Politeía Digest

Quis custodiet ipsos custodes?

Sunday’s New Yorker (X)

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The Financial Page

Are You Being Served?

by James Surowiecki

American workers are mad as hell, and they’re not going to take it anymore. That’s the clear message of flight attendant Steven Slater’s emergence as a “working-class hero,” after he threw his job away with a tirade against passengers and a slide down an exit chute. Slater’s fifteen minutes of fame may be winding down, but his heady time in the spotlight—he was the subject of numerous tribute songs and his Facebook fan page drew more than two hundred thousand people—suggested just how frustrated employees are with stagnant pay, stressful working conditions, and obnoxious customers.

Still, there was something a little surprising about the adulation. After all, the public comprises customers as well as workers, and everyone knows that the contemporary customer is mad as hell, too—fed up with inept service, indifferent employees, and customer-service departments that are harder to negotiate than Kafka’s Castle. Witness the popularity of last summer’s customer-service sensation Dave Carroll, whose guitar was broken by careless United Airlines luggage handlers and who wrote a song slamming uninterested flight attendants and stonewalling customer-service reps. As protest songs go, Carroll’s “United Breaks Guitars” isn’t exactly “Blowin’ in the Wind,” but it has garnered more than nine million views on YouTube. When it comes to customer service, it seems, people are unhappy no matter what side of the counter they’re on. Why can’t we get it right?

For a start, most companies have a split personality when it comes to customers. On the one hand, C.E.O.s routinely describe service as essential to success, and they are well aware that, thanks to the Internet, bad service can now inflict far more damage than before; the old maxim was that someone who had a bad experience in your store would tell ten people, but these days it’s more like thousands or even, as in Carroll’s case, millions. On the other hand, customer service is a classic example of what businessmen call a “cost center”—a division that piles up expenses without bringing in revenue—and most companies see it as tangential to their core business, something they have to do rather than something they want to do. Although some unhappy customers complain, most don’t—one study suggests that only six per cent of dissatisfied customers file a complaint—and it’s tricky to quantify the impact of good service. So when companies are looking for places to cut costs it’s easy to justify trimming service staff, or outsourcing. The recession has aggravated the problem, as companies have tried to cut whatever they could—the airlines, for instance, have trimmed payrolls by sixteen per cent since 2007—but even in more prosperous times there was a relentless emphasis on doing more with less. That’s how you end up with overworked flight attendants, neglected passengers, and collective misery.

In some areas, the push for efficiency can be a boon—the shift toward just-in-time production has helped transform American manufacturing by making it leaner and more efficient. But this approach isn’t well suited to solving customers’ problems. Modern businesses do best at improving their performance when they can use scalable technologies that increase efficiency and drive down cost. But customer service isn’t scalable in the same way; it tends to require lots of time and one-on-one attention. Even when businesses try to improve service, they often fail. They carefully monitor call centers to see how long calls last, how long workers are sitting at their desks, and so on. But none of this has much to do with actually helping customers, so companies end up thinking that their efforts are adding up to a much better job than they really do. In a recent survey of more than three hundred big companies a few years ago, eighty per cent described themselves as delivering “superior” service, but consumers put that figure at just eight per cent. Read more in The New Yorker.

Rational Irrationality

Bernanke Changes Story on Lehman Collapse

Posted by John Cassidy

Could the federal government have saved Lehman Brothers and prevented the biggest financial blowup since the Great Depression? During a week when many policymakers and financiers are still relaxing on the beach, the Financial Crisis Inquiry Commission is delving into this fascinating question, and you can watch some of the action here.

Yesterday, Dick Fuld, the former head of Lehman, claimed the Fed could indeed have prevented Lehman’s demise during the weekend of September 11 and 12, 2008, by lending money to the investment bank in the same way that it subsequently did to other big Wall Street firms, such as Goldman Sachs and Morgan Stanley. Said Fuld: “I submit that had Lehman been granted that same access as its competitors, even as late as that Sunday evening, Lehman would have had time for at least an orderly wind down or for an acquisition which would have alleviated the crisis that ensued.”

