Opinion

Felix Salmon

The non-scandal of Scott Irwin and Craig Pirrong

Felix Salmon
Dec 29, 2013 22:01 UTC

Ostensibly Respectable Academic Is In Fact A Hack: it’s a hardy perennial, and an enjoyable one at that. The best example is Inside Job, where big names like Ric Mishkin and Glenn Hubbard got their well-deserved comeuppance. And it’s a genre I’ve indulged in myself: last year, for instance, I spent 4,500 words on a paper by Bob Litan, showing how he lies with numbers to arrive at his paymasters’ predetermined conclusion.

But here’s the thing: for this kind of article to carry any weight, it has to demonstrate the mendacity or venality of the academics in question — and, ideally, those academics should have a high-profile reputation which deserves to be tarnished.

Which is why David Kocieniewski’s article about Craig Pirrong and Scott Irwin this weekend is such a disappointment. It’s currently doing very well on the NYT’s most-emailed list, but it’s easy to guess who’s doing the emailing: people who love to hate Wall Street, and who will use just about any possible excuse for doing so. Because in this case Kocieniewski has missed the mark. Neither Pirrong or Irwin is mendacious or venal, and indeed it’s the NYT which seems to be stretching the facts well past their natural breaking point.

Let’s start, for instance, with the one part of the article almost everybody will read: the big picture at the top of the article, showing the gleaming and extremely expensive University of Illinois business school. “The Chicago Mercantile Exchange has given more than $1.4 million to the University of Illinois since 2008,” says the caption, “with most of the money going to the business school.”

That number — a very big sum, which is more than enough to buy research from for-sale economists — gets repeated further down the article:

One of the most widely quoted defenders of speculation in agricultural markets, Mr. Irwin of the University of Illinois, Champaign-Urbana, consults for a business that serves hedge funds, investment banks and other commodities speculators, according to information received by The Times under the Freedom of Information Act. The business school at the University of Illinois has received more than a million dollars in donations from the Chicago Mercantile Exchange and several major commodities traders, to pay for scholarships and classes and to build a laboratory that resembles a trading floor at the commodities market.

Mr. Irwin, the University of Illinois and the Chicago exchange all say that his research is not related to the financial support.

This is carefully written to be as damning as possible. Yes, it makes perfect sense that the CME would fund a major business school right in its own backyard — and that it would fund activities related to its own business of commodities trading. But surely Kocieniewski is about to show us how the grants are linked in some way to Irwin’s research: no NYT reporter would write such a thing unless he had reason to believe that there was some kind of quid pro quo, or that the grants to the business school were written in gratitude to Irwin.

Except, if you keep on reading to the point at which you’re 2,500 words into the piece — and pretty much nobody reads that far — you’ll find this:

While the C.M.E. has given more than $1.4 million to the University of Illinois since 2008, most has gone to the business school and none to the School of Agriculture and Consumer Economics, where Mr. Irwin teaches. And when Mr. Irwin asked the exchange’s foundation for $25,000 several years ago to sponsor a website he runs to inform farmers about agricultural conditions and regulations, his request was denied.

This is real jaw-on-the-floor stuff. The NYT has published an article about how academics who write nice things about Wall Street “reap rewards”, in the words of the headline — and its main illustration is donations to a business school where the academic in question doesn’t even work! Anybody trying to hold academics to standards of intellectual honesty has to be intellectually honest themselves. And the fact is that there’s zero reason to believe that there’s any connection between the business-school donations and Irwin’s research.

Or maybe Kocieniewski thinks that consulting contract is enough to demonstrate that all money in the general vicinity of Irwin is tainted by venality. Except, if you get to the very end of the article, you’ll find out a bit more about what this consulting contract comprises:

Mr. Irwin also works for a business called Yieldcast that caters to agricultural producers, investments banks and other speculators, selling them predictions of corn and soybean yields. Mr. Irwin has said he does not consider it a conflict because he works only with the mathematical forecasting models and never consults with clients.

This is pretty blameless stuff. If you’re a professor who puts together models of commodities prices, it’s fine to consult for a company which puts together models of commodities prices. Shouldn’t we be encouraging professors to work on real-world applications of their research, rather than implying that any such work is a dastardly conflict of interest?

Once you realize how much of an axe Kocieniewski is grinding, then the rest of his article rapidly starts to crumble. For starters, as Evan Soltas says, both of these men are “super-freshwater” academic economists, working at freshwater schools. (In econojargon, “freshwater” economics happens far from the coasts, and is generally laissez-faire and pretty right-wing; “saltwater” economics takes place in coastal universities and tends to be more Keynesian, interventionist, and leftist.) Neither is inclined to write anything which deviates from freshwater orthodoxy. Kocieniewski takes issue with these professors’ defense of financial speculation — but that’s a central tenet of freshwater economics, and “orthodox economist is orthodox” is never going to be much of a story.

What’s more, there’s clear evidence that Pirrong, in particular, does not simply churn out whatever his paymasters want him to write:

Commodity trading houses are not “too big to fail”, says a report commissioned by the banking industry’s top lobby group, which had hoped it would conclude the opposite.

That report was written by Pirrong, who is on the record as saying that the report was never officially published precisely because he refused to change its conclusions. (Kocieniewski quotes from Pirrong’s post, but doesn’t link to it.)

Indeed, you don’t need to spend very much time reading Pirrong’s excellent blog before you realize that he’s one of those economists who will always speak his mind. Pirrong is not a grandee who can be counted on to deliver a certain conclusion if you pay him enough money: there are many economists out there who I consider to be in the “bought and paid for” camp, but Pirrong is absolutely not one of them.

So, what’s going on here? Three things.

First, Kocieniewski has a bee in his bonnet about the effect of commodities speculation on commodities prices. He has not only convinced himself that speculative flows caused substantial increases in commodity prices; he has also seemingly convinced himself that anybody who disagrees with that position must be lying. So he’s taken aim at Pirrong and Irwin, not because they have made a lot of money from the financial-services industry, and not because they’re particularly conflicted, but just because they hold a position Kocieniewski doesn’t like. As Peter Klein acerbically puts it, “if you oppose the Times’s editorial position on regulation (or any other issue), you are compromised by financial or other ties. If you support the Times’s position, you are a scholar or public figure of great integrity.”

Secondly, Kocieniewski has picked on these two professors in particular because they both work at public universities, which can be FOIA’ed. Kocieniewski put in freedom-of-information requests for the two professors — requests that private universities like Harvard or Yale could happily ignore — and used the results as the basis for his story. Thanks, David — you’ve just made it even more difficult for public universities to attract top economic talent.

And finally, Kocieniewski seems to have bought into a much bigger conspiracy theory which he’s looking to illustrate — a theory summed up in the NYT’s “Professors as Pitchmen” subhed. It’s a theme which runs through Kocieniewski’s piece:

Underwriting researchers and academic institutions is one part of Wall Street’s efforts to fend off regulation…

Major financial companies have also funded magazines and websites to promote academics with friendly points of view…

Financial firms have been able to use the resources and credibility of academia to shape the political debate.

The Chicago Mercantile Exchange and the University of Illinois at Champaign-Urbana, for example, at times blur the line between research and public relations.

The exchange’s public relations staff has helped Mr. Irwin shop his pro-speculation essays to newspaper op-ed pages, according to emails reviewed by The Times. His studies, writings, videotaped speeches and interviews have been displayed on the exchange’s website and its online magazine.

Kocieniewski’s most explosive allegation, here — that major financial companies have paid magazines and websites to promote certain academics — is in desperate need of backing up: he needs to name the companies and the magazines in question, and explain exactly what he’s talking about. Is he just referring to advertorial content, or sites like the Financialist which are clearly sponsored by financial institutions? Or is he saying that financial-services companies have found a way to pay for certain content to find its way into the editorial pages of certain magazines? That’s certainly what he’s implying.

