On Rajat After The Verdict

A month ago on June 15 a jury found Rajat Gupta guilty of insider trading.  He faces sentencing with substantial jail time in October, although he will appeal and his lawyer said "This is only Round 1."  His best case scenario is overturning of the verdict on appeal, followed by retrial with a more favorable outcome - a harrowing process that will last years.

Headlines like the one in WSJ said "Insider Case Lands Big Catch" but this is misleading. It implies snaring someone who played a huge part in, or was at the root of insider trading.  Instead, Rajat's "bigness" lies in his fame and prominence in contributions to business and philanthropy, or the respect and esteem he was held in prior to being charged in this insider case. Any wrongful gains as a result of his alleged insider tip-offs adding up to a few million dollars to his friends (none to him personally) are dwarfed by his positive contributions to society, business and philanthropy.  Those could easily run into tens of billions of dollars, if quantifiable in monetary terms, quite apart from the way he profoundly touched people in personal contact with him.

Assuming he's guilty as charged (a jury's findings don't necessarily make it so) what caused him to act that way?  Even the prosecution said it wasn't for greed or "quick profits but rather a lifestyle where inside tips are the currency of friendships and elite business relationships." The Financial Times on June 19 and the WSJ on June 18 offer insights on how the Indian culture and way of helping friends could have affected Rajat's perceptions about passing on inside information.  While it is illegal just like in the US, "insider trading is widespread in India, and often not considered a serious crime."

Anant Rangaswami in his June 16 article "Rajat is no criminal, he's just an Indian" in FirstPost says, "... in India, many of us are bemused by the accusations and the conviction. A man goes to jail because he shared information with a friend? By that yardstick, half of India would be in jail.  Knowing people in power and to benefit from the knowledge and contacts that they possess is the ladder to success that Indians have recognised centuries ago.  It’s an ethos and a culture – and it’s deep-rooted...That’s the first step to insider information, to an unfair advantage.  But that’s what India is all about – having the contacts and taking advantage of the contacts to give one an edge...The moment everybody does it, we forget that, in the first place, what is being done IS wrong. And when everybody does it for decades and centuries, it’s so much a part of us, part of the way we behave and interact." 

But the US is very different with very tough laws against leaking of and trading on non-public information, right?  Well, no. It just depends on who is doing the leaking and the trading, and on the type of information.  Rampant legalized corruption existed right through till April 4, 2012 when under media glare and public pressure the Stop Trading On Congressional Knowledge (STOCK) Act was finally passed.  Till then Congressional leaders and their staffers could freely trade on stocks even if they knew these would be drastically affected by their pending or forthcoming legislation that wasn't public knowledge.  And even this law has deliberate loopholes that would let a truck through.

For instance, Ron DeLegge in ETFguide on April 12 writes: "When a hedge fund or an influence peddling individual wants inside information, they can still buy it – by paying members of Congress or other high level officials for something called "political intelligence." This rogue but still legal practice of gathering information from lawmakers and Hill aides is regularly used by Wall Street to steer money into profitable investments. It's nothing more than legalized cheating, because he with the most money and political influence wins.  CASE STUDY: Former US Treasury Secretary, Henry Paulson sold political intelligence when he tipped off hedge funds about Fannie Mae's rescue in 2008 while he was serving as the U.S. Treasury Secretary. Paulson's hedge funds pals made billions in illicit profits. That type of unethical conduct is still legal under the "new and improved" STOCK Act. ... Here's another gaping omission: The STOCK Act still allows elected officials to own stock in industries they can affect with their political power." 

On the non-government side another Paulson, hedge fund manager John ("JP") Paulson, packaged the worst mortgage backed securities he could find into the "Abacus" fund and bet heavily against them.  He then colluded with Goldman Sachs to dupe its own clients into buying these funds, causing them heavy losses.  "JP" as the counter party made $1 billion from this and got clean away with it. And a July 15, '12 NYT story describes how hedge funds and big investors widely use as yet non-public analyst inputs to gain improper trading advantages.

In sum the ethos in India as well as in US financial circles may have shaped the actions of an otherwise upright Rajat whose goodness and modesty I saw and mentioned in my March 29, '11 post.  He may not have considered it that big a deal to share scraps of yet-to-be-public information with a friend, especially if he was not personally benefiting from this.  Of course he must now be regretting if he did it, and is paying a terrible price.

