Monday, December 22, 2008

Run, Mike, Run With What You Made Off With

In light of the recent Bernard Madoff scandal, we cannot help but revisit the Daily News editorial that recommended that Mayor Michael R. Bloomberg should run for a third term and that term limits should yield in order to let him do so. (See: Run, Mike, run, Monday, September 22nd 2008.)

Daily News Endorsement Based on Perception of Bloomberg’s Financial Expertise

The recommendation was made largely based on the News’ endorsement of what they touted as Mr. Bloomberg’s ostensible financial expertise. To wit, we offer these extracts:

Michael Bloomberg must stand for reelection to a third term as mayor in 2009. Run, Mike, run.

New York is only beginning to weather the damaging effects of the worst financial crisis to hit the U.S. since the Great Depression.

* * * *

New Yorkers deserve to select the person they feel is best qualified to pull the city through the crisis from among a full field of candidates.

Bloomberg must be in the pack.

* * * *

The decisions that await New York, home of Wall Street, epicenter of the financial meltdown, will be extraordinarily tough, far tougher than anyone imagined just a few weeks ago.

With the city's main economic engine headed for a sustained period of weakness, this mayor and his successor . . . . must have the know-how to draw businesses in rising new sectors that can pick up the slack in the coming decades.

* * * *

Put simply, Bloomberg knows what he's doing. . . .

* * * *

Run, Mike, run.
Perceived Expertise Ain’t Always What It’s Cracked Up to Be (See Madoff)

What the Madoff scandal teaches us is that perceived financial expertise is not the equivalent of actual financial acumen and dependability. We think that the case strong that Bloomberg’s vaunted financial expertise is mostly myth and that the reality is quite the contrary. (See: Thursday, October 23, 2008, Bloomberg Qualified Financial Crisis Leader? He Can Learn Says Schumer! and Saturday, October 25, 2008 More Discredit of Bloomberg as Qualified Financial Crisis Leader.)

Bloomberg, a Politician to Watch (Not Listen To: Powerful Reasons Why)

Politicians like Bloomberg work hard to promote myths so one needs to be especially conscious of the realities they would have you ignore. Mike Lupica in an excellent recent Daily News sports piece that looks at the how the Yankee Stadium financing scam* “will tell you everything about the way Bloomberg's New York actually works for the rich and the powerful” puts it exactly right: “As always with the current mayor, pay close attention to what he does, not what he says.” (See: It's a wonderful lie, Saturday, December 20th 2008) That’s good advice for dealing with our politician-mayor and, if followed, would probably also serve to keep you from losing money in a pyramid or Ponzi scheme like what Mr. Madoff was running.

* (There is a hearing on it coming up on January 15th.)

Madoff Victim: Daily News Owner Mort Zuckerman

A particular reason for revisiting the Daily News’ endorsement for a Bloomberg third term is that it turns out that Daily News owner Chairman and Publisher Mort Zuckerman was among Madoff’s victims. (See: Madoff Scheme Kept Rippling Outward, Across Borders, by Diana B. Henriques, December 19, 2008 and Daily News Owner Mort Zuckerman Madoff Victim, By Chuck Bennett and Frank Rosario, December 15, 2008). His charitable trust is reported to have lost $30 million.

To be fair, Mr. Zuckerman says the loss was not due to his own investment decision and that the money was “invested through a fund manager who hired Madoff without Zuckerman's knowledge.” (See: Losses rise in collapse of Bernie Madoff's Ponzi scheme, by Douglas Feiden and Thomas Zambito, Daily News Staff Writers, Tuesday, December 16th 2008.) The Wall Street Journal published a correction to make clear that it was the the Mortimer B. Zuckerman Charitable Remainder Trust that invested assets through a fund firm into Bernard L. Madoff Investment Securities that faces losses and not Mr. Zuckerman himself (December 15, 2008, Corrections & Amplifications). Mr. Zuckerman says “the losses won't keep him from making promised charitable contributions.”

Trusting Those Who Trust

It might not therefore be fair to say that Mr. Zuckerman put his trust in Mr. Madoff when he shouldn’t have. As he says, his $30 million was lost only because he trusted someone who in turn put his trust in Madoff. But how do these things work anyway? How close do most of us really get to knowing or considering everything we should know about underlying numbers and transactions? The fact is the way whole Madoff thing worked is that there were too many people around trusting Madoff and too many people around trusting those people who trusted Madoff. Yes, maybe by his account, Mr. Zuckerman was one step back in the trust chain but it is close enough to think about the issue of where he recommends we should put our trust. Why do certain people “trust” Bloomberg: Because there are a few too many people talking about how they trust him rather than paying close attention to what he does rather than says.

How the Daily News Made its Decision to Tell Us To Trust Bloomberg

Understand how the Daily News endorsement of a Bloomberg third term (for reasons of his purported financial acumen) came about: It came about from the top down. Bloomberg who had been using a pollster to gage public reaction and structure his approach to securing the term limits change reached out to:

fellow media titans—including Arthur Sulzberger of the Times, the Post's Rupert Murdoch, and the Daily News's Mort Zuckerman.
(See: The Transformation of Mike Bloomberg: How the benevolent billionaire with no political debts ended up owning us all, by Wayne Barrett, Tuesday, November 18th 2008.)

