Saving for Retirement Takes Commitment. "Marry" Your 401(k).

As a company CFO, I routinely speak with our staff -- most of whom are in their 20s and 30s -- about the need to plan for their retirements and to get started with an aggressive savings plan NOW. I gave such a talk today, Valentine's Day, 2014. In keeping with the theme of love and commitment, I came up with the idea of treating your 401(k) like a life partner; i.e., whatever you make, think about sharing it 50/50 with your partner. Obviously, you can't share your entire salary with your 401(k). However, annual raises can be thought somewhat as being "found money," and if quickly shared on a 50/50 basis with the 401(k), the employee will simply moderate their lifestyle based on their remaining take-home pay, and they'll never miss what gets tucked away in the 401(k). Here's a scenario:

• Pat and Chris start their careers at the same time and at the same salary.
• They both get $5,000 raises following each of their first 5 years of work, followed by 4% annual raises thereafter.
• They both start their 401(k) contributions at 10% of their gross pay.
• Pat maintains his contributions throughout his career at 10% of his pay.
• Chris "marries" her 401(k) and splits all of her raises 50/50 with her 401(k) plan; i.e., whatever her raise, half of it goes to her 401(k).
• Chris hits the current annual contribution max of $17,500 in Year 6. She continues to contribute the max thereafter. [Take note: after 5 years of employment, both Chris and Pat have increased their salaries by $25,000. Stingy Pat has only given an extra $2,500 to his 401(k). Generous and loving Chris has shared her increase 50/50 to the tune of $12,500 with her 401(k).]
• We'll keep things simple and won't show Chris or Pat taking advantage of the additional catch-up contribution of $5,500/year when they reach 50.
• We'll assume the IRS authorizes 3% annual increases in the max during that time.
• We'll also assume a 7% investment return and a 40-year career. 

After 40 years of work, Chris ends up with roughly $4.3 million in her 401(k), almost double Pat's total. If she draws on that money at a rate of 4% of the ending investment balance, she'll be able to replace 61% of her ending pre-retirement salary, whereas Pat will only be able to replace 31% of his. Adding social security on top of Chris's draw, she'll probably be pretty comfortable in retirement. Pat, on the other hand, needs a part-time job in retirement.

Is this a gimmick? Maybe, but I'd rather think of it as being a rational method to enforce a savings discipline. Retirement doesn't fund itself, and few people have pensions any longer. So, if it takes a gimmick to help people reach financial security, I'm all for it. Here are the numbers (click to enlarge on a new page):

On Rush Limbaugh and the Freedom of Speech

Societies achieve their own acceptable levels of harmony when their citizens hold each other accountable to certain, generally accepted behavioral norms and standard practices (e.g., business practices, the rule of law, etc.). It’s not always easy to define those norms and practices, which is why we occasionally see protests in the streets, such as during the movements for women’s suffrage, organized labor, and civil rights, and even now with the Occupy movement.

Clearly, there are ranges of acceptable behavior; i.e., tolerance levels, and they vary from country to country. For example, the Japanese have a well known expression that captures the importance they place on conformity and homogeneity: “The nail that sticks up gets pounded down.” In contrast, the people of the U.S. are fairly tolerant, and accept wide ranges of behavior before they express outrage and attempt to corral those who step out of line. For example, we can accept having a Nazi party within our borders, but when that party attempted to march on the large Jewish population of Skokie, Illinois, there was outrage in every corner of the country. The Nazi’s freedom of speech equated to intimidation of another group, and most people felt that was intolerable.

Freedom of speech doesn’t mean that someone can say whatever they want and not be held accountable. Rush crossed over the line. Through his deliberate choice of inflammatory words, he chose to step outside of the range of acceptable behavior, and it is fair and right that he be brought back into line, especially given the magnitude of his influence, which is a courtesy of his publicly-granted access to the air waves. Even worse, though, he proposed to infringe on the hard-won rights of others, and we are now seeing a very healthy reaction by millions of vigilant people in this country who want those rights to be unassailable.

We’ve all heard the saying, “All that is necessary for the triumph of evil is that good men do nothing.” When someone steps out of line, we can’t just shrug our shoulders and say, “Oh well, it’s his right to say that.” It may be his right, but it’s also our right, and even our obligation, to protect the rights and values that are important to us and to counter venom with truth.