Interestingly, my May 12, '12 post analogy about even Mother Teresa being prosecuted in our justice system if she committed a robbery was repeated almost verbatim by Judge Rakoff in court 5 days later.  He may have seen my post, or simply thought of the same analogy.  Either way he also hopefully considers a person's history of good deeds and overall conduct, though irrelevant in the charging and jury trial stage, to be a key factor when it comes to sentencing. 

Rajat is almost the diametric opposite of a face for financial greed and misdeed.   Unsavory Wall Street titans often give a portion of their ill-gotten wealth to charity or philanthropy to burnish their image, salve their conscience or feed their egos while lavishing the rest of it on themselves.  Rajat in contrast has used his talents and energies for doing good that outweighs the value of alleged illegal favors to friends by a thousandfold.  As for any personal gains he made none and ironically was instead stiffed out of $10 million by Rajaratnam who quietly withdrew his own investment from his ailing Voyager fund without informing Rajat. 

Some of the more sympathetic media coverage has highlighted Rajat's contributions and philanthropy in the abstract sense.  Yet just as much it's the personal goodwill and concern for those around him that has rallied friends to his side, including the 300 plus who signed an open letter at a website set up to support him.  I've interacted with him just about a dozen times, and yet he made a profound impression.  To see why, consider for example my first meeting with him and his ever warm and kindly wife Anita. (They may not even recall any of this as I understand that this was quite typical of their behavior.)

It was early 1991 and my family had just joined me from Shimla, India a few months after I joined my Ph.D. program at the University of Chicago.  The saintly Mr. P.K. Mattoo, retired Chief Secretary of Himachal state and my ex-boss whom I loved and respected had sent a little gift packet through my wife Anita to be given to his niece Anita Gupta.  All we knew through Mr. Mattoo was that his niece had married a fellow IIT student named Rajat "who after completing his MBA in the US had settled into a nice job in Chicago."

 I called Anita Gupta and learned they lived in the northern suburb of Winnetka on the opposite side of Chicago from our Hyde Park campus.  We combined dropping off their packet with a Sunday evening drive to pick up Indian groceries and dine in Chicago's Indian sector of Devon Street that was much closer to their home.  Keen to spare them any hassles (as we were strangers merely carrying an uncle's gift) I said to Anita Gupta, "We'll just have eaten so no food or drinks for us. We'll hand over the package, say hi and be on our way home. We'll be a little late - will about 8 to 8:30pm be okay?"

"Agreed, and that's perfectly fine," Anita Gupta assured.

We were late reaching Devon driving in traffic on unfamiliar roads (this was before the GPS and cell phone era) and further bogged down in shopping amid the crowds.  I reached Anita Gupta from a pay phone and asked if arriving as late as 9:30pm was okay as we'd been held up.  She again said it wasn't any problem.  "Remember, no food or drink for us," I reminded, "and we won't stop at this unearthly hour." "Okay, Baba," she said, "but just come in for a minute."

Using maps and directions we actually reached the Gupta home after 9:45pm.  The large estates and stately homes in the area set it apart from our typical neighborhoods.  Anita and Rajat with their three daughters behind them (their fourth was just a few months old) welcomed us at the door of  their mansion-like home.  After handing Mr. Mattoo's packet at that late hour on a Sunday we were ready to leave but Anita and Rajat urged us to come inside.

We were surprised when they led us to a large dining table set with four placements and a nice dinner.  They had guessed (correctly, despite my fibs on phone) that we may not have eaten properly at Devon.  "We've kept a little food for you," said Rajat softly, sounding almost apologetic for having ignored my request not to serve us anything.

Our kids had had a long day and our older daughter Sheena wanted to lie down right away.  Anita Gupta made soothing noises and their eldest daughter Geetanjali cheerfully led the way to her room where Sheena hit the bed and promptly fell asleep.

Then Anita Gupta and Rajat who had already eaten sat with us at the dining table as Rubina, Anita and I tucked into the food.  By the time we were done, both the Anitas were chatting like good friends as they cleared the table and put the dishes away.  The Gupta daughters were remarkably sweet and unspoilt considering their family's obvious wealth.  After dinner the elder three took Rubina away for play and kept her happily occupied.

