Monday, October 30, 2017

The Whitefish Energy Saga: Corruption While People Suffer

Trump emphasized that the White House saw the hurricane aftermath in Puerto Rico as a profit opportunity first, and the Whitefish Energy contract puts those comments in a new light. A virtually nonexistent electrical contractor is being paid 7 times the market rate for electrical technicians to repair broken electric lines in Puerto Rico. Had the contract run its course, the owners would have pocketed around a quarter of a billion dollars without doing any work themselves. Whitefish Energy does not have any employees — journalists have been able to identify only two people who work for the company — so it must simply have hired other companies who do employ electric workers to do the actual work. I assume the dozens of workers who ultimately arrived in San Juan did real work, though I must add that so far there is no concrete evidence of this — no photographs of workers working, no building with its electric supply restored. At the same time, there is little room to imagine that the technicians Whitefish Energy hastily rounded up on the job boards could have been as skilled and qualified as ones who had been through a regular hiring process. Essentially, the Whitefish Energy contract was little more than a vehicle to funnel unearned money to this mysterious shell of a company.

The contract did not last long after journalists found out about the terms. The largest daily paper in San Juan, though it didn’t break the story, ran an infographic showing how disproportionate the pay arrangements were. That image was seen everywhere last week, it seemed. The mayor of San Juan asked for the contract to be voided, which resulted in Whitefish Energy threatening the mayor on Twitter. The company apologized quickly, but it was too late. The Inspector General’s office looked at the case for a day and decided it wouldn’t have anything to do with it. After two more hops, the governor recommended canceling the contract. By that point, no one would admit to having anything to do with approving the contract in the first place, and it was canceled the next day. That happened over the weekend.

Except — work already underway is being allowed to continue. This makes a kind of sense, but it also means that the work will run long enough that Whitefish Energy, whoever they really are, will get to keep a lot of money, surely in the neighborhood of $10 million. That is still a huge government payout in what looks like a case of government corruption from beginning to end. It is more than enough money to allow a small group of people to retire to a tropical island, as we have seen in the final scene in more than one or two Hollywood heist flicks. This is a money bag on a similar scale to what we see in the movies. And we don’t even know at this point who Whitefish Energy really is.

FEMA seemed to own the contract originally, but disowned it after the terms became public. Over the weekend they were complaining that other parties hadn’t properly vetted the contract, though it is far from clear that the electric company owned by the bankrupt territory had the authority to question a financial arrangement set up by its federal overseers. The indirectness of rule by an oversight committee did not just mean it took five days to cancel the contract. This kind of arrangement, by allowing everyone involved to disclaim responsibility, tends to allow corruption to flourish. This is especially likely when the direction from the White House is to treat Puerto Rico as a profit opportunity rather than a civic problem to be solved. The whole situation looks like a White House-directed plot to siphon off government funds for the personal gain of someone connected to the Trump administration. The $10 million they got away with probably seems small on the scale of activities in Washington, but it will surely rankle in Puerto Rico, where most of the island is still without power and citizens now know the restoration of the electric grid was delayed by more than a week just so someone on the mainland could get filthy rich.

Sunday, October 22, 2017

Getting the Story Straight in Puerto Rico

It took an agonizing month to get here, but the world has mostly gotten its story straight on the disaster in Puerto Rico. The White House went from denying that Hurricane Maria had ever happened to mentioning the storm by name and acknowledging the human impact of destroyed power plants. Major news outlets are using terms like “post-apocalyptic” and are showing photos of empty supermarket shelves. The state government of Puerto Rico is doing better at capturing daily information on the disaster recovery and their information is slowly catching up to the magnitude of the disaster.

Looking back, the strangest thing about the Puerto Rico disaster response was the initial six-day delay in which it seemed hardly anything happened. It seemed as though federal agencies, charities, and news organizations crossed their fingers and hoped for good news in spite of the weather reports that indicated a storm likely to damage most of the buildings on the island. These were days wasted when it would have made more sense to start helping local authorities in search and rescue in any way possible.

