My Breast Cancer Advocacy Focus: A Big Shift

I never set out to be a breast cancer advocate.

Two years ago I was looking for a good cause to align with, as I set out on a cross-country motorcycle trip. When I asked people for suggestions, breast cancer of course came up, but it wasn’t my first choice for a cause. The proliferation of pink events and high-profile news stories for breast cancer made me think I should turn my efforts to something that actually needed some help. Breast cancer seemed to be doing fine without me.

How's this for pink bling?

But when I found out about a group of women from the US and Canada who rode their pinked-out bikes each summer to raise money for breast cancer research, things took off for me. I checked the  Charity Navigator scores of the beneficiaries I raised funds for, and thought my due diligence was complete.

I strapped a pink bra across the windshield of my own motorcycle, a modest effort compared to some of my fellow bikers (like the one pictured right), but nonetheless, people were attracted to that bra. They knew I must be doing something for breast cancer, and stopped me to tell me their story or the story of someone close to them. There were times I’d hear one story at the gas pump, another in the bathroom, and more in the concession area. I had no idea there was so much cancer in the world. My book, Live Full Throttle: Life Lessons From Friends Who Faced Cancer was born of these conversations from the road with strangers and from my fellow motorcycle riders.

 Where’s all that money going?

This year, as I began touring with my book and preparing for my annual road trip, I decided to scratch the mental itch I’d been feeling, the one that suggested there might be something more important I could do for breast cancer causes than raise money. As I deepened my understanding of the cancer charity landscape, I learned that a well-run, high-scoring charity could nevertheless be pouring money into programs that have nothing to do with preventing or curing the disease, the things that interest me most.

I wondered why there was so little money being spent on the environmental and nutritional factors that contribute to cancer rates, and why so much money was channeled to pharmaceutical companies, which make drugs that don’t prevent cancer at all. I started digging, and my research led me to the film Pink Ribbons, Inc. based on a book of the same title.

Pink Ribbons lays bare the conflicting interests of those claiming to have a passion for curing breast cancer, including some of the most-recognized breast cancer charities. The movie also examines how people have been lured into shopping for a cure instead of being activists–holding charities, companies, governments and other institutions accountable for reducing the incidence of all forms of cancer.

I learned that while the Susan G. Komen Foundation has donated over $600m to basic clinical research and the annual Avon walks have raised over $380m for breast cancer causes, there is little to no coordination for the research that’s funded and indeed. The lion’s share of research dollars go to Big Pharma, which has no economic interest in curing the disease. The US federal government’s National Cancer Institute leads 37 agencies, yet there is an endless repetition of research that seeks to find an incremental increase in life (rather than prevention or true cure). Few are researching the kinds of  cancers that metastasize.

The vile business of “pinkwashing”

I also learned about the vile practice of “pinkwashing,” which occurs when companies that produce products that increase the RISK of breast cancer also MARKET these same products to BENEFIT breast cancer.  Avon is guilty of pinkwashing, since it both sells cosmetics that are laden with carcinogens and uses the breast cancer cause to sell those cosmetics (see the above statistic on money raised).  Revlon and Estee Lauder are equally guilty, but pinkwashing transcends cosmetics peddlers. Ford Motor Company is another (of many), since it markets its Ford Mustang to breast cancer patients, while its manufacturing processes are linked to all kinds of cancers.

I’ve decided there should be a special place in hell reserved for pinkwashers like Eli Lilly (because our courts have now decreed that corporations are people, I guess that means they also have a hereafter). Lilly is the only company in the world making and distributing rBGH, an artificial growth hormone found in many dairy products that is linked to increased risk of breast cancer. Eli Lilly also manufactures breast cancer drugs. That’s a highly lucrative profit cycle, deserving of outrage.