Rajat and I went to the living room to be joined later by the two Anitas.  Rajat was as good a listener as he was gracious and time passed quickly.  I looked around and solemnly proclaimed that his company must be paying him really well to have a home like this.  The Guptas laughed and Rajat explained what he did.  That's the first time I had heard of McKinsey and it sparked my interest in management consulting.  He didn't let on about his stature at McKinsey.  Nor (so as not to rush us and I only learned of this by chance) that he had to leave for work at 6:15am the next morning.

When we finally collected our kids to leave the Guptas came out to see us off.  They weren't at all fazed at the sight of our battered old Honda Accord hatchback sitting incongruously in their driveway, and Rajat opened its door to help me settle the children in the rear seat. They solicitously gave us directions to I-94S for the drive home and we were on our way.  It was past 11pm.

 

Union Bashing - Good Or Bad?

How do I perceive unions, particularly public employee unions?

My childhood memories are of the already slow and congested life in Calcutta (now Kolkata) coming to a halt during general strikes called "bandhs" that occurred all too often.  On the good days workers would take time off after their lunch break to stage demonstrations in support of "worker rights" that meant more pay, less work, and more additions to already bloated payrolls.

We then moved to the scenic hill station of Darjeeling (of tea fame) with little union activity where I spent my middle and high school years.  But union activity and strikes were much in fashion when I entered college at the University of Delhi.  Most colleges in our 110,000 strong University used to be closed for a couple of weeks a year due to strikes by students and non-teaching staff (called "karamcharies".)

The University karamcharies earned about 50% more than their counterparts in the private sector.  Our college education was publicly funded and nearly free and few of us were aware of what exactly were the demands of the striking students.  To most it seemed a way to avoid classes and inject a little excitement by clashing with authorities.  Our own St. Stephen's College with 1000+ students was one of the very few (of the nearly 100 colleges and departments comprising the University) that refused to take part in any strikes.  So police would be posted outside our gates to guard against trouble by outside strikers who resented our non-involvement.

Years later after joining the IAS I was on the other side, with my fair share of handling public union negotiations, agitations and strikes.  One of my later stints was as Municipal Commissioner (city manager) of Shimla city that had one of the most militant public unions.  They would strike or disrupt services about twice a year in spite of the Essential Services Maintenance Act (ESMA) that made these jail-able offenses.  That's because ESMA was never invoked, or action under it was rapidly withdrawn as a precondition for any settlement.  Of our 1100 employees, we had over 600 sanitation workers as part of previous concessions to the union though we needed no more than 400.  Their pay and benefits were double of those in the private sector.

Early in my Shimla MC tenure the union went on strike and their staff threw buckets of human feces in my office in appreciation of my engaging temporary replacements to keep the city going.  It took me and my team almost a year to draw up contingency plans and train home guards to distribute water and run other facilities in case of future stoppages.  In a subsequent strike, I used these preparations to maintain services, deployed armed police to guard our strategic installations against sabotage and invoked ESMA to penalize strikers and restore normalcy. It was the first time this had happened in the (then) 120 year history of Shimla, and put a stop to labor troubles for the next three years.

 By then I had come to the "capitalist" US and expected things to be very different here, but there are commonalities.  Political leaders here also tend to make deals with public unions to smooth their own tenure even while giving away long term benefits that devastate budgets down the road.  Then there are the illegal strikes disrupting essential services that are barred by US laws (also all too often failed to be invoked by the authorities).  For example the New York transit strike of 2005 disrupted life for millions and violated the Taylor Law (similar to ESMA) but the violators received a mere slap on the wrist.  Then there are the airline pilots unions who get around strike bans by staging mass sick-outs.  Employees avoiding duty by falsely claiming to be sick can be fired, and the management can easily require medical testing by an independent board in such circumstances, yet this abuse is taken in stride.

Even in the broader philosophical context one can question the value and social contributions of unions.  Collective bargaining had a big and useful role to play in the old days when a few large and powerful employers could collude to keep wages and benefits artificially low.  Or when a race to the bottom (in costs) could cause unsafe conditions or extreme hardship in the absence of public safety laws.

