Gary Shilling Commentary from June 6th (morning). I am not a fan of Gary Shilling as one can see from this post However, I enjoyed this particular piece someone sent to us. The topic is leadership and focuses on finance. Additionally, Gary had a bit of a prophecy as he seems to have authored this right before the Obama spying on your grandmother (who was also patted down by the TSA).
Gary Shilling: Set The Tone
In the early 1960s while studying for my PhD in economics at Stanford, I was a Resident Assistant at one of the university’s eating clubs, El Toro. These were like fraternities but rather than fraternity houses where the undergraduate members ate and slept—among other things—they consisted of separate kitchens and dining rooms in one building complex while the members—men only—slept in Toyon Hall, a nearby men’s dormitory.
Turning Pricing Power Into Profit
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As a Resident Assistant, I learned an invaluable lesson about group cultures. The eight RAs had rooms in Toyon and our job, in return for room and board, was to oversee the eating club members. These were generally wellbehaved young men but most were away from home for the first time and, well, boys will be boys. Drinking back then was always a concern, but in those pre-Vietnam War years, drugs were not a significant problem and neither were student revolts and the disintegration of respect for authority of any kind that erupted a few years later.
Toyon had a house mother, a lovely, sweet and cultured older widow who I’ll refer to as Mrs. L. She would assemble all the RAs periodically in her Toyon apartment for discussions on fire drills and other housekeeping issues. One thing she always emphasized, however, was our responsibility to behave properly and serve as role models for the Toyon residents. “It’s up to you men to set the tone for Toyon,” was her constant directive.
At the time, I thought this admonition a little hokey and condescending. After all, these eating club members were responsible young men, mostly from good families and brought up to understand the responsibilities that accompanied their privileged status as Stanford students. But as the years pass, I more and more understand the importance of setting the right tone, and how group cultures are determined by the examples set by those at the top.
Jamie Dimon, the aggressive CEO of JPMorgan Chase & Co. (NYSE:JPM), drives his subordinates to make money. Even though he prides himself on knowing all the “bones and the joints” of the bank, he says he was surprised when the “London Whale,” Bruno Iksail, one of the bank’s derivatives traders in London, lost $6.2 billion from overly aggressive trading. Maybe Dimon was unaware of the situation, but who set the tone that pushed Iksail to take those huge risks?
Steven A. Cohen is regarded as one of the sharpest hedge fund managers alive. His firm, SAC Capital Advisors, has had an annual return of 30% since its founding in 1992. In the 1998-1999 tech bubble, SAC made 70% per year by being long dot com stocks, and another 70% by betting against them in 2000 as they collapsed. His firm manages $15 billion, more than half of which belongs to Cohen and other employees with about $4 billion from outside investors.
How did he achieve such extraordinary results? His subordinates and outsiders are paid for successful trading ideas that they feed to him for the “Big Book” portfolio he trades. Those folks were so zealous to produce successful trading ideas and for the huge financial rewards that they brought that they used illegal insider information, according to SEC charges. Cohen is yet to be charged with trading illegally on secret information, but SAC agreed to pay a $616 million penalty, a Wall Street record, to settle two insider-trading cases.
Outside investors are decamping in droves, and belatedly, the firm has disclosed plans to shore up its compliance efforts. But what sort of tone did Cohen set that led his subordinates and outsiders to risk public disgrace, huge fines and jail time in order to provide him profitable but illegal trading ideas?
President Obama is a doctrinaire liberal who is absolutely firm in his convictions. There’s plenty of blame for everyone in Washington over the ongoing gridlock, but Obama’s unwillingness to compromise on spending cuts and his insistence on tax increases for the rich carries a lot of the responsibility. His rantings against “fat cat bankers” and conservatives rank right up there with Nixon’s enemies list that was revealed during Watergate.
In fact, in October 2010, Obama referred to political opponents as “enemies” and also said conservative advocacy groups were a “threat to democracy.” So, with this tone, is it any wonder that just like the Watergate break-in crew broke the law, the IRS has attacked conservative groups with “Tea Party” and “Patriotic” names in considering them for nonprofit status? Those with “Progressive” names, the new moniker for liberals, sailed right through. And like the bottling up of Watergate information, senior IRS officials knew back in 2011 of these biases but failed to disclose them until forced by Republicans in Congress. Back in 1962, Mrs. L was absolutely right. An organization’s tone is critical and it’s set at the top.