There was surely an element of procrastination in the White House’s response, as if they hoped the story would just blow over if they did nothing at all. After ten days or so, the initial reaction from the White House felt more like a coverup than a response. Perhaps the White House did not want to highlight the early days in which it did nothing at all while the President went out to play golf. During the coverup period there were social media reports of emergency supplies in Puerto Rico being improperly diverted. This was part of the coverup story. None of the people making these reports had actually seen any emergency supplies. There were only rumors of supplies that had supposedly come and gone in the dead of night, an exceedingly unlikely scenario in a place where all the lights, including the street lights, had gone dark. The more plausible explanation for these reports is that these supplies had been promised but had not yet reached Puerto Rico. It was impossible for the supplies to be diverted because there was nothing there.

The White House has made a series of statements that indicate that it sees the crisis in Puerto Rico primarily as a profit opportunity for Wall Street. Protecting hedge funds and bond investors from losses is a higher priority than preventing deaths from starvation and waterborne pathogens, according to the way the White House describes the situation. This point of view will for years to come serve as the picture of colonialism as advocates for democracy seek to change Puerto Rico’s status.

Workers are in the very early stages of getting Puerto Rico running again, and the most optimistic plans call for electric power for close to 90 percent of customers by the end of the year. It will take longer than that for workplaces to be operating again, and in the meantime, hundreds of thousands of workers will leave Puerto Rico for jobs in the eastern United States and California. One of the big unknowns in Puerto Rico is just how many residents have already moved away. The influx of voters could affect the electoral balance in some states, particularly Florida, Ohio, Virginia, and New York. When the numbers are finally added up I expect Hurricane Maria will stand as both the most disruptive disaster and the most badly muffed disaster response in U.S. history. Voters who remember this debacle a year from now will not look kindly on the Trump White House or its allies in Washington.

Friday, October 13, 2017

Bank Failure: The Farmers and Merchants State Bank of Argonia

The FDIC reported the liquidation of The Farmers and Merchants State Bank of Argonia. This was a small bank with two locations in Argonia and Schulte, Kansas.

It did business as Farmers & Merchants State Bank & Insurance Agency. The combination of banking and insurance might seem strange. There was a brief period after 1999 when many in the banking industry thought every bank should also be working in insurance. Most such arrangements were unwound by 2010. I have never seen an example where combining banking and insurance worked well. With so little operationally to connect banking and insurance, each business would have to be a distraction from the other. There are also financial implications. When a community bank makes half of its money from mortgage loans in its local area, concentration of risk is a concern in the first place, and this only gets worse if the bank is also issuing the insurance on those loans. I don’t have any relevant information on the cause of this bank failure, but regardless of the real story, the failure of any “Bank & Insurance Agency” may serve as a further caution to anyone who might be considering that combination of businesses.

This is the first FDIC bank resolution since May 26, which means the United States went for three months without a bank failure. This is what the pace of bank failures looks like in normal times, and it means that banks are doing reasonably well, even if hundreds of banks have not yet recovered financially from the real estate crash of a decade ago.

The Lost Hurricane, or Why Strategists Are Useless Most of the Time

We are approaching the end, we hope, of the worst hurricane season in U.S. history. I am sure most of my readers have been following the stories, so for those who have, please bear with me as I engage in a quick exercise in revisionist history. Pay attention — there will be a quiz at the end.

It is the morning of September 6, 2017, and things look grim. There are hurricane warnings for dozens of islands in the eastern Caribbean. A major hurricane, Irma, has just leveled Barbuda, stripping away most of the trees and damaging almost every building on the small island. From the U.S. point of view, there is reason to worry. This is one of the biggest hurricanes ever seen in the Atlantic Ocean, and it appears to heading almost directly toward the United States’ most important territory, the island of Puerto Rico.

Fortunately, when that hour comes, the hurricane passes by to the north. Puerto Rico is close enough to sustain wind damage and power outages, but the damage is surely nowhere near as bad as it might have been. Emergency managers in Washington hope for the best in Puerto Rico while they cast a worried eye on Florida. Evacuations there are underway as the hurricane appears to heading in that direction.