We need more, not less, government planning

I listened to John Stossel's latest show today on Fox Business (see link below), in which he cited Austrian-born economist F. A. Hayek's 1944 book, The Road to Serfdom, which warned against the tyranny that Hayek felt inevitably results when government controls national direction via a central planning function. Stossel was supportive of Hayek's view, and seemed to imply that planning and goal-setting by themselves equate to harsh government control and the elimination of personal freedoms. Essentially, he said we should rely on the capitalist system and let our corporations do our planning for us, as if corporations -- which are largely global today and without national allegiances -- can somehow be relied upon to put the American public's interests before their own.

Hmm... With unemployment so high, with government spending and our national debt out of control, with our infrastructure in decay, with our economy repeatedly bouncing from boom to bust, and with over 25% of our national wealth in the hands of less than 1% of our population (up from 9% thirty years ago), does it seem like we're on a a good course and that it's a good idea to continue to not do any long-term planning with the people's interests in mind? Furthermore, ironically, the corporations that Mr. Stossel so admires all have central (i.e., strategic) planning functions. Such functions are considered to be essential in the business world. Given that people like Stossel constantly advocate for government to be run more like business, then why shouldn't such a function exist within government, but with the national interest in mind? As it is now, in the absence of a strong planning function, we aimlessly meander from election to election, never building towards a unified vision of a better society. In the meantime, China, which does have a strong central planning function, is gaining ground on us every day. It's very frustrating.

You can't get where you want to go without a road map, and a road map is a product of planning.

To read about Stossel's show on his blog, click here. The show will be repeated again tonight, Sunday, July 10th, at 6pm on Fox Business (Comcast channel 130 in the Bay Area).

Helpful Behaviors for Building Wealth

There are some really good points in this article (link below), although the title is a little misleading. It's not so much about becoming super-rich, but rather, it's really about the behaviors that may help someone become more wealthy than they otherwise might, whatever their income level may be.

The author refers to these things as being traits, but they're really skills that can be developed by anyone. Not everyone has the ability or opportunity to become a financial expert or to even go to college, but that doesn't need to condemn them to a life of financial insecurity. It's never too late to develop these skills either, although they're certainly more beneficial if picked up at an early age. I agree that comfort and confidence with basic math is really important, as is developing a methodical approach to problem-solving. The article emphasizes planning skills as well. In my experience, I've found that many people have an aversion to planning simply because they are afraid of the unknown and what they might learn from the planning process. The simple truth, though, is that it's better to be prepared and to learn about potential problems as soon as possible in order to maximize the amount of time available to rectify them. Developing a willingness to encounter uncertainty and a fearlessness about tackling problems, therefore, can by extremely valuable behaviors. If parents could help their kids zero in on these skills, it would go a long way to improving their children's long-term prospects no matter what those kids end up doing in life.

What can someone do to develop these skills or to instill them in their kids? First, you get comfortable with planning simply by doing it. Start small in order to stay within your comfort zone. For example, if you find yourself running out of cash every month, then put together a simple monthly budget. If you're concerned about retirement, then play around with some of the retirement calculators that are available on the Internet. They'll help you determine how much you have to save every month prior to retiring in order to support your lifestyle in retirement. As far as the kids go, there's nothing wrong with getting them involved in household budgeting. Explain to them how much you make, how much comes off the top in taxes, and how you budget the remainder, which hopefully includes some savings. Demonstrate to them that it's important to not spend more than you make. Explain the concept of priorities. Help them understand that maybe spending $100 a month on a cell phone for them isn't a great idea when mom and dad are concerned about their retirement or making tuition payments. If kids don't know what the limitations are, then there will be no limit to their expectations. The main point, though, is you'll be getting them used to the planning process early, which they will hopefully carry forward into their adult lives.

Click here to read "Character Traits and Behaviors that Make You Rich," by Laura Rowley.

Nassim Nicholas Taleb: A Crazier Future

The author of Fooled by Randomness and The Black Swan speaking at a Long Now Foundation event. Fresh and irreverent as ever.

The runtime is about 90 minutes, but it's a good overview of the key concepts in The Black Swan, if you haven't had time to read the book. The parable of the turkey is particularly humorous, but makes an important point: intentions that we infer from previous events that may tend to confirm a belief, may actually be the opposite of what we believe. As Taleb's story goes, by virtue of the farmer showing up every day and feeding the turkey, the turkey's trust grows more each day that he is loved and cared for, right up until the hatchet falls. Another good takeaway: don't confuse infrequency with randomness. There's nothing random about market crashes, terrorist attacks, great fires, wars, earthquakes, etc., as they are, in effect, planned or conditions-based. The normal distribution (bell curve) doesn't apply to them, yet we insist on assuming that it does, and often to our peril.

