bit longer, they can buy what they need at a lower price.

Next thing you know, spending has collapsed into the notorious and much-feared “death spiral” and the economy grinds to a halt. Mass unemployment, the fall of social morality and Huns impaling the babies of screaming mothers on top of their bayonets. The yooj.

But at Amazon, every time they lower prices, people spend more.

How come when Amazon does it, it creates more business and an environment where everyone (consumers and Amazon as a business) prospers, but when it happens in the economy at large, we get a death spiral and impaled babies?

Somewhere, there’s a disconnect between micro and macro. The secret (that the Keynesians never share and refuse to explain) is how and why this necessarily happens. Good luck figuring it out, I still haven’t!

A Record Of Some Misgivings ($DWA, $DIS, $FRMO, @WhopperInvest, #valueinvesting)

A Record Of Some Misgivings ($DWA, $DIS, $FRMO, @WhopperInvest, #valueinvesting)

I’ve had a little back and forth with some other value investors recently on my concerns about some of DreamWorks Animation’s outstanding corporate governance and capital allocation issues. I figured it was probably time to put pen to paper and formally record some of these thoughts.

Capital mis-allocation

To start, I want to mention the capital allocation issues. Over the last four years (2008-2011), DWA generated approximately $508M in operating cash flow, or about $127M/yr. In that same period, DWA invested $217M in their business, or about $54M/yr, while it bought back $389M, or about $97M/yr, worth of stock and finally they retired $73M worth of debt, which occurred in one year (2009) and represented the last of their LT debt on the books at that time.

As you can quickly surmise, there was only $291M of FCF or about $73M/yr over that period to support $462M in buybacks and debt paydown, a deficit of $171M which appears to have been financed by drawing down cash on the balance sheet and potentially leaning on the revolving credit facility as well.

I see a couple problems here:

  1. This is a growth company but the company will not be able to finance its growth ambitions on its own now because it has used a ton of its own financial resources buying back stock, which means it’ll have to either issue substantial new equity at low prices or take on more debt to finance its future growth
  2. The buybacks occurred at a range of prices and therefore market valuations of the company, with many of them clustered at the high end of that range, implying the company is not good at determining its own value and buying back only when the company is on sale

The first issue concerns me especially so given the nature of DreamWorks Animation’s business– in the end, it is highly speculative and could easily fail, meaning the most appropriate financing type is equity, not debt. Debt is more appropriate for a low-risk, predictable, consistent enterprise (such as financing a real estate venture). Equity provides the kind of flexibility and endurance one needs to weather the potential storms in a business like DWA’s.

But by using up much of its cash, DWA has put itself in the position where it will have to either dilute existing shareholders at potentially disadvantageous prices, or else it’ll have to raise debt which I believe adds substantial extra risk because of the way it mismatches with their business fundamentals.

The second issue concerns me because I think it directly explains a lot of the apparent value destruction that has occurred at DWA over the last 4 years as communicated by the fluctuating market capitalization and I think it sets a precedent that is in the long-run bad for minority shareholders, not good, as people of the “buybacks are good no matter what” school of thought seem to believe.

In 2008, the peak price of DWA was $32/share and with 91M FDSO at the time, that amounted to a market cap of $2.9B. In early 2010, the company climbed to an all-time peak price of nearly $43.50/share and with 87M FDSO that amounted to a market cap of nearly $3.8B. The shares now linger back below their 2009 low of $18.56/share and very close to the all-time low of $16.52/share reached in January of 2012, trading around $17/share for a total market cap of about $1.43B.

Slice it how you like it but according to the market the company has conservatively destroyed almost $1.5B of value in that time and I’d say that’s primarily due to spending $460M on buybacks and debt reduction that could’ve been spent on growing the business or waiting for opportunities to grow the business. If you add that capital back into the business you’d get a market cap closer to $2B right now.

Most of the buybacks occurred near the $30/share range with relatively little of the buybacks occurring near the lows of around $17/share. This kind of capital allocation “discipline” can not be put to bed by arguing that “share buybacks are good if they happen at all”– the latter price represents a 50% discount to the former (or the former a nearly 100% premium to the latter, depending on how you want to look at it)! Are we supposed to be comforted by the fact that DWA’s management and board seem to think the company is cheap anywhere between $3B and $1.5B in market cap?

That isn’t a reasonable way to manage capital. You’ll never catch Warren Buffett making that kind of argument and I highly doubt you’d have much money to manage on your own if you adhered to that philosophy for long.