The Daily News then issued its editorial endorsing the Bloomberg third term in lockstep with the issuance of editorials by the New York Times and the New York Post using similar language and a similar themes. The New York Post even used exactly the same title for its editorial. (See: The New York Post’s Run, Mike, Run, September 30, 2008 and the New York Times’ The Limits of Term Limits, September 30, 2008.) Is it possible that before the lockstep issuance, Mr. Zuckerman’s Daily News editorial page conferred with its city news staff team before deciding what to recommend concerning Bloomberg’s financial expertise? The evidence is that this did not happen at the Times. (See: Saturday, November 15, 2008, The Mayor, The Times’ Timing, and a Proper Ordering and Thursday, October 23, 2008, Bloomberg Qualified Financial Crisis Leader? He Can Learn Says Schumer!)

How Trustworthy Was Daily News Conflicted Endorsement of Bloomberg?

Did we get from the Daily News the best recommendation it could have given with respect to Bloomberg’s having good qualifications to run the city? At least in one context you could say that Mr. Zuckerman had seen Bloomberg up close in a business context: The above-linked Wayne Barrett Village Voice story points out that Mr. Zuckerman had done his share of conflict-of-interest-raising business with Mr. Bloomberg. (Conflicts of interest abound since, observes Mr. Barrett generally, “Many New Yorkers have an eerie feeling now that Mike's money is literally everywhere and that a city, said to be for sale in the era of the big-time bosses, has actually been bought by a mayor so much bigger than they ever boasted of being.”)

When Bloomberg ran for mayor in 2001 and the Daily News was the only paper to endorse him, he held more than a half-million dollars of stock in Boston Properties, the publicly traded real estate company that Zuckerman controls (Bloomberg may have actually owned more, but, by law, he was required only to disclose dollar amounts up to that ceiling). Bloomberg had to give up those holdings when he took office, prompted by an earlier COIB [Conflict of Interest Board] ruling, and the Bloomberg administration ended up doing its share of deals with Zuckerman's company—like air rights and other approvals on the company's 39-story tower at 250 West 55th Street. At an October 8 investors' conference, Boston's senior vice president Robert Selsam boasted of the company's success with City Planning, recounting how the firm had secured three complicated variances across five zoning districts that allowed it to maximize floors and footage. "The key," said Selsam, "is knowing how to effectively navigate the review and approval processes" of the city. He didn't, however, mention that he might have a bit of an edge at that game.
Bloomberg’s Financial Expertise Failings (Including Special Relationship to What Daily News Mentioned as Important)

But does Zuckerman’s personally having done business with Bloomberg qualify him to know that Bloomberg has the financial acumen to run the city? We say no and we think evidence of it is right in the language of the above-quoted Daily News editorial.

The worst things about Michael Bloomberg’s financial administration of the city are:

1. He took us deeply in debt in a time of plenty. It was a time when the city was unusually awash with unsustainable windfall cash and should have been saving for a rainy day. (See: New York Will Survive Without Bloomberg: The mayor never bothered to prepare the city for any lean years, by Jason L. Riley, October 16, 2008.)
2. He has played an insiders’ game with both Wall Street and the big developers of the real estate industry. In both cases his deals short-change the public.

3. As a consummate crisis-insider he has failed to see the crisis coming or have appropriate perspective on its solutions.

4. He put all the city’s eggs in the Wall Street basket . . . And this is where we quote from the Daily News editorial: “this mayor and his successor . . . . must have the know-how to draw businesses in rising new sectors that can pick up the slack in the coming decades.” The fact is, the Mayor Bloomberg and his Doctoroff minions have had only scorn for anyone who tried to suggest cautious consideration of a future for the city that was not based nearly exclusively on the Wall Street economy. That scorn was because other sectors could not compete with the inflated values that Wall Street was generating.
Inflated Values With Which Wall Street Made Off: Krugman Analysis

That is exactly what those Wall Street values were: inflated. Paul Krugman volunteered an assessment of Wall Street’s inflated values, taking it one step further with an analogy to Madoff’s Ponzi scheme (We provide extracts below but it is a piece we highly recommend reading in full):

. . . surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?

* * * *

. . . surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.

* * * *

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. . . . the end result was the same ..: the money managers got rich; the investors saw their money disappear.

We’re talking about a lot of money here. . . . . — we’re talking about $400 billion a year in waste, fraud and abuse.

But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.

* * * *

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? . . . . The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

After all, that’s why so many people trusted Mr. Madoff.
(Emphasis supplied. See: The Madoff Economy, by Paul Krugman, December 19, 2008.)

Selling Wall Street’s Inflated Values: Bloomberg Made Off

The Daily News editorial told us to trust Bloomberg in these echoing words: “Put simply, Bloomberg knows what he's doing” . . . .

. . . . Yet, isn’t it time to check our assumptions about Bloomberg’s expertise and what he actually knows? In Bloomberg we must certainly have an almost perfect example of what Krugman means when he describes the tendency “to idolize men who are making a lot of money, and assume that they know what they’re doing.” Bloomberg put his faith in the inflated values of the nontransparent Wall Street financial system. He was selling those inflated values to the city without an end game or exit strategy. Personally, as a participant higher up the chain Bloomberg may have done well, but with his clubby deals benefitting insiders at the expense of the public, how much is Bloomberg to be trusted?

Mr. Zuckermen lost $30 million to Mr. Madoff. He may or may not have put his faith directly in Madoff, but when he recommends that we put our faith in Bloomberg does he recommend an individual who is really that much more deserving of our trust or capable of delivering a substantially different result?

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