Here’s what I learned about the pink ribbons industry from Pink Ribbons, Inc.:

Pharmaceutical companies use money to provide a marketable product, something that will increase survival for a period of time — even three weeks — but which can be very profitable for that slight period of time. “They don’t seem to be interested in prevention, but this is how capitalism works.” ~Ellen Leopold, author of A Darker Ribbon: Breast Cancer, Women and Their Doctors in the Twentieth Century

Big players on the nonprofit boards of the “cancer establishment” are filled with members from pharmaceuticals, chemicals and energy industries. This is a co-mingling of those responsible for the perpetuation of the disease with those trying to cure/prevent it. ~Dr. Samantha King, author of Pink Ribbons, Inc,: Breast Cancer and the Politics of Philanthropy

Of all the millions raised, only 15% goes to prevention; only 5% of research goes to the environmental cause of breast cancer.

Dr. Susan Love

What science knows–and doesn’t–about breast cancer

Here’s what I learned about the disease itself:

>50% of women who are diagnosed with breast cancer don’t have one of the major risk factors that we know about…but most of the research is not targeted at answering those questions.”~ Dr. Mhel Kavanaugh-Lynch, Director of the California Breast Cancer Research Program at the University of California

“Slash, burn and poison*…is what you do when you don’t understand (the disease).”  Dr. Susan Love, President & Medical Director of the Susan Love Research Foundation

 “Only 20-30% of breast cancer happens in women with risk factors. If we can only explain 20-30% of breast cancer, we don’t know what causes it. We’re missing something big and if we keep looking at the same risk factors we’ll miss it.” ~Dr. Susan Love, President & Medical Director of the Susan Love Research Foundation

There are three categories of people who get a cancer diagnosis from a mammogram:

1. Those who have treatable forms of breast cancer, for whom early detection saves lives
2. Others who have something that will never be life threatening, and if it’s treated, the treatment makes them sick/kills them
3. Those who have a form of the disease that’s so aggressive that no currently-available treatment is going to heal, no matter how quickly it’s found

 Questioning our worship for the workings and intelligence of free markets

I’ll never look at cause marketing the same way. THIS is what happens when we throw important public health issues out to the markets for resolution. OK, that decision will take a while to reverse, so in the meantime, how do intelligent, concerned and earnest breast cancer advocates work within this landscape?

Breast Cancer Action suggests asking these five questions before you use your purchasing power to “benefit” breast cancer campaigns

1.         How much money from your purchase actually goes toward breast cancer? Is the amount clearly stated on the package?

2.         What is the maximum amount that will be donated?

3.         How are the funds being raised?

4.         To what breast cancer organization does the money go, and what types of programs does it support?

5.         What is the company doing to assure that its products are not actually contributing to the breast cancer epidemic?

What this means for my 2012 road trip

I’m still going to travel with a pink bra on my motorcycle. But instead of raising money, I’m going to educate.

While we live in a toxic world, we have SOME choices for what we expose ourselves to. Personal care products are a starting point for my education efforts. I want to help people prevent cancer or decrease their chance of contracting it, so I’ll hand them cards with links to both the Environmental Working Group’s Skin Deep database and to Good Guide, where they can research the products they buy for health, environmental and social responsibility

How about it, readers? What do you think I should do with my advocacy efforts? How would you like to join me?

*slash=surgery, burn=radiate, poison=chemo

Breast Cancer,Inc.: Breast Cancer as an Industry

Since my involvement with breast cancer causes, I’ve become acutely aware of the commercialization of the disease. Looks like this filmmaker is ahead of me.

I see that the film will be shown in Richmond, VA on 2/10/12.  My mother-in-law, whose breast cancer metastasized into bone cancer, is buried there. I’m inclined to go up and see the film and the panel discussion afterwards.

The film draws heavily on the book, Pink Ribbons, Inc. Breast Cancer and the Politics of Philanthropy.

Breast cancer advocacy is being transformed from meaningful civic participation into purchasing products.

The pink ribbon has come to symbolize efforts to find a cure for breast cancer. But it has also become a powerful symbol for corporate philanthropy, boosting the image of corporations, that promote products from yogurt to cars, slicing off a portion of proceeds to support breast cancer research. King, a women’s health issues scholar, explores the phenomenal growth of Pink Ribbons Inc.; the annual massing for the Susan G. Komen Foundation’s Race for the Cure 5K runs; and other high-profile events with huge corporate sponsorships. However admirable the effort to find a cure, King argues that it overwhelms efforts to learn how and why women get breast cancer and how it can be prevented. Prevention efforts could help more low-income women who lack the means to pay for treatment. King examines the history of philanthropy and how breast cancer became such a prominent cause, garnering far more support and publicity than other diseases, demonstrating the ability of American women to flex their political and economic muscle on behalf of an important cause. ~Vanessa Bush Copyright © American Library Association. All rights reserved

Six Easy Questions for a Law Firm

One of my clients is looking for a new slogan. Would you please answer these SIX EASY QUESTIONS as part of my research?