One of the replies I got back from another investor (see below) on this was that “what’s done is done.” That is an unacceptable response. What’s done is not done because it could very easily happen again and it is more than likely to do so given that the pattern set, the discipline demonstrated so far, is that the management and board of DWA is incompetent when it comes to allocating capital to share buybacks. This is a red flag and a way they could continue to destroy whatever value they create through their growth strategy in the future.

Golden parachutes for the pilot and the flight crew, but not the passengers

At the behest of another money manager with a value-based approach I had been communicating with, I decided to review the Form DEF-14A filed 4/11/12 for DWA. I had (admittedly) skim-read the thing when first performing due diligence several months ago, but I had not read it line-by-line as he had urged me to do, more on that fact in a bit.

As I read through it, I noticed a few things.

For one, I noticed that FRMO-owned companies own 9,614,089 shares or 13.1% outstanding, ostensibly for their ETF products. I am impressed with the strategic thinking of this organization and for the purposes of their own business they seem to be great capital allocators (of course, I have no idea at what prices they accumulated their position). But then it dawned on me that most of their products are passively-managed index ETFs and that took the wind out of my sails. I’m not necessarily under the impression at this point that they hold a stake because they think it’s a great buy, but just because it fits some strategy or theme for one of their proprietary indexes. So, that’s about 13% of the company potentially owned by “dumb money” in this case.

Then I noticed that the company utilizes Exequity and Frederic W. Cook & Co., compensation consultants, to determine executive pay. I’m working on a “digest” post of articles I’ve been reading about corporate governance and activism over at a now-defunct website nominally belonging to Carl Icahn (man, that guy seems a bit ADD at times the way he starts and stops investments, grass roots activism platforms, etc.) and I came across this post on compensation consultants which really set off alarm bells for me.

Think about it for a second– the managers are using company money, which belongs to shareholders, to hire consultants (multiples in this case) who charge millions of dollars and spend hundreds of hours trying to outdo each other in justifying outlandish executive compensation packages. In other words, they use your money to figure out how much they should pay themselves at your expense. It’s kind of like gilt-edged unionism for corporate executives. Why the hell is this such a mystery? Why do you need consultants to figure stuff like this out for you?

This is a corporate governance red flag– this is not treating minority shareholders like equal partners but rather treating them like the sucker at the table. After all, Katzenberg owns about 15% of the company and because of the dual class share structure (another red flag, by the way), effectively controls the company himself which makes him an owner-operator (to be fair, a good thing)… you think he can’t figure out how much to pay his other executives in terms of what’s good for K-man and what’s not?

Preposterous!

Then I get to the actual executive compensation itself. Katzenberg is now paid a $1 annual salary, choosing to receive most of his compensation via stock options and other perks. Other executives are compensated quite generously and compensation has been growing. The value of options grants is $17M annually, or over 1% of market cap each year. Long-term incentive compensation is worth another $9.2M. Combined, that is $26M or almost 2% of the company’s market cap for a handful of top execs and board members.

Other things of note:

  • Lew Coleman, president and CFO, recently exchanged higher annual cash salary structure in return for decreased long-term incentive awards, does this show lack of faith in the long-term value of the company?
  • Ann Daly, the COO, has part of her compensation tied to performance of the company’s stock price, which is an idiotic practice given that it incentivizes her to manipulate the company’s operations to game short-term numbers meanwhile the company’s management has no direct control, in the long-run, over what the investing public thinks of the value of the company (yes, their actions will translate into better or worse valuations but in the end it’s like tying someone’s compensation to the weather)
  • Overall, tons of golden parachutes for just about everyone in the case of a change of control or a termination with or without cause, which are more blatant red flags and give minority shareholders an unfair shake

Then there’s the income tax savings-sharing agreement with Paul Allen, a former shareholder and financial enabler of the company which the proxy explains constitutes “substantial” payments to Mr. Allen over time (this fact being confirmed by the multi-hundred million dollar payable on the balance sheet). To put it simply, I don’t get this or how it works and so far no one has been able to explain it to me. It could be harmless, it could be disastrously unfair to minority shareholder. I really have no clue, it’s beyond my accounting and income tax liability knowledge.

My overall impressions were thus: it takes 66 pages to explain/justify DWA’s compensation practices and related-party special transactions. The company hires compensation and other consultants with shareholder money to determine what management should be paid. And shares are locked up and all change of control decisions will be made by Katzenberg. This company gets maybe a C in terms of corporate governance, which is average in relative terms but sucks in my absolute opinion.

