Well, the response to today's post has been a little disappointing. I prefer to think of course that you were simply overwhelmed by the brilliance of my analysis and have nothing further to add to my remarks at this time
So here's today's music video with an important message from Bryan Ferry.
I could feel at the time There was no way of knowing Fallen leaves in the night Who can say where they're blowing As free as the wind And hopefully learning Why the sea on the tide Has no way of turning More than this, there is nothing More than this, tell me one thing More than this, there is nothing
It was fun for a while There was no way of knowing Like a dream in the night Who can say where we're going No care in the world Maybe I'm learning Why the sea on the tide Has no way of turning More than this, there is nothing More than this, tell me one thing More than this, there is nothing
This post is a follow-up to my essay Humans Are Not Rational Problem Solvers, which I reprinted last Sunday. Here I will examine anthropogenic climate change (global warming) through the lens of Jared Diamond's explanation of why humankind has done little or nothing to address the climate problem. Diamond is well-known to thoughtful people as the author of Guns, Germs And Steel, Collapse and other fine books which discuss the human condition. Diamond reminds me a bit of Mr. Spock, but let me say at the outset that I like him and admire him for openly talking about the Big Questions. My remarks today should not be construed as a personal attack on Diamond, even if I am sometimes a little rough on him. That said, Diamond's rational view of human decision-making appears to be almost wholly misguided.
Diamond's relevant remarks start at 27:39 in the lecture below and continue until about the 35 minute mark. I have transcribed the beginning of these remarks and included the video, which you need to watch in order to fully understand my critique.
In this area, which poses issues of long-term thinking, how do you manage a society so it will last hundreds or thousands of years? There have been surprises, and perhaps the biggest set of surprises has to do with that question that my UCLA students have kept asking me: How on Earth do people end up doing these dumb things? Why do they practice such short-term thinking? What don't they, at least, foresee a decade ahead? Why do people do something so obviously dumb as to chop down all their trees? Or to kill off all their big animals? Or to run out of fresh water?
That turns out to be an unexpectedly complicated [set of questions]. There are not simple reasons why people make bad decisions. We know that in our individual lives, people make bad decisions sometimes. Sometimes we marry the wrong person, or we invest in the wrong investment, or we make a poor choice of career, and there are complicated reasons why we make these poor choices. Similarly for human groups. Human groups sometimes make bad decisions for the same reasons that individuals do, but with groups there are additional reasons for failures of decision-making, [these are] problems intrinsic in group dynamics...
Diamond goes on to discuss three reasons why people "make bad decisions" and uses global warming to illustrate those reasons. What is the salient real-world fact about humankind's handling of the climate change problem? It is this: every few years representatives of the Earth's nations get together (e.g. Copenhagen, Denmark or Durban, South Africa) and make no binding, concerted decision about global warming. They agree to postpone any meaningful action until the next meeting. You don't have to be a rocket scientist to see that such procrastination never ends. This real-world observation sets the context for this discussion.
Here is my quick critique of Diamond's three reasons why humankind continues to make poor "decisions" about global warming. My main remarks come afterwards.
failure to anticipate the problem — In fact, if you read Spencer Weart's The Discovery Of Global Warming, you will find out that scientists did indeed anticipate the problem. Syukuro ("Suki") Manabe's group at Princeton had created the first working (but flawed) models by 1965, which were based (as all climate models are) on the basic physics of how greenhouse gases work in the atmosphere. The Charney conference to try to iron out a consensus took place in 1979. See this page at Weart's website. By the time Jim Hansen testified before Congress in 1988, climate scientists had been working on the problem for a long time. Anticipating the global warming problem has had no bearing on our failure to do something about it.
slow-moving problems, imperceptibility — While this consideration is generally valid because humans are designed to react quickly to fast-developing or immediate problems, the general failure to make good "decisions" about mitigating global warming has not depended on this human limitation. Early on, smart people were quick to grasp the problem. They understood perfectly that the problem existed, even if it was slow-moving and abstract. Those we might call "fence-sitters" who wanted more data before making a decision about whether the problem existed are not now, and have not been for quite some time, the ones preventing a good "decision" from being made about climate. And no amount of annual temperature data will satisfy those who have denied in the past and deny now that global warming is a problem.
resistance by vested interests, insulated elites — Diamond's contention that powerful vested interests and insulated elites are preventing humans from mitigating global warming is partially valid, but misses the point (see below) and is not nearly general enough. We have heard this argument before. The good "liberal environmentalists" want to solve the problem but the bad "pro-growth conservatives" won't let them. I debunked this politics-as-usual fantasy in The Inherent Contradictions Of Pro-Growth Environmentalism. And I might add that those who protest the burning of fossil fuels make use of the energy these fuels provide. They are not living off the grid. Those opposed to "fracking" for shale gas are very likely using natural gas (at the source) for electricity, heating or cooling, cooking, and so on. Billions of people on this planet have a "vested interest" in continuing the harvesting of fossil fuels for energy.
