U.S. Congress: Mandatory Training Required

This has been a week full of cloudy events: Icelandic ash, the Greek bail-out and the Goldman CDO lawsuit, to name a few. Notwithstanding the “transparency imperative” in the wake of the financial markets meltdown, we are still mired in opacity. Gillian Tett of the FT shared similar sentiments in today’s column. Readers of this blog are well aware of my views on transparency in every aspect of the financial markets: financial reporting, risk management and trading. Yet transparency remains a stubborn and seemingly unattainable goal, even with the knowledge that the social and financial costs of opacity are stunningly high.

Why the trouble? Easy - lobbying, money and ignorance. While transparency is couched as super-sophisticated Wall Street issue, it is fundamentally a Main Street issue. Opacity is what leads to “unexpected” crisis, the price tag of which is invariably picked up by Main Street. Fundamental reform stuck in Congress? Tell your Congresspeople to get on the stick and to represent their constituencies - not their lobbyists. Moving the lion’s share of OTC derivatives to exchanges is both an academic and pragmatic no-brainer, yet this shift is consistently stonewalled by those with huge checkbooks and contacts in Congress. I have written about fair-value accounting and how it should be used in all situations where there is neither the intent nor the ability to hold an asset to term. Not surprisingly, there has been huge push-back on this issue from the same people who want continued opacity in the OTC derivatives markets. And more complete accounting disclosures with “plain english” footnotes would also be a thrilling development, yet many corporations are none too keen to have to display all their laundry, dirty and otherwise. Common sense has not prevailed, largely because of our system of lobbying, privilege and fear of reduced campaign contributions if a powerful business interest is angered.

The costs of friction in everything from complying with our arcane tax code to complex documentation for non-standard financial transactions to extra time spent analyzing byzantine financial statements has to exceed $100 billion - per year. And this says nothing about the reduced investment due to fears over the high costs of growing businesses. Consider the recent proposal to cause venture funds with over $30 million in AUM to have to register with the SEC because of fears over systemic risk. This is nothing more than a publicity stunt by an ill-informed Congressman, but it is simply a microcosm of the bias towards posturing and grandstanding instead of substantive, common sense reform. We are in the midst of a jobless recovery, yet a Congressman is wasting time and money talking about idiotic regulation of the venture capital industry whose very lifeblood is creating the high-value jobs we need to resume a healthy growth trajectory. Why isn’t he talking about tax reform, financial transparency, or something else that really matters? Because those issues don’t make for good headlines and he probably lacks the knowledge to propose something intelligent.

Perhaps the issue is that our Congresspeople are simply ill-equipped for the job. Based upon their decision-making, it is fairly clear to me that many lack even basic knowledge of economics and finance, yet have a hand in making legislation that requires real understanding of the issues. My guess is that the lobbyists and special interests, who have a very keen understanding of the issues and what’s at stake, have a large hand in how legislation is worded. This does those of us who pay our Congresspeople and put them in office a great disservice, and it is hard to see how this will change unless people get really angry. At a minimum, incoming Congresspeople need to go to school, a finance and economics “boot camp” for starters. Classes on micro and macroeconomics. International trade. Financial markets. Corporate finance. Basic yet important stuff. Should a Congressperson really be able to cede their vote to someone more knowledgeable (e.g., that lobbyist or special interest making a campaign contribution) than they are? Clearly not.

So much of what needs to be done is just so simple. None of this is rocket science, but it does require a basic level of understanding (and a good heart, common sense and a conscience). Naysayers will mutter “What you are saying is stupid - your suggestions are unrealistic.” My response: Why?

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Vertical Integration in a Rapid World

I have long been a student of organizational structure. In general, I’ve been a proponent of specialization and laser focus. This works against the concept of conglomerates specifically and vertically-organized enterprises generally. A recent Wall Street Journal article highlighting several recent examples of vertical integration piqued my interest. Just why is it that vertical integration seems more compelling today than it did even five or ten years ago? What has changed in the environment to have caused the perceptions of many to do a 180? Is this a rational adaptation to a different landscape or a costly fad that will invariably run its course?