Today, it was Ben Bernanke’s turn in the witness chair, and he was asked repeatedly about Fuld’s statements. In response, he repeated an argument he has used many times before: the Fed lacked the legal authority to rescue Lehman. Under an obscure provision of the Federal Reserve Act of 1934, the Fed could lend large sums of money to stricken Wall Street firms—or any other type of firm—but only if the firm could provide adequate collateral. But Lehman didn’t have sufficient collateral for the size of loan that would have been necessary to save it (tens of billions dollars) and the government had no choice but to let it file for Chapter 11. “The only way we could have saved Lehman would have been by breaking the law,” Bernanke said. And he went on: “I was not prepared to go beyond my legal authorities.”

So far so predictable. But for the first time Bernanke also offered a second argument to justify his inaction: even if the Fed had gone beyond its legal remit and tried to save Lehman, it wouldn’t have worked, because the panic enveloping the firm was already too advanced. All along, Bernanke insisted, he was determined to try to prevent Lehman’s demise. Citing his own academic research into the banking collapses that helped prolong the Great Depression, he said he was perfectly aware that if Lehman were allowed to fail, or did fail, the consequences would be “absolutely catastrophic…. I never wavered in my view that we should do absolutely everything we could do to prevent a collapse.”

By the evening of Sunday, September 12th, however, the “run was on,” with Lehman’s lenders and counterparties desperately trying to secure their assets. According to Bernanke, no amount of lending from the Fed would have stemmed this panic. Whether the Fed decided to lend or refused to lend was immaterial, he insisted, the firm was destined to unravel. In Bernanke’s words: “The view was that failure was essentially certain in either case.” Had the central bank gone ahead and given Fuld the emergency funding he was asking for, Lehman would have collapsed anyway, leaving the Fed (and the taxpayer) holding tens of billions of dollars worth of illiquid assets. “Any attempt to lend to Lehman would be futile and would only result in a loss of cash,” Bernanke said in explaining what he and his colleagues were thinking. “It wasn’t just a question of legality. It was a question of whether there was any conceivable option that would work.” The conclusion reached was “there is no way…. If I could have done anything to save it, I would have saved it.”

This is all very interesting, and, in my view, potentially harmful to Bernanke’s reputation. As long as he stuck to his story that saving Lehman was legally proscribed, there wasn’t very much more to be said. People could argue the legal niceties, but they couldn’t really question the Fed chairman’s financial judgment. Now, though, Bernanke has shifted the debate onto the issue of whether saving Lehman would have been a practical option. Here, I fear, he is on much shakier ground.

Recall that right up until Sunday night, Barclays, the big British bank, was ready to take over and stabilize Lehman in the same way that, six months earlier, J. P. Morgan had taken over and stabilized Bear Stearns. The official story is that this option fell through because Barclays needed to obtain shareholder approval for such a takeover, which would have taken at least a few days, and the British government refused to waive this requirement. With the markets about to open in Asia, there wasn’t time to wait for Barclays to do what it needed to do in Britain.

But what if the Fed and the Treasury had made a public announcement that they had approved a takeover by Barclays and were willing to provide Lehman with bridging finance until the deal could be completed? Wouldn’t that have been enough to reassure the firm’s creditors and counterparties? It isn’t immediately obvious that the answer is no.

Many people from Lehman and Barclays suspect that the real barrier to the Barclays rescue wasn’t the legal niceties in London but a reluctance on the part of Bernanke and others—Treasury Secretary Hank Paulson in particular—to fill the gaping gap in Lehman’s balance sheet by providing a Bear-style loan from the Fed, which could have topped fifty billion dollars. Rather than bailing out Fuld and his myopic colleagues, who had failed to heed Paulson’s warnings that they needed to raise more capital during the summer, the Treasury and the Fed decided to let Lehman go under and damn the consequences. Read more in The New Yorker.


Written by Theophyle

September 5, 2010 at 2:45 pm

3 Responses

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