Diamond's Spock-like logical approach to why humankind has failed to make good "decisions" about global warming assumes that humans are rational problem solvers, or at least have the potential to be, but have been impeded for the reasons he mentions. This is nonsense, it is orthogonal to what's really going, and therefore debunking it directly (as I did above) is not the best approach if you want to explain what's really going on.
I assume that humans are not rational problem solvers in the general case. Therefore there are no "decisions" being made now and there will not be any "decisions" made in the future. Inaction is indeed a kind of decision, but this choice is not made through some rational thinking process. Remember, we are trying to answer questions like these: why do people make "dumb decisions" [Diamond's phrase] like killing off all their large animals or continuing to burn fossil fuels as fast as they can?
It is helpful to change our perceptions of what's going on by re-framing the problem. What would rational decision-making look like?
Statement By World Leaders, Qatar, December 7, 2012
As you know, collectively the Earth's nations continue to pursue business-as-usual with respect to carbon dioxide emissions. We have decided that humankind will simply have to take its chances with a warming Earth in so far as it is in nobody's best interests to slow or reverse our 200-year legacy of success in providing improved standards of living for expanding human populuations as implemented through economic growth, exploitation of the Earth's abundant natural resources, and remarkable human ingenuity.
Perhaps one day technological solutions in energy and geo-engineering will emerge which effectively fix the global warming problem and do not require sacrifice. This is our hope and our faith. If this comes to pass, we have made the right decision today. If no such solution is forthcoming, our message to future generations is simply this: Good Luck & God Bless.
[My note: Read the "inherent contradictions" post I alluded to above if you want to fully understand what I've said here. You should also be familiar with Tim Garrett's work (and here) if you want to fully understand my previous remarks. It would also be helpful to look at my essay For Humans, The Economy Is Everything.]
But of course this is absurd. You will never hear such a statement, yet this is what a rational decision regarding our continuing failure to address global warming would look like. The very absurdity of this imaginary statement underscores the very real fact that humanity is stumbling blindly into the future, not only with respect to global warming, but also regarding our precarious crude oil supply, the ongoing destruction of marine ecosystems and species, the acidification of the oeans, and a host of other problems created by willy-nilly human expansion on this finite planet.
Now I hope you can see why Diamond's explanation of why humans have done nothing about the climate problem is simply nonsense. Anticipating the problem, the slow-moving nature of the problem, and resistance by vested interests which perpetuates the problem are insignificant factors in explaining ongoing human neglect of the Earth's health. In fact, the peak of crude oil production has been glaringly obvious in the global data for about seven years now. Nobody is doing anything about that, outside of mostly futile efforts to replace (in terms of flows) the bountiful crude oil which has already been consumed. This very fact falsifies Diamond's slow-moving problem hypothesis. It is impossible to make strong predictions about human behavior based on Diamond's hodgepodge of reasons for human inaction on important issues, or he is simply wrong.
Diamond assumes at least the potential for rationality in solving these huge environmental problems. He talks in terms of "decisions" being made or not being made. I assume as a matter of course that no decisions are being made, and that's what we observe in the real world. At bottom, I am an empiricist. Theories of Human Nature can not be constructed if real-world observations are not taken into account. If you don't have a theory of what makes humans tick, or you make use of an unexplicit, naive theory as Diamond and most people do, you are very likely spouting nonsense. If we truly want to understand why humans continue to burn fossil fuels as fast as they can, regardless of the well-understood dangers of doing that, we need to construct a theory which predicts the observed behavior.
Briefly stated, my own view is that the urge to grow is biologically-driven (innate). You can not ask people to stop having so many babies, you can not ask them not to strive for greater material comfort for themselves and their offspring (and thus enhance the survival of those offspring). In short, you can not ask people to do things they are not able to do. In fact, humans have fewer offspring only when their material comfort has become well-established (or so they believe). Our misnamed species Homo sapiens is a species like any other, even if we do see remarkable plasticity in our cultural and individual behavior, and despite our astonishing technological abilities.
But some things can not be changed. Sometimes there are no "decisions" being made. A substantial part of human behavior is pre-determined—what you see is what you get, and what you're going to get. Will there be future wars? Of course. Human inaction on global warming and other problems resulting from unchecked growth is not nearly the same as making a conscious decision not to address the problem through a rational thought process. As I said, humans are stumbling blindly into the future.
In many matters, and especially with respect to the big issues affecting our future on this planet, humans are not (or even potentially) rational problem solvers as Jared Diamond seems to assume. As I've said before, my view of Human Nature is falsifiable. I would be glad to be proved wrong about anthropogenic climate change and many other things. But I believe that future events will only confirm what I've said here. I'm not happy about it, but that's very likely the way it is now, and will be in the future.
I'm working on a follow-up to Sunday's post but it's not done yet. So please accept this piece of unimportant but informative fluff — Dave
It's funny how things work. Being a gazillionaire in America automatically accords a person great reverence and respect, even though becoming filthy rich is mostly a function of luck—doing the right thing at the right place at the right time. It's certainly not a function of hard work and talent. Lots of talented people who work hard never attain great wealth. And those whose interests and opportunities do not flow in the direction of making scads of money seldom end up with a big pile of it, no matter how hard they work.