Vertical integration has often been linked with monopolists seeking to exercise control over a particular product or market, e.g., Andrew Carnegie and steel in the 1850s, Henry Ford and automobiles in the 1900s. From mining operations to refineries to ships and rails to factories and distribution, these companies controlled every part of the their supply chain. They overpowered their supply chains with capital, and barriers to entry were high. Starting a new steel company was no mean feat, and competing against Henry Ford wasn’t a picnic, either. But over time, as these industries globalized, the value of each part of the supply chain shifted. Japan became a powerhouse in steel from a processing perspective, creating high-quality steel with few defects at low cost. But they didn’t have control over the raw materials supply chain. Technology and quality management became the key sources of differentiation, and the US steel companies that were slow to adapt got crushed. A similar phenomenon happened with the Japanese and the auto industry, where they didn’t control the bottom layers of the value stack but used technology, process engineering and customer focus as sources of competitive advantage. In the face of superior technology and control processes, the power of vertical integration withered.

Fast forward to today. We’re seeing several examples of the return to verticalization, including those cited in the WSJ article: Oracle, Boeing, HP, and Apple. The general knock I’ve had against these kinds of moves is that a company has a core competency, and when it strays from that competency it sub-optimizes. For example, can a company really design and manufacture the best hardware AND software? Can it design and manufacture the best printers, communications equipment AND run a world-class consulting business? Wouldn’t it be better to put all of one’s efforts into a particular area, achieve market dominance and high profit margins, and dividend the cash out to shareholders rather than spending it on acquisitions to achieve vertical dominance? Certainly over the last 30-40 years the pendulum had swung towards specialization, as the vertically integrated companies got picked apart up and down the value stack: there were always companies better, stronger, faster than members of a vertical organization. But something has changed. In a word: speed.

The world has flattened. Supply chains are global and fragmented. Information dissemination happens at lightening speed. Customer preferences drive design and not the other way around. Think about the impact Apple has had by controlling the user experience, a seamless integration of hardware and software. This is markedly different than the Dell/Microsoft/Intel experience. Apple is selling not just a product but an experience, an image. Dell is selling a bundle of features. And Apple is able to achieve this partly because of vertical control of its value stack. Dell is a procurer and an assembler. And they are very good at it. But Apple’s tight integration laid the foundation for a host of add-on hardware and software solutions that augment the core experience. Dell simply can’t go to these places because it lacks the holistic perspective and control. Assuming perfect access to all materials in its supply chain, might Apple be able to deliver its customer experience better and more cheaply by simply focusing on software and product design than it does today? Sure. But given that perfect access doesn’t exist and that speed is critically important to adapting to changing customer preferences, does vertical integration create a kind of option value that a more fragmented supply chain lacks? Undoubtedly.

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Happy 2007 From Me to You

Colleagues, Past and Present, Fellow Bloggers and Friends, Old and New,

Best wishes to you and your families for a Happy and Healthy 2007. It promises to be a very fun and exciting year. Thanks for your friendship, support, comraderie and insights during 2006, and I look forward to your continued participation in the online and offline dialogue in 2007 and beyond. If you’d like to connect, you know where to find me.

Best,

Roger

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Information Arbitrage to Richard Berke of the NYT - Get a Life!

I’ve learned a lot about myself recently. Where I was once all about Wall Street, I am now about Wall Street plus technology plus the Internet. Further, I have added another key element to my self-perception - blogger and denizen of the global online community. With this brief lead-in, you will now appreciate why I got so ripped when I read some comments from RIchard Berke, Assistant Managing Editor of the New York Times, in a post on the muckraking NYT-hating site TimesWatch. Let me be clear - my feelings of rage have nothing to do with politics, the NYT’s editorial policies or anything of the sort. They are wholly centered on the mistaken perception that blogs are somehow making the life of those in the mainstream media (MSM) difficult, and unfairly so. I will present some extracts from the TimeWatch post and explain exactly why I think Richard and those like him in MSM are way, way off base, ultimately to the detriment of MSM and the quality of mainstream journalism.

For those who already know the Times has a liberal bias, the Halloween night Times Talk at the New York Historical Society on Manhattan’s Upper West Side didn’t provide too many scares.

“Writing About Politics in an Age of Contention” featured Editorial Page Editor Gail Collins, Managing Editor Jill Abramson, and Assistant Managing Editor Richard Berke, along with non-Times people Al Hunt, formerly the executive editor for the Wall Street Journal, and Dick Polman, reporter-blogger for the Philadelphia Inquirer.