Brokers vs Advisors vs Clients’ Best Interests

Last week the NYT ran another story on the screwy financial regulatory landscape here in the States.  With so many financial professionals calling it quits with big firms and hanging out shingles as advisors,  the big money (brokerage firms) do their best to obfuscate their incentive to SELL, rather than ADVISE or MANAGE.

The story ably illustrates how some individual brokers provide advisor-like services while some advisors closely resemble brokers.

One advisor’s view

I interviewed Derek Hernquist, Chief Investment Officer at Integrative Capital, LLC in Charlotte, NC on this matter.

Derek: “It makes no sense to me that there are two standards, and I think the brokerage industry has blurred the lines by changing titles to “financial advisor” from broker or registered rep. Most people I speak with are unaware of the distinction between financial advisors and investment advisors.

“Seriously, how can anyone read this line from the article and not think there’s a problem “Congress is now considering a provision that could alleviate some of this confusion by requiring brokers to act in their clients’ best interest. ‘Requiring brokers?’ Shouldn’t a client be able to trust this is already the case?”

Derek’s a smart guy with principles. While I had his ear I asked a few more questions:

Q: Why did you launch your own advisory practice?

A: I found myself frustrated with my answer when friends asked “What do I do with my money? The growth of Wall St. left investors with an overwhelming array of underwhelming choices. It became harder and harder for the true risk managers to be noticed amidst the race to beat the benchmark. I felt compelled to step in and help filter the noise for those without the time to do so.

Q: Why did you choose Registered Investment Advisor (RIA) registration?

A: I needed complete independence of investment choices as well as fair pricing to give clients a shot at attractive risk-adjusted returns. This eliminates everything but the hedge fund and investment advisory models,and I felt that the demographic I wanted to help was outside the scope of hedge funds.

Q: Compensation is a big issue. How did you determine your fee structure?

A: I love the performance-driven aspect of hedge fund fees, but had to compromise in order to open my tent to individuals that don’t qualify as accredited investors.

In Warren Buffett’s early days, he charged nothing for the 1st 6% of return and asked for 25% of profits above that.  I’d love to do that, but that’s outlawed for non-accredited investors under the 1940 Act. To this point, I’ve settled for charging clients 1% of assets up to a max of $10,000 per year. Account size doesn’t dictate required workload, so this is my way of flattening the cost curve a little as clients grow into accredited investors.

Prompts for Professionals

I wrote about compensation and the need for some honest disclosure on how any professional is paid last June. One of the comments included this observation: “Funny – no one asks their doctor how they get paid either.  Might be worth asking. Most doctors I know have incentive to rush you through their office because they are paid by the HMOs based on how many patients they see per day.”

• If you own your firm, tell your clients why you decided to structure your compensation as you did.   If you work for a broker or agency, tell your clients why you believe the comp structure you work under is fair to you and to them.
• Explain how you balance the competing interests of your financial future and theirs.
• Have an up-front discussion about how they can challenge your ethics.
• Do you belong to a professional organization that requires credentialing?  Tell your clients about the credentialing process and how your preparation and credentialing benefit them.
• Publish your continuing education plans for the year.
• Solicit feedback from clients: what topics do they find most confusing?

How about it? Let’s have a hearty discussion in the comments section.

BofA Taking one for Team USA?

In a banking town like Charlotte, you can’t swing a dead cat without hitting a VP of one bank or another. Well, these days make that “or a former VP.”

One of my friends works for Bank of America and another is a criminal defense lawyer. The banker persists that Ken Lewis and BofA are being singled out for bad treatment by the feds. Here’s what the lawyer says on the matter of Mr Lewis and the Merrill Lynch deal:

Q: Did Mr. Lewis breach his fiduciary duty to BOA shareholders when he did not terminate the deal noting a contractual clause that losses were way over what was projected?

