GP 21 January 2009: US Air 1549: Looking for a Soft Landing on the Hudson

 
                                    Honesty is such a lonely word.
                                    Everyone is so untrue.
                                    Honesty is hardly ever heard.
                                    And mostly what I need from you
                                                --from a song by Billy Joel

Thursday Afternoon, January 15, 2009.  We were next in line.  Just a few minutes after US Air 1549 left, we were airborne on our way to Raleigh.  Our flight AA4718 had been due to leave at 12:50 PM, but the American Eagle operations staff typically shortchanges RDU-bound flights, switching air crews and even crafts to flights to cities deemed more important.  So we got in at 5:03 PM, as on-time as American Eagle likes to get.

Five minutes short of touchdown, our pilot came on to tell us that US Air’s Charlotte flight had gone down into the Hudson, his information sparse and late, maybe to avoid panicking us.  After his dour announcement, he ironically said, “Thank you for flying American Eagle today.” Immediately upon landing we got a flood of calls to find out if we were alive and kicking, even from acquaintances who did not know we were traveling.

Agony Air. We were not completely surprised about US Air’s bad fortune. A witty limo driver out in Chicago has always referred to US Air as “Useless Air,” and before that he called its predecessor Allegheny Airlines “Agony Air.”  In 1989, US Air spilled another Charlotte flight into the waters of New York: apparently it simply went off the runway right into the water.

Fact is that passengers are taking a crapshoot after 3 PM on any Thursday from LaGuardia.  Each airline gets where it is going (Raleigh or Charlotte) on-time about 50% of the time—a performance nobody wants to brag about.  Airlines and airports typically get in a jam as the day grows longer, and this is true at LGA in spades.  Our chances of being late—or much worse—soar between 3 and 6 PM.  But, perversely, we blithely ignore facts like these that don’t suit to us, and sometimes wind up in the soup as a consequence.  So we fly with the herd at absolutely the worst time. High risk behavior.

For a whole nest of reasons we Americans are inclined to focus on risks that don’t matter, and miss the ones that may flatten us, such as the tumultuous conditions at our busiest airports. We are blinded by addictions (smoking), poor transparency (Bernard Madoff and other flimflammers in the financial community), hackneyed wisdom (our ill-founded belief in most of our larger financial institutions), poor governance and foolish ideologies (stock and housing bubbles), and a host of other veils that keep us from meeting head-on the realities of everyday life. Only once in a long while do we luck into a tremendously skilled pilot who can get us out of the traps in which we discover ourselves, blinded as we are.

The Harder They Fall.  In really bad times, the big companies and institutions that we think are Rocks of Gibraltar turn out to be crumbling cliffs.  Because they have been around for a while, we want to think they won’t go away, but they will.  Back in 1973-1974 we had a pretty big recession which laid waste to our stock market.  Small stocks took a beating first.  The potentates at Bankers Trust, then a highly regarded corporate bank in New York that is no longer, issued quick orders to a money manager directing portfolios made up of small stocks.  “Get rid of them,” he was told.  “We, at Bankers, are now only investing in the Nifty Fifty,”—a slew of big company growth stocks.  The young manager arranged for the stocks of the young companies to be sold in an orderly way—and left the bank in disgust.  Of course, thereafter, the Nifty Fifty and big capitalization stocks took an even worse beating than the small guys.  Bigger was not better.  The bigger they are; the harder they fall.

That younger and wiser money manager went off to run money on his own out in San Francisco—Baghdad by the Bay.  He appeared to have character, so we put him to work.  We have never gotten better results from any other asset manager.  He did what he believed in, knew the companies he bought very well, and found a clientele that did not want to run with the pack.  When we are trying to manage risk, we find that safety, oft as not, is not to be found where the crowd is headed.

Tearing Up His Past.  As a young man in Vienna, Arthur Koestler tore up his transcript weeks before graduation from university.  There was no way it could be reconstructed, and he did not complete his degree.  He went off to try the kibbutz life in Israel.  Later in Weimar Germany he had a top journalist job with the Ullstein newspapers, but gave up his sweet life and went off to see Soviet Russia.  Again and again, he skipped out on apparent success.  Yet, in casting aside his safety net, he lived to tell the story.  In Arrow in the Blue and Invisible Writing, his autobiographical writings, he notes that his extended family in both Germany and Austria despaired of him, for they all played it safe and found careers from which they did not move. They could not understand his feckless behavior. Yet they all died at the hand of the Nazis, while foolhardy Arthur survived, very well thank you, in England.  Prudence turns out to be terribly imprudent in a world gone mad.

United Health Group.  But the worst risks, the ones we should be paying heed to, in developed societies flow from practices that have long been embedded in everyday custom—habits which have simply gotten out of hand over time.  We have long known that insurance companies that do well manage to take in bushels of money but only fork out a little hay.  Years ago it was alleged that AIG, under the Maurice Greenberg regime, simply did not pay a goodly portion of its insurance claims, so it rose to the top of the insurance heap.  With insidious claims agents and a battery of outside lawyers, even the most diligent claimants can be put off for years.

United Health Group, the big guy on the block in health insurance, recently got slapped with a $350 million fine by New York Attorney General Andrew Cuomo, because it was shortchanging patients who saw doctors outside its so-called network.  Further, the terms of the settlement obligated it to remedy the formulas of a database subsidiary on which the industry bases its payments to out-of-network providers. The headline in The New York Post, January 14, 2008, p. 10, reads:  “It’s Just Sickening:  Health Insurer Exposed.”  Previously William McGuire, the chief executive who built the company, had to resign because of a pervasive stock option backdating problem.  This is a company that has pursued a host of slippery tactics designed to dress up the bottom line of the company and the pocketbooks of each of its principal executives.