Then again, when Kocieniewski starts babbling about “the line between research and public relations”, the simplest explanation starts becoming clear: that he’s just gone a little bit off the reservation. There is no “line between research and public relations”; rather, as every financial journalist knows, there is research, and then there is a small army of PR people who try to get journalists to write about that research. Those PR people might work for sell-side banks, or for the Federal Reserve system, or for private universities, or for public universities, or for non-profit think-tanks, or for-profit corporations — but in any event, their job is just to get certain pieces of research noticed. If the CME finds a piece of research that it likes, it makes perfect sense that it will feature that research on its website and tell journalists about it. No line is being crossed there.

There’s no doubt that PR people can be infuriating at times, but Kocieniewski is taking this idea one step further: he’s saying that if an academic agrees with a certain corporate point of view, and allows the company in question to promulgate that view, then the academic has thereby basically become that company’s PR person.

Once you understand that deep assumption, then the rest of the article starts to make more sense. Kocieniewski sees Pirrong and Irwin as PR people for financial speculators, and feels that no PR people should ever receive the kind of respect that these two economists get, especially in Washington. If Kocieniewski presented that view in a blog post, maybe at Daily Kos or Zero Hedge, few people would bat an eyelid. It’s a little on the overheated side, but I know a lot of people who would basically agree with it.

The problem is that Kocieniewski isn’t presenting this view as opinion: instead, he’s presenting it as a fact, unearthed by his diligent use of freedom-of-information requests. Even though those requests revealed nothing surprising whatsoever. What Kocieniewski calls Pirrong’s “financial dealings with speculators”, for instance, Pirrong himself has another term for: “litigation consulting”. It makes sense that Pirrong would frequently be used as an expert witness: he explains things clearly, he’s well respected, and he’s entirely consistent in where he comes down on certain well-known questions. The causality here is abundantly clear: Pirrong’s views caused the commodities firms to hire him as a witness, not the other way around.

In presenting Pirrong and Irwin as doing something deeply unethical, Kocieniewski is actually making sensible ethics reform much more difficult. The AEA code of ethics is an important document, which goes a long way towards addressing the conflicts in the financial-economics industry. But Irwin, for one, was clearly entirely in line with the code all along. (Pirrong, I think, should have been more forthcoming about the identity of the companies paying him substantial expert-witness fees.) If Kocieniewski can take a blameless professor and turn him into a poster child for graft, then it’s easy to see how the rest of the academy might come to the conclusion that they were better off when everything was secret.

Update: Craig Pirrong has responded to the NYT’s story with a detailed and excellent post.

COMMENT

The non-scandal of Scott Irwin and Craig Pirrong
By Felix Salmon ~ DECEMBER 29, 2013 ~ Posted by Christofurio 

Ostensibly Respectable Academic Is In Fact A Hack: it’s a hardy perennial, and an enjoyable one at that. The best example is Inside Job, where big names like Ric Mishkin and Glenn Hubbard got their well-deserved comeuppance. And it’s a genre I’ve indulged in myself: last year, for instance, Ispent 4,500 words on a paper by Bob Litan, showing how he lies with numbers to arrive at his paymasters’ predetermined conclusion. RC: Pure Krugmanite of NYT/Princeton.
But here’s the thing: for this kind of article to carry any weight, it has to demonstrate the mendacity or venality of the academics in question, ideally, those academics should have a high-profile reputation which deserves to be tarnished.
Which is why David Kocieniewski’s article about Craig Pirrong and Scott Irwin this weekend is such a disappointment. It’s currently doing very well on the NYT’s most-emailed list, but it’s easy to guess who’s doing the emailing: people who love to hate Wall Street, and who will use just about any possible excuse for doing so. Because in this case Kocieniewski has missed the mark. Neither Pirrong or Irwin is mendacious or venal, and indeed it’s the NYT which seems to be stretching the facts well past their natural breaking point. RC: Pure Krugmanite of NYT/Princeton again.
Let’s start, for instance, with the one part of the article almost everybody will read: the big picture at the top of the article, showing the gleaming and extremely expensive University of Illinois business school. “The Chicago Mercantile Exchange has given more than $1.4 million to the University of Illinois since 2008,” says the caption, “with most of the money going to the business school.” RC: MMmmm…:POTUS former law practice area. Let’s also remember CME is in 20 Wacker drive, a common habit of 20′s aged students. In fact I see the entire case one for wacker’s.
That number — a very big sum, which is more than enough to buy research from for-sale economists — gets repeated further down the article: RC: Didn’t they know they can buy Krugman cheaper as NYT prove, but he isn’t crom the mob trained city, Albany NY is more the business end of the $.
One of the most widely quoted defenders of speculation in agricultural markets, Mr. Irwin of the University of Illinois, Champaign-Urbana, consults for a business that serves hedge funds, investment banks and other commodities speculators, according to information received by The Times under the Freedom of Information Act. The business school at the University of Illinois has received more than a million dollars in donations from the Chicago Mercantile Exchange and several major commodities traders, to pay for scholarships and classes and to build a laboratory that resembles a trading floor at the commodities market. RC: MMmm…POTUS taught UC rather than UI, but taught all the same Illinois & Chicago pretty much one? UC being private research based with great accolades & Lauriat’s than the State Research UI same city anyhow, so same thinking UICU follows, rather than leads. Mr. Irwin, the University of Illinois & Chicago exchange all say his research is not related to the financial support.
This is carefully written to be as damning as possible. Yes, it makes perfect sense that the CME would fund a major business school right in its own backyard — RC: MMmm… win POTUS support too perhaps??? & that it would fund activities related to its own business of commodities trading. But surely Kocieniewski is about to show us how the grants are linked in some way to Irwin’s research: no NYT reporter would write such a thing unless he had reason to believe that there was some kind of quid pro quo, or that the grants to the business school were written in gratitude to Irwin. RC: Can’t hurt to be at 20 Wacker drive either. Chicago has plenty of them. Always has since roaring 20′s. Anyhow now with POTUS former links entrenched, and On August 18, 2008, shareholders approved a merger with the New York Mercantile Exchange (NYMEX) and COMEX. The Merc, CBOT, NYMEX and COMEX are now markets owned by the CME Group, back in Krugman vested NYT’s area. That’s where NYT reporter might find a reasonable fear of being undermined by invading CME dudes into NYMEX. Or perhaps its just that Monsanto have vested interests in the subject research and a long hekld strong attachment to Illinois Viz., see Wikipedia “In1926 the company founded and incorporated a town called Monsanto in Illinois (now known as Sauget). It was formed to provide a liberal regulatory environment and low taxes for the Monsanto chemical plants at a time when local jurisdictions had most of the responsibility for environmental rules. It was renamed in honor of Leo Sauget, its first village president”.
Except, if you keep on reading to the point at which you’re 2,500 words into the piece — and pretty much nobody reads that far — you’ll find this:
While the C.M.E. has given more than $1.4 million to the University of Illinois since 2008, most has gone to the business school and none to the School of Agriculture and Consumer Economics, where Mr. Irwin teaches. And when Mr. Irwin asked the exchange’s foundation for $25,000 several years ago to sponsor a website he runs to inform farmers about agricultural conditions and regulations, his request was denied.
RC: Now lets see vested research & Monsanto interests perhaps CME’s main Ag-field :~ “Commodity futures and options ~ Agricultural Commodity Contracts include: Live Cattle, Lean Hogs,Feeder Cattle, Class IV Milk, Class III Milk, Frozen Pork Bellies, International Skimmed Milk Powder (ISM), Nonfat Dry Milk, Deliverable Nonfat Dry Milk, Dry Whey, Cash-Settled Butter, Butter, Random Length Lumber, Softwood Pulp, Hardwood Pulp.