So it should not surprise us then when some egregiously mediocre people become very rich and famous. Facebook founder Mark Zuckerberg is a case in point. Mark is on his honeymoon, and because of his global status as a mover & shaker, the press is documenting his every move, especially in light of the recent IPO fiasco.
It goes without saying that Facebook itself is a joke. Basically, it's a platform in which Zuckerberg and friends try to sell a bunch of monkeys some shit they don't need while these monkeys groom each other online. That's also why Twitter and smartphones are so popular—it's the constant stroking.
These big-brained, bipedal monkeys—technically, suborder Anthropoidea, family Hominidae, Genus Homo—like to stay in touch. All the time. Almost every minute of every day. Facebook claims it has 900 million users. I believe it. Perhaps you have heard it said that humans are social animals. Now you know what that means.
ashton kutcher (@aplusk on twitter) — 10,809,396 followers
Mark Zuckerberg and his wife Priscilla Chan spent their honeymoon abroad in Rome, Italy.
They flew there in a private jet and stayed at a five star hotel, Portrait Suites, near the Spanish Steps. It's owned by Salvatore Ferragamo; rooms start at 800 Euros per night.
They had a 32 Euro meal in the at Nonna Betta, dined at Pierluigi, grabbed McDonald's, toured the Vatican, Sistine Chapel, Colosseum, and Trevi Fountain.
"They seemed like two lovebirds," says one of the restaurant owners. "They shared a plate of artichoke ravioli in the centre of the table. It was a very romantic scene."
Mark and Priscilla wondering whether that painting on the ceiling is for sale
I don't know about you, but I always eat at McDonald's when I'm in Rome. After all, it's the finest food in the world. However, Mark and Priscilla did try some other eateries like Pierluigi. So adventurous! We've got a report on that, too.
He may be worth $20 billion, but when Facebook founder Mark Zuckerberg took his new wife to lunch during their secret honeymoon in Rome he spent just 32 euros (£26) – and did not leave a tip.
The owners of the kosher restaurant in Rome's Jewish Ghetto – a historic quarter in the center of the city – were surprised when Mr Zuckerberg and Priscilla Chin walked away without leaving a gratuity.
Their bill came to just 32 euros after a lunch consisting of deep-fried artichokes – a Roman Jewish speciality – fried pumpkin flowers and ravioli stuffed with sea bass and artichokes.
Instead of wine or beer they opted for a bottle of water and a pot of tea.
Waiters at Nonna Betta, which specializes in Roman Jewish cuisine, were amazed by Mr Zuckerberg's parsimony, not just because of his huge wealth but because of Americans' reputation for tipping generously, as is expected of them at home.
It was not a case of not enjoying the meal, said the owner of the restaurant.
"I asked him 'how was it?' and he said 'very good'", the owner, identified only as Umberto, told Corriere della Sera newspaper. "I had gone up to him and said 'Are you ...?' and he said 'Yes'."
It was not the first time that the multi-billionaire chose not to tip – he reportedly did the same thing the night before at Pierluigi, a historic trattoria near Campo de' Fiori, a pizza in the heart of Rome.
Not a big tipper, that Mark. By the way, the great thing about McDonald's is that nobody makes a fuss about it when you don't leave a tip. But Umberto, the owner of Nonna Betta, says not to worry.
Meanwhile the owner of a kosher restaurant in Rome's historic Ghetto quarter dismissed a row over Mr Zuckerberg not leaving a tip when he and his new wife ate there during their two-day stay in the capital.
Umberto Pavoncello said the failure to leave a tip for a lunch which cost 32 euros (£26) was of no consequence and said he was considering renaming one of the restaurant's signature dishes – deep-fried courgette flowers – after Mr Zuckerberg.
He wrote on the website of his restaurant, Nonna Betta (Granny Betta) that he would like to make the internet guru "an honorary nephew" and speculated that he had failed to leave a tip because he was in a hurry.
Mark is also puzzled by the existence of cash machines.
The 28-year-old multi-billionaire was unable to access his vast personal fortune when he tried to withdraw money from a cash point on the island of Capri.
The young internet tycoon and his new wife, Priscilla Chan, went by boat from the picturesque Amalfi Coast to the island in the Bay of Naples earlier this week.
From the island's tiny port they took an open-topped taxi to have lunch at Da Giorgio, a local restaurant.
They then found a nearby ATM machine, owned by Banca della Campania, in a whitewashed alcove of Capri's main village, a haunt of Hollywood celebrities and the super-rich.
A video shot by a passer-by showed Mr. Zuckerberglooking at the cash machine quizzically and asking advice from a fellow tourist, before abandoning the attempt to withdraw money and walking away.
Mark doesn't quite "get" this ATM thing. Mark wants to know what's this all about? And Mark didn't leave a tip because he was in a hurry. It's not because he's mean and stupid. It's not because he's some mediocre asshole with a shitload of money. It's not because Mark Zuckerberg is a cretin.