Click here to see the video.

As Yogi Berra said, "The future ain't what it used to be."

Fortune's Top 10 Stock Picks for 2011

Leigh Gallagher, assistant managing editor at Fortune, tells CNBC which stocks will be standouts in 2011. (The Raging Capitalist has no opinion on these stocks.)



You can read more from Fortune here

Was the Stimulus Too Small?

Given Tuesday’s election results, there has been much reflection and debate in the media and in Washington about what went wrong for Obama and the Democrats. As suggested by Kathleen Parker in a recent op-ed, and I agree with her, "The election was a referendum on policies that are widely viewed as too overreaching and, ultimately, threatening to individual freedom. It's that simple." Others, perhaps most notably Paul Krugman, state that the stimulus was simply too small and was consequently ineffective, thus not reviving employment and turning voters against the Dems. As Krugman says, "Mr. Obama’s problem wasn’t lack of focus; it was lack of audacity. At the start of his administration he settled for an economic plan that was far too weak. He compounded this original sin both by pretending that everything was on track and by adopting the rhetoric of his enemies."

Although it's important to understand the political climate, we must address the real issue when we start talking about the stimulus and our economic recovery. We all want to reduce unemployment, but the first question to ask is, is unemployment the real problem or is it a symptom of something else? To date, the Fed and the Obama administration have approached our economic woes as if we were merely in an ordinary recession. Following the standard cures for such an event, they believe all will be well with a little time, provided we can just keep the public spending. In essence, they're trying to load the citizenry onto an arc so we can ride-out a tsunami safely at sea, and once the waters subside from our island paradise, we'll return to the shore and resume our lives. Well, I would suggest that the shore is not there any longer, and never really was.

I absolutely agree that we need to buffer our citizens from the shocks of this downturn. However, the real problem is that the economy we have known for the past 30 years was a myth. With the inventions of credit cards, second mortgages, and the mortgage securitization markets (the one sponsored by the government and its evil cousin, sponsored by Wall Street), we have been riding a debt-fueled bubble since the Reagan era. Debt-fueled growth was an easy path for the Republicans to take because it kept the economy firing on all cylinders once the growth associated with the post-WWII/baby boom era began to subside. The bubble worked for the Democrats as well, because it supported their social agenda of home ownership, and it enabled growth in the tax base that supported the progressive agenda of big, "the-government-shall-provide" government. The ruse created an unholy alliance between left and right that went unspoken, even when it became very dangerous. In any event, as we have learned twice now in the past 10 years, bubbles are not sustainable, and we experienced the inevitable collapse.

What disturbs me is that our political leaders still don't seem willing to face the reality that we need to create a new economy. When the dot-coms went bust, everyone knew the early-stage dot-coms didn't have viable business plans, so no one advocated that we devise ways to keep their employees in place until the public came to their senses and started finally using Webvan and Pets.com. Instead, we let those businesses go bust, we provided unemployment benefits to the dislocated, and we waited for businesses to get back on their feet and start hiring again. It actually didn't take very long. The current situation is more insidious, though. Because we were riding an inflated economy for so many years, many excesses became baked into our culture that simply cannot be sustained: federal and state agencies that don't provide a return on investment; ridiculous salaries, benefits and retirement schemes for many government workers; plus we had a misallocation of labor, with many civilians working in bubble-related industries, such as mortgage banking and construction. All of these excesses need to be eliminated in order to create a new, sustainable economy, as we are not going to have the money available to pay for governmental waste or to keep people in jobs that provide goods and services that are no longer in demand. Instead, rather than returning to a consumption-based economy, we must create an investment-oriented economy that is supportive of innovation and entrepreneurship. We must build a new economy that is based on viable business models that generate in-demand goods and services.

