Who’s Looking After Momma?
Bear Stearns strayed from its core business.
Powered by greed, the firm got into creating indecipherably complex investment funds designed to cover the tracks of indecipherably complex consumer home loan contracts.
Nobody understood this stuff. Not Bear Stearns’ managing directors, not the sales people hawking this fatuous crap. Not the greedy investors that saw obscene returns. Not the original mortgage lenders. And certainly not the dodos who got way in over their heads borrowing to buy homes by signing adjustable rate mortgage contracts that sucked them dry.
But hey, if I was a renter and was offered a $220,000 loan to buy a $200,000 home, who is the dodo—I or the lender? I get to live like royalty, and if I find I cannot afford it, I become a “mortgage walker” who hands the house keys to the lender and says ta-ta.
The operative rule of thumb: If a thing looks too good to be true, it is.
This past week, myriad lives have been turned topsy-turvy because this rule was ignored.
The Bear Stearns debacle
One of my oldest friends has been a honcho at Bear Stearns for 30 years. He was flying high when, in January 2007, the stock hit its peak of $172.61. Last Sunday, at the Fed’s behest, JPMorgan bought the company for $2 a share.
I don’t think that my friend’s losses match those of British currency gambler Joseph Lewis, who has taken an estimated $800 million bath, or Bruce Sherman of Naples, Fla., who was sitting on 5.5 million shares.
But one-third of the company is owned by the 14,000 employees. Many will be jobless with their savings wiped out.
Lives turned topsy-turvy.
I hope my friend has diversified investments.
I once had a highly dubious client named Jerome Schneider whose business was turning greedy investors into offshore bankers—helping them set up banks in the Cayman Islands, Grenada, Montserrat, Vanuatu and the Cook Islands. The object was to enable them to: (1) hide money from the IRS and (2) take trips to their banks in exotic locales and write them off as business expenses. Schneider stiffed me on a payment and shortly thereafter did six months in jail.
When I mentioned the Caymans and Vanuatu as places to hide money to a wealthy German friend, he shook his head. “Liechtenstein,” he said. “That’s where you want to put your money—where it will be safe, and your identity will be protected.”
Last Valentine’s Day, the CEO of Deutsche Post AG and a director of Morgan Stanley, Klaus Zumwinkel, was subjected to a perp walk by German prosecutors with TV cameras rolling outside his home in the suburbs of Cologne, Germany. He was suspected of evading $1.46 million in taxes by hiding money in Liechtenstein.
It turned out that one Heinrich Kieber—who worked at the LGT Group, Liechtenstein’s largest bank, owned by the country’s ruling family—filched a slew of confidential client files and offered them for sale to tax authorities around the world.
“After checking out a sample of the information on the CD,” wrote Carter Dougherty and Mark Landler in The New York Times, “the German finance minister, Peer Steinbrück, authorized a payment of about €5 million ($7.3 million) for the information.”
Zumwinkel, who has resigned all business affiliations, is the first of potentially hundreds of important and wealthy tax evaders in Europe and the U.S. whose lives are about to be turned topsy-turvy—as in fines and jail time—because they got involved in operations outside their core businesses that they did not understand and believed they were untouchable.
The thief, Heinrich Kieber, is on the lam and in fear of his life.
Eliot Spitzer, the luv-guv
“I am a f*****g steamroller,” crowed Eliot Spitzer, former attorney general and later governor of New York. He was truly hated for the vitriol with which he went after his quarry as well as taking advantage of a complicit media to heap humiliation on people in high places even before they came to trial. Not only did he go after the rich and powerful, in 2004 he indicted 18 people involved in New York “escort services” and another ring that promoted sex tours to Asia.
He was caught by “questionable transactions”—moving suspiciously large amounts of money out of his bank account into a shell corporation. When the story broke last week that he had patronized a high-priced hooker in Washington, D.C., champagne flowed in boardrooms and brokerage houses all over New York. “I’ve never known anyone who was more self-righteous and unforgiving than Eliot Spitzer,” said Republican Congressman Peter King of Long Island.
Spitzer, who went after people using this very technique of following questionable transactions, no doubt believed he was just as immune from detection as the poor suckers who parked their money in Liechtenstein.
Instead of concentrating on his core business, he took his eye off the ball and got careless.
Also, Spitzer failed to remember the old adages: “If you live by the sword …” and “What’s sauce for the goose …”
The Starbucks Conundrum
I have always liked Starbucks. With 15,700 stores worldwide, wherever we traveled it used to be comforting to know Starbucks was nearby—our assurance that we could get a world-class cup of coffee and fine hunk of pastry for a lot less than the €20 (US$30) breakfast in the hotel dining room.
But Starbucks lost its way. It started using preground coffees instead of filling the store with the heady aromas of fresh-ground. The place started smelling of breakfast sandwiches—ham and eggs. What’s more, it turned itself into an uppity variety store, trying to shovel down my throat CDs, such as Pearl Jam, The Little Willies, Prince, Sly and the Family Stone, and off-the-wall books such as “Beautiful Boy: A Father’s Journey Through His Son’s Addiction” and “Her Last Death: A Memoir.”
Not only did this stuff get in the way of what I was in the store for—good coffee and a snack—but by screaming, “LOOK HOW IN TOUCH WE ARE AND YOU CAN BE TOO!” I got the feeling Starbucks did not really want Bach, American Songbook and Patrick O’Brian fans as customers.
I was not alone. For starters, Starbucks stores averaged a grand total of two CD sales a day. Its stock was off 50% from its 2006 high, and it had a lousy December. In desperation, CEO Jim Donald was canned, and Howard Schultz brought himself back to resuscitate the company.
In order to regain “the soul of the past,” Schultz ordered all 7,300 stores in the U.S. closed at 5:30 p.m. on Feb. 25 for a three-hour kaffeeklatsch, during which time employees would be retrained in the glories of coffee and how to sell it.
This was dumb. You do not lock out paying customers to hold sales meeting during business hours. As a result, 20% of the Starbucks faithful headed for Dunkin’ Donuts—which offered a special 99-cent latte promotion that day—and 80% of those said they would be back there soon.
The Starbucks mass closings received vast media coverage. According to a survey by Synovate, 75% of Starbucks customers were aware of the closings, but half of those had no idea why. As a PR stunt, it was a bust.
In last Tuesday’s edition of this e-zine—which described the Blitzkrieg PR that gets 50% of Regnery Publishing’s titles on The New York Times best-seller list—I wrote:
Impress on the author to never neglect the core audience. It is tempting to try and convert the uninitiated, but the core audience is where the sales are. “It’s easy to walk away from your base,” said Marji Ross, “and not sell to them. But an author must talk to the base.”
This goes for every business, every product, every service.
Hopefully Howard Schultz will reinvent Starbucks.
Never forget the late marketing guru Dick Benson’s dictum about the dangers of straying from careful and constant attention to your core business: “Who’s looking after Momma?”