But most or all of this is now inapplicable since mechanisms are in place for protecting workers through anti-trust laws, OSHA, the Minimum Wage Act and the like.  It is these laws that ensured a five day work week, stopped child labor and promoted worker safety much more than the unions, contrary to claims by film maker Michael Moore on Stephen Colbert on his March 29 show, or by union leader Richard Trumka in a WSJ Op-Ed on March 4.

Almost by definition so long as there is no employer collusion or monopoly, union activity is an attempt to secure wages and benefits over and above the free market level.  In the latter the workers are free to go (or be wooed away) to where they get the best compensation for their services, according to their perceived worth.  Instead, collective bargaining can look a lot like collective blackmail, as when workers at the GM plant making engine transmissions threaten or go on strike bringing most production to a halt.  No wonder US manufacturers want to diversify production globally to make them less vulnerable, and it's not just to go to where labor costs are lowest. 

So yes, I'm not a fan of unions nor view them as net contributors to public welfare, as their raising of US labor costs has contributed at least partially to the current level of unemployment.  There are some pro-union laws and practices that beg for change.  For example, see how the National Labor Relations Board (NLRB) is trying to force Boeing to locate its Dreamliner assembly plant in heavily unionized Washington State, instead of in South Carolina.  In 2008 Boeing workers in Washington went on a 58 day strike that cost Boeing $1.8 billion.  So Boeing management understandably wanted to instal new plants in less unionized and more business friendly locations.  The NLRB interpreted this as illegal retaliation against union activity.  The WSJ in its April 21 Opinion pages rightly deplores NLRB's sandbagging of Boeing and calls for a change in such a system.

And what of Republican efforts to restrict bargaining by public unions on matters other than their salaries, or do away with compulsory contributions by workers to their union funds?  In principle I find little wrong with that.  We already know that politicians are not mindful of future liabilities that their concessions to unions can impose on future administrations.  That's a big reason why our states and local governments are in budgetary crises.  As far as union contributions go, why should workers be forced to contribute if they don't want to?  That's the situation in the "right to work" states in the South that employers find more attractive, and such forced contributions did not commonly exist even in more socialist countries like India.

On the other hand I'm perfectly fine with the unions launching concerted drives to mobilize public opinion against Republican union busters, and trying to recall elected representatives as they are doing in Wisconsin.  Besides, Governor Scott Walker and his fellow Republicans in Wisconsin have been quite weaselly in their actions.  For instance, they have specifically exempted police and firefighter unions from the new restrictions, apparently because these union members traditionally lean Republican.  These uniformed personnel that are vital to maintaining security and safety should be specifically barred from union activity, as they are, even in India, let alone favored with special exemptions.

Indiana and Ohio states under Republican leadership have also moved to curb the scope of collective bargaining by public employees.  But they have sought a more uniform implementation without picking any favorites, so their actions are fairer and a better blueprint for change than those of Walker & Co. in Wisconsin.

The Rajat I Know

A rather sanctimonious mass email I've received is prompting this post.  Rajat Gupta, former head of McKinsey has been widely praised and admired though he is now in the news for passing material non-public information to Raj Rajaratnam (RR) of the Galleon hedge funds.

The email titled "How Much is Enough?" echoed some other chatter about how the wealthy and highly respected Rajat let greed get the better of him and ruin his reputation by abetting insider trading.

I feel compelled to balance the picture about Rajat whom we know personally since 1991 when I had just come to the US for PhD studies at the University of Chicago.  I knew nothing of McKinsey or what he did at that time, and we drove to his house simply to deliver a gift from India sent through us by one of my favorite ex-bosses in the IAS.  That was Mr. P.K. Mattoo, Chief Secretary of HP state till 1987,  and uncle of Anita Mattoo Gupta, Rajat's wife and a warm, wonderful person whom he met as a fellow student at IIT Delhi. 

I've rarely seen anyone more gracious, modest and personable than Rajat, in spite of his brilliance and success at McKinsey.  He was that way in all the subsequent times we met him, and Mr. Mattoo told me how Rajat was ever ready to sleep on the floor when he and family would visit and stay with them in India. In 1994 after Rajat became head of McKinsey, my friend Harsh from the University of Chicago who joined McKinsey told me about how he and other fresh recruits met Rajat at a welcoming party for them.  He said the recruits were blown away when Rajat came up to them individually, put out his hand and diffidently said, "Hi, I'm Rajat Gupta," before chatting with them.  "As if anyone in the gathering didn't know who he was," Harsh marveled, "And he was on the cover of many major magazines."