The current stimulus may, in fact, have been too small, but that's not to say that what has been spent was wisely spent in an effort to bridge us over to a new economy. The spending has been incredibly scattershot (details here), and virtually all of it supported the "arc and tsunami" scenario noted above. So far, we have spent on tax cuts to support consumption, we have kept government workers in their jobs, we have helped states keep their Medicaid programs going, we've provided unemployment benefits, and we've created some temporary jobs at incredible cost, not to mention doled out billions in pork to individual Congressional districts as quid pro quo payoffs to our Congressional reps. All of this spending has been done with no one -- not Obama, or anyone in Congress, or any members of the intelligentsia, like Krugman -- painting a picture of the new world we would emerge into once all the spending was done, nor have they given us a realistic, properly prioritized spending plan or timeline for getting us there. And do you know why that is? It's because they still haven't faced the reality that our world must change, and that's because they've never really searched for the root cause of our problems.

The answer is that we need to spend little AND we need to spend large. In other words, the spending needs to be differentiated and prioritized. Our former economy popped, yet the Fed and our government are spending trillions in doomed fiscal and monetary strategies to try to reinflate the same bubble. It won't work. Rather than clinging to broken systems, we need to accelerate the destruction of the old and the creation of the new. We need to support our brothers and sisters who have been displaced, but we need to steamline our spending so we can marshal the rest of our resources and refocus them on revitalizing the economy. Inconsistent with revitalization is spending on "make-work" temporary employment. Tempting as it may seem, it should be avoided, as there is no lasting value in the jobs, the projects cost too much to plan and supervise, and the work only postpones the inevitable. Moreover, the cost of the labor can oftentimes be exceeded many times by the cost of materials; e.g., there's more to the cost of a bridge to nowhere than the cost of the labor. The people are better off spending their time learning a marketable skill.

There are many things that we can and should be doing, and that's where the big spending comes in. For example, maybe I'm dreaming, but how much would it cost and how huge would the benefits be if we completely revitalized the city of Detroit? Can you imagine the economic and societal benefits of lifting half a million people up a step or two on the economic ladder? Undoubtedly, the cost would be enormous. Doing so might involve paying to relocate half of the population to other parts of the country (voluntarily, of course) and demolishing entire sections of the city, then consolidating the rest in order to make the city a community again. The remaining people would need to be trained and businesses would need to be provided with incentives to move in. This is just one grand-scale project that would cost big, but until we take it on, a city like Detroit will forever be an anchor chained to this country's feet. Of course, there are many smaller initiatives as well that we should take on: provide business start-up loans and grants; provide salary-based tax credits to existing businesses to take the risk out of hiring new employees; provide vocational training; provide businesses with tax credits for relocating and hiring the unemployed from economically depressed regions, and so on.

It's no wonder many people questioned the value of the stimulus. The problem we were trying to address had never been defined, a picture of the end game had never been painted, the objectives of the spending were too unfocused, and the results were not visible enough or were not individually significant enough to demonstrate the kind of success that would win public support. For example, there was no Hoover Dam, Golden Gate Bridge, AlCan Highway, or Tennessee Valley Authority, which were all projects from the Depression era that generated huge economic benefits, past and present. Moreover, as many on the left have criticized, expectations were not properly set. It was a mistake to let the public believe that a real fix could be effected in just a year or two. We are attempting to rebuild from a disaster that was 30 years in the making. That's going to take time, patience, determination, and a real plan.

Restoring Confidence is the First Step

I just read a good article by David Smick on the role of confidence in restoring and maintaining a robust economy.

To add my own thoughts, confidence comes from predictability and trust. Job #1 for the government is to stop creating uncertainty and to implement systems that ensure fair playing fields for all, whether they be entrepreneurs or ordinary taxpayers.

Job #2 is to eliminate government waste and other spending that isn't absolutely vital to restoring the economy, thereby allowing government funds to be aimed at viable investments and a reduced tax burden (which also helps with Job #1).

Job #3 is for government to make the targeted, huge investments -- that only it can make due to its size and reach -- in education and infrastructure that will enhance industrial productivity and enable new business formation.

Job #4 is to provide incentives for people and companies to invest their new excess capital (from #2's tax savings) here in the U.S. Creating abundant capital and making it easier to achieve returns on that capital will reduce the cost of that capital to those he want to use it. Many investments that have been off the table for a generation now -- like building a blue collar factory -- would become viable again. Despite all the press about everyone needing to be a knowledge worker, we can definitely make use of well-trained people who can work with their hands, as they do in Germany.

It is well within our means to put people back to work and to set the stage for sustained prosperity. Some sacred cows will need to be slayed, "business as usual" (e.g., earmarks) in Washington will need to change, and we'll need to endure some upheaval as government workers are displaced and redeployed in industry, but the effort would be worth it. We just need to get on with it.