In general, I am concerned about my own ability to understand the accounting behind the company’s compensation practices. And this dovetails with my lingering concern that neither I nor anyone else seems to be able to confidently and accurately model just how much cash specific or even any single movie title in DWA’s library generates for the company at different points over its life.

Bringing it full circle

A few days ago I posted a video interview of Rahul Saraogi, a value investor operating in India, along with my notes of the interview. I found the interview surprisingly impactful (I’ve been watching other interviews from the Manual of Ideas folks and unfortunately none of them have come anywhere close in terms of profundity) and the item that stuck out the most from the whole thing was Saraogi’s comments on the importance of corporate governance and capital allocation for the long-term investment results of minority shareholders.

To reiterate, according to Saraogi good corporate governance means dominant shareholders who treat the minority shareholders like equal partners, who do not treat the company like a personal piggy bank or a tool for furthering their own personal agendas at others’ expense. He says good corporate governance is binary– it either exists or it doesn’t, there are no shades of grey here. The issues I’ve cited above make it clear that DWA does not have good corporate governance practices. The fact that the Form 14A discloses the fact that both David Geffen and Jeffery Katzenberg are essentially using the company resources to the tune of over $2M per year to subsidize their ownership and maintenance of private aircraft is another good example– it is one thing to have the company reimburse them for expenses occurred in doing business but it is quite obvious from the way this agreement is structured that the company is basically paying for the major costs of ownership while they are deriving the personal benefits and exercising discretion as owners in name and title.

Similarly, capital allocation is critical in Saraogi’s mind and many companies and their management don’t get it– they either don’t understand it’s importance or how to do it, or they don’t care because they’re rich enough. I think a little bit of both is operating here. Certainly Jeffery Katzenberg is “rich enough” at this point. He’s worth several hundred million dollars at least, he has the company paying for his private aircraft and other perks and he has even said in interviews I’ve read that he’s got all the money he could need or want at this point and continues to work out of passion and interest. Normally that’s a good thing but in this respect it’s a bad thing because a person who operates as an artist rather than a businessman probably doesn’t care what their ROC looks like as long as they get to put their name on the castles they build.

And people who get capital allocation don’t pay prices that range nearly 100% in value for shares they purchase, unless of course they’re absolutely convinced the intrinsic value still far exceeds such prices. I note here that while there is no evidence from the company that this isn’t the case, there’s similarly no evidence that there is, and I don’t think faith is a good basis on which to form a valuation. As an aside, none of the grade-A elite Wall St analysts on the earnings calls ever ask about this, and my e-mail to DWA’s IR on this topic and numerous others went completely unanswered, which is another embarrassing black mark for the company in terms of corporate governance.

Other voices in the wild

For those who are interested, there are now two recent write-ups on DWA over at Whopper Investments, the first on the value case for DWA and the second analyzing the company’s potential takeover value when compared to Disney’s acquisition of Pixar in 2004.

I really enjoy Whopper’s blog for the most part but I consider these two posts to be some of his weaker analytical contributions to date (which should be obvious from my remarks in the comments section of each, 1 and 2) and if anything that makes me even more queasy with this one– he mimicked a lot of my own unimpressive reasons for investing and I don’t generally find the sound of my own voice that soothing in cases like these, and he seemed unable to answer some of my deeper concerns, which could be evidence of his own shortcomings as an analyst or it could be evidence that these are questions with unsatisfactory answers by and large (I prefer to believe the latter at this point).

In a nutshell, at this point my major concern is that, even if the company successfully executes on its grand growth strategy it might not mean as much for minority shareholders as we might like due to outstanding corporate governance and capital allocation concerns. I seriously wonder if I and many other value investors like me are not blinding themselves to these “binary” concerns because the potential home-run hit possibility of getting in near all-time lows on “the next Disney” is just too exciting to resist.

Whatever I do, I’ve now written this post and put it in the public domain so I won’t be able to excuse myself later on by claiming I hadn’t thought about these issues.

Does Bernanke Read Blogs? (#EndTheFed)

Does Bernanke Read Blogs? (#EndTheFed)

I learned in a recent Mish blogpost that Ben Bernanke denied that people were taking advantage of the carry trade with record low US government debt yields in a recent letter to the US Congress:

To the charge reduced interest income to savers from quantitative easing is a “tax” on savers, Bernanke responded that it’s in everyone’s interest, both savers and borrowers, to have an economy performing at highest level of capacity.