Q: Did Merrill execs enter into a contract knowing of these losses, hiding them in some way and using “fraud in the enducement”? Charges coming against Merrill execs.?

Q: Would BOA’s stock price settled at a higher price when the market hit rock bottom? i.e. not as big a loss to shareholders.

A: If yes, to any of these, then he failed in his duty as CEO. Thus, a jury must decide if that is negligent (fired for that) or criminally negligent or culpable (go to jail for this).

Bottom line: Taking one for the USA team is not a defense, it is mitigating.

Banker Motivation

As I mentioned in December Book Lust I’m reading Dan Pink’s new book Drive: The Surprising Truth About What Motivates Us. The book’s publisher had perfect timing, with  January’s headlines of banker bonuses and the prospect of taxing TARP recipients.

There’s a lot of hand wringing about what will happen to the entire economy if the financial sector is reined in:

• Will “under paid” (therefore presumably under qualified) bankers screw up the economy?
• Will all the good financiers move to hedge funds, leaving our big banks in the hands of a bunch of brain-dead drones willing to work for a mere 25x their average company worker’s wage?
• Is limiting banker compensation the last nail in capitalism’s coffin?

And then there’s the rumor that Goldman Sach’s Lloyd Blankfein will be taking a $100m bonus for 2008′s work. That’s in contrast to the US Census Bureau’s report that the average 2008 per capita income was just under $27k. I don’t think the feudal lords of the dark ages made those multiples.

Before jumping in with Drive‘s analysis of human motivation,  I’ll let The Daily Show guide us down memory lane with those to whom much was given and nothing was demanded:

The evolution of motivation

Mr Pink says Motivation 1.0 centered around survival. Sometimes survival meant stealing a meal or a spouse but eventually the human species figured out that cooperation was a less painful, more humane way to conduct ourselves, and Motivation 2.0 came into being.

Motivation 2.0 centered around punishment and reward and “it is so deeply embedded in our lives that most of us scarcely recognize that it exists.”

Despite its greater sophistication and higher aspirations, Motivation 2.0 still wasn’t exactly ennobling. It suggested that, in the end, human beings aren’t much different from horses — that the way to get us moving in the right direction is by dangling a crunchier carrot or wielding a sharper stick. But what this operating system lacked in enlightenment, it made up for in effectiveness. It worked well, extremely well. Until it didn’t.

The Seven Deadly Flaws of Carrots and Sticks:

1. They can extinguish intrinsic motivation
2. They can diminish performance
3. They can crush creativity
4. They can crowd out good behavior
5. They can encourage cheating, shortcuts, and unethical behavior
6. They can become addictive
7. They can foster short-term thinking

This is not to say that carrots and sticks are always bad

Drive has a chapter on circumstances where punishment and rewards work very well, thank you very much. But we’re headed full gallop into Motivation 3.0, which recognizes that while people are at times profit maximizers (and therefore extrinsically driven), we are also “purpose maximizers,” which means we’re motivated intrinsically as well.

For the word lovers among us, “purpose maximizers” has its own Latinate descriptor: Homo Oeconomicus Maturus (Mature Economic Man).

Bruno Frey, an economist at the University of Zurich says “Intrinsic motivation is of great importance for all economic activities. It is inconceivable that people are motivated solely or even mainly by external incentives.“

Mr Pink lists several highly successful business people who are driven by intrinsics to achieve and even asks us to ponder whether the intrinsically-motivated Warren Buffett and Oprah Winfrey are any less economically successful than Jeff Skilling and Donald Trump (whom most would agree are Motivation 2.0 poster boys). 

What about the bankers?

Americans are stuck in Homo Oeconomicus (Economic Man) mode, instead of Homo Oeconomicus Maturus mode. We aspire to big bucks ourselves, so while there’s still a chance we can make the current system work for us, we’re loathe to reform it. I think this is why we  didn’t DEMAND taxpayer representation on the boards of the organizations we taxpayers saved from the ash heap in October 2008. That,  plus the fact that the moneyed class and the politicians they own have convinced us that we should fear big government more than big business (or perhaps anything else).