We saw Rajat and family after a gap of of over 10 years in June 2009 at a high school graduation party for the daughter of Sunil, Mr. P.K. Mattoo's son.  Rajat was as unassuming and cordial as ever, and introduced us to his daughter and her African American husband who had been warmly welcomed into the family.  We also learned about Rajat's hectic schedule, working for free with non-profits, including with the Gates Foundation (that he's now stepped down from) to help eradicate malaria.

While he certainly violated confidentiality as a Goldman Sachs director in his conversations with Raj Rajaratnam, he seems to have done it out of a misplaced sense of friendship, without profit to himself.  I saw SEC's most damning evidence against him, this 18 minute transcript of his call with RR.  The disclosure seems incidental to the main conversation, and as a result of RR pumping him for information.

The other striking incident cited is Rajat calling RR seconds after a Goldman board meeting where Warren Buffet's $5B investment was disclosed.  Minutes later RR placed bets on Goldman shares that netted Galleon $900,000.  To me, it's very out of character for Rajat to call someone just after receiving confidential information to tip them off for illicit gain.  Even a March 7 Times article referred to some curious aspects of the SEC's case against Rajat.

The kind of scenario I'd envision is that RR tracked scheduled board meetings and timed messages requesting a call back to Rajat accordingly.  After meetings are over the attendees typically get to their other activities, including returning calls, as Rajat did with RR.  Then in the course of other conversation that was ostensibly the purpose of RR's contact, he casually asked Rajat some leading questions about Goldman, and pounced on any resultant cues.  RR is obviously sharp as a whip, but his laid back style and humor interspersed with personal chats could disarm a friend into revealing more than he should.  Rajat's amiable and forthcoming nature could make him hesitate to clam up and pointblank refuse to answer RR's "incidental" questions.

In sum Rajat's approachability and helpfulness has apparently proved to be his undoing.  His lack of motive or ill intent seems to be why he hasn't been criminally prosecuted, though he's had to resign all his board positions and suffer ignominy. 

Sometimes bad judgment or carelessness can land very good people in trouble.  I'm sorry to see Rajat in this plight and hope he gets out of this okay.

Landmark Half-Measures

This is just the latest of the Obama (and Congress) half-measures that have been widely labeled as "historic", "unprecedented" and "landmark".  I'm referring to the Financial Reforms Bill signed into law on July 21st.

It started with the $800B economic stimulus package of Feb. '09 that Paul Krugman warned even at the negotiation stage as being very inadequate,and reiterating these concerns after Congressional agreement. His fears of a stalled recovery have been realized.  Next we had the Afghanistan surge of troops, but with delays and declaration of a withdrawal starting in July 2011 - signaling intentions to embolden the enemy though leaving some leeway.  Then of course there's the health care overhaul of Mar. '10 but without even the public option, leave alone the far more appealing and cost effective "Medicare for all" (aka "single payer") push.

Which brings me back to the financial reforms law.  It is huge and complex, yet leaves almost all the important safeguards against a meltdown to be put in place through subsequent regulations by government agencies.  That's great for bankers and their lobbyists who can get all the loop holes and escape clauses inserted while working with regulators.  If they can win over hundreds of lawmakers, why not a few dozen regulators behind closed doors?  Krugman points to further timidity by the Obama team - they are even dithering over nominating an obviously great fit like Elizabeth Warren to head the new consumer financial protection agency.

But that's not all.  Regulations can be changed by successive administrations, without further legislative oversight.  That means that even if the present crop of  regulators do their job well and insert the right checks and balances, all this can be undone by a future Bush clone who assumes the Presidency.  Knowing this, even the Republicans beholden to bankers and supporting them may not be quite so upset with the new law.  And as seen in the current crisis, it can take many years for the negative consequences of lax oversight to surface, while banks can start to profit almost immediately.

This means that a future regime that loosens regulations that unfairly helps banks can benefit from their patronage.  Yet such an administration can quite possibly escape (or at least get the benefit of the doubt for) the blame for planting the time bomb that causes a financial disaster on a successor's watch.  