Hot Off The Presses! This Just In!
We've learned the real reason Mark didn't tip his waiters at those restaurants in Rome.
Well, that didn't take long.
Less than two weeks after Bloomberg's Billionaire Index declared Mark Zuckerberg the 29th richest person on Earth, the Facebook founder has fallen off the list entirely.
Bloomberg's index measures only the wealth of the top 40 richest people in the world, and as of now, Zuckerberg is $800,000 behind the current No. 40 on the list — Luis Carlos Sarmiento, a septuagenarian who controls more than a quarter of Columbia's financial industry.
Of course, no one is suggesting you feel bad for the 28-year-old newlywed — as of Tuesday his estimated net worth was still a whopping $14.7 billion, according to Bloomberg. But on the other hand, the guy did lose $4.7 billion in just 11 days — at least on paper.
Could this be why he skimped on tipping a waiter in Rome?
Yes it is! With his net worth down to a paltry $14.7 billion, Mark couldn't afford to leave a tip.
Experience tells me that nobody wants to hear about the poor. Not even DOTE readers want to hear about the poor, unless they themselves are poor. To paraphrase Mark's gospel, the poor are always with us, so taking them for granted is easy to do, especially in so far as their very existence reminds us of our contining failures. It is far easier to look the other way.
But shouldn't we celebrate the poor? They are far and away America's biggest product since the Great Recession began (graphs below). Borrowed money spent to keep the poor alive adds to GDP, which grows and grows as a result.
Adam Smith's Invisible Hand at work! Capitalism on the move! Annual data since 1975
A closer look post-recession. Source for both graphs
One in seven Americans receive food stamps, and an even higher proportion of American children do, but you are far more likely to hear about the relatively small amount of supplemental food assistance fraud than you are about these disturbing and embarrassing facts.
But the truth is that the poor are defenseless. They have no recourse. As a result, and especially here in the Greatest Country on Earth, the poor are the target of predators who want to steal what little wealth they have. That is the subject of Barbara Ehrenreich's recent column How Corporations and Local Governments Rob the Poor Blind.
The trick is to rob them in ways that are systematic, impersonal, and almost impossible to trace to individual perpetrators.
Individually the poor are not too tempting to thieves, for obvious reasons. Mug a banker and you might score a wallet containing a month’s rent. Mug a janitor and you will be lucky to get away with bus fare to flee the crime scene. But as Business Weekhelpfully pointed out in 2007, the poor in aggregate provide a juicy target for anyone depraved enough to make a business of stealing from them.
The trick is to rob them in ways that are systematic, impersonal, and almost impossible to trace to individual perpetrators. Employers, for example, can simply program their computers to shave a few dollars off each paycheck, or they can require workers to show up 30 minutes or more before the time clock starts ticking.
Lenders, including major credit companies as well as payday lenders, have taken over the traditional role of the street-corner loan shark, charging the poor insanely high rates of interest. When supplemented with late fees (themselves subject to interest), the resulting effective interest rate can be as high as 600% a year, which is perfectly legal in many states.
I guess that's what pundits mean when they say America is still The Land of Opportunity. I couldn't quite grasp what they were getting at before, but now I think I understand it. And as Barbara points out, there's no reason governments can't get in on the action.
It’s not just the private sector that’s preying on the poor. Local governments are discovering that they can partially make up for declining tax revenues through fines, fees, and other costs imposed on indigent defendants, often for crimes no more dastardly than driving with a suspended license. And if that seems like an inefficient way to make money, given the high cost of locking people up, a growing number of jurisdictions have taken to charging defendants for their court costs and even the price of occupying a jail cell...
Once you have been deemed a criminal, you can pretty much kiss your remaining assets goodbye. Not only will you face the aforementioned court costs, but you’ll have a hard timeever finding a job again once you’ve acquired a criminal record. And then of course, the poorer you become, the more likely you are to get in fresh trouble with the law, making this less like a “cycle” and more like [a] waterslide to hell. The further you descend, the faster you fall — until you eventually end up on the streets and get busted for an offense like urinating in public or sleeping on a sidewalk.
Paying for your own bogus incarceration. Don't tell me the American Dream is dead! It's simply been redefined.I guess that's why no one cares about the poor. You might think...
Government Joins the Looters of the Poor
You might think that policymakers would take a keen interest in the amounts that are stolen, coerced, or extorted from the poor, but there are no official efforts to track such figures.
Instead, we have to turn to independent investigators, like Kim Bobo, author of Wage Theft in America, who estimates that wage theft nets employers at least $100 billion a year and possibly twice that.
As for the profits extracted by the lending industry, Gary Rivlin, who wrote Broke USA: From Pawnshops to Poverty, Inc. — How the Working Poor Became Big Business, says the poor pay an effective surcharge of about $30 billion a year for the financial products they consume and more than twice that if you include subprime credit cards, subprime auto loans, and subprime mortgages.