We’ve seen what extrinsically motivated bankers can do for society. I’m sure we can find some Homo Oeconomicus Maturus boards and managers out there — aren’t they the ones running credit unions?

Maybe Sir Richard Branson could bring “Virgin Money” to the US, too. The CEO (a woman!) says “Our aim is to make ‘everyone better off’ in the way we do business by offering good value to customers, treating employees well, making a positive contribution to society and delivering a growing profit to shareholders. Our approach to banking is founded on developing a sustainable, savings-based business.”

Finally, I’m not in a position to judge whether Lloyd Blankfein believed himself when he declared that his firm does “God’s work.” Stephen Colbert seems to have an answer to that question:

Because You Can’t Spell Gold without G-O-D

The goddess Juno Moneto from whose name "mint" and "money" are derived

In our current frenzy for certainty in an uncertain world, gold is back in the news. Time for a little context on the current gold rush, starting with a tale from antiquity:

A man who wanted riches dutifully installed a money god in his home altar. He prayed to it for hours every day. His knees ached and his forehead bore a bruise from his repeated prostrations.  He persisted in the fanatical belief that he was on the true path to prosperity despite the daily worsening of his situation.  One day he flew into a rage with the god for all the time he’d wasted, picked up the little clay god and smashed it on the altar board, revealing a cache of gold coins.

The moral? I’ve heard a few including:

• We must slay our conceptions to achieve a breakthrough
• Praying for money brings us to rage and despair
• Money can be hidden in plain sight
• Go deep inside religion/a spiritual path to find true prosperity

The Wizard of Oz: an American tale of gold?

The last time I gave gold any thought was business school ten years ago when my micro-economics prof told us that some people considered The Wizard of Oz to be an allegorical story about America and the gold standard.  BBC News summed up this story, reminding us that Judy Garland’s ruby slippers were a departure from the silver slippers of Baum’s original tale, which some believe represented the promise of a dual gold-silver standard.

Baum published the book in 1900, just after the US emerged from a period of deflation and depression. Prices had fallen by about 22% over the previous 16 years, causing huge debt.

Farmers were among those badly affected, and the Populist political party was set up to represent their interests and those of industrial labourers.

The US was then operating on the gold standard – a monetary system which valued the dollar according to the quantity of gold. The Populists wanted silver, along with gold, to be used for money. This would have increased the US money supply, raised price levels and reduced farmers’ debt burdens.

CHARACTER SYMBOLISM

Dorothy: Everyman American

Scarecrow: Farmer

Tin Woodman: Industrial worker

Lion: William Jennings Bryan, politician who backed silver cause

Wizard of Oz: US presidents of late 19th Century

Wicked Witch: A malign Nature, destroyed by the farmers’ most precious commodity, water. Or simply the American West

Winged Monkeys: Native Americans or Chinese railroad workers, exploited by West

Oz: An abbreviation of ‘ounce’ or, as Baum claimed, taken from the O-Z of a filing cabinet?

Emerald City: Greenback paper money, exposed as fraud

Munchkins: Ordinary citizens

A post-Depression history of gold prices

With a new gold rush in the news I wanted some historical context, which I plucked selectively from USAGold.

April 5, 1933: President Roosevelt, acting under the sweeping authority passed to him by Congress on March 9, invoked his authority to make it unlawful to own or hold gold coins, gold bullion, or gold certificates. The export of Gold for purposes of payment was also outlawed, except under license from the Treasury.

January 31, 1934: President Roosevelt fixed the weight of the Dollar at 15.715 grains of Gold “nine-tenths fine”. The Dollar was thereby devalued from $20.67 to one troy ounce of Gold to $35.00 to one troy ounce of Gold – or 40.94%. The Treasury, which had become the possessors of all the nation’s Gold on the previous day, saw the value of their Gold holdings increase by $US 2.81 Billion. The Treasury now “owned” the Gold, and no one else inside the U.S. was allowed to own any Gold except by the express permission of the Treasury.