This is real jaw-on-the-floor stuff. The NYT has published an article about how academics who write nice things about Wall Street “reap rewards”, in the words of the headline — and its main illustration is donations to a business school where the academic in question doesn’t even work! Anybody trying to hold academics to standards of intellectual honesty has to be intellectually honest themselves. And the fact is that there’s zero reason to believe that there’s any connection between the business-school donations and Irwin’s research.
Or maybe Kocieniewski thinks that consulting contract is enough to demonstrate that all money in the general vicinity of Irwin is tainted by venality. Except, if you get to the very end of the article, you’ll find out a bit more about what this consulting contract comprises:
Mr. Irwin also works for a business called Yieldcast that caters to agricultural producers, investments banks and other speculators, selling them predictions of corn and soybean yields. RC: Oh! Goody Monsanto prime subject at this time “Corn & Soybean GMO Yield accelerators” Mr. Irwin has said he does not consider it a conflict because he works only with the mathematical forecasting models and never consults with clients.
This is pretty blameless stuff. If you’re a professor who puts together models of commodities prices, it’s fine to consult for a company which puts together models of commodities prices. Shouldn’t we be encouraging professors to work on real-world applications of their research, rather than implying that any such work is a dastardly conflict of interest? RC: Never fear Monsanto will practice those risks, and CME/NYMEX/NYT can also look & smell like roses.
Once you realize how much of an axe Kocieniewski is grinding, then the rest of his article rapidly starts to crumble. For starters, as Evan Soltas says, both of these men are “super-freshwater” academic economists, working at freshwater schools. (In econojargon, “freshwater” economics happens far from the coasts, and is generally laissez-faire and pretty right-wing; “saltwater” economics takes place in coastal universities and tends to be more Keynesian, interventionist, and leftist.) Neither is inclined to write anything which deviates from freshwater orthodoxy. Kocieniewski takes issue with these professors’ defense of financial speculation — but that’s a central tenet of freshwater economics, and “orthodox economist is orthodox” is never going to be much of a story.
What’s more, there’s clear evidence that Pirrong, in particular, does not simply churn out whatever his paymasters want him to write:
Commodity trading houses are not “too big to fail”, says a report commissioned by the banking industry’s top lobby group, which had hoped it would conclude the opposite.
That report was written by Pirrong, who is on the record as saying that the report was never officially published precisely because he refused to change its conclusions. (Kocieniewski quotes from Pirrong’s post, but doesn’t link to it.)
Indeed, you don’t need to spend very much time reading Pirrong’s excellent blog before you realize that he’s one of those economists who will always speak his mind. Pirrong is not a grandee who can be counted on to deliver a certain conclusion if you pay him enough money: there aremany economists out there who I consider to be in the “bought and paid for” camp, but Pirrong is absolutely not one of them.
So, what’s going on here? Three things.
First, Kocieniewski has a bee in his bonnet about the effect of commodities speculation on commodities prices. He has not only convinced himself that speculative flows caused substantial increases in commodity prices; he has also seemingly convinced himself that anybody who disagrees with that position must be lying. So he’s taken aim at Pirrong and Irwin, not because they have made a lot of money from the financial-services industry, and not because they’re particularly conflicted, but just because they hold a position Kocieniewski doesn’t like. As Peter Klein acerbically puts it, “if you oppose the Times’s editorial position on regulation (or any other issue), you are compromised by financial or other ties. If you support the Times’s position, you are a scholar or public figure of great integrity.”
Secondly, Kocieniewski has picked on these two professors in particular because they both work at public universities, which can be FOIA’ed. Kocieniewski put in freedom-of-information requests for the two professors — requests that private universities like Harvard or Yale could happily ignore — and used the results as the basis for his story. Thanks, David — you’ve just made it even more difficult for public universities to attract top economic talent.
And finally, Kocieniewski seems to have bought into a much bigger conspiracy theory which he’s looking to illustrate — a theory summed up in the NYT’s “Professors as Pitchmen” subhed. It’s a theme which runs through Kocieniewski’s piece:
Underwriting researchers and academic institutions is one part of Wall Street’s efforts to fend off regulation…
Major financial companies have also funded magazines and websites to promote academics with friendly points of view…
Financial firms have been able to use the resources and credibility of academia to shape the political debate.
The Chicago Mercantile Exchange and the University of Illinois at Champaign-Urbana, for example, at times blur the line between research and public relations.
The exchange’s public relations staff has helped Mr. Irwin shop his pro-speculation essays to newspaper op-ed pages, according to emails reviewed by The Times. His studies, writings, videotaped speeches and interviews have been displayed on the exchange’s website and its online magazine.
Kocieniewski’s most explosive allegation, here — that major financial companies have paid magazines and websites to promote certain academics — is in desperate need of backing up: he needs to name the companies and the magazines in question, and explain exactly what he’s talking about. Is he just referring to advertorial content, or sites like the Financialist which are clearly sponsored by financial institutions? Or is he saying that financial-services companies have found a way to pay for certain content to find its way into the editorial pages of certain magazines? That’s certainly what he’s implying. RC: I think if you read my yellow research comments you may agree with this conspiracy theory viz., POTUS Chicago U ties, CME now NYMEX tec. NYT always open to Krugmanlike flexible $$$ Professors, CME Group Ltd., commodity futures & Option trading in ag., Monsanto 1926 links, their main emphasis today both players “Corn & Soybean GMO’s”~ Is this a starting place?
Then again, when Kocieniewski starts babbling about “the line between research and public relations”, the simplest explanation starts becoming clear: that he’s just gone a little bit off the reservation. There is no “line between research and public relations”; rather, as every financial journalist knows, there is research, and then there is a small army of PR people who try to get journalists to write about that research. Those PR people might work for sell-side banks, or for the Federal Reserve system, or for private universities, or for public universities, or for non-profit think-tanks, or for-profit corporations — but in any event, their job is just to get certain pieces of research noticed. If the CME finds a piece of research that it likes, it makes perfect sense that it will feature that research on its website and tell journalists about it. No line is being crossed there. RC: Yep Monsanto lackies do that well.
There’s no doubt that PR people can be infuriating at times, but Kocieniewski is taking this idea one step further: he’s saying that if an academic agrees with a certain corporate point of view, and allows the company in question to promulgate that view, then the academic has thereby basically become that company’s PR person. RC: Probably as “Money speaks louder than words” always.
Once you understand that deep assumption, then the rest of the article starts to make more sense. Kocieniewski sees Pirrong and Irwin as PR people for financial speculators, and feels that no PR people should ever receive the kind of respect that these two economists get, especially in Washington. If Kocieniewski presented that view in a blog post, maybe at Daily Kos or Zero Hedge, few people would bat an eyelid. It’s a little on the overheated side, but I know a lot of people who would basically agree with it.
The problem is that Kocieniewski isn’t presenting this view as opinion: instead, he’s presenting it as a fact, unearthed by his diligent use of freedom-of-information requests. Even though those requests revealed nothing surprising whatsoever. What Kocieniewski calls Pirrong’s “financial dealings with speculators”, for instance, Pirrong himself has another term for: “litigation consulting”. It makes sense that Pirrong would frequently be used as an expert witness: he explains things clearly, he’s well respected, and he’s entirely consistent in where he comes down on certain well-known questions. The causality here is abundantly clear: Pirrong’s views caused the commodities firms to hire him as a witness, not the other way around.
In presenting Pirrong and Irwin as doing something deeply unethical, Kocieniewski is actually making sensible ethics reform much more difficult. The AEA code of ethics is an important document, which goes a long way towards addressing the conflicts in the financial-economics industry. But Irwin, for one, was clearly entirely in line with the code all along. (Pirrong, I think, should have been more forthcoming about the identity of the companies paying him substantial expert-witness fees.) If Kocieniewski can take a blameless professor and turn him into a poster child for graft, then it’s easy to see how the rest of the academy might come to the conclusion that they were better off when everything was secret.

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Why it’s not OK for cyclists to run red lights

Felix Salmon
Aug 5, 2012 17:33 UTC

Randy Cohen, the NYT’s former Ethicist columnist, has now attempted an ethical defense of running red lights on his bicycle. “I flout the law when I’m on my bike,” he writes; “you do it when you are on foot, at least if you are like most New Yorkers.”

This, of course, is one of the weakest ethical defenses imaginable: if lots of other people are flouting the law, that doesn’t give anybody else the ethical right to do so, let alone the legal right. But Cohen continues:

I roll through a red light if and only if no pedestrian is in the crosswalk and no car is in the intersection — that is, if it will not endanger myself or anybody else. To put it another way, I treat red lights and stop signs as if they were yield signs. A fundamental concern of ethics is the effect of our actions on others. My actions harm no one. This moral reasoning may not sway the police officer writing me a ticket, but it would pass the test of Kant’s categorical imperative: I think all cyclists could — and should — ride like me.