As news trickles in from Puerto Rico, though, damage is worse than expected. On September 22, aerial photos arrive showing a major dam that has sustained damage from the excessive rainfall. Engineers say the dam could collapse within hours. Evacuations are ordered downstream. The dam stands, and the military is sent in to do what they can to stabilize it and slow the erosion. Elsewhere across the territory, the damage is severe. Hospitals are operating on emergency power if they are open at all. Reports are slow to come in because communications and electricity are out almost everywhere. More supplies are sent, but progress continues to be slow. The U.S. President reluctantly agrees to visit Puerto Rico to see how the recovery efforts are going. The visit is delayed until October 3, and as the President hands out paper towels and tries to cheer up residents, he is puzzled by the disaster scenes he sees. The hurricane on September 6 had delivered only hours of tropical storm-force winds. What had happened? Puerto Rico must be badly managed indeed. By October 12, with electricity restored to only one tenth of Puerto Rico, the President is losing patience. Puerto Rico, he insists, was already a disaster already before the hurricane arrived. Federal disaster workers cannot stay there indefinitely, he says.

Those of you who have already spotted the error in preceding paragraph, please consider: there are also a great many people who will not see anything wrong in this narrative. People who think this way — for my purposes here, I will call them strategic thinkers or strategists — are in positions of power everywhere in the world. As long as this point of view carries so much weight, it is important for all of us to understand it and its strengths and limitations.

It is not even really about the often-cited differences between the “big picture” and “details.” If it looks like I have perhaps falsified the details of my narrative, I assure you that I have not. You could look up and verify each detail one by one, but that would not help.

For those who still don’t know where the problem is, I must not keep you in suspense any longer. The problem with the narrative above is that I failed to mention the most important thing that happened in the whole sequence of events. On September 20, 2017, Hurricane Maria crossed Puerto Rico. The entire island was in hurricane-force winds for the entire day. In the areas with the worst damage, most of the trees were brought down and those still standing had only a few leaves. Elsewhere, there were places where most trees stood, though most of the leaves were ripped away. One-day rainfall from Hurricane Maria ranged from 10 to 40 inches across Puerto Rico.

When you know about Hurricane Maria, the narrative based only on Hurricane Irma no longer makes any sense at all. But this also means the White House response to Puerto Rico no longer makes any sense. Maria must have failed to register on the television screens at the White House, which continued to respond to the crisis in Puerto Rico as if this second hurricane had never occurred. The White House response to Puerto Rico is proportional to the disaster if you know about Hurricane Irma and its near-miss. The White House response to Puerto Rico becomes nonsensical only after you add in the effects of Hurricane Maria, something that, I feel comfortable saying, the White House somehow failed to do.

Whoops! Needless to say, this is a pretty big mistake, but it’s important to see that it is not just a dumb mistake. Such mistakes occur every day in some form when people look at the world through the “strategic” lens. To those who stick to this point of view, numbers are details that don’t matter. One hurricane, two hurricanes — who cares how many hurricanes there were? The same point of view also may confuse hurricanes with earthquakes. It’s a form of confusion that most of us have difficulty imagining, but consider: both are natural disasters that may have effects in a short time period across a wide area.

You really don’t ever want strategists running anything because the results are regularly this embarrassing. Americans are going hungry because the White House lost track of the biggest hurricane in U.S. history? Yes, that is actually happening, literally today, right this minute, and it’s no wonder if those who are hungry are angry about the situation and those who are more distant from the problem are embarrassed.

I like to imagine that strategists make such big mistakes because they are comfortable dealing in abstractions but uncomfortable dealing in observations. This also tells you why strategists are useless most of the time. We get most of our results by observing what is going on in the world and reacting accordingly. Adding a layer of abstraction, most of the time, just muddies the waters. The recovery in Puerto Rico is being conducted by local workers and officials who go from building to building, finding the survivors and dead bodies, identifying the hazards, seeing what’s working and what’s broken. To have these workers criticized from a distance by someone who says that “Puerto Rico” (as if the territory were a person) could have built more hurricane-resistant buildings and avoided much of the current work is not only counterproductive but embarrassing.