United Health Group and AARP.  Through AARP, United Health Group offers Part D Prescription Drug Insurance for those on Medicare.  Suddenly, this year, without apparent warning, it pulled a switcheroo on its insured.  That is, in a rush to push people into generics, it escalated the prices on brand name drugs up to unconscionable levels.  For example, a senior paying $80 a quarter for a blood pressure drug saw the tab rise 2½ times to $200.  That’s a lot of payola for someone on a fixed income. The prescription drug benefit has been more of a gift of the Bush Administration to the drug and insurance industries than to folks on Medicare.  We suspect the Administration turned a blind eye, as it was going out of office, to this last bit of shysterism, although there was some talk of banning this bait-and-switch brand pricing practice.  If this sort of chicanery is pervasive in our society, then we can easily identify the biggest risk we all have to confront in 2009: dishonesty.

As it happens, AARP itself has condemned this very practice.  Its bulletin carried an article called  “Medicare Part D: Penalties for Brand Drugs Hidden From Beneficiaries.”  It mentions that it is hard for patients to find out if insurers charge them a premium for brand name drugs.  And at one point it pointed out that some insurers had furtively changed the terms of their plans to score some dollars in brand name drugs, but did not tell their insured.  AARP’s own partner seems to have been guilty. It’s our impression that AARP does not watch over its insurance activities very carefully.

America Ranks 18.  For several years Transparency International has ranked countries as to how they stack up for apparent corruption.  America has floated between 17 and 20 for quite a while—not a bad performance, but not a good one either.  Back in the 1990s the United States came in 14 or 15 during some years, so we may have drifted slightly downwards in the rankings.  Basically we just sort of make it into the top 10% of all countries by the skin of our teeth. There are a fair number of countries that get single digit, good guy scores.

Curiously, too, we also come in 18th when the Economist looked at how democratic we are.  Is it possible that democracy and clean government go hand-in-hand? What seems clear—whether we are dealing with government, or a health insurer, or some other institution—is that our biggest risk, the biggest threat to the health and happiness of each of us and of the nation, is systematic dishonesty.  It’s not the sickness of bees, nor global warming, nor earthquakes that most threaten us.  It is dishonesty and the slippery practices that grow out of it.

A Good Man is Hard to Find.  We’ve always liked the work of a fine Southern novelist called Flannery O’Connor. Her short story A Good Man is Hard to Find hits the nail on the head. Goodness is hard to lay your hands on. But it’s around.

We and our associates do business every year with L.L. Bean.  Sometimes its merchandise is a bit dated, or the colors wrong.  But we buy anyway.  Because it always tells the truth about its products, takes returns without a lot of fuss, and provides some decent repair services.  In other words, what you see is what you get. Honesty.

Don’t Deny It. Embrace It.  We have to find ways of managing risk, steering around obvious rocks in the sea.  But it is likewise foolish to try to deny that it exists:  every action, and even every inaction, we take is filled with risk.  That’s life.  Our task is to decide which risks we shall take and how large an appetite for risk we harbor. It is the ultimate lie—a lie to ourselves—to pretend that risk does not exist and to think we are sitting pretty.  If our comfort in life depends on the mistaken belief that risk does not exist, we’re in for some mighty big disappointments. It is part of the human condition.

In these rather shaky times, it is well to reread Peter Bernstein’s Against the Gods:  The Remarkable Story of Risk which makes clear that the whole edifice of modern capitalism, in the shadow of which many of us have prospered, is built on risk. We have forged the tools to assess when the rewards are large enough to compensate for the risks.  Risk is our bread and butter. But the rewards for risk can never be high enough if the atmosphere is poisoned by dishonesty.  When shadiness is in the air, the best you can pray for is a soft landing on the Hudson.

P.S. Joe Nocera has written a provocative article on “Risk Management” for the New York Times Sunday Magazine, January 4, 2009, pp.24-33, 46, 50, & 54.  Generally it makes clear that we can devise models and schemes that can measure and protect us against the ordinary 95% of the risks that will present themselves to us.  But 5% of the risks are extraordinary, suddenly rearing their heads and throwing the lie to all our models and wisdom.  We need to deal with both kinds of risk.  The trouble is that at times of tremendous transition in global or societal circumstance an inordinate number of extraordinary events come to pass for which we are unprepared. The oddball 5% risks are flying high these days.  Given enough time even the best models become outdated as well, but our seers never quite understand when old saws no longer hold water. By the way, it is amazing how little risk managers at major corporations know about dealing with risk.

P.P.S.  Our companion site Spicelines is giving away some books.  Look at the list and see if there is something that would put some better meals on your table.

P.P.P.S.  When John Shad, head of the SEC in days of yore, exited the Federal Government, he gave $30 million to the Harvard Business School to underwrite a program on ethics.  He knew a problem when he saw one.  Even back in 1987, he’d seen plenty on Wall Street.

P.P.P.P.S.  Finding an honest man is not an easy chore.  But it’s possible.  You need a good B.S.D. (i.e., bovine elimination detector).  Right out, cast aside those who promise you “a sure thing.”  It never is.  If somebody makes you an offer of any sort that he or she can’t explain very well and you simply don’t understand it, don’t go for it.  Chances are the promoter doesn’t even understand what he is selling, whether he is a banker, academic, pol, or preacher.  That was true of all the middlemen who were peddling Bernie Madoff.  We’ve seen a whole lot of feedlot deals where we didn’t bite.  If you know somebody to be honest, ask them who amongst their acquaintances is honest.  See who promises less and gives more. By the way, virtually every major firm on Wall Street peddled subprime loans:  even the best of them were still selling these products at the very moment when their internal asset managers were going short (betting against) on the subprimes.  With that kind of dishonesty, it is no surprise that Wall Street is disappearing without a trace.