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Talk turned to the Internet and the “nastiness” of current politics. Richard Berke blamed bloggers for making reporters’ jobs harder –- the following is a paraphrase, as Times Watch’s shorthand isn’t that great.

Joking, or maybe half-joking, the affable Berke said, “There are some good blogs, like Dick’s [fellow panelist Dick Polman]. The bad blogs are the ones that take on the New York Times.” He continued, roughly: “Some of the blogs take a toll on our reporters. One question on our minds is, ‘What are the blogs going to say?’…Reporters have to be careful not to pull their punches…There are people dedicated to analyzing and picking apart whatever we say and do, not always in a bad way, but sometimes it’s just mean-spirited…The bloggers are after us…we try not to be affected, but foremost in our mind, we know that everything we write will be picked apart…you have to ignore those people that go after you…I’m afraid that blogging…creates problems for people to do their job.”

At least the Times is aware of the criticism of blogs like TimesWatch, even though the paper apparently shrugs it off as a bothersome annoyance.

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There is so much to say. Where to begin? These comments are so laden with hypocracy, defensiveness and a lack of understanding of the role of the blogosphere in news dissemination and commentary that I’m on the verge of speechlessness. In order to organize my thoughts, let me use a list to address the issues I see with Richard’s sentiments.

1. “Some of the blogs take a toll on our reporters. One question on our minds is, ‘What are the blogs going to say?”

Richie, baby, you’ve got to be kidding me. There is this thing that has been around for centuries - let’s call it mainstream media for kicks. Well, MSM has been known to dig up stories, report the facts, sometimes bend the facts to match a thesis and generally make those who happen to be the targets of MSM writers pretty miserable. As someone who spent nearly two decades on Wall Street working on deals that were often news-worthy, I was often reminded of the old adage “Don’t do/say/write anything that you wouldn’t be willing to see on the front page of the XXXX (choose your favorite MSM daily publication).” Why? Because of MSM and concern over how what we say and do might be perceived. This was a rational concern, and while it may have been a pain at times to rigidly comply with this directive, it did ultimately build discipline, precision and professionalism. The PR industry grew up around how to handle the potential ramifications of being in the MSM, and how to manage one’s image in the media. So, Richard, we have all been worrying about “What are the MSM writers going to say” for centuries; the fact that you and your peers now need to think about your constituencies for a change truly warms my heart. Wake up. The world has changed. Get some thicker skin.

2. “There are people dedicated to analyzing and picking apart whatever we say and do.”

Awww, people are actually going to be critical about what you write and how you do your job. YEAH, WHAT ABOUT IT? It’s called checks-and-balances, Rick, you know, like we have in government and which we really should have in media? Well, now we have it. Kinda means you need to up your game, doesn’t it? Maybe dig a little deeper when doing research, interview that extra person to make sure you can confidently corroborate your thesis, anticipate potential holes in your story by thinking about the potential criticisms coming from knowledgeable bloggers? This is a healthy process, RIchard. Sorry if it feels like a burden, but when viewed through the prism of opportunity I think you’ll conclude that this can contribute to better journalism and a healthy and necessary balance in a historically unbalanced system.

3. “The bloggers are after us…we try not to be affected, but foremost in our mind, we know that everything we write will be picked apart.”

Ricky, from the way you’re talking it sounds like you’re suffering from post-traumatic stress or something. There isn’t a witch hunt here, pal. At least no more so than what happens in MSM every single day (get hold of a story, even if of questionable veracity, and ride it until it is no longer newsy. Yes, admit it, this happens every day and you know it). Yes, your work will be picked apart. In fact, tell me what working person’s work isn’t picked apart? Why should MSM writers somehow be exempt from analysis and criticism? It is just that writers and reporters are quasi-public figures and their work product is available for many to see, leading to a potentially larger pool of critics than most people have to endure. But these positions require both responsibility and the ability to withstand criticism. If you can’t meet these criteria, if you can’t handle the heat, don’t become a writer. It’s just that simple. My guess is that many are up to the challenge, and those who are prepared to step up and accept it are likely those who will be dogged in their pursuit of the truth, do super-thorough and intense research and be worthy foils for those in the blogosphere who want to take shots at their journalistic integrity. Again, this is a constructive, healthy process - if you can handle it.

4. “I’m afraid that blogging…creates problems for people to do their job.”