Bretton Woods in July 1944: The new ratio of $US 35 was adopted and the U.S. Dollar was made the world’s Reserve Currency.  The now international ratio of 35 U.S. Dollars to one troy ounce of Gold lasted until August 15, 1971.

January 1961: Shortly after President Kennedy was Inaugurated and  newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the U.S. and Europe should pool their Gold resources to prevent the private market price of Gold from exceeding the mandated rate of $US 35 per ounce. Acting on this suggestion, the Central Banks of the U.S., Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the “London Gold Pool” in early 1961.

The Pool came unstuck when the French, under Charles de Gaulle, reneged and began to send the Dollars earned by exporting to the U.S. back and demanding Gold rather than Treasury debt paper in return. Under the terms of the Bretton Woods Agreement signed in 1944, France was legally entitled to do this. The drain on U.S. Gold became acute, and the London Gold Pool folded in spring of 1968.

January 1975: After 42 years, it again became “legal” for individual Americans to own Gold. Anticipating the demand, the U.S. Treasury in particular and many other Central Banks sold large quantities of Gold, taking large paper profits in the process.

July 1979: Paul Volcker was appointed as Fed Chairman while  gold continued to surge, hitting $400 in October. While this was happening, Mr Volcker was attending a conference in Belgrade. There the assessment was made that the global financial system was on the verge of collapse. When Mr Volcker returned to the U.S. from Belgrade, he took a momentous step. He announced that the Fed was swiching its policy from controlling interest rates to controlling the money supply.

I worked at a jewelry store in 1980 and learned how to spot-price our gold merchandise because it was a waste of time to affix labels to the inventory.  U.S. interest rates skyrocketed. As they rose, the dollar first slowed it’s descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted, but at a cost. The U.S. Prime rate hit 20% in April 1980 and stayed there (with a brief dive in mid-1980) until the end of 1981. There was a rush out of Gold and back to Dollars.

Once interest rates began to come down, in early/mid 1982, the choice of where to put the Dollars faced investors once more. The initial solution was just as it had been in the 1970s. The Dow took off – rising from 776 to almost 1100 between mid August 1982 and late January 1983. Gold fell $105 in the last four trading days of February 1983. As it fell, the Dow broke above the 1100 point level for the first time. The long bull market in stocks, and the long stagnation of Gold, had begun.

Post-meltdown gold rush

Fast forward to 2010 with stories about home parties where a jeweler brings in scales to buy party goers’ jewelery.  What gives? As investor Jim Gobetz said to me, “Gold is traditionally (at least in the age of fiat currencies) a hedge against inflation.” Problem is, in certain circles, the fear mongering is unavoidable, deafening and self-serving.  Take Glenn Beck’s hucksterism, as exposed on The Daily Show:

If you prefer something more buttoned down, PBS’s NewsHour did a thorough job examining the current gold rush.

Gold as a sure thing

Gold investor Bob Chapman recently said “Gold and silver are the only real way to protect against financial calamity and offer possibilities for profit simultaneously.”

Really? If so, why are gold promoters letting the rest of us in on the security? Because they want to sell us something and make money on our insecurities. If gold really offered true protection, guys like Beck and Chapman would be hoarding — not promoting.

In The Secret Life of Money, I learned a lot about the history of money, including its many forms, from seashells and porpoise teeth to tobacco and beaver skins, to, of course, gold.  Author Tad Crawford tells stories of how belief in the value of something transcends rationality, and sometimes, practicality.

For example, the Yap people of Micronesia used giant limestone discs for currency.  These discs were so difficult to transport that eventually people left them in place with the communal understanding of who truly possessed the “wealth.”  So isn’t gold similarly “accepted” as valuable despite its impracticalities as a currency?  Do we really expect to carry bullion around? And do we want to carry a beaker of acid with us every day to test the purity of coins and bullion exchanged for goods and services? If we all believe gold is the only ultimate thing with intrinsic and everlasting value, then it is. It’s our belief that matters.

Crawford’s book discusses at great length the connection between money and the divine, from the ancients who minted coins with faces of divinities (see Juno Moneta at the top of the post) to the practice of stamping “In God We Trust” on American currencies since 1864.  ”If the phrase means nothing, perhaps we should put ‘In the Federal Reserve We Trust’…In times of recession and depression, this slogan offers a way to understand why money fails us. Money, although a secular tool, requires our belief in the richness of a divine power.”