The “should” at the end of this passage is utterly indefensible. At best, Cohen has demonstrated that he’s causing no harm to others (although I’ll take issue with that in a moment). But if Cohen is doing something illegal — which, by his own admission he is — then he needs something much stronger than “no harm to others” before he urges such behavior on all other cyclists.

There are cases where flouting the law can be the ethical thing to do, but those are generally cases where following the law, or standing idly by in the face of something which is clearly wrong, cannot be ethically justified. In this case, stopping at a red light and waiting for it to turn green does no harm to anybody, and there’s no morality I know of which would frown on such behavior.

It is important to cyclists that we get the full respect of drivers as fellow road users, with just as much right to be riding down the street as they have. The biggest danger facing cyclists is when drivers get annoyed if we slow them down, or drive as though we’re simply not there. Developing a relationship of mutual respect between drivers and cyclists is the most important thing we can do to improve cyclists’ safety, and to reduce the number of injuries and fatalities on the streets. And cyclists will find it much harder to earn that respect if they visibly flout the law every time they reach a red light.

Do pedestrians flout red-light laws all the time? Yes, of course they do. But they also fear cars, and respect the fact that the roadway is built for the purposes of cars and not for themselves. No pedestrian insists on the right to walk down the middle of the road at any time of day or night, and to be respected by drivers while doing so.

Similarly, Cohen — quite rightly — saying that cyclists “are a third thing, a distinct mode of transportation, requiring different practices and different rules”. I wrote as much myself, in my unified theory of New York biking. But that theory was based on the idea that the tragedy of New York cycling is that everybody — pedestrians, drivers, and cyclists — treat cyclists too much like pedestrians. Cohen, by contrast, says that “most of the resentment of rule-breaking riders like me, I suspect, derives from a false analogy: conceiving of bicycles as akin to cars”. I wish that New Yorkers would conceive of bicycles as akin to cars: pedestrians would look first before stepping out in front of us; cars would respect our right to be on the road; and fellow cyclists wouldn’t endanger everybody by riding the wrong way down the street.

One of the weirder parts of Cohen’s essay is that he extols Amsterdam and Copenhagen, which are cities where, to a first approximation, all cyclists always stop at all red lights, and don’t go again until the light turns green. Doesn’t he understand that in order for New York to work as a cycling city, cyclists will have to stop taking the law into their own hands? “Uninterrupted motion,” he writes, “gliding silently and swiftly, is a joy.” Well, yes, it is. Uninterrupted motion is quite nice for car drivers, too, but they stop at red lights. And even pedestrians generally wait until the way is clear before they cross the street.

More to the point, I simply don’t believe Cohen when he writes that he only breaks the red-light rule “if and only if no pedestrian is in the crosswalk and no car is in the intersection”. What about when there’s a pedestrian in the crosswalk who’s walking away from the bike? I’ll bet he does it then, too. The point is, when you can make up your own rules, you can also make up when to bend them. I can understand that Cohen would prefer it if New York had rules like Idaho’s. But whatever the rules are, we should obey them. If Cohen wants to agitate for a change in the rules, I’ll join him and support him. But I’m not going to pretend that it’s OK to break the rules just because you think the rules should be changed.

It’s quite common for pedestrians to thank me when I stop at a red light behind the crosswalk. That’s nice of them, I guess — but it’s also a bit depressing: it shows that most pedestrians expect most cyclists to flout the law. And that makes them afraid and resentful of cyclists in general. That’s the last thing anybody wants. And so for the time being it behooves all cyclists to adhere to the law as it stands, even if they’re convinced that they’re doing no harm. Running red lights is highly visible behavior, and every time a pedestrian or a driver seen Cohen do it, that only confirms in them their prejudice that cyclists are lawless people with no respect for the rules of the road. They can’t see the counterfactual case where Cohen would have stopped had there been a pedestrian in the way: all they see is the law-flouter.

I’m no angel on this front: I’ve done, on my bike, everything Cohen has done on his. I just don’t kid myself that I’m behaving ethically when I do so. And I’m trying to set a good example, even if I don’t always succeed. If you ever see me run a red light on my bike, feel free to tell me off. I’ll deserve it.

COMMENT

Well in some cities it is legal to ride a bike through a red light. And where I live I would NEVER get through red light. Why…because they only change for a car…not a bike. In some cites when a bicycle stops over the bicycle symbol that is on the street the light changes just as if they were a car. That is what needs to be done but most cities won’t because they just don’t care…period. I am in the street when I approach a stop light and if I were to stop all the time I would have cars mad at me because they feel I am in the way. I could use the crosswalk at a red light, but that is infinitely more dangerous. Why…because cars making a right-hand turn do not care one bit if they hit me and will cut in front of me all the time. Then when I am in the middle of the intersection about to get to the other side, those cars making a turn, either a left going the same direction as me, or those making a right in front of me will ALWAYS cut in front of me. You have to stay in the street and you have to run a red light at least part of the time. Those that don’t ride in the city should not comment as they have NO clue.

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Business ethics need to move beyond what’s illegal

Felix Salmon
Jul 18, 2012 22:37 UTC

Business school professor Luigi Zingales, with the full agreement of fellow business-school professor Justin Wolfers, has an important op-ed under a provocative headline: “Do Business Schools Incubate Criminals?”

Zingales’s point is a good one: that the way business-school students study ethics is much like the way that entomologists study ants. Quite aside from the fact that ethics courses are generally taught by relatively junior professors, they also tend to shy away from actually telling students to be ethical:

Most business schools do offer ethics classes. Yet these classes are generally divided into two categories. Some simply illustrate ethical dilemmas without taking a position on how people are expected to act. It is as if students were presented with the pros and cons of racial segregation, leaving them to decide which side they wanted to take.

Others hide behind the concept of corporate social responsibility, suggesting that social obligations rest on firms, not on individuals…

My colleague Gary Becker pioneered the economic study of crime. Employing a basic utilitarian approach, he compared the benefits of a crime with the expected cost of punishment (that is, the cost of punishment times the probability of receiving that punishment). While very insightful, Becker’s model, which had no intention of telling people how they should behave, had some unintended consequences. A former student of Becker’s told me that he found many of his classmates to be remarkably amoral, a fact he took as a sign that they interpreted Becker’s descriptive model of crime as prescriptive. They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity.

At business school, there are lots of classes where students try to maximize profits; that’s nearly always considered to be the way to win in business. It’s easy to see, then, how Becker’s framing of unethical behavior as something with costs and benefits essentially strips the ethics away, leaving only a simple decision of whether the actor wants to take the risk of punishment.

And frankly the headline on Zingales’s piece makes a similar error. What it implies is that we should be worried about criminal behavior, rather than unethical behavior more generally. But I’m with Zingales: we need to go further than that.

When the economist Milton Friedman famously said the one and only responsibility of business is to increase its profits, he added “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” That’s a very big caveat, and one that is not stressed nearly enough in our business schools.

Lobbying to secure a competitive advantage from the government certainly does not represent “open and free competition.” Similarly, preying on customers’ addictions or cognitive limitations constitutes deception, if not outright fraud.

There are interesting ethical debates to be had as to where to draw the line: for instance, all those “free offers” which require you to hand over your credit-card details and then bill you regularly unless you cancel. They prey on cognitive limitations, I’d say, and are less ethical than companies which don’t do that. Should business-school professors tell their students that they should avoid implementing such schemes? I don’t know. But I do think that acting ethically, even if such actions are legal and don’t maximize profits, is something that many more business-school students should be encouraged to consider.

This is a very large step, of course, from the kind of discourse which excuses illegal bribes by Walmex on the grounds that, hey, everybody does it. And in a way it’s closer to what I’m urging in a journalistic context: less emphasis on bright lines, such as what’s legal and what’s illegal, and more emphasis on acting as ethically as possible on a day-to-day basis. Treating your employees well, for instance, is sometimes good for the bottom line and sometimes bad for the bottom line. But I’m uncomfortable with arguments that urge companies to treat their employees well on the grounds that doing so will increase profits: the implication is that if it doesn’t increase profits, then the reason to do it goes away.