You are just wrong here, Richard. Just dead wrong. It is only a problem if you view it as a problem. Do your job, do it well and the blogosphere may still criticize you, but their criticisms will roll off you like water on Gore-Tex. There is strength in the truth and a job well done, and there will always be those who will criticize either because they simply have a different view or are a pain in the a**. But that is ok. What writers of all stripes have to fear is a job not well done, which will invariably be exposed in short order by the millions of eyeballs trained on the work of mainstream writers. Again, bloggers don’t make a reporters’ job harder, it just sets the bar a little higher than it had been previously. And as a consumer of media, I am happy for this group that has been added to the conversation that necessarily causes those to think more critically about their own work products. The net result: a better work product. VIew this through the prism of opportunity, Richard. You’ll see a really, really cool picture if you try.

I think there needs to be the acknowledgment that the internet in general, and the blogosphere in particular, has changed the face of media forever. This can either be viewed as a threat or an opportunity by those in MSM. I truly believe that the foundation has been established for a win/win/win situation - for consumers of media, for MSM itself, and for the bloggers who now have a voice and a role to play in the information creation and dissemination process. I am particuarly miffed by the NYT as a publication who recently initiated the branding campaign “These Times Demand the Times.” I actually posted about this a month or so ago. How can one reconcile Richard Berke’s words with a publication that claims to be THE source for today, yet is practically afraid of the most rapidly growing source of new content creation, the blogosphere? They seem pretty backward to me. 

Either get on the bus or get off it - but no whining, please. You’ll get little sympathy from me.

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Who Represents “The Truth” In MSM?

To say we are experiencing a transition in the world of “news” is the understatement of the century. I’m not sure across how many axes this transition - this war - is being played (print vs. online, blogs vs. MSM, free vs. paid, etc.), but suffice it to say that a big shakeout is afoot and a significant amount of brainpower and advertising dollars are being spent to shape the outcomes. Likely the most intriguing axis of debate - blogs vs. traditional MSM - was recently highlighted in two different stories concerning the New York Times and the Washington Post.

For those of you playing along, the NYT is in the midst of a big advertising campaign with a fresh, new tagline - “These Times Demand The Times.” There was a big hoo hah over this campaign, and the NYT Investor Relations department put out a detailed release on this new initiative, some excerpts of which are below.

NEW YORK, Sept. 15, 2006 – The New York Times announced today its new branding campaign, “These Times Demand The Times,” focusing on the high-quality journalism produced by Times reporters in print and online.

“In these incredibly exciting, technologically fast-paced times, consumers and advertisers more than ever are searching for a trusted brand that reports the news with authority, accuracy and clarity,” said Alyse Myers, senior vice president and chief marketing officer, The New York Times Media Group. “Our new campaign speaks directly to these issues: these times absolutely demand The Times.”

The campaign will launch to coincide with the new fall television season. A 30- and 60- second TV commercial will illustrate, in reverse, the unfolding story of how news is reported, beginning with the finished paper in the reader’s hands and working backwards to the reporter on the ground. The spots can be viewed at TheseTimesDemandTheTimes.com, a microsite specially created for the campaign. Other ads will highlight the path of several reporters, editors and columnists with vignettes of their personal stories and how they work as journalists. A special 24-page insert in the paper as well as radio, video and banners online, and targeted marketing on Yahoo! will also convey the message.

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“There may be more media choices than ever before,” added Ms. Myers. “But there is still only one brand that can give you all the news, analysis and opinion about everything that is important to your life … that respects your intelligence and helps you decide what really matters — and for advertisers, that delivers the well educated, influential audience both in print and online that is second to none. That’s why the focus of this new campaign is about the quality of our journalism.

“Journalism is everything to The New York Times and we wanted our new campaign to reflect that essential point of differentiation.”

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Whew, where to begin. And this, from the former employer of Jayson Blair. Come on, guys, get off the soap box and become a little more human, ok? Now, don’t get me wrong. I read the NYT in both print and online. I think it employs many fine writers and believe it is a top-notch publication, most of the time. And while my friend Fred is perpetually pissed at them due to their Times Select model of keeping some of their best writers inside a walled garden, I think it is hard to argue with the fact that the NYT is one of the best written, most influential publications on the planet. Now that said, could they be any more pompous and self-aggrandizing? So let me get this straight - they think enough of the Internet medium to use it as a vehicle for advertising (so who exactly are they trying to reach on the Internet? A bunch of uneducated idiots?). And they claim to be the “…one brand that can give you all the news, analysis and opinion about everything that is important to your life…”