Follow-up on Obama and Change Management

As a follow-up to my last article on the importance of change management, below are a coupled of links to analyses of Obama's success or lack thereof in managing change. Both analyses reference the Harvard/Kotter change management model that I mentioned in my article.

"...Obama seemed to miss the opportunity to re-mobilize and engage the millions of supporters that had been energized by his campaign and to redirect them towards specific initiatives. Instead, he seemed to focus his efforts on traditional political forms of influence, with the unintended consequence of even greater polarization than there was at the beginning of his term."

Analysis from the Harvard Business Review blog: click here.

"President Barack Obama embarked on one of the most challenging change leadership initiatives imaginable -- with no previous large-scale change experience. Some have said that inexperience does not matter if the president surrounds himself with experienced people.

They were wrong."

Analysis from Human Resource Executive Online: click here.

Our Future Depends on Change Management

‎"We need to stop waiting for Superman and start building a superconsensus to do the superhard stuff we must do now."

This is an essential truth from Tom Friedman's brilliant October 2, 2010 article in the NYT (see article below).

To expand upon the importance of consensus building, in my opinion, we will never move forward as a nation until our political leaders understand the change management process, keys to which are establishing a legitimate sense of urgency about the problem(s), developing a unifying vision for a better post-change state, and building the consensus necessary to proceed into action.

No matter what any president's party affiliation, consensus of Democrats AND Republicans will be necessary to avoid gridlock. Impossible, you say? Well, that's what true leadership is all about. Building consensus is absolutely necessary, no matter how long it takes and no matter how painful the process may be. It will take an enormously patient, open-minded, courageous and determined president, but as we've seen with the divisiveness that results from the traditional approach -- which Obama fell into the trap of following -- attempts to shortcut the change management process simply don't work. I'm not saying Obama hasn't been well-intentioned (although I do disagree with his vision for our nation), but he either didn't know or didn't respect the process, and more harm has been done than good.

Click here to read more about the change management process, according to Harvard's John Kotter, who is arguably the foremost expert on the subject.

Third Party RisingBy THOMAS L. FRIEDMAN

A friend in the U.S. military sent me an e-mail last week with a quote from the historian Lewis Mumford’s book, “The Condition of Man,” about the development of civilization. Mumford was describing Rome’s decline: “Everyone aimed at security: no one accepted responsibility. What was plainly lacking, long before the barbarian invasions had done their work, long before economic dislocations became serious, was an inner go. Rome’s life was now an imitation of life: a mere holding on. Security was the watchword — as if life knew any other stability than through constant change, or any form of security except through a constant willingness to take risks.”

It was one of those history passages that echo so loudly in the present that it sends a shiver down my spine — way, way too close for comfort.

I’ve just spent a week in Silicon Valley, talking with technologists from Apple, Twitter, LinkedIn, Intel, Cisco and SRI and can definitively report that this region has not lost its “inner go.” But in talks here and elsewhere I continue to be astounded by the level of disgust with Washington, D.C., and our two-party system — so much so that I am ready to hazard a prediction: Barring a transformation of the Democratic and Republican Parties, there is going to be a serious third party candidate in 2012, with a serious political movement behind him or her — one definitely big enough to impact the election’s outcome.

There is a revolution brewing in the country, and it is not just on the right wing but in the radical center. I know of at least two serious groups, one on the East Coast and one on the West Coast, developing “third parties” to challenge our stagnating two-party duopoly that has been presiding over our nation’s steady incremental decline.

President Obama has not been a do-nothing failure. He has some real accomplishments. He passed a health care expansion, a financial regulation expansion, stabilized the economy, started a national education reform initiative and has conducted a smart and tough war on Al Qaeda.

But there is another angle on the last two years: a president who won a sweeping political mandate, propelled by an energized youth movement and with control of both the House and the Senate — about as much power as any president could ever hope to muster in peacetime — was only able to pass an expansion of health care that is a suboptimal amalgam of tortured compromises that no one is certain will work or that we can afford (and doesn’t deal with the cost or quality problems), a limited stimulus that has not relieved unemployment or fixed our infrastructure, and a financial regulation bill that still needs to be interpreted by regulators because no one could agree on crucial provisions. Plus, Obama had to abandon an energy-climate bill altogether, and if the G.O.P. takes back the House, we may not have an energy bill until 2013.