Zingales says that business-school professors actively foster a culture of amorality; that’s right. But the real problem isn’t business school; it’s the idea that there’s something ethically dubious about doing anything other than maximizing profits for shareholders. Which is one reason why I’m such a fan of b-corps.

COMMENT

The problem with the golden rule in business is that every profit maximiser expects everyone else also to be a profit maximiser and hence justifies his actions by appealing to a level playing field in competition.

In other words, as a profit maximiser I use mis-leading/confusing commercials/pricing structures or whatever. Since I am highly sophisticated in the world of pricing structures I expect the same to happen to me whenever I am on the receiving end.

Therefore, I do unto others what I am happy to have done to me.

What we need is a little Rawls thrown in there.
http://en.wikipedia.org/wiki/Veil_of_ign orance
We need to protect the weakest and most vulnerable in our society.
So it needs to be the case that retail investors for example can’t buy highly complex derivatives.

Again, with the rules/laws.

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Media ethics and transparency

Felix Salmon
Jul 11, 2012 06:42 UTC

I’ve just been told that it’s International Media Ethics Day in September, which is so far away that I’m bound to forget to post something. But I have been thinking a bit about media ethics of late, and especially the ever-increasing list of rules designed to ensure that journalists are neither conflicted nor seen to be conflicted. And the more I look at such things, the more I come to the conclusion that all too often they do a very good job of banning harmless activity, while at the same time proving quite ineffective against situations which are far more ethically problematic.

It’s easy to come up with a list of cases where ethics watchdogs in high places have come down too harshly on infractions which were pretty harmless. Think of Mike Albo being fired from his NYT column, or for that matter Neil Collins being fired from Reuters. In neither case did the punishment fit the crime, notwithstanding of the letter of the law as unilaterally interpreted by the news organization in question.

It’s also easy to come up with instances of news organizations tying themselves up in rather hilarious knots in order to meet their own self-imposed ethical standards. Len Downie and Mike Allen never vote, for instance, for fear that their private and secret ballot might in some way inform their journalism. And I was particularly tickled by the contortions that the WSJ went through when faced with an extremely good-natured wager by Dan Neil:

The Wall Street Journal, which I joined in February 2010, does not permit its journalists to engage in this kind of wagering, regardless of subject or beneficiary — even by critics and columnists like me who are paid to have and express their opinions. And that’s perfectly reasonable: You wouldn’t want a theater critic betting a play will succeed or fail. Moreover, it’s better for journalists to write about the story than to somehow become part of the story. However, since I undertook this obligation before my tenure at the WSJ, and since the outcome is a charitable contribution, the Journal allowed me to follow through.

There’s an implication here that if Neil had promised to pay Elon Musk $1,000, rather than Doctors Without Borders, then the WSJ would have considered his welshing on his bet to be more ethical than his making good on it. We don’t know, which is a bit problematic in itself.

The theme running through all of these cases is that of reductio ad absurdum. Organizations decide that their journalists should be above reproach, and draft a set of rules to that effect. They then consider themselves bound by the rules, rather than by the principle underlying those rules.

The risk of absurdity is particularly high when it comes to social media in general, and Twitter in particular. As Twitter inexorably erases the professional/personal distinction, sophisticated organizations are increasingly adopting social-media policies based on simple “don’t be stupid” principles, rather than on hard-and-fast rules.

What goes for Twitter goes more generally, too. Twitter has proved that journalists are human, which has upside as well as downside. Journalistic ethics should embrace that, rather than trying to force all journalists into being magisterially impartial observers.

What would ethics look like in a world which is messier and more transparent? For one thing, we would spend less effort ring-fencing journalists’ lives and conflicts, and more time simply being open about them. The end result could actually be a significant improvement.

The reason is that the single biggest problem, when it comes to journalistic bias, has nothing to do with journalists owning stock in companies, or being paid speaking fees. (Although with speaking fees, a simple would-you-be-happy-being-transparent-about-this test is often a very good place to start.) Rather, by far the most common way in which journalists are captured by corporate interests is precisely the same way that journalists get scoops: source cultivation.

Journalists don’t always have sex with their sources, but when you’re having long and often boozy meetings with people, it’s statistically inevitable that many journalists are going to end up liking some subset of those people. After all, sources aren’t necessarily bad or evil: some of them are very good, very charming people. And often journalists end up working incredibly closely with sources for weeks or months on end as stories progress. Sometimes, that work becomes formalized: after Gretchen Morgenson used Josh Rosner as a source during much of the financial crisis, she then co-authored a book with him. Other times, the source ends up marrying the journalist: think Alan Greenspan and Andrea Mitchell.

But most of the time, it’s not nearly as obvious as that. Especially when it comes to background dinners with no particular agenda, a lot of what’s going on is a complex game of two people trying to get comfortable with trusting each other. That trust needs to be built up over time, and building it up takes a substantial amount of effort. It can be hard to distinguish, sometimes, from friendship. And if the journalist writes something bad about the source or the source’s company, the whole relationship can be jeopardized.

Keith Winstein has a fantastic way of explaining why beat reporters don’t make great investigative reporters; it basically comes down to the fact that beat reporters need access, which is the one thing that no company wants to give to an investigative reporter. But all reporters, be they beat reporters or investigative reporters or opinion journalists or anything else, have human sources and understandably feel bad if they write something that upsets the sources they get along well with. And that ends up shaping news stories, at the margin, much more than any financial incentives they might have.

Source relationships are particularly fraught when it comes to short-sellers, most of whom have good relationships with a certain subset of the financial-journalism world. That makes perfect sense: short-sellers often uncover newsworthy frauds, and it’s in everybody’s interest for those frauds to be uncovered in a public manner. But the closer a short-seller gets to a journalist, the more problematic the relationship, just because the short seller is likely to have advance notice of a key precipitating event — the publication of the story in question.

Here’s the problem: let’s say I’m a short seller, and I’ve uncovered a big fraud. I can go short the stock, but doing so is fraught with danger: so long as the fraud isn’t public, the stock can rise a lot and I can get stopped out. And if I simply sit back and wait for some journalist or government agency to find the fraud on their own, I could be waiting a very long time indeed. So I make things happen by talking to a journalist I know I can trust. And somewhere along the way I get a reasonably good idea for when that journalist’s story is going to appear — a story which I’m pretty sure is going to result in the company’s share price falling. At that point, I have the holy grail for any short-seller: knowing not only that a stock is going to fall, but also when it’s going to fall. And I have that information just because of how close I am to the journalist. You can see how the journalist, in this light, looks a bit less like the impartial crusader of Truth, and a bit more like the willing patsy of the short-seller.

I don’t know how or even whether this problem can or should be addressed, but I suspect that a bit more transparency could only help. And that’s not the only area where more transparency would surely be a good thing. I’m a long-time reader and fan of Joe Nocera, for instance, and so I know that he has featured Westwood Capital’s Dan Alpert in his column numerous times, as well as letting Alpert guest-blog for him on occasion. Last August, Nocera introduced him, quite explicitly, as “my friend Daniel Alpert”.

Yesterday, Nocera wrote about the eminent-domain plan for seizing underwater mortgages; he concluded that “it’s time to give eminent domain a try”. In doing so, he ducked all of the questions I’ve raised about the plan he’s writing about: how Mortgage Resolution Partners is buying mortgages rather than homes, and performing mortgages rather than defaulted mortgages, and indeed is trying to buy performing mortgages for a fraction of their face value, even as investors are valuing them at or even sometimes above par. “Since the home has dropped dramatically in value, the mortgage is worth a lot less than its face value,” asserts Nocera — ignoring the fact that once a mortgage is seasoned and performing well, it has to be worth at least as much as a performing unsecured loan of the same amount.