Other instances of the Obama and the Congressional Democrats collectively lacking courage are in enacting effective energy legislation, and perhaps immigration reform.  In energy we couldn't even have the weak cap and trade system passed, leave alone a stiff gasoline tax that can fund alternative fuel development as espoused by Thomas Friedman for years.

My take even on Obama "victories" is generally of his doing a lot when cornered into having to act, yet without doing enough.  It's almost like trying to save half the patient.  And it's not a question of being a centrist, but being ineffective.  I believe his taking the lead and acting more vigorously and decisively on contentious issues would help rather than hurt the Democrats in the 2010 mid-term elections.  It would not only rally his disheartened Democratic base, but also win the respect of more independents. 

But some initiatives did work well.  The response to the H1N1 "swine" flu epidemic was good overall, and overestimating the demand for the swine flu shots and the resultant oversupply was much better than if they'd underestimated it.  On the gulf oil spill the Obama team could have acted faster and forced more skimmers to be mobilized, including those from other oil companies.  But it did force BP to pay into a $20 billion fund despite Republican condemnation and appointed Kenneth Feinberg to administer compensation (with luck speedily and impartially) from it.   

Hopefully they can build more upon these types of successes in the time to come.

Guarding Your Tail

Imagine you are running a $100B company. Your personal salary is 2% of the excess earnings (over and above the safe treasury rate) of your company. You secretly bet your company's fortune so you get an extra 1% of return on investment with 98% probability, but your company can lose everything with a 2% probability.

Any bookie can see these are terrible odds for the company since the "expectation" is (0.98 X 1) - (0.02 X 100) = -$1.02B. In other words your actions will cause your firm to lose $1.02B a year on average over a long period of time.

But if you are mainly concerned about about your own earnings during your 5 year tenure at the top, then making this bet makes perfect sense. There is an over 90% chance that your company gets that 1% for all five years, netting you $20M every year. If they are unaware of the chances you've taken, then your investors will attribute your "success" to your superior managerial capability. And if that calamity does occur wiping out your investors, you personally get to walk away paying nothing. You even keep your past earnings, go yachting and getting your life back, as BP's CEO Tony Hayward would say.

That in essence is why people can have strong incentives to take on tail risks defined as very unlikely but catastrophic events. Instances of such tail risk taking include:
a) The aforementioned BP spill, where cutting corners and ignoring safety imperatives can save oil companies hundreds of millions of dollars a year. While the other oil chiefs solemnly swear to the complete safety of their practices, they know the chance of any such false claims being exposed on their watch is very low. Just as it was for Tony Hayward who was unlucky enough to have lost the reverse lottery. But the the risk of something terrible happening is very high, when aggregated over all the operating companies and the tens of thousands of wells operating under loose regulations.
b) The financial meltdown led by the collapse of the sub prime mortgage loans market. The easy money architects like Alan Greenspan thought the risk was very low. Many lenders, traders and money managers (backed by their rocket scientist quant analysts) knew that a drop in real estate prices could be catastrophic to the derivatives market. They just figured that the bubble wouldn't burst in their short term trading horizon, and someone else down the line would take the fall. Or if they were too big to fail, that they could collect on the upside while a lot of the downside would be borne by taxpayers. They were right on many counts. Even Goldman Sachs which famously dodged the bullet would have done badly if the housing price collapse had started a year earlier, before they unwound their positions.
c) Hurricane Katrina and the damage to New Orleans. Generations of politicians and lawmakers avoided raising and strengthening New Orleans' barriers. These would have guarded against the very unlikely possibility (in their watch) of a Category 5 hurricane directly hitting the city. They instead could divert such resources for popular "pandering" projects that would win them accololades and political support, with no one the wiser about the risk that did not materialize. But a city's life should be measured in centuries (think of the Netherlands' dikes) and over that horizon the risk was very high.
d) Other as yet unrealized disasters like nuclear accidents (assuming Three Mile Island wasn't bad enough and a while back) or earthquakes where safety codes are not strong or enforced enough.

The common factor in all these instances is that the people taking the risks on average derive a huge benefit from doing so, even if this is severely detrimental to the affected populace. That's why leaving the regulation and policing to the private industry can be so harmful. These special interests can lobby fiercely, or use a portion of their expected benefits to bribe or buy support and intimidate opposition that wants tighter controls.