I think times like these serve the purpose of reminding us of how uncertain life really is. We middle-class Americans thought we’d somehow transcended subsistence issues like food and shelter, but the meltdown has driven record numbers of Americans onto food stamps and out of their homes. We thrash about for something certain and land on gold — the modern analog of a Micronesian Yap’s limestone.

Security is a head game — as JM Keynes reminded us, “In the long run, we’re all dead.”

Weighing in on the gold rush with some spiritual advice is Baha’u'llah, the Prophet-Founder of the Baha’i Faith:

Busy not thyself with this world, for with fire We test the gold, and with gold We test Our servants.

Private Equity and the Next Credit Crisis

My September Book Lust column included a preview of Josh Kosman’s book, The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, which was released this month.

Monday I heard Kosman interviewed by Fresh Air’s Terry Gross (on NPR affiliates everywhere).

FASCINATING STUFF, including:

• How interest tax deductibility allows private equity (PE)  firms to dodge about $70b in federal taxes
• Why you can’t buy a two-sided mattress any longer
• Why PE  likes the hospital industry (and what it could mean to you if your local provider is bought by PE)
• PE firms (including the companies they own) are the largest employers in the country; even larger than Walmart (by a mile)
• Four of eight former treasury secretaries now in PE.  John Snow (under G. W.  Bush) is now at Cerberus which finagled bailout funds for its company, GMAC, by turning it into a bank (even though it didn’t have capital reserve requirements of “real” banks)
• Buyouts are facilitated by Collateralized Loan Obligations  (CLOs), the private equity version of the mortgage industry’s Collaterelized Debt Obligations (CDOs)
• Returns to PE  investors are below that of the S&P 500

SCARY STUFF, including:

• The conservative Boston Consulting Group estimates that half the companies owned by PE will default on their loans or go into bankruptcy
• If these companies lay off half their employees (which is reasonable) another 1.9m people will be out of work, which will ripple through the economy in consumer spending, mortgage foreclosures and so forth
• The trillion in bad debt will freeze lending everywhere
• Of the current 11% corporate loan default rate, 50% has PE involvement. Tsunami of defaults has begun

Prescription

Kosman would like to eliminate interest tax deductibility for corporate takeovers. This would make LBOs unprofitable and end the industry.

Why is the end of private equity considered a good thing?  Don’t buyout firms improve companies? According to Kosman,  PE firms only put down about 20% of the purchase price, then use CLOs to fund the remaining 80%. The acquired company has to service the debt out of profits instead of spending that money on R&D and other capital expenditures. PE has a 4-5 year horizon on its exit, so they’re not running companies for the long haul.  Theoretically, everyone’s supposed to win with PE, but the record shows that few do.

The Obama administration is reportedly looking into this.  Paul Volker is charged with considering the whole tax code, including tax deductibility of interest for buyouts.

Writing Prompts for Blogs and Newsletters:

• Here’s your chance to defend PE, and the enabling triumvirate of i-bankers,  hedge funds and ratings agencies!
• Do you work for a pension fund that invested in CLOs? How will you assure participants that YOUR CLOs will perform in spite of the 11% corporate loan default rate Kosman cites?
• GMAC fired its CEO this week. Do you regret giving TARP money to this non-diversified auto lender-cum-bank?
• Do you have a better idea for recouping the estimated $70b in federal taxes lost to PE deals than dis-allowing interest deductibility? Are we in for a national value-added tax or sales tax?

Die Broke Blogger

Follow your bliss and the universe will open doors where there were only walls ~Joseph Campbell

This month I began blogging on small business and the meltdown on the Die Broke blog, part of the StockTwits network.  My focus is helping small business owners deal with creditors, the IRS, family members and their own inner demons.

What qualifies me for this assignment? Personal experience.

Since shuttering the industrial cleaning businesses in 2007 I’ve continued to deal with creditors (including friends and family), the IRS and a loss of face.  I’ve learned a great deal about financial law, pondered business ethics and done a lot of navel gazing.