Why was Nocera so seemingly blind to the weaknesses in the MRP plan? Maybe he considered and rejected them; maybe he didn’t consider them at all. Or, maybe, he was predisposed to like the MRP plan because his friend Dan Alpert is one of the principal movers behind it. I knew that Nocera had written about the MRP plan before I knew what Nocera had written about the MRP plan — but because I also knew about the Nocera-Alpert connection, I didn’t need to read the column to know what Nocera’s conclusion would be. Nocera was under no compulsion to write about the plan, and I’m reasonably certain that if he can’t say something nice about Dan Alpert, he’s not going to say anything at all.

Dan Alpert wasn’t mentioned in Nocera’s column, and neither was his company, so even a close reader of Nocera’s work would have found it difficult to notice what you might call the friendship conflict. Nocera gives paid speeches, including to securitization professionals, and I don’t think that the money he gets paid for giving those speeches affects his columns one bit — any more than his cruise-ship seminars do. But the NYT keeps very close tabs on all that extracurricular income, because it’s seen as raising potential ethical issues. Nocera’s connection with Alpert, on the other hand, isn’t scrutinized at all — it’s a perfectly unexceptional journalist-source relationship — despite the fact that it must have had some significant effect on the column.

This, then, is where a bit of first-person transparency would come in useful. “I’m biased: I’ve known Dan Alpert for years, and he’s a friend. But I still think this is a good idea.” It doesn’t take up much space, it’s perfectly natural, and it helps readers understand where the writer is coming from.

Was it unethical for Nocera not to disclose his relationship with Alpert? I wouldn’t go that far. But then again, I don’t think it’s particularly helpful to try to draw rules-based bright lines between “ethical” and “unethical”, and say that anything on one side of the line is fine, while anything on the other side of the line is unacceptable. We don’t want journalists to become like corporate executives, who, in the words of Eduardo Porter, “behave as corruptly as they can, within whatever constraints are imposed by law and reputation”.

Instead, I’d encourage all journalists to consider every action they do, every day, and ask whether it’s helpful or unhelpful, good or bad, at the margin. And the point here is to spend as much time trying to do things which are good as you do avoiding things which are bad.

Right now, US journalism has a rather Calvinist view of ethics: it’s all downside and no upside. But it seems to me that if publications encouraged their journalists to be more ethical, rather than just requiring them not to be unethical, things might get a lot better. We’d see more detailed disclosures like Kara Swisher’s at All Things D. We’d see fewer anonymous quotes, since there’s always something a bit dirty and secretive about them. We’d have fewer journalists automatically saying “yes” whenever anybody asked them if they could talk off the record. And we’d have columnists like Nocera explain their personal connections to the subjects they were writing about, even when doing so isn’t strictly necessary: it would still at the margin be better than not doing so.

My suggestion for Media Ethics Day, then, is that, this year, we stop talking about rules: what behaviors are OK, and what behaviors aren’t. I don’t have a problem with those rules existing, but I worry that an unintended consequence of putting those rules in place is that journalists end up worrying much more about the rules, and what side of the rules they’re on, than they do about the underlying ethics of what it is that they’re doing, or not doing. Similarly, I’d like to see a little less emphasis on what constitutes unethical behavior in journalism. While that’s an important topic, it’s also a constrained one. What I want to see more of is discussion of what constitutes ethical behavior in journalism — what kind of things can all journalists do to make their practice ever more ethically sound?

I’d particularly love to see that conversation take place in the context of an increasingly social world, where friendships and relationships are more out in the open than they have been in the past, and where grown-ups recognize that conflicts are a fact of life, rather than something which should always be avoided.

If you study ethics in a philosophy department, it’s a tough nut to crack, with lots of very difficult questions. In a journalistic context, by contrast, everybody seems far too keen to boil everything down to simple yes/no answers.

COMMENT

And what is journalism these days anyway? A few years back I had no doubt what it was, but now I don’t know where the definition begins and where it ends. “The transmission of a single message, other than a sales promotions, via means capable of reaching more than 50 people”?

Posted by tindale | Report as abusive

Is Kenneth Dam working for Elliott Associates?

Felix Salmon
May 13, 2012 04:59 UTC

Kenneth Dam is an unusually reticent professor. Since he released his amicus brief in the case of Elliott vs. Argentina, I’ve phoned him and sent him multiple emails to two different addresses, but have received no reply at all. Which is odd, because he clearly feels very strongly about the case — strongly enough to enlist Kevin Reed, of the white-shoe law firm Quinn Emanuel Urquhart & Sullivan, to put together his brief and submit it to the Second Circuit.

Such services don’t come cheap: my guess is that Reed charged Dam well into six figures for his services.

So why would Dam spend hundreds of thousands of dollars to submit an amicus brief in this case, yet at the same time evince no interest in talking to the press about it? He hasn’t returned Bloomberg’s calls, either, and neither is he quoted in Michelle Celarier’s story in the NY Post. But Celarier has managed to come out and say what many of us suspected, when we first saw the brief:

Elliott Capital Management’s Paul Singer must be sweating it…

Singer has enlisted the support of ex-Treasury vet Kenneth Dam, who served under Ronald Reagan and was deputy secretary of the Treasury under George W. Bush, to write a “friends of the court” brief for Elliott in a case the US Court of Appeals for the Second Circuit is slated to hear later this month.

This wouldn’t be the first time that Elliott paid a venerable law professor to submit a brief in support of its case. But in this particular brief, there’s an unambiguous footnote:

Pursuant to Local Rule 29.1, Kenneth W. Dam states that he authored this brief and that it was not authored or funded by any party to this action.

On the off chance that you’re not familiar with Local Rule 29.1, it requires a disclosure statement under FRAP 29(c)(5), which in turn says that this footnote must indicate whether “a person — other than the amicus curiae, its members, or its counsel — contributed money that was intended to fund preparing or submitting the brief and, if so, identifies each such person”. Since Dam identifies no such person, I would normally conclude that he paid the costs of preparing and submitting this brief himself.

But Michelle Celarier is a veteran and very well-sourced journalist, and if she says that Dam’s brief was commissioned by Elliott, I’m inclined to believe her.

It’s all very peculiar. Within the brief itself, Dam’s only declared interest is this:

Prof. Dam has a substantial interest in the outcome of this action because it presents issues involving the international financial markets, the role of international financial institutions, and U.S. international policymaking that he has written on and studied extensively.

Which might explain why he’s interested in the outcome of the action, but doesn’t come close to explaining why he’s willing to spend a very large amount of money attempting to influence the outcome of the action.

All of this could be cleared up, of course, very easily, if only Dam or Elliott were willing to answer some simple questions. But instead we get this:

Dam didn’t return a phone message and e-mail sent to his law school office seeking comment on the filing. Peter Truell, a spokesman for New York-based Elliott Management, declined to comment.

I first tried to ask Dam about this back on May 2, and then tried again on May 7. So far, I’ve heard nothing. So if anybody out there knows Ken Dam, and gets the opportunity to ask him a simple question, I’d be much obliged if you could ask him whether he’s working for Elliott. Then, if he says yes, ask him why he didn’t say so in his brief. And if he says no, ask him how much it cost to file this brief, and whether he personally paid the full sum. I’d be fascinated to learn what his answers are.

COMMENT

” Which is odd, because he clearly feels very strongly about the case — strongly enough to enlist Kevin Reed, of the white-shoe law firm Quinn Emanuel Urquhart & Sullivan, to PUT TOGETHER his brief and submit it to the Second Circuit.”

“Pursuant to Local Rule 29.1, Kenneth W. Dam states that he AUTHORED this brief and that it was not AUTHORED or funded by any party to this action.”

So I’m a little confused here. It seems that Dam is very clearly stating that neither Kevin Reed (nor anyone else) wrote the brief. So what do you believe Kevin Reed did that you believe cost a six-figure sum? Regardless of how rapacious lawyers are, I can’t believe the simple act of filing the paperwork (and perhaps reading the brief to make sure there is nothing embarrassing therein) would cost a six figure sum, and no matter how much it cost, if it is true that Reed represents Elliot, then he filed that paperwork as just one of those services for which he is being paid by Elliot.