These are not, of course, trivial amounts. They are on the same order of magnitude as major public programs for the poor. The government distributes about $55 billion a year, for example, through the largest single cash-transfer program for the poor, the Earned Income Tax Credit; at the same time, employers are siphoning off twice that amount, if not more, through wage theft
Barbara Ehrenreich is no dummy. She's a smart cookie, and surely knows that none of this is going to change anytime soon, so when she started using the word "should" in the last paragraph, it was surely a result of a strong sense of social and moral obligation, as opposed to delusional obligatory hope.
I could propose all kinds of policies to curb the ongoing predation on the poor. Limits on usury should be reinstated. Theft should be taken seriously even when it’s committed by millionaire employers. No one should be incarcerated for debt or squeezed for money they have no chance of getting their hands on. These are no-brainers, and should take precedence over any long term talk about generating jobs or strengthening the safety net. Before we can “do something” for the poor, there are some things we need to stop doing to them.
The truth is that America is a country that can not and does not even want to give each of its citizens dignified, well-compensated labor which allows those people to stand on their own two feet. America has always had a substantial number of poor people, but some of us can remember a time when this country wanted to become a place where each citizen had an opportunity to make their lives work. But the desire to do the Right Thing disappeared sometime in the 1970s, and it's been fading from sight ever since. And now here we are.
Preying on the poor has replaced honest work and government, and that's never going to change, not ever again. That's just the way it is.
Bonus Video — Barbara Ehrenreich on the Big Questions
This is a reprint of my February 28, 2012 post. I intend to pick up this irrationality theme this week. It's Memorial Day, so this seemed like a good time to repost it. — Dave
Anyone who has read this blog for some length of time knows that humans are not working hard to fix the large problems confronting them in the 21st century. Why is that? The answers are complex in the details, but can be boiled down to a few simple precepts in the abstract.
One answer states that for humans, the economy is everything. We don't do anything about the imperiled crude oil supply and anthropogenic climate change because we need energy to support growth, both of populations and the economies which support them. In the former case, human generally deny that peak oil is a concern, despite mounting evidence which suggests we're at the top of the production curve, because it is literally unthinkable that we might not have enough of the stuff (along with coal and natural gas) which allowed human populations to grow and grow in the 19th and 20th centuries. With respect to global warming, fixing that problem would also mean the end (and no doubt a reversal) of growth in populations and economies. See my posts The Inherent Contradictions Of Pro-Growth Environmentalism and Carbon, Energy And Craziness. Growth is an ineluctable imperative for the human species.
Another answer states the inarguable view that humans are flawed and corruptible. At all times since the rise of complex human societies, and in all places, it is guaranteed that some portion of the human population will be attracted to, seek out and attain great wealth, power and influence which is all out of proportion to the rest of society. In short, all complex societies which may be called civilizations have been run by elites sitting atop the wealth and power pyramid. There are no significant exceptions to this rule. The hierarchical nature of complex human societies is not an accident. Such outcomes appear to be inevitable, and the resurgence and strengthening of such elites in the declining Amercian Empire is simply one example among the countless others which five thousand years of history records. Ronald Wright's A Short History Of Progress, which I read recently, discusses this unsolvable dilemma at some length.
Update: I recently posted about Wright's book in Gauguin's Questions, published May 10, 2012.
Despite these intractable problems, which appear to be deeply rooted in Human Nature, I see the same fallacy repeated over and over again in modern times. We might call this fallacy the Imputation of Rationality, meaning that the speaker assumes that humans are rational problem solvers, despite ample empirical evidence to the contrary.
I will provide one telling example today, but I intend to return to this subject in the future, for there is no dearth of good examples to pick from. Woody Brock, founder of Strategic Economic Decisions and author of American Gridlock: Why the Left and Right Are Both Wrong, is upset about the political paralysis in Washington. I will quote from his interview with Aaron Task (video below).
The people in Washington know the K-Street system is not working... The rascals [our Washington elites] are going to be thrown out [in 2016], or pitch-forked out, as I prefer [to say]. So, once you show them there are win-win policies that don't screw the left or screw the right, which they do not understand right now, and that's why I wrote [my book] ... you show them that there's a way that their constituents will be very happy that a problem gets solved, and they're not eating [that problem], do you see what I'm saying? It's win-win.
You might ask what planet is Woody living on? and that's the right question, because it's certainly not Earth. His thesis is that if we only show our political elites that there is win-win opportunity ripe for the plucking, they will end all this petty bickering and our elected government will once again start solving problems instead of creating them. This is the Imputation of Rationality in a nutshell.
What is missing from Woody's tidy little explanation? Many, many things, too numerous to list here, but I'll list some. Where is the simple understanding of human motivation? Of the unalterable nature of opposed human groups? Of the shared but irrational belief systems which bind those groups together? What about the overwhelming human impulse (among strivers and sycophants) to wield influence and attain great wealth and power? What about simple corruption, aka. money in politics, which paves the road to that influence, wealth and power? What about the crucial role of media propaganda designed to shape the views of pliant (and ignorant) voters?
I could go on and on. This is all Human Nature 101, a course no university offers.