Alas, these mistakes of context occur daily when a strategist is in charge. You ideally don’t want a pure strategist running anything that creates real-world consequences, yet Washington and much of the world are run by strategists. Many large businesses hire only strategic thinkers as executives. The world is regularly embarrassed by Trump’s out-of-context declarations. Equally embarrassing situations occur when the head of Hewlett-Packard or Uber threatens journalists, when Amazon issues a statement implying that authors deserve to starve, or when a Microsoft executive explains why fixing bugs is a waste of the company’s time. In practice, strategists are in charge in many places, and if we cannot replace them, we are left to find ways to work around them.

It is important to have strategic thinkers because they help us make some of the big leaps that a more concrete and prosaic thinker would never even think of. I want to be careful not to overstate this point, because equally big advances can emerge under the leadership of people who aren’t given to the strategic mindset. Thomas Edison, Henry Ford, and Franklin D. Roosevelt are prominent historical examples, and currently, Tesla, Apple, and Ikea are companies moving the world without leaning on strategic thinking. On the other side of a big advance, an initiative based on strategic thinking can flame out when it runs into a problem that the strategists can’t think their way around, as seen currently at Chipotle Mexican Grill and Uber, and you can doubtless think of dozens of other examples. We want to have strategists, but when they decide on something harmful, we need to be able to set their decisions aside and do something sensible instead.

In the case of Puerto Rico, the President is saying in essence that if Mr. Rico is starving it’s his own stupid fault. There are legitimate questions about Donald Trump’s brain function in recent weeks, but this conclusion has nothing to do with Trump’s mental decline. This is an everyday example of a strategic thinker led astray by his own strategic mindset. What we need to do is set Trump’s conclusion aside and say instead that these are our people and with an entire agricultural season wiped out, we are going to make sure that they have food.

For those in a position to choose leaders, it is important to look past the appeal of the great leap forward that strategic thinkers promise and see the inevitable blunders. With strategists in charge, breakthroughs and flameouts are all but guaranteed — except that after the first flameout, there might be nothing left. In politics, strategic thinkers are usually advisers, not executives, and that is the way it should be in business too.

Thursday, October 12, 2017

It’s Not Just Weinstein and It’s Not Just Hollywood

The Whole Corporate System Is Rotten With Predatory Worker Exploitation, and It’s Going to Get Worse

The Harvey Weinstein story is one that is hard to miss. The movie mogul was revealed to be a sexual predator with a decades-long pattern of workplace sexual harassment in a New York Times story. Weinstein responded with a confusing combination of apology and blustery denial, but at the same time, he also went into hiding. The day that followed was a parade of resignations from his corporate board and among his legal advisers. Then what was left of the board of directors at Weinstein’s company let him know that he was fired. Other journalists had already been working on the same story, and a New Yorker story along with others in other publications gave the situation a darker color. Weinstein’s habits of sexual predation, intimidation, and character assassination were far more pervasive and violent than the New York Times story would lead one to believe. Extrapolating, it is hard to imagine that this one man had not ruined the careers or lives of hundreds of the women who had worked for him. Rumors today say that Weinstein has left the country. Supposedly he is on his way to a residential treatment program, but one has to wonder whether, if criminal indictments follow, he will ever return to the United States. Meanwhile, Weinstein’s credits are being scrubbed from movies he nominally worked on. At the Weinstein Co., the board of directors has said that it will at least change the company name, but the company is said not to be functioning in any meaningful sense at this point and it is reasonable to guess that the office will close down and the company will liquidate. Today the news came that the company’s book imprint, at least, is no more.

Attorney Gloria Allred expanded the issue of Hollywood sexual predation yesterday with an interview on CNN. Weinstein, she said, is not the only bad guy running things in Hollywood:

Harvey Weinstein is not the beginning and the end of this issue because I have been contacted by many accusers who are accusing other high-profile figures in Hollywood as well.