So it seems more like the cost here is the time spent by Dam in researching and writing the brief. Why would he spend this time? Well, the fact is people do crazy stuff like this constantly. Once someone buys into a particular view of the world, whether it’s economics, politics, or the law, they’re frequently willing to spend insane amounts of time to convert others to their cause. This strikes me as absolutely no different from, to take an obvious example, some of the commenters who stalk your pages and respond, sometimes extremely prolix, to your points.

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Was Walmart’s ethics policy part of the problem?

Felix Salmon
Apr 24, 2012 14:36 UTC

Back in November 2006, Eduardo Castro-Wright, who was then the US president of Walmart, dispatched the company’s jet to pick up marketing head Julie Roehm in Chicago. She arrived late, in an ice storm, but made it in to the Walmart headquarters, where Castro-Wright started grilling her on the agency review process: how she had picked DraftFCB as the agency which would take over Walmart’s $1 billion-per-year account. Roehm had interviewed some 30 agencies before settling on Draft; the questions centered on whether she had allowed any of those agencies to pay for dinner while she was talking to them, and whether she had accepted a lift in the car of any of the agencies’ CEOs.

Four days later, Roehm was fired, for violations of Walmart’s extremely strict ethics policy. As Walmart expert Charles Fishman explains,

Wal-Mart had a kind of unbending almost obsessive adherence to even the trivialist elements of an ethical code. They’re a brutal competitor and everybody acknowledged that, but Wal-Mart was also the company that wouldn’t take a dinner from you, that wouldn’t let you provide a soda if you went to meet them to talk about business, where they wouldn’t join trade associations for many, many years because they didn’t want to pay dues and have a conflict of interest.

We now know, of course, that Castro-Wright was the man at the very center of the Walmex corruption scandal. Which raises the obvious question: did the corruption at Walmex appear despite Walmart’s ultra-strict ethics code? Or did it, paradoxically, appear because the code was so strict?

The point here is that Walmart left, essentially, nothing to its employees’ discretion. It didn’t trust them to do the right thing: it codified everything in a set of rules, and then told them to follow those rules. And you can see how that might have resulted in a kind of Calvinist scale-blindness, where accepting a soda when going to meet a vendor is exactly as bad as greasing Mexican wheels to the tune of 24 million dollars.

On top of that, the most senior executives at Walmart had a lot of discretion when it came to enforcing the rules. For someone like Roehm, who never fit in to the corporate culture, it was easy to find an infraction and fire her. On the other hand, when it came to allegations touching on Castro-Wright himself, it was similarly easy to hand the investigation off to one of his loyal subordinates, who did what he was expected to do and buried it.

Accepting a soda from a vendor, of course, is not illegal; engaging in sham investigations, on the other hand, is. Or can be, at any rate. At a grown-up organization, the Mexican allegations would have been a much darker shade of grey than anything that Roehm is alleged to have done, and would therefore have been taken much more seriously. But executives at Walmart, used to seeing the world in black and white, were unable to distinguish between the merely unethical and the downright illegal. As a result, there could be criminal charges for Walmart executives. Call it the ultimate unintended consequence of a strict ethics policy.

Update: EJ Fagan has a very smart take on all this.

There’s a difference between having a soda bought for you and buying someone a soda. Internally, maybe Wal-Mart did not want its employees to make economically inefficient decisions based on who bestowed upon them the most favor, just like people in Mexico don’t want their government making decisions they wouldn’t otherwise make if an agent from a giant multinationals didn’t transfer six figures to their offshore bank account. Their ethics policy may be designed to support what’s good for Wal-Mart, not necessarily to follow any sort of legal or moral code. We shouldn’t expect anything else from a profit-seeking corporation in a competitive marketplace.

COMMENT

The case of Walmart making facalitaing payments is extreemly similar to BofA and most other publicly traded banks bending and breaking forclosure rules.

The business case is simple… Walmart will not be, can not be, and should not be fined enough to make the net present value of breaking the law negitive. If the back of the envelope estimates are anywhere near accurate 20% of the value of the company is the mexican business. If they got an unfair jump start on half of that business than their crime is worth a clean 20 billion.

They will never be fined that much… probably not even one hundreth of that amount… and so the ethics are pretty small potatoes…

…there is no inured party that I can find anyway… customers save money, the employees actually make a market wage in mexico, the mexican goverments actually collect taxes since Walmart actually reports unlike many small mexican businesses, and best of all Walmart reinvests every dime of mexican profit in mexico because they don’t want to pay US income tax on repatrating the profits they make down there.

If I’m a Walmart share holder I’m glad they did what they did… it’s not like they killed someone here which a bunch of companies have.

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Could the NYT make money from its scoops?

Felix Salmon
Apr 24, 2012 04:14 UTC

Perhaps the most surprising thing about the NYT’s Walmart exposé this weekend is that it was such a surprise to the market. Note this, for instance:

In December, after learning of The Times’s reporting in Mexico, Wal-Mart informed the Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act, a federal law that makes it a crime for American corporations and their subsidiaries to bribe foreign officials. Wal-Mart said the company had learned of possible problems with how it obtained permits, but stressed that the issues were limited to “discrete” cases.

“We do not believe that these matters will have a material adverse effect on our business,” the company said in a filing with the Securities and Exchange Commission.

The filing in question was Walmart’s quarterly report, which was filed with the SEC on December 8. These things take a significant amount of time to put together; it’s reasonable to assume that Walmart has known about this NYT investigation, then, for a full five months at this point. And while the story carries the sole byline of David Barstow, it was reported with the help of James McKinley in Mexico City, as well as the fabulously-named Alejandra Xanic von Bertrab. The newspaper was surely extremely assiduous in its reporting and fact-checking; I’m sure that there was an extremely large number of sources who had some inkling of what was being reported.

And yet the market was taken by surprise, with $12 billion of market capitalization evaporating from Walmart and Walmex in one day.

Which raises the obvious question: shouldn’t the NYT, which can always use a bit of extra revenue, take advantage of the fact that its stories can move markets so much? Not directly: I’m not suggesting that the New York Times Company should start buying out-of-the-money put options on Mexican corporates in advance of its own stories. But how much would hedge funds pay to be able to see the NYT’s big investigative stories during the trading day prior to the appearance of the story? It’s entirely normal, and perfectly ethical, for news organizations, including Reuters, to give faster access to the best-paying customers.

What’s more, good journalism is increasingly being done by people who unabashedly have skin in the game. The Muddy Waters report on Sino Forest, for instance, was explicitly written by someone with a big short position in the company. And today Anonymous Analytics, a forensic-accountancy spin-off of the hacker group, has released a detailed report on Huabao International which is similarly likely to cause a substantial fall in its share price. They write:

Anonymous Analytics holds no direct or indirect interest or position in any of the securities profiled in this report. However, you should assume that certain contributors to this report, as well as their members, partners, affiliates, colleagues, employees, consultants, muppets clients and investors, as well as our clients have a short position in the stock of Huabao International Holdings Limited (HK: 336, “Huabao” or the “Company”) and/or options of the stock, and therefore stand to gain substantially in the event that the price of the stock declines.

It’s a good report, well worth a read for connoisseurs of short-seller research. My favorite bit is where they flew to Botswana to try to find out what on earth the Huabao operation there was up to, tracking down the plant despite the fact that the company had photoshopped its photograph to make it impossible to work out where it was. This is a kind of long-form journalism, and it can be extremely remunerative. If the NYT is working on similar stories, why not take advantage of that fact and allow other people to make money off what you’re doing anyway?

The reporters and even the editors on any given story need never have any connection with any hedge fund or corporate client. All that’s needed is that when a big story is entering the final stages of layout and fact-checking, a version is sent under strict embargo to a client or clients who have paid for that access. They can then act on the story in the markets.

The main potential problem I see here is that if such an arrangement were in place, corporate whistleblowers might be risking prosecution as insider traders. But I’m sure the lawyers could work that one out. The church-lady types would I’m sure faint with horror. But if hedge funds are willing to pay the NYT large sums of money to be able to get a glimpse of stories before they’re made fully public, what fiduciary could simply turn such hedge funds away?