Obama probably did the best he could do, and that’s the point. The best our current two parties can produce today — in the wake of the worst existential crisis in our economy and environment in a century — is suboptimal, even when one party had a huge majority. Suboptimal is O.K. for ordinary times, but these are not ordinary times. We need to stop waiting for Superman and start building a superconsensus to do the superhard stuff we must do now. Pretty good is not even close to good enough today.

“We basically have two bankrupt parties bankrupting the country,” said the Stanford University political scientist Larry Diamond. Indeed, our two-party system is ossified; it lacks integrity and creativity and any sense of courage or high-aspiration in confronting our problems. We simply will not be able to do the things we need to do as a country to move forward “with all the vested interests that have accrued around these two parties,” added Diamond. “They cannot think about the overall public good and the longer term anymore because both parties are trapped in short-term, zero-sum calculations,” where each one’s gains are seen as the other’s losses.

We have to rip open this two-party duopoly and have it challenged by a serious third party that will talk about education reform, without worrying about offending unions; financial reform, without worrying about losing donations from Wall Street; corporate tax reductions to stimulate jobs, without worrying about offending the far left; energy and climate reform, without worrying about offending the far right and coal-state Democrats; and proper health care reform, without worrying about offending insurers and drug companies.

“If competition is good for our economy,” asks Diamond, “why isn’t it good for our politics?”

We need a third party on the stage of the next presidential debate to look Americans in the eye and say: “These two parties are lying to you. They can’t tell you the truth because they are each trapped in decades of special interests. I am not going to tell you what you want to hear. I am going to tell you what you need to hear if we want to be the world’s leaders, not the new Romans.”

The Problem with a Poorly Weighted Dow 30

I’ve always been annoyed by how the constituent members of the Dow 30 are weighted (i.e., based on the price of each company’s shares), but current weightings are really ridiculous in that only a handful of the 30 stocks have any meaningful influence on the value of the index.

Why is this a problem? Because the Dow is considered (although wrongly) to be a barometer of the health of the entire economy. If the Dow is doing poorly, it influences the psychology and behaviors of consumers and business leaders. With a poorly constituted index, as is the case now, false indications can more easily result, which is potentially harmful, as a negative trend in the Dow could trigger behaviors that could cause a recession.

Do we really want the price movement of three or four stocks to influence the psychology of the country, if not the globe? Some of the current heavy hitters in the index, like IBM and McDonalds, are doing fine now, but they had significant business issues within the past 20 years that dramatically deflated their stock values and which had nothing to do with the state of the economy as a whole. That could certainly happen again, and it's nothing trivial. Obviously, I'm dramatizing the risk somewhat to illustrate my point, but why unnecessarily create risks, especially after what we've been through over the past couple of years? The public is tired of having its fortunes dictated by Wall Street.

Given that price per share is simply a function of how many shares are outstanding, which has no relevance to anything, why not base the weighting on something more rational, like market cap, or why not even do an equal weighting?

Here’s a good explanation of what’s going on, in case this subject is new to you.




Click here for a link to the article that the video is from.

It's Time for Public Pension Reform

The photo above is of CalPERS' list of Top 10 pensioners. Between $200K-$500K a year for life? Good for them, but not for the taxpayer. (Click here for California Pension Reform's searchable database.)

Daniel Borenstein at the Contra Costa Times has been doing a bang-up job of reporting on how out of control our public pensions are in California (see link below). Not only is the system itself outdated and flawed, but the tactics used by some public employees -- with the support of their bosses -- to "spike" their pensions just prior to retirement border on criminal behavior, as far as I'm concerned.

Those of us in the private sector have to rely on our self-funded 401(k) plans for our retirements. Why are we providing full pay (or more) -- for life! -- to retirees who are in their early 50s? The outrageousness of this problem is exacerbated by recent surveys that show that public workers are also better paid and have dramatically better benefits than private sector workers in similar positions. In other words, they should be more capable of providing for their own retirements than the typical private sector employee. To add insult to injury, not only do many public workers have generous pensions, but they also have the equivalent of 401(k) plans (403(b) plans, etc.) with generous employer matching. How much is enough? Especially in light of the outrageous abuses that have been exposed in the Bell, California scandal, one has to wonder why no one is responsible for monitoring the fairness of these compensation schemes. It's time for serious public pension reform.