It is by going down into the abyss that we recover the treasures of life. Where you stumble, there lies your treasure ~Joseph Campbell

I won’t chronicle the whole debacle here…it will unfold over time over on Die Broke. But I will say that my entrepreneurial “failure” freed me to pursue the writing career I was always told would never be mine.  How?  Janis Joplin’s raspy lyric explains it best: Freedom’s just another word for nothing left to lose.

In 2008, with no money to invest in a different company, a dismal job market and absolute loathing of corporate America anyway, I gave myself permission to hang out my shingle as a business writer.

The privilege of a lifetime is being who you are ~ Joseph Campbell

Fortunately my husband still has a job. The best off-balance-sheet asset an entrepreneur has is someone who lets them bunk in rent free.  Thanks, Matt.

More Joseph Campbell bon mots:

• We must let go of the life we have planned, so as to accept the one that is waiting for us

• Your life is the fruit of your own doing. You have no one to blame but yourself

• I think the person who takes a job in order to live – that is to say, for the money – has turned himself into a slave

• Is the system going to flatten you out and deny you your humanity, or are you going to be able to make use of the system to the attainment of human purposes?

• Opportunities to find deeper powers within ourselves come when life seems most challenging

• The big question is whether you are going to be able to say a hearty yes to your adventure

• The goal of life is to make your heartbeat match the beat of the universe, to match your nature with Nature

Dan Ariely 3 of 3: Trust and Healthcare Reform

In the first of this three-post series I offered a sound file of Dan talking about the limits of rationality when devising and regulating public services.

In the second, we explored how  Treasury’s un-trustworthiness dealing with TARP and the financial meltdown has led to social anxiety and depression.

While writing that second post it occurred to me if our elected and appointed officials been truthful and upfront in their dealings with $700b bailout, we’d already have a healthcare reform bill.

It also occurred to me that we hold public servants to a higher standard than CEOs of healthcare. When healthcare execs earn blood money by standing between us and our doctors, we shrug it off by saying “Hey, that’s just capitalism,” or “Oh well, cost of doing business,” but when our elected officials stand between us and our doctors we get nuts because that’s rationing.

What Ariely has to say about our beloved invisible hand of the market

In the updated version of Predictably Irrational, Ariely observes about his own profession:

Rational economics has always been the basis for setting up policies and designing our institutions. What’s wrong with that? Neoclassical economics is built on very strong assumptions that, over time, have become ‘established facts.’   Most famous among these are that all economic agents (consumers, companies, etc., are fully rational, and that the so-called invisible hand works to create market efficiency). To rational economists, these assumptions seem so basic, logical, and self-evident that they do not need any empirical scrutiny.

Building on these basic assumptions, rational economists make recommendations regarding the ideal way to design health insurance, retirement funds, and operating principles for financial institutions. This is, of course, the source of the basic belief in the wisdom of deregulation: if people always make the right decisions, and if the “invisible hand” and market forces always lead to efficiency, shouldn’t we just let go of any regulations and allow the financial markets to operate at their full potential?

On the other hand, scientists in fields ranging from chemistry to physics to psychology are trained to be suspicious of ‘established facts.’ In these fields, assumptions and theories are tested empirically and repeatedly. In testing them, scientists have learned over and over that many ideas accepted as true can end up being wrong; this is the natural progression of science. Accordingly, nearly all scientists have a stronger belief in data than in their own theories. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful, logically appealing, or mathematically convenient.

Unfortunately, such healthy scientific skepticism and empiricism have not yet taken hold in rational economics, where initial assumptions about human nature have solidified into dogma. Blind faith in human rationality and the forces of the market would not be so bad if they were limited to a few university professors and the students taking their classes. The real problem, however, is that economists have been very successful in convincing the world, including politicians, business people, and everyday Joes not only that economics has something important to say about how the world around us functions (which it does), but that economics is a sufficient explanation of everything around us (which it is not). In essence, the economic dogma is that once we take rational economics into account, nothing else is needed (emphasis added).

In sum, we trust theories more than facts.  No wonder we’re in such a quandry.

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