He also said financial institutions aren’t executing carry trades on U.S. Treasurys, when they use short-term repo transactions to fund investments in longer-dated Treasury notes and bonds. Bernanke says this activity reflects the funding of inventories by securities dealers as part of their market-making activities and not an attempt to exploit differences between short- and long-term rates.

It’s curious that Bernanke covered this particular topic because it was only recently that David Stockman complained about it explicitly in an interview with Doug Casey:

This market isn’t real. The two percent on the ten-year, the ninety basis points on the five-year, thirty basis points on a one-year – those are medicated, pegged rates created by the Fed and which fast-money traders trade against as long as they are confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten-year bond at a two percent interest rate. But they’re doing it because they can borrow overnight money for free, ten basis points, put it on repo, collect 190 basis points a spread, and laugh all the way to the bank. And they will keep laughing all the way to the bank on Wall Street until they lose confidence in the Fed’s ability to keep the yield curve pegged where it is today. If the bond ever starts falling in price, they unwind the carry trade. They unwind the repo, because then you can’t collect 190 basis points.

Does this mean Bernanke reads blogs and follows Doug Casey?

I got excited at first when I noticed this apparent connection. But then I realized it’s more likely he was responding to particular inquiries from Congresscritters, not necessarily the vox populi itself. Congresscritters and their staff do have their ear to the ground and occasionally turn annoying phone calls, emails and fax inquiries at their office into cases for Congressional investigation. I hear some staffers also read ZeroHedge and I’m sure the interview came up there.

This is probably a good example of the charge that politicians are nothing more than social weathervanes– they aren’t intellectuals and they don’t lead the debate in society, they merely follow it and, when they think it’ll earn them some goodwill, they stick their finger into people’s eyes according to which eyes and how deeply they believe “the people” want them to gouge.

That’s not to say they govern according to the people’s will. Standing on your soapbox and shouting is a bit different from actively trying to manage the economy according to your perception of a mass of other people’s wishes. To the extent that what the politicians do to society overlaps with what certain interest groups actually desire and “vote for”, the coincidence is explained by nothing more than the fact that this is how politicians pay people off to remain in power. The rest of the time, they’re firmly entrenched in the elitist conspiracy and power politics of rulership which has its own agenda, set of rules and schedule of procedures.

In conclusion, Bernanke probably doesn’t read blogs. He probably doesn’t have much time in between manipulating interest rates and having his dome waxed and beard trimmed. After all, the central planner of the free world’s got to look illustrious.

Video – Michael Mauboussian On Forbes (#valueinvesting)

Video – Michael Mauboussian On Forbes (#valueinvesting)

Intelligent Investing with Steve Forbes presents Michael Mauboussin, chief investment strategist, Legg Mason Capital Management, author of Think Twice

Major take-aways from the interview:

  • 9%, 7.5% and 5.5-6%; the rates of return, respectively, for the S&P500, mutual funds and mutual fund investors, on average– why the discrepancy?
  • Mutual funds underperform the S&P500 on a total return basis due to fees; mutual fund investors underperform the funds mostly due to timing– most individuals buy when funds have done well, sell when they’ve done poorly, exposing themselves to underperformance and missing out on subsequent overperformance
  • Curiously, institutional investors underperform as well; the culprit is overactivity– people believe “if you work hard, you’ll be rewarded”, so institutional investors try to “earn” their returns by moving money around constantly
  • Increasingly, investment returns have to do with luck and not skill; all activities in life fall along a continuum between pure skill and no luck (running competition) to pure luck and no skill (the lottery); the “Paradox of Skill” states that the more skillful competitors are, the more uniform their results become and the more important luck is to explaining differences in results
  • How to accurately judge a manager’s returns? Sample size is important: the more decisions the manager has to make over time, the shorter time horizon can be used to judge them; the fewer decisions they make over time, the longer the time horizon used to judge them
  • Focus on process, not outcome; in investing– analytical process of ideas, behavioral/psychological process, and organizational process (constraints w/in the organization that impede performance)
  • Investing boils down to two activities: handicapping (looking at market assumptions via price and then backing into the scenario that would have to occur for that price to be reasonable, and judging the probability of it occurring) and bet-sizing (waiting until you have a strong advantage and then betting big)
  • Expectations-based investing process: back into the cash flow assumptions that justify current market price; financial/strategic analysis of the company and its industry to see if the company is likely to do better or worse than the market implies; then decide to buy, sell or do nothing– what’s built in? what’s likely to happen? then “over-under” rather than “I know precisely what those cash flows will be”
  • Systems that are entirely skill-based don’t revert to the mean at all; aside from fatigue, running a race 5x will result in the same, highly-skilled winner each time
  • The extent to which a system is not all-skill is the extent to which it can mean-revert, but the question is, what mean? A highly skilled person might come down off a peak but they will not revert to the mean of more normally skilled individuals, for instance (tall parents tend to have tall children, but they might not be as tall as the parents — mean reversion — but you also don’t expect them to go down to the height of the average population)
  • Investing is not all-luck, but it is luck-leaning on the continuum; the best way to judge managers is by process, not performance
  • “Buy cheap and hold”: consider the story of Bob Kirby and the “Coffee Can Approach” [PDF]
  • What can older investors do in today’s interest rate environment? Follow Jim Grant’s advice, “Roll back the calendar 30 years”, ie, nothing, they’re screwed
  • “Patience is the key” to great investment returns