Click here for a good article by Borenstein.

The Importance of "Systems Thinking"

I came across a good article last night from the consulting firm, Booz & Company. It discusses what is known as systems thinking. The use of the word “systems” is a reference to a corporation as an organic whole, with many interconnected and interdependent functions. The article dovetails nicely into my own MBA research. I’ve been thinking a lot about this topic recently due to the BP oil spill, which one can very clearly identify as a breakdown in systems thinking, once you know what to look for.

What became very clear to me in my own research was that the bedrock of any successful, enduring corporate system consists of its leaders’ vision and values, which are expressed on a daily basis through the ethics and standards by which the company operates, through the delivery of its value proposition (i.e., the unique value it intends to deliver to its customers), and in how it operates internally in order to deliver that value proposition.

The vision of how a company will operate internally is communicated in the form of what I call an operating psychology, which consists of the organizational structures, methods, standards, processes, technologies, etc., that the organization will use to accomplish its work. The operating psychology needs to ensure that the leaders' values will be maintained through their employees' daily decisions and actions, and that such actions will produce the long-term vision the leaders have for the company.

A very basic issue to address, for example, when developing an operating psychology is to determine the level of quality the company wants to deliver as part of its value proposition, as quality has huge implications on the investments a company will make on plant and equipment, how much it will spend on training, the quality of people it will hire, whether it will use outsourcing, how much supervision it will provide to its staff, etc., etc.

Safety is another important issue. If a company's business activities are inherently risky, then the business needs to incorporate that degree of risk into its operating psychology. A company like BP, for example, would need to make sure that safety is prominently woven into the fabric of the company, and that safety would always take top priority over everything else. It must do so, as the consequences of doing otherwise can jeopardize the very existence of the company. To make safety the highest priority, the company would need to rigorously train its employees on good safety practices, and it would need to reward exhibitions of putting safety first, even when doing so results in short-term costs. Importantly, there can be no negative consequences on an employee who exercises appropriate caution -- no sideways glances, no withheld promotions, etc. Simply put, a commitment to safety must be a core value, and it must be continuously hammered into the psyche of the company.

Long story short, clearly communicating the operating psychology to the employees is every bit as important as disseminating the customer value proposition. This is where companies often fall down. After watching a 60 Minutes segment on the events leading to the BP disaster, it was obvious that there were both managerial failings on the rig and through every level in the company preceding those failings. It’s no coincidence that BP had the worst safety record in the industry even before this disaster. Clearly, a linkage between safety and the long-term sustainability of the corporation has not been firmly ingrained in BP's operating psychology. In other words, there are reasons why you get horribly short-sighted, costly and dangerous decisions from a mid-level manager on a rig in the middle of the Gulf. Those bad decisions result from breakdowns throughout the entire organization, all of which can be traced back to a failure in having a clear, enduring, and well communicated vision of how the company will operate and achieve success over the long haul.

The BP manager on the rig was worried about staying on schedule, as a slip in the schedule may have cost the company a few million dollars. Instead, by not keeping the long-term perspective in mind, he (and BP, through its bad management) created a disaster that may well bring down the entire company, and have costs on the people and ecosystems of this planet for decades to come. These same types of failings have brought down many corporations over the years, including many of the financial houses in the past couple of years. Hence, learning about these issues is really important, which is why I wanted to share these perspectives and the Booz article.

The article can be found here:

"Seeing Your Company as a System," from Booz's Strategy+Business online magazine.

Similarities between the Shuttle Challenger and BP Oil Spill Disasters

Most of the major accidents we're all familiar with could have been easily prevented. The more I learn about the BP oil spill, the more I see similarities with the Space Shuttle Challenger disaster: 1) speed and schedule were put before safety; 2) vital information provided by engineers in the field was ignored by management; 3) those same engineers allowed themselves to be bullied into continuing their work, rather than escalating the matter or seizing the power necessary to take control and avert disaster; 4) an overconfidence due to prior records of good safety led to complacency; 5) the failure of a relatively cheap and simple component (in both cases, a type of rubber seal) ultimately triggered the catastrophic failure.

If you've never studied the results of the Challenger investigation, I can recommend it as an excellent case study in poor communication and bad management.

60 Minutes ran a great investigative segment on the causes of the BP oil spill. The video can be seen here.

The results of the Challenger investigation can be seen here.