But somehow they have a hard time connecting the dots between an educated readership that is internet-savvy, critical, desirous of best-of-breed news, analysis and opinion, and other outlets that might provide a welcome complement to what they provide, i.e., blogs written by people who are every bit as influential, educated, and knowledgeable as NYT reporters? The feel one gets from the official press release is “Join the NYT family. We are all you need.” I think that is a very, very bad message to send, and one that will not resonate with the bulk of their readership - assuming their readership represents the kind of following they really want - young, educated, insightful, critical and smart. It just so happens that when you combine these characteristics one other notable feature pops out - Internet-savvy. And these people will not settle for a single locus of knowledge. Because they know knoweldge is resident all over the place, and they will aggressively seek it out, wherever it may reside. Bottom line - yeah, I’ll check you out, but if this is all you’ve got I’m outta here. Not a sustainable model for a rapidly changing world, in my opinion.

Now let’s look at a little story concerning our friends over at the Washington Post. I think you’ll see that their take on other forms of media - most notably bloggers - actually enhance the value of their work, the value of their property and up the game of their writers and editors. My feeling is that this is a somewhat more forward-looking attitude than that held by my friends at the NYT. Anyway, let me provide you some excerpts from an article quote Washington Post editor Len Downie, and you be the judge.

WASHINGTON Speaking at the Online News Association’s annual convention in Washington, D.C., Friday, Washington Post editor Len Downie looked back on the changes in newsgathering and production over the past decade, and listed some of what he thought would be the biggest challenges for news organizations in the near future.

Downie said that when it first became apparent that the Internet would change the news business, executives and editors worried that its influence would erode the quality of journalism, increase competition, and become a distraction for the reporters and editors working on the print edition of the paper. But he said instead that the increased focus on the Web has “improved journalism a lot, way more than we could have expected.”

He said that the 24/7 news cycle has changed his newsroom for the better, with reporters always tuned in to what’s happening and constantly trying to find stories to report for the Web site — and that reporters could add more detail because the Web had “unlimited newshole.”

“I was known for writing long as a reporter, I edit long, and now there’s a place to put it all,” he said.

Reporters love newsroom blogs, said Downie, because they put writers in better touch with their readers: “Everyone in our newsroom wants to be a blogger.”

And the blogs that pick apart every article that the Post produces are a good thing, said Downie, because they “keep the paper honest” and, even if their commentary isn’t positive, bring people to the site.

“Blogs are not competitors and not problems,” he said. “Instead we have a very interesting symbiotic relationship. Our largest driver of traffic is Matt Drudge.”

While it’s true that competition for print media has increased tremendously due to the Web, the Washington Post’s overall audience has now become huge compared to what it once was, Downie added. And instead of weakening the paper’s brand, as he said it was feared, it has strengthened it and made the Washington Post well known around the world.

Listing some main challenges for the future, Downie worried that as people’s attention spans become shorter due to the Web and more readers access news from mobile plaforms on the go, the “contemplative” features of journalism would suffer; he wondered whether online ads would eventually make up the difference from lost print revenue, and whether the results would pay for the kind of professional journalism that people expect; he asked whether edited and verifiable content — and branded content in general — would continue to be important.

Downie speculated that perhaps in the future content sharing between old media and new media would be less of a one-way street, with print media taking cues and integrating ideas from multimedia integration and blogs.

I’m not sure what to say here except to say that Len Downie and the Washington Post truly get it. It’s not about saying “We’re the best, we’re it, we’re Alpha and Omega and there is nothing in between,” it’s about saying “We’re in a changing world, there is stuff we can learn, our people dig it and we can up our game by embracing change.” The thing that is so amazing to me is his recognition of the symbiotic relationship between MSM and the blogosphere.  I had written about this “reflexive” relationship in a post about Lonelygirl15, and this same dynamic is at work here. Embracing change is scary. And hard. And the outcomes are uncertain. But Len isn’t afraid. He knows it is more scary and dangerous to stand still, to protect the status quo (see my last post on CEO bloggers and the push-back from the wire services - big surprise) than it is to embrace change.

Between the messaging of their latest ad campaing and their Times Select strategy, it is clear that the NYT has taken a different approach. We’ll see who wins. My bet is on the folks looking forward - not those intent on protecting their backside.

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