At "my" University of Chicago the majority academic view leaned heavily towards private enterprise and self regulating markets. It went way beyond the concept of "efficient markets" relating to stock, etc. prices that makes intuitive sense. Many of the arguments and reasoning I heard in support of this more extreme "private and unregulated is generally the best" view was not convincing to me. It generally cited historical correlations between free enterprise and economic prosperity. Many of these no longer hold as even Andy Grove pointed out on July 1 in BusinessWeek in a different context of job creation and the rise of China and other controlled economies.

Still, to its credit the University of Chicago does tolerate dissent and fosters diversity of opinion. Paul Krugman in his April 9, 2009 NYT column, pointed to Raghuram Rajan of this school presciently warning back in 2005 of the risk of a financial meltdown, absent adequate controls. Now we just need to have lawmakers and politicians step up to the plate and have the right government safeguards to watch our collective back - and tail.

More J&J Shenanigans

As I suspected my Listerine experience mentioned in the last post was not just a one-off by J&J. It looks to be part of a pattern created by the top management placing quick growth and profits over ethics and long term reputation and performance.

Here are other recent instances:

• The Justice Department in January accused J&J of bribing nursing home drug procurer Omnicare with tens of millions of dollars to buy and promote its drugs. The kickbacks allegedly increased J&J's sales through Omnicare from $100 million annually to $280 million. The inappropriately administered drugs like Risperdal increased the risk of death for many patients with dementia.
• A subsequent March 11 BusinessWeek article (March 22-29 issue) reports an "explosion of litigation" by states against J&J over illegally marketing Risperdal for unapproved uses. The practices included getting paid doctors to plant questions from the audience so they could talk about off-label uses. J&J may end up paying billions to settle this.
  
• Last week J&J recalled 40 of its pain and allergy drugs for children including children's Tylenol. These drugs were contaminated or had the wrong strength of ingredients, and J&J's may be guilty of criminal (not just civil) misconduct. It's ironical that the government is advising consumers for their children's safety to switch from branded J&J products to their generic equivalents.
• BusinessWeek on April 29 reported J&J will pay over $81 million to settle criminal and civil cases over improper promotion of its drug Topamax.

J&J of course is not alone in cutting corners and acting improperly. It's just no better now than the rest, and the loss of its reputation is likely to cost it much after its current management and CEO have departed. To consumers that means being wary of it, and regret its exit from the small pool of iconic brands that we over the decades had learned to trust.

Beware of New Listerine Claims and Products

For over 17 years I have used Listerine mouthwash continuously on the recommendation of my periodontist, after getting religion on dental care. Its current maker and distributor Johnson & Johnson (J&J) bought the brand from Pfizer in 2006.

I had thought highly of J&J after reading a business case of the way it had handled a major crisis. It had launched a massive campaign, recalled 31 million bottles and reassured its customers following the 1982 Tylenol poisoning murders. That was 28 years ago.

Now it's very different. J&J seems (like Pfizer) to be all too willing to engage in deceptive marketing and mislead customers so long as it doesn't technically violate the law. Take Listerine.

Advanced Listerine was introduced in 2005 amidst much hype as an improvement over regular Listerine, with "the same germ killing power", "plus it controls tartar for cleaner, brighter teeth." It cost almost twice as much as regular Listerine. After switching to Advanced Listerine I one day happened to compare its back label with that of (regular) Cool Mint Listerine. To my amazement they both had exactly the same four active ingredients, in exactly the same proportion.

This way Listerine managed to make customers overpay for essentially the same product (except for the flavoring) with its misleading claims. I figure consumers eventually caught on, and the Advanced Listerine has quietly retreated from store shelves, but not before making millions in this rip-off.

Now here's the latest. Two months back I saw that the regular Listerine had been replaced in our local Costco store shelves by Listerine Total Care Anticavity Mouthwash. It was a different color (purple) and cost 25% more. The package had bold claims about protecting teeth and promoting dental health in six ways and gave the impression that this new product was all of the regular mouthwash and more.

I bought this and (wary from the previous experience) compared the label with that of the regular Listerine. Imagine my surprise when I found that its only active ingredient was sodium flouride, the same stuff you found in virtually all toothpastes sold in the stores. Since the fluoride in the toothpaste is sufficient for most users, the new Listerine is essentially useless for most folks, except for its alcohol content (same as in the regular variety) that kills germs.