This shouldn’t be too surprising in the town that invented the term “casting couch.” It also shouldn’t be too surprising in light of the recent news that male actors in Hollywood movies earn roughly twice the amount that female actors earn. It is still unsettling to hear, it is a disappointment to those in Hollywood who might have hoped that the scandal would pass quickly, and it points to an image problem that Hollywood now faces. Suppose you’re someone who has just purchased a movie ticket at your local cinema. Where does the money go, you might ask. People know by now that the cinema itself keeps a vanishingly small share, not enough even to keep the lights on. A well-run cinema literally makes more money from soft drinks than it does from ticket sales. If you pay by credit card, the banks get a share of the money, more than the cinema but still small. Some of the money must go to the starring actors, but that is not as much as we had imagined either. Most writers, technicians, actors, assistants, and musicians in Hollywood work for starvation wages if they are paid at all. So if you buy a movie ticket, is the money going to someone like Weinstein? That unfortunate picture is basically accurate. That is not what you think you are paying for when you see a movie, and it is an image problem that Hollywood now has to solve.

Obviously, the problem extends way beyond Hollywood. Donald Trump hardly counts as a Hollywood figure, but the sexual predation habit he described in such disgusting detail in a television interview so resembles the pattern of Weinstein I have to wonder whether Trump had studied Weinstein’s method and taken notes. In the music business, the timing of the way sexual predators meet their victims is obviously quite different, but otherwise the stories and the effects are much the same.

And it is not just a problem associated with creative work such as films and music. It is when the contracts, roles, and bureaucracy of the corporate world make some people so much more powerful than others that this kind of predatory behavior becomes hard to keep in check. You might think corporations would have a way to enforce policies that ensure that workers can go to work with an assurance of basic dignity and security, but the economic incentives point in the opposite direction. Corporations already in a position of power with respect to their workers work to consolidate that power by further disempowering and degrading their workers in any way they think they can get away with.

I have worked, for example, in the banking sector, and I have watched over the last two decades as the sector has been largely taken over by foreign workers. American banks hire foreigners not because the foreigners are more skilled or local workers are hard to find — in fact, just the opposite is true. It is not even that the foreign workers are paid less. Banks hire foreigners mainly because a worker in a foreign land is in a more vulnerable position, less able to object, report wrongdoing, or go elsewhere when the employer is doing something that everyone can see is wrong.

But a vulnerable position is just what a predator is looking for. It is the fundamental nature of a predator to see who is the most powerless. Weinstein’s victims included temporary workers, unpaid interns, and workers who were new in the industry. These were workers who had to succeed where they were, and Weinstein knew this and took advantage. I have no doubt that unscrupulous managers in banking and every other industry are exploiting workers’ vulnerabilities in whatever ways they can think of — certainly having them work off the clock and on cloak-and-dagger activities that a more confident worker would refuse to participate in, but also at times extending to the kind of brute-force sexual assault we read about in the Weinstein case.

This won’t be fixed as long as corporations hold so much power over workers. This imbalance of power inevitably leads to exploitation, including the sexual exploitation scandal now shaking Hollywood. It is important to recognize that the sexual exploitation of workers can‘t really be corrected without correcting the institutional forces that promote all the other forms of worker exploitation. It is the imbalance of power that has to be corrected. Some of the policy fixes are obvious, like raising the minimum wage and reducing executive pay. Unfortunately, a plurality of policymakers disagree with any such solution. “Pro-business” politicians are looking for ways to create an even worse imbalance of power by taking away protections for whistleblowers and unions and creating loopholes so that corporations can effectively ignore labor laws. Even the immigration crackdown can be seen as a way to create a vulnerable pool of workers who can more easily be exploited.

The consensus of social media is that a cultural fix is called for. Men must be persuaded to be less predatory in their approach to sex. I don’t disagree with this approach. If even one sexual predator can be persuaded to change his ways, that is a good thing. At the same time, neglecting the influence of the environment is naive. To be blunt about it, corporations and sexual predators are made for each other. As long as corporations exist in their present form, sexual predators will be drawn to them. To solve the problem in a meaningful sense, the nature of the corporation has to change.

I have no illusion that this is about to happen. Currently in Washington the White House and House of Representatives are not about to take up any measure that would be beneficial to workers. Things are slightly better in some other countries and slightly worse in others. As long as laws define corporations and employment in terms that encourage exploitation, there is no realistic prospect of a solution to the plague of sexual predators in the corporate environment. I am afraid this is a problem that will get worse and will persist for a very long time, changing only after the global political climate has shifted.