Video – Joel Greenblatt On Forbes (#valueinvesting)

Video – Joel Greenblatt On Forbes (#valueinvesting)

Intelligent Investing with Steve Forbes presents Joel Greenblatt, adjunct faculty member at Columbia University, co-CIO of Formula Investing

Major take-aways from the interview:

  • 70% of active managers can not be passive index funds like the S&P500 due to high costs, high fees
  • Unfortunately, for the 30% who beat the index over the last 3, 5 and 10-year periods, there is no correlation with how they do over the next 3, 5 and 10-yr periods
  • A disadvantage to standard index investments is that they are market-cap weighted; the more overpriced something is, the more of the index it represents, the more underpriced something is, the less of the index it represents
  • A superior alternative is equal-weight indexes, for example, in the S&P500, Stock #1 is allocated the same amount of capital as Stock #500; errors are therefore random rather than systematic
  • Greenblatt’s firm created a “value-weighted index”: the cheaper something is, the more weight it gets in the index
  • Key metrics for analyzing a business
    • High adjusted FCF
    • Returns on tangible assets
  • Why do good companies sell cheaply? People are worried that earnings power over the next few years will not be as good as the past so they’re willing to sell at a discount; institutional investors will systematically avoid uncertainty and provide you opportunity to buy cheap
  • Most business schools are teaching Efficient Markets theory, not Benjamin Graham; good news for value investors because it means you have less competition

 

Video – Mohnish Pabrai On Forbes (#valueinvesting)

Video – Mohnish Pabrai On Forbes (#valueinvesting)

Intelligent Investing with Steve Forbes presents Mohnish Pabrai, managing partner, Pabrai Funds

Major take-aways from the interview:

  • Attitude is the most important attribute of any investor
  • The value investor’s attitude advantage is the ability to wait for the right opportunity
  • “All man’s miseries stem from his inability to sit in a room alone and do nothing” channeling Pascal into an investor appropriate format: “All investment managers’ miseries stem from an inability to sit alone in a room and do nothing”
  • Ideal investment industry: gentlemen of leisure who go about their leisurely tasks and when the world is severely fearful is when they put their leisurely tasks aside and go to work
  • People think entrepreneurs take risk; in reality, they do everything they can to minimize risk– low risk, high return bets
  • Pabrai Funds has a “moat” by mirroring Buffett’s 25% performance after 6% hurdle because it aligns his interests with his clients; total fund expenses are 10-15 basis points, with Pabrai’s salary and staff paid for out of performance fees
  • Shorting makes no sense because maximum upside is a double and maximum downside is bankruptcy
  • Do not talk to company management because they are high charisma sales people and will pitch you on optimism, not realism
  • Big fan of the Checklist Manifesto, has a checklist of 80 items he looks over before making an investment
  • Pioneers are the people who get filled with arrows

This Is How Analyst Earnings Calls Look To Me, Too (@JeffreyMatthews, #WallSt)

This Is How Analyst Earnings Calls Look To Me, Too (@JeffreyMatthews, #WallSt)

I’m glad to know I’m not crazy and Jeff Matthews has a similar experience to my own. This is hilarious and represents satire at its best, satire that is essentially just reality with the names changed:

CFO Cathie Lesjack: “The following discussion is subject to all sorts of risk factors, and since most of your clients have already lost a lot of money in HP stock by listening to me in the past talk about how great we were doing and taking it at face value, I figure you should already know enough not to pay much attention to what we’re going to say.”
CEO Meg Whitman: “Thanks Cathie. We’re going to dispense with reading the press release and the boo-ya stuff, since most of you know how to read—at least you can read everything but a balance sheet. (Giggles) Operator?”
Operator: “Thank you.” (Reads instructions) “Our first question is from the line of Glen Obvious. Mr. Obvious?
Glen Obvious: (Confused) “Hey, thanks. That was quick. Umm…”
Whitman: “Operator, Glen, is trying to figure out what to congratulate us for, because he always starts out saying ‘congratulations’ on something so his poor clients who own our stock feel better no matter how bad the actual news is. Why don’t you move on to the next question while Glen gets his brain going.”
Operator: “Yes ma’am. Next is Janet Literal.”
Janet Literal: “Thank you for taking my question—”
Whitman: “Why wouldn’t we? This is a conference call.”
Literal: “Well, I always say that…so you’ll think well of me.”
Whitman: “Well cut it out. We’re all grown-ups here. You don’t have to thank us for foisting dopey acquisitions, massive write-offs, a negative tangible book value, a highly leveraged balance sheet and non-GAAP earnings on America’s small investors. Just get on with it.”
Literal: “Okay—well, that’s my question: you don’t have any non-GAAP numbers in the press release.”
Whitman: “Yeah, we figured since those aren’t actually based on ‘Generally Accepted Accounted Principles,’ we should probably start going with just plain old GAAP. It’s a lot closer to the truth that way.”
Literal: “But these GAAP numbers are terrible. You didn’t make any money.”
Whitman: “Bingo.”
Literal: “So how come your non-GAAP guidance was so much better than this?”
Whitman: “D’oh!”
Literal: “I’ll get back in the queue.”
Whitman: “We won’t hold our breath, honey. Next!”
Operator: “Your next question is from Fred Forehead. Mr. Forehead, your line is open.”
Fred Forehead: “Thank you for—oh, sorry, never mind that. Meg, how should we think about the revenue decline?”
Whitman: “You want me to tell you how to think about something?! Didn’t God give you a brain?”

Review – The King Of Oil (#MarcRich, #EnemyOfTheState, #oil)

Review – The King Of Oil (#MarcRich, #EnemyOfTheState, #oil)

The King of Oil: The Secret Lives of Marc Rich

by Daniel Ammann, published 2010

The Story of Marc Rich

The popular telling of the myth of the crimes of Marc Rich almost perfectly captures the modern American zeitgeist– a businessman, the most evil and exploitative kind of villain that can plague a nation of honest and earnest people, sought to earn a profit via oil trades with the enemy (post-Revolution Iran) during a time of national crisis and embargo (the embarrassingly stupid hostage situation in Tehran circa 1979), evaded his tax obligations and then had the sheer nerve (or perhaps deep well of pure, black hatred within his heart) to refuse to stand trial for his crimes by fleeing to neutral Switzerland, using his enormous, illegally-acquired and not to mention positively unsightly personal wealth to buy himself immunity — and eventually a full pardon — from a criminal justice system to which lesser mortals must pay heed.

But if we peer a little closer (and trust the retelling of Rich’s story in Daniel Ammann’s biographic to be honest and accurate), we begin to see Marc Rich in an entirely different light– if not immediately heroic, then certainly victimized by a benighted American public and tormented by a vengeful “limited” government with ulterior motives. Yes, in this new light, Marc Rich casts long shadows, and standing hunched over in the shadows we see the plotting, manipulative forms of then-US Attorney Rudy Giuliani and then-US Federal prosecutor Sandy Weinberg, as representatives of themselves but also as representatives of the disaster of unbridled ego, political pragmatism and the twisted logic of the State that has nowadays become so popular.

The man’s accomplishments are legend and long-form: single-handedly creating the world market for spot-price oil; circumventing blockades, trade barriers and hare-brained foreign policy situations to move commodities from the conflict-ridden pieces of earth where they lay, wasted, into the hands of producers all over the world who value them most; organizing a billion-dollar-a-year commodity trading company with his partner Pincus Green, whose reach spanned the globe; and evading the vagabonds and plunderers calling themselves the US federal government and the US Marshal Service for over a decade.

And the man’s crime? Libertarians, steady yourselves– doing business in certain places and in a certain fashion without the express permission of the United States federal government to do so. In other words, Marc Rich was guilty of minding his own business.