So I returned the new Listerine and (at the urging of the nice Costco customer service folks) sent my feedback to Costco management. Many others must have done the same, because now the regular Listerine is back on the shelves, and I'm sticking with it. That's a product that I'd recommend any day, but beware of more marketing tricks and deceptions by these companies.

Another Uniquely American Feature

Last month I picked up my parents returning from India at New York JFK airport. That's when I learned that the luggage cart rental has been increased there from $3 to $5. This apparently happened in February 2009 at both NYC airports.

Welcome to the US. Most fellow passengers of my parents were quite upset, and many avoided using the carts and struggled with their bags. Back in the late '80s and early '90s this charge was $1 to $1.25. I suspect Smarte Carte, the private company that operates and rents these carts, has a pretty cozy relationship with the airport authorities. This company's website as well as JFK's official one studiously omit disclosing these rates.

The parallel between these cart charges and non-universal US health care (at least as it existed till today) is obvious. It also points up the inefficiencies of this private, fee for service arrangement that makes everyone except this private company worse off. While passengers are being ripped off we also may be nearing a high cost death spiral as also explained by Krugman in a health care context. That means the exorbitant cart rates will decrease demand for them so much that the overhead costs will be spread over fewer carts, creating a push for even higher rates.

In all airports outside of the US luggage carts are "free", meaning these are included in normal airport charges that should work out to a few cents per passenger. So almost everyone uses carts and the per unit cost is a small fraction of that here. It's high time the airports (like health care authorities) learned from such better practices outside the US.

No Returning to GEICO

This is a consumer alert for Americans considering GEICO after watching those brilliant and funny ads featuring the gecko lizard and cavemen.

We carried GEICO auto insurance for several years till they heavily jacked up rates when we changed one of our cars for a new one. That's apparently a common way for insurers to reward loyal customers that they figure will stick around no matter what. So we switched to AllState that offered much lower rates.

If we do want to switch again some time we'll probably steer clear of GEICO even if they offer low premium rates. This is because of their ineptness and questionable practices that we experienced at first hand. Some instances:

• Our car driven by daughter Sheena was lightly hit in the rear side by a car jumping a red light. That other driver was deemed at fault and ticketed by the investigating police officer. We reported the incident to GEICO and were assured this wouldn't reflect adversely on our record. The operator advised us to let GEICO fix our car in their own workshop and they'd recover expenses from the other driver's insurer. The car was repaired all right at a cost of $700. We then received a letter that GEICO had decided not to pursue the claim with the other insurer as the amount involved was too small and billed us the deductible of $100. Years later we learned that GEICO had without our knowledge recorded this claim in the insurers' common database, showing our daughter to be at fault. Why? Because this way we would get higher rate quotes from competing insurers.
  
• GEICO has its claims adjusters who assess damages and then offer the claimant the choice of a cash settlement , or proceeding to a GEICO designated workshop for getting the repair done. The problem I saw is that adjusters typically offer a very low cash settlement, forcing the car owner to go to the designated workshop that vastly inflates the claim after the drop-off, which the GEICO adjuster then readily allows. The workshop obviously has a kickback arrangement with the adjuster. This is corruption remniscent of practices in a third world country. The inflated repair charges adversely affect the claims history of the policy holder. They also affect GEICO's bottom line since the amount paid out may be far higher than claimants would have agreed to receive in fairer settlements.
• We saw a surprising number of clerical errors (e.g., in recording VINs, coverage and billing) in the policies issued. When I called to seek correction we'd typically get a lot of duplicate and contradictory mailings. It sometimes took multiple iterations for them to get things right, only to have the process repeated when even minor changes were required to be made.

GEICO is a subsidiary of Berkshire Hathaway which is founded by the legendary and admirable Warren Buffett. Improving GEICO's operational structure and execution to match its marketing and advertising creativity shouldn't be so hard. For example they can compile data on cost escalations for their designated and third party workshops that will help flag their crooked claims assessors / adjusters. They can track the numbers and cost of mailings and compare it to industry averages to improve efficiency, and also track the average number of customer calls made to resolve an issue. These measures are almost so easy that even a caveman can do it.