If all that were necessary was to simply demonstrate to our Washingon elites that there are rational, win-win solutions to our problems, assuming these exist at this late stage in our history, those problems would have been fixed long ago. That's the Imputation of Rationality in a context which is anything but reasonable. Humans are not rational problem solvers, which goes a long way toward explaining why humanity in general and America in particular are in such deep trouble today.
U.S. Securities and Exchange Commission investigators have concluded their probe of possible financial fraud at Lehman Brothers Holdings Inc. without recommending enforcement action against the firm or its former executives, according to an excerpt of an internal agency memo.
Lawmakers and investors have pressed the agency for more than three years to determine whether Lehman misrepresented its financial health before filing the biggest bankruptcy in U.S. history in September 2008.
Under a heading reading “Activity in Last Four Weeks,” the undated document reads, “The staff has concluded its investigation and determined that charges will likely not be recommended.”
SEC officials didn’t dispute the authenticity of the memo or its contents.
Pressure on the agency to punish any wrongdoing related to Lehman’s collapse escalated after Anton Valukas, the court- appointed bankruptcy examiner, found the firm misled investors with “accounting gimmicks” that disguised its leverage.
Senior SEC officials have been reluctant to formally close the matter even though investigators found a lack of evidence of wrongdoing, according to people with direct knowledge of the matter. The officials have weighed issuing a public report on their findings that would stop short of an enforcement action while highlighting the firm’s questionable conduct...
‘Grossly Negligent’
According to Valukas, Lehman’s former Chief Executive Officer Richard Fuld [image, top] was “at least grossly negligent” for letting Lehman file financial reports that distorted the firm’s risks.
Fuld didn’t structure or negotiate the Repo 105s, nor was he aware of the accounting treatment, his lawyer, Patricia Hynes of Allen & Overy LP, said in a statement after Valukas’s report was released. Hynes didn’t immediately respond to an e-mail seeking comment.
[My note: See the Bloomberg story if you want to know about the Repo 105s.]
According to the internal memo, SEC staff investigated whether Lehman and its officers misrepresented the firm’s financial health, capital situation, liquidity and its commercial real estate portfolio.
In its final year, Lehman overvalued real-estate holdings, including a stake in U.S. apartment developer Archstone-Smith Trust, Valukas said. Lehman and Tishman Speyer Properties LP completed a joint acquisition of Archstone for $22 billion, including debt, in October 2007.
Lehman presented “unreasonable” valuations of its Archstone stake in the first three quarters of 2008, overvaluing the holding by as much as $450 million in the second quarter, Valukas said.
Speaking for myself, I used to be outraged. That was nearly four years ago. But if I were to get outraged about every single outrageous thing people do, and particularly all the outrageous things which have been perpetrated in the United States over these last 30 years, I would have no time left over for anything else.
This story comes on the heels of the multi-billion dollar gambling loss at JP Morgan Chase. A trader known as "the London whale" was betting on European debt. Right now we don't know exactly how many billions the bank lost. This story reminded all right-thinking people that we need Glass-Steagall to be reinstated so banks like JP Morgan Chase can't gamble with depositor and tax-payer money. Glass-Steagall calls for the strict separation of commercial and investment banking. As things stand, banks like Chase are free to act like hedge funds with your money. But of course it is no longer your money. It is their money.
Is this outrageous? You bet it is. Do you feel outraged? Maybe you do, but I don't. As with Lehman, rest assured that nothing is going to be done about this outrage either.
However, there is one useful reference in the Daily Ticker story, which opens up an opportunity for some comic relief, which is the only kind of relief there is.
Today we note the death of Disco, as seen in the recent passing of Donna Summer and Robin Gibb (Bee Gees). No doubt there are many humorless rock & rollers or punk fans out there who will celebrate this death, people who say with some justification that Disco sucked. Well, of course Disco sucked, but it sucked in a happy sort of way. It was dance music with a steady, heavy 4/4 back beat and some nice background licks, and that's all it was, except for the slow dance numbers, and that was all it needed to be. But disco certainly compares favorably with the shit that passes for "music" today. I can listen to good music anytime I want, and do. But listening to disco today always takes me back and makes me smile.
And as I write this, here's what I think. I think that if the only thing human beings were doing on this planet was dancing to disco tunes, that wouldn't be such a bad thing. Unfortunately, they are up to no good, they are busy, busy, busy committing all sorts of crimes against Nature and each other, making all sorts of irreversible mischief. Consequently we always have put up with all of this heavy angst bullshit because humans are such irredeemable screw-ups, whereas what the vast majority of human beings were really meant to do beyond procuring the bare-bones necessities is dance 'til the sun comes up.
So never forget the real meaning of what Donna sang—
Toot, Toot, Ahh, Beep, Beep!
Here's the playlist. And don't forget to crank it up.
In my previous Saturday report I speculated that prices would stay the same, though I said there was a possibility they would continue to fall. They did fall. Nymex-traded WTI fell about $5/barrel and Brent fell about $6/barrel (below).
Graph courtesy of oil-price.net. Prices have declined about 16% in the last quarter, with most of that coming in the last month.
The alarm level remains the same.