Enemy of the State

That’s the reality of Marc Rich’s crimes, but that was not the story fed to journalists by U.S. attorney Rudy Giuliani on September 19th, 1983. On that day, the public learned of Rich’s “fifty-one counts of fraud, racketeering” and “tax evasion” (pg. 116). “It was ‘the largest tax evasion indictment ever,’ Giuliani said.”

The defendants engaged in this scheme as a part of a pattern of racketeering activity in which they concealed in excess of $100 million in taxable income of the defendant Marc Rich International, most of which income was illegally generated through the defendants’ violations of federal energy laws and regulations. This scheme, and pattern of racketeering activity, enabled the defendant Marc Rich International to evade taxes in excess of $48 million in United States taxes for the 1980 and 1981 tax years.

Giuliani, however, held back the most serious charge until the end of the press conference.

The most serious charge:

Marc Rich + Co. AG [Rich’s Swiss trading corporation and mother-company to MRI] ‘entered into contracts with the National Iranian Oil Company (NIOC) to purchase Iranian crude and fuel oil.’ ….Trading with the enemy– the gravest of accusations” (pg. 117)

This is how Marc Rich’s crimes became famous, and Marc Rich himself infamous. Prior to these allegations, Rich had been a quiet genius, an unknown billionaire. For a man who would later become the detested scoundrel of a nation who had, until that time, been quite familiar with its many antiheroes (Billy the Kid, Al Capone, Charles Manson), the initial reaction of Sandy Weinberg to allegations against Marc Rich was telling.

“Marc who?” Weinberg asked. “I’ve never heard of a Marc Rich.” (105)

Yet, this “accidental discovery” (117) of Weinberg and Giuliani’s (trading with the enemy) would provide the political impetus to eventually charge Rich and partner Pincus Green with the nation’s toughest “RICO” (Racketeer Influenced and Corrupt Organizations Act) laws, the “prosecutor’s equivalent of nuclear weaponry” (122). For a man whose entire indictment contained not one crime of actual fraud or extortion, the traditional definition of racketeering, it’s hard to imagine how racketeering charges could be justified. Actually, it’s hard to imagine how any charges could be justified because, remember, Rich’s crimes were not against actual, existing individuals but rather against the positive corporate mandates of the United States federal government and its immense regulatory and tax bureaucracies.

True crimes

The real racket being run was that of the US tax authorities, the real crime Rich — a literal world citizen with passports issued by Spain, Switzerland and Israel and whose main business was incorporated in Switzerland — was guilty of was not paying his protection money and furthermore being so bold as to trade with a rival gang in Iran.

And this is really the most instructive moral of the many morals of the Marc Rich saga. Forget the struggle of fleeing Europe’s Holocaust and losing everything in the process. Forget the hard work and determination of an immigrant family that allowed them to overcome language barriers and their immediate poverty to ultimately realize an ‘American Dream’ of their own. Forget the sheer talent and raw force of will necessary to forge a world commodities empire and create an entirely new way to trade oil, a new market that directly challenged the oligopoly of the Seven Sisters oil cartel.

No, Marc Rich’s story is significant and telling because it reveals the true nature of government in practice, and especially government as practiced in America, where it is nothing but politics and egos that decides men’s fates, and not some phony, childish striving for the “common good.” It shows us that government is fundamentally anti-competitive, anti-business and anti-individual.

Political vendetta embodied

The crusade against Marc Rich was over the top and beyond any reasonable idea of the pursuit of justice in a free country. With rampant politicization of the process and the prosecution and defense alike, its use of the most formidable federal charges possible (RICO) and the wanton collateral damage caused to Rich’s company, employees, trading partners and even world markets, it was akin to an all-out totalitarian war.

“It was phenomenal,” Sandy Weinberg told me with glee. “We tied up all U.S. assets, including 20th Century Fox. We shut ’em down completely. We shut the company down for a year. They couldn’t operate in the U.S. It cost them dearly. I assume it cost them probably a billion dollars.” (123)

Ask yourself, what is this prosecutor gloating over? What is he gloating over besides his own pride in his personal power to destroy a man’s business, business partners and reputation? What is he thrilling over but the loss of value, to many millions of people the world over, that the “billion dollars” in lost revenue represents? Rich was never charged with a crime that represented stealing from others or extorting his trading partners… all money he made, he made on the basis of voluntary, wealth-producing transactions from the viewpoint of his trading partners.