COMMENT

I love the way you initiate the discussion. I live in Mexico and from many sources I have heard many corruption acts from Walmart and other companies such as America Movil. Having or not the information beforehand wouldn’t change their ethics…

Posted by partner.analyst | Report as abusive

When journalists take money from Wall Street

Felix Salmon
Mar 20, 2012 15:11 UTC

Many thanks to Paul Starobin for getting to the bottom of the question of journalists being paid by Wall Street to give speeches. This is one of those issues, a bit like the exact meaning of “off the record”, where everybody thinks they know what the standard is, but everybody also thinks it’s different.

It turns out there are lots of different standards. At one end of the spectrum you have the Wall Street Journal which simply bans its journalists from accepting speaking fees at all. Interestingly, it’s also the most influential financial news outlet, according to Gorkana’s recent survey. Second on the Gorkana list is Bloomberg, which also bans its journalists from accepting speaking fees, but loopholes can be found. Bloomberg View editorial board member Clive Crook, for instance, is not a full-time Bloomberg staffer, and thus feels free to accept such fees.

Third on the Gorkana list is the New York Times, which has a slightly messier and more nuanced approach to speaking fees: basically, you’re allowed to take them, but only from non-profit organizations like universities. And even that rule can be bent: when Joe Nocera gave a speech to a securities conference in Miami, New York Times spokesperson Eileen Murphy told Erik Wemple that “there is some flexibility to our guidelines around speaking engagements”.

Fourth on the Gorkana list is Reuters, which isn’t mentioned in Starobin’s story. Our policy is that “payment should not be sought or accepted”, but travel and lodging reimbursements may be accepted.

After that, it becomes more of a free-for-all. At the FT, both Gillian Tett and Martin Wolf can and do accept speaking fees from anyone they want; Tett’s income from such things is “well into the six figures”, she says, and she has chosen to give “most” of it to a UK charity. And the FT seems to be more the rule than the exception, if Starobin is to be believed:

Many journalists give paid speeches to businesses and business groups. And Wall Street, as it happens, is probably the top source of such engagements. Household names like Bank of America as well as obscure hedge funds, private-equity firms, and others in the financial world frequently hire journalists—including scribes who regularly cover Wall Street—to deliver speeches at events ranging from publicized conferences to small private dinners with select clients. Millions of dollars have flowed to journalists in speaking fees in recent years.

We’re moving to a world where brands are more personal than they are corporate — where the likes of Michael Lewis and Malcolm Gladwell and Jim Surowiecki and Bill Cohan and Bethany McLean and Sarah Ellison and Niall Ferguson and so on and so forth are self-employed freelancers for various publications, rather than being full-time employees. As such, they have to make up their own rules about speaking fees, and it’s incredibly easy when you’re in that situation to tell yourself that you would never be unduly influenced by corporate interests and that therefore no harm could be done by taking Wall Street’s dollar.

Given that all these other stars are likely to be happy accepting paid speaking gigs, it’s easy to see how employers like the FT and CNN feel the need to allow their stars to give paid speeches too. (Fareed Zakaria has a rack rate of $75,000, and has given speeches to a long list of financial firms, including Merrill Lynch and T. Rowe Price.)

So what should be done? The vision of Gretchen Morgenson tying herself up in ethical knots before deciding what she can and can’t do is not a particularly edifying one: there’s got to be a better way than this.

On occasion she gives paid speeches to universities, as Times policy permits, and sometimes she appears, for free, at financial-industry events—but not without doing due diligence. “I did recently participate in a one-hour question-and-answer session about the state of the economy and markets with about 50 clients of First Long Island Investors, a small, local registered investment advisory firm,” she said in an e-mail. “It does business only in New York and Florida, has 200 or so accounts, and does not conduct securities underwriting or trading for its own account. As such, it would not be a firm I would cover. I received no honorarium for my participation in this session and before I agreed to participate, I checked that the firm had not been subject to any regulatory or disciplinary actions.”

My feeling is that for full-time employees of media organizations, a single, named ethics chief should make final determinations in all cases where a journalist wants to give a paid speech. It’s silly to ask the journalists themselves to make such determinations unilaterally, since they’re the ones being paid. The rules could be written or unwritten, but at least there would be someone being clear about what is allowed and what isn’t. Alternatively a blanket ban, like the WSJ has, works just as well.

For freelancers, however, things become a lot more difficult. The NYT, for one, tries to hold its freelancers to the same standards as its full-time journalists, but that’s hard, especially when the NYT isn’t paying them nearly as much. At the very least, we need more disclosure. This is very telling:

With the notable exceptions of Gillian Tett, Michael Lewis, and Martin Wolf, most of the journalists I tried to talk to about their speaking appearances resisted comment, or would only talk anonymously—which is a little ironic. One prominent scribe pleaded not to be mentioned at all. (Sorry, no passes.) I still have the bite marks on my neck from a telephone conversation with another who demanded to know whether he was the target of a “hostile inquiry.”

If you’re not proud to be giving a paid speech, and happy to be open about that fact, then it seems to me you shouldn’t be doing it. And that applies whether you’re self-employed or not.

COMMENT

“This is such a non-issue. I wonder if Gretchen Morgensen “ties herself up in ethical knots” when she decides to simply make up a “story”? (D.Black)

Nah – maybe the first couple of times it bothered her a little, but she’s an old hand at it now.

Posted by MrRFox | Report as abusive

Hank Paulson’s inside jobs

Felix Salmon
Nov 29, 2011 14:55 UTC

What on earth did Hank Paulson think his job was in the summer of 2008? As far as most of us were concerned, he was secretary of the US Treasury, answerable to the US people and to the president. But at the same time, in secret meetings, Paulson was hanging out with his old Goldman Sachs buddies, giving them invaluable information about what he was thinking in his new job.

The first news of this behavior came in October 2009, when Andrew Ross Sorkin revealed that Paulson had met with the entire board of Goldman Sachs in a Moscow hotel suite for an hour at the end of June 2008. He told them his views of the US and global economies, he previewed a market-moving speech he was about to give, and he even talked about the possibility that Lehman Brothers might blow up. Maybe it’s not so surprising that Goldman Sachs turned out to be so well positioned when Lehman did indeed do just that a few months later.

Today we learn that the Goldman meeting in Moscow was not some kind of aberration. A few weeks later, on July 28 2008, Paulson met with a who’s who of the hedge-fund world in the headquarters of Eton Park Capital Management — a fund founded by former Goldman superstar Eric Mindich.

The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship” — a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets…

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out…

The fund manager who described the meeting left after coffee and called his lawyer. The attorney’s quick conclusion: Paulson’s talk was material nonpublic information, and his client should immediately stop trading the shares of Washington- based Fannie and McLean, Virginia-based Freddie.

When we found out about the Moscow meeting, I asked how on earth Paulson thought such behavior was OK. But now I think he was downright pathological in giving inside information to his old Wall Street buddies. And the crazy thing is that we have no idea how many of these meetings there were, or how long they went on for — the only way that we ever find out about them is when reporters like Sorkin or Bloomberg’s Richard Teitelbaum manage to find a source who was in the meeting and is willing to talk about what happened.

Given that it’s taken two years since the release of Sorkin’s book for the Eton Park meeting to be made public, it’s fair to assume that there were other meetings, too — possibly many others. Paulson was giving inside tips to Wall Street in general, and to Goldman types in particular: exactly the kind of behavior that “Government Sachs” conspiracy theorists have been speculating about for years. Turns out, they were right.

Paulson, says Teitelbaum, “is now a distinguished senior fellow at the University of Chicago, where he’s starting the Paulson Institute, a think tank focused on U.S.-Chinese relations”. I’d take issue with the “distinguished” bit. Unless it means “distinguished by an astonishing black hole where his ethics ought to be”.

COMMENT

For help with transparency, read this book (See http://www.amazon.com/gp/reader/08070032 12/ref=sib_dp_kd#reader-link)

Have your US Congressperson ask the questions, the reason is the punishment for lying to US Congress is 5yrs in prison. Did that help?

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