Oil Alarm Level — Orange
Despite the assiduous efforts of Goldman Sachs to get their clients to go long on crude oil, the markets have stubbornly refused to cooperate. Why is that? To answer that question, you've got to look at the global economy. And how does it look? Shaky, very shaky. The steady deterioration of global economic conditions does not bode well for oil demand.
China’s manufacturing may shrink for a seventh month in May, a private survey showed, reinforcing the need for stimulus as Premier Wen Jiabao accelerates a shift in policy to support growth.
The 48.7 preliminary reading for a purchasing managers’ index [left] released by HSBC Holdings Plc and Markit Economics today compares with a final 49.3 for April. If confirmed on June 1, it would mark the longest run of below-50 readings since the global financial crisis.
Today’s report, along with worse-than-forecast data from Japan and Taiwan yesterday, add to concerns that growth in Asia is in danger as the world grapples with the threat of Greece's exit from the euro. China will increase the intensity of policy “fine-tuning” amid rising “downside risks” facing the economy, the State Council, or Cabinet, said yesterday.
“This calls for more aggressive policy easing, as inflation continues to slow,” Qu Hongbin, Hong Kong-based chief China economist for HSBC, said in a statement. “Beijing policy makers have been and will step up easing efforts to stabilize growth, as indicated by a slew of measures to boost liquidity, public housing and infrastructure investment and consumption.”
... The manufacturing index stayed below 50 for eight months through March 2009. The new orders, export orders and employment components of the gauge all showed a contraction for May, while output expanded, according to the preliminary readings.
China's apparent oil demand in April edged up just 0.3% year on year to 38.32 million mt or an average 9.36 million b/d, according to Platts' analysis of recent data released by the government.
This is the lowest monthly growth in oil demand since June 2011, when it fell 8.2% year on year — from a high base — to 9.02 million b/d.
China does not release official data on oil demand or commercial and strategic oil inventories. Platts calculates the country's apparent oil demand based on official data on refiners' crude throughput and net oil product imports. April demand was dragged down by lackluster refining, with total runs falling 0.3% on year to 36.96 million mt, or an average 9.03 million b/d, according to National Bureau of Statistics data released on April 11.
April crude oil processing volumes were also the lowest so far this year on a barrels/day basis compared with 9.07 million b/d in March, 9.32 million b/d in February and 9.38 million b/d in January.
But net oil product imports rose 16.2% year year-on-year to 1.36 million mt (323,680 b/d) in April, although this was down 24.4% compared with 428,400 b/d of imports in March.
"The [macroeconomic] data out of China was particularly weak in April, and it was the weakest month in terms of oil demand for almost two years," said Neil Beveridge at Bernstein Research in a conference call held on Friday to discuss oil prices.
In the first four months of the year, overall apparent oil demand averaged 9.57 million b/d, up 1.8% year on year, according to Platts' calculations.
I'm not going to bother telling you the story in Europe. You already know about the huge slowdown there unless you've been unconscious for the last two years. In the United States, the best word to describe oil demand is lackluster. EIA data shows that demand has held steady between 18 and 19 million barrels-per-day for the last few months. We have entered the "summer driving season"—remember that?—but demand is well below what it was prior to 2008.
It's Memorial Day weekend and I'm sure nobody much cares about an incipient global recession. Gas prices are much lower than they were a month ago, and that's all that counts for Americans looking to hit the road this weekend. Americans have their heads firmly planted up their asses, so they have no idea why they are enjoying this happy reversal of fortune on gas prices. But they will no doubt pay for it in different way down the road (so to speak) when the global economy unravels.
Where will oil prices be in two weeks? I don't know. Could they fall even lower? Brent below $100? WTI below $90? It's possible. The market may (and likely will) overshoot to the downside. We'll see.
This is Friday's open thread. Talk about anything you want. I will approve your comments (or not) as I get to them. I hope you will enjoy the Memorial Day weekend.
I've got a good story for you today. It's about crude oil, and it's called GOLDMAN: Why Oil Prices Are Heading Higher. Of course, oil prices are not going to move higher, all supply things being equal, because the global economy is sinking like a stone. But never mind. I will talk about that in my biweekly Saturday Oil Report tomorrow.
Goldman Sachs consistently predicts oil prices will move higher so they can lure long-only oil investors—their clients, aka. the suckers who deal with them—into buying oil contracts, which is a profitmaking operation in Goldman's commodity index fund and ETF. That's not news, of course. Lots of suckers have been long oil, and there were way more of them than there were traders who were short oil. Oil prices fell, just as I predicted they would in my Saturday reports because the global economy is going down the toilet. Those suckers have been selling those losing long-only positions as fast as they can to avoid further losses. The price has been falling off a cliff as a result. See my post The Markets Are Broken.
I would never say that the oil markets are not driven entirely by supply & demand. I would never say that
On February 22, the commodities team at Goldman Sachsv initiated a long trading recommendation on WTI crude at $107.55 a barrel.
[My note: Nymex-traded WTI crude is going for about $91/barrel as I write this.]