Citigroup on "Plutonomy"

Plutonomy: where the rich rule with the support of the government. (Obviously, a derivation of the word "plutocracy.") Bill Moyers was just talking about this on his show and referenced a series of reports from Citigroup on the subject. (Ironically, taxpayers now own the majority of Citigroup!) When something becomes so obvious that investment houses start to build investment strategies around it, then you know it's for real, and in this case, we have a problem.

I have no problem with people making the most of their available opportunities and becoming rich, evenly astonishingly so. I only care that we have fair playing fields, and a government that is not in the hip pocket of a few. From one of the Citigroup papers:

"Our thesis is that the rich are the dominant drivers of demand in many economies around the world (the US, UK, Canada and Australia). These economies have seen the rich take an increasing share of income and wealth over the last 20 years, to the extent that the rich now dominate income, wealth and spending in these countries. Asset booms, a rising profit share and favorable treatment by market-friendly governments have allowed the rich to prosper and become a greater share of the economy in the plutonomy countries."

Click here to access Citigroup's report on plutonomy.

Bill Black and Barry Ritholtz on the Goldman Sachs Fraud

Here's a good discussion on the Goldman fraud allegations. Folks, how many examples do we need to see before we realize these guys should be put out of business? When you come across a corrupt culture, there's never just one incidence of fraud. It's like the old "you can't be a little bit pregnant" saying. As Black says, if you're rotten, you're rotten to the core. Given that these types of situations take awhile to unravel, but then they just get uglier and uglier, it's beyond me why GS stock was only down 13% today. This is only the beginning. Take a look at this quote from Fabrice Tourre, the man who orchestrated this deal at Goldman. Of course, incompetence and/or irresponsibility do not necessarily equate to illegality, but I would say that there'd have to be a good chance that other of his "monstrosities" would have been illegal as well (from an Associated Press article):

In an email to the friend, he described himself as "the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"

Elizabeth Warren on the Collapse of the Middle Class

Elizabeth Warren is a law professor at Harvard and has become a public figure recently due to her leadership role on the TARP Congressional Oversight Panel. She's also an expert on trends concerning the middle class. In this lecture at U.C. Berkeley in 2007, Ms. Warren discussed why the quality of life and financial security of the middle class has diminished year after year for the past 30 years. Not a pleasant subject, but it's an important topic. I hope you find it informative.

Credit Default Swaps Explained

Finally, someone has done a pretty straightforward video on how credit default swaps work. The punchline, if you will, is the part near the end about how someone can buy this type of insurance without actually owning the asset that's being insured. That was the magic ingredient that multiplied all of the problems in the meltdown and sent everyone into a panic. Also, take note that these swaps only cost about 2% per year of the insured value. So, when our government made good on AIG's contracts, they were providing Goldman Sachs and others with nice little 50:1 payoffs in many cases.

Barney Frank has it all under control

Good grief. I caught this interview on CNBC on March 24th. It's of Barney Frank and Chris Dodd talking about their financial reform agenda following their meeting with the President.

Frank's comments are particularly shocking. Fairly early in the video, he says that we've "dealt with" all of the problems that led to the collapse of the likes of AIG and Lehman. Oh really? How have we dealt with them, Mr. Frank? If any new regulations or government powers have been implemented, please cite them.

Then, about 80% of the way through the video, he says that we'll only pay down bank debts (in future bailouts) that threaten a "total spiraling downward" (i.e., a systemic meltdown of the financial system). Mr Frank, isn't systemic risk what we need to prevent by implementing too-big-to-fail measures and Mr. Volcker's ideas regarding the segregation of high-risk, non-banking activities? The whole idea is that we need to refocus banking and Wall Street on "boring" customer-focused activities, rather than high-risk proprietary activities, so that we don't create enormous risks in the first place.

I have to say, I feel like absolutely nothing has been learned, and that the American people are in very poor hands.

Video: Dodd, Frank meet with Obama over financial regulation
- Watch more Politics Videos at Vodpod.

Gretchen Morgenson on why no progress on financial reform

Wonderful interview on Bill Moyers Journal last night with Gretchen Morgenson of the NY Times: "Eighteen months after the economic meltdown, why has Washington been unable rein in Wall Street with serious regulation? Bill Moyers speaks with financial journalist Gretchen Morgenson for a candid look at the obstacles facing substantive reform and what Congress' proposed legislation would — and wouldn't — accomplish."


Click here to watch the video on PBS' site.