This is the stark reality of government, that it destroys wealth. That it tears society down. That it hobbles trade. And all for what? For the egos of ambitious politicians. Who benefited from Marc Rich’s downfall? Not the people of the United States, and not the people of the rest of the world. But for Giuliani, it was “another feather in his cap” (123).

“U.S. Attorney Giuliani knew that the case would serve as a springboard for his political career– a career that would lead him to become the mayor of New York and later to make an unsuccessful bid for the U.S. presidency. One could go so far as to say that Giuliani’s political and very public career actually began with this case. As history has shown, the fact that the case escalated rapidly before virtually exploding as a media event was not exactly to Giuliani’s disadvantage. In all likelihood, this escalation was even desired.” (142)

Ultimately, Marc Rich ran afoul of the political process. He sought to trade around arbitrary regulations and restrictions on oil exchange established by the political Department of Energy. He maintained multiple passports and was not beholden to the ever-changing nationalistic political winds of any land or time period. He exploited tax loopholes to avoid paying as much protection money as he could, protection fees which are, again, established arbitrarily and politically by the respective governments involved on he basis of what is expedient, not what is right or necessary. And finally, he traded with unpopular foreign regimes without respect for outstanding bans and embargoes and did so without the nauseating moral hypocrisy of the politician who makes claim that he is transacting with rights-violators for the Greater Good.

The moral: the individual stands alone

No, Marc Rich only traded for profit, nothing more, nothing less, and a value that is truly non-partial and non-political.

4/5

Review – Influence: The Psychology Of Persuasion (#psychology, #influence)

Review – Influence: The Psychology Of Persuasion (#psychology, #influence)

Influence: The Psychology of Persuasion

by Dr. Robert B. Cialdini, published 1984, 2006

Another study in the motivations underlying human behavior

Originally published in 1984, Cialdini’s “Influence”  has gone through several updates and reprints since. The book outlines 6 categories of persuasion, most of which we encounter on a daily basis (frequently by someone who wants us to buy something, but not always), and most of them are so ingrained in us that we barely even notice ourselves complying with them anymore.

Now this is not to say that you won’t recognize the 6 categories, in fact you’ll know them all too well, but the genius of the book lies in describing how each one of these methods is currently used unbeknownst to us, you’ll start recognizing them being used the second someone’s using them, which helps to ignore them if you want.

The 6 categories of influence

  1. Consistency & Commitment – continuing a course of action to be consistent with your previous actions (e.g. you subscribed to our cable service last year, so why not this year?)
  2. Reciprocation – feeling obligated to give something in return just because someone gave you a gift (e.g. take these free mailing labels, can you make a donation to the Children Need _________ Fund?)
  3. Social Proof – when there is a lack of objective, 3rd party evidence, people typically use what other people are doing as a guide for their actions, which is acceptable in most situations, but also horribly unacceptable in many others (e.g. Buy this product because these people did! )
  4. Authority – ever done something just because someone was wearing a uniform? It’s easy to put a lot of stock into what someone says just because they’re wearing a $20 uniform or have a title in front of their name.
  5. Liking (Similarity) – ever agreed with someone just because they seemed to be like you, and people like you are agreeable, therefore what they say makes sense right? Erm…sometimes it doesn’t…
  6. Scarcity – this one is ingrained in us like the need to eat and sleep. When we feel there is the potential for there to be less of something in the very near future, we automatically value it more (e.g. But don’t wait, call now before we run out!)

Truth runs deep beneath the surface

The average person can grasp these concepts with ease, but that’s not to say they’re simplicity prevents them from being profound. In fact, the truth is that these things go much, much deeper.

  • Have you ever continued on a path you knew was silly just because you’d already committed to it?
  • Have you ever had difficulty resisting what other people are doing simply because so many people were doing it?
  • Have you ever agreed with someone for the moment simply because you felt similar to them, only to realize after the fact that you don’t really agree with them at all?

I have absolutely done all of these things, and as you get older most people become less susceptible to the weak forms of these strategies (but this book certainly helped me leap frog my previous understanding of them). These strategies of influence are not inherently bad, but knowing when they’re being used will allow you to step back from the persuader, realize the strategy being used, and assess whether you want to continue your current course of action.

And the implications of these forms of influence go further than just understanding how marketing or advertising messages work. Think about the investment markets– how many investors put their money into something because they heard someone else they respect is doing it (similarity), they’re concerned there isn’t enough to go around such as in an IPO (scarcity), because the government said they’re backstopping it (authority) or because they were caught up in a bubble and everyone else was doing it (social proof)?

3/5