It's been a rough few weeks for anyone who took that advice — oil closed out this past trading week at $91.48, down 15 percent from the time of the recommendation as uncertainty in Europe has stoked fears of a significant slowdown in global growth looming ahead.
In their latest note, the Goldman analysts assert that "the extent of the recent sell-off was largely unwarranted" given supply and demand catalysts in the oil market on the horizon...
We asked MercBloc president Dan Dicker, a veteran trader with more than two decades of experience in the oil markets under his belt and a recent book credit on the subject, for his reaction to the Goldman note.
Dicker was surprised — he said he would have expected Goldman to wait a few more weeks before "doubling down" on the long recommendation, given what is happening in Europe right now. He said he was "not a seller here," but at the same time thought it was still too early to be long as well...
Goldman is known for its influence in oil markets, and they are encouraging clients to get long. Even so, significant headwinds working against their thesis could be right around the corner.
And here's the Goldman Sachs oil investor theme song.
Bonus Video — Think the world's fucked up? You Should Be Dancing! (more tomorrow)
Social networking has been all the rage for some time now. When it came time for Facebook to go public, you knew the gullible would be out in force, the so-called "retail" mom & pop investors. There was enormous demand for the stock. Low-hanging fruit ripe for the picking! Was Facebook's valuation way too high? You betcha! Was the initial public offering price way too high? You betcha! Is a sucker born every minute few seconds? You betcha.
May 24 (Bloomberg) -- Ryan Cefalu, who lives with his wife and two kids in Baton Rouge, Louisiana, saw in Facebook Inc.'s much-anticipated initial public offering a chance to buffer his retirement fund.
His expectations fizzled along with the stock within the first minutes of trading.
"It's disheartening to know that things get over-hyped," Cefalu, a 34-year-old data-systems manager who spent about $4,000 on the stock, said in an interview. "That's about a 12th of my annual income — so a month's salary. I'm trying to do an on-my-own retirement kind of thing."
Whoops! Another get-rich-quick scheme gone wrong. Another sucker bites the dust.
Facebook, a site used by 901 million people worldwide, allocated more than 25 percent of shares to retail investors, said two people familiar with the offering who asked not to be identified because the process was confidential. That means the value of stock bought by that group for $38 in the IPO has dropped by at least $630 million in total, based on the closing price of $32 yesterday and assuming investors held onto the stock.
While asset managers and hedge funds got to buy the stock in private trading years before the IPO and investment banks made money in the offering, small-time investors had to wait until last week's IPO for a piece of the action.
The outcome: After Facebook and its underwriters misjudged demand in pricing the IPO and glitches on the Nasdaq hampered trading on the first day, the world's largest social-network website lost 18 percent in three days. The stock is still about 16 percent under its $38 IPO price after paring some losses yesterday.
The excitement over Facebook's debut on the Nasdaq stock exchange Friday has given way to investor fury.
The immediate decline in its share price, along with allegations that Facebook and its underwriters failed to disclose relevant information to investors, has prompted government inquiries and multiple lawsuits, including one that involves California plaintiffs.
Legal experts say others are surely on the way.
At this stage, it's unclear if the social-networking giant or its underwriters violated the nation's complicated maze of securities laws. The key question is whether Facebook properly disclosed all material facts about the company's financial performance in advance of its initial public offering.
Reuters reported Tuesday that lead underwriter Morgan Stanley informed major investors that its analyst had lowered revenue forecasts on Facebook just days before the IPO - information that didn't reach the investing public.
JPMorgan Chase and Goldman Sachs, two other underwriters on the deal, also reduced their estimates around that time.
Those changes followed Facebook's filing of an amended prospectus with the Securities and Exchange Commission, which warned that revenue growth could slow because more people are using mobile devices to access the site. The company earns less money from advertising on phones and tablets.
Unfair advantage?
Bloomberg News and the blog Business Insider, citing unnamed sources, reported that Facebook provided additional information after the filing to analysts at certain banks. Lawyers representing retail investors say those banks had an unfair advantage over their clients, who were not briefed and had relied only on the amended prospectus.
While investment banks were lowering their earnings guidance, Morgan Stanley actually raised Facebook's offering price - as well as the number of shares to be included in the IPO. But the Menlo Park company's stock began to fall shortly after it began trading Friday. And by the close of the markets Monday, shares were more than 10 percent below the $38 offering price.
Morgan Stanley defended its role in Facebook's initial public offering after a Massachusetts regulator subpoenaed the bank over talks between an analyst and investors about the social media company’s revenue outlook.
“Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs,” Pen Pendleton, a spokesman for the New York-based investment bank, said yesterday in an e-mailed statement. “These procedures are in compliance with all applicable regulations.”
I'm pretty sure Morgan Stanley did indeed comply with all existing applicable regulations because in the United States institutional theft has been codified. But the Little Man who got hosed in this deal has nobody to blame but himself. Ample warning signs that Facebook and the banks underwriting the IPO are not trustworthy have been posted everywhere for many years now — Shark-Infested Waters, Swim at Your Own Risk!
