Pearlstein: Executive Indemnity

Steven Pearlstein
Washington Post Columnist
Wednesday, December 10, 2008; 11:00 AM

Washington Post columnist Steven Pearlstein was online Wednesday, Dec. 10 at 11:00 a.m. ET to discuss why corporate and Wall Street executives refuse to take responsibility for what went wrong and instead blame it all on a "perfect storm."

The transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

Pearlstein was honored with the Pulitzer Prize for commentary for his columns about mounting problems in the financial markets. His award was one of six Pulitzer Prizes won by The Washington Post this year.

Read Pearlstein's latest columns.


Severna Park, Md.: Hi Steven, good article this morning. I agree with most of what you said, except perhaps that these guys were caught off guard. I think it would be more accurate to say that they chose to ignore the risks, not that they weren't aware of them. When people are rewarded based on short-term successes, they don't care about long-term things like stability and future profits. And everyone - execs, company boards and shareholders - thinks short-term. (You know, the drive to "get out with whatever I can" no matter what).

I have no more sympathy for these guys than I do for that person that built a multimillion dollar house on a sandbar and also got hit by the "perfect storm". (And what is most interesting is that we bail those people out too).

Steven Pearlstein: The tidal building analogy is a good one. BTW, I surely didn't mean to suggest they were unaware of the risks -- they knew of the risks, like the Billy Tyne, and chose to ignore them.


DC: Mr. Pearlstein, they don't apologize because they're not sorry. At least, if there IS anything they're sorry about, it's that their nice ride has ended. The people who rise to these high positions don't get there because they're kind, thoughtful souls -- they get there because they're quicker on the grab.

Ever seen results of college-wide ethics tests? Economics students score the lowest, business students barely above them. Those exercises in which everyone can share resources or one person can try to scoop the lot? They go for "scoop the lot, screw the others" every time.

And these are our economic leaders! Don't it make you proud.

Steven Pearlstein: I am aware of those test results. But I'd like to point you to another test that was conducted by Dan Ariely, a behavioral economist. He took a group of very smart business students, as I recall, and gave them a test that in some way gauged their willingness to take risks or show judgment, particularly as it relates to sexual matters. Then he took a second group and showed them some pornography before giving them the same test. And what do you know: the erotic stimulation eroded their judgment! What Ariely would say is that the excessive bonuses and compensation may have acted like a kind of financial pornography on the psyche of people working on Wall Street, or commercial real estate, eroding their judgment and their ethics. And that makes some sense to me.


DC: Let's blame Congress--It is really their fault but like all government organizations there is no accountability--They get paid--they get their benefits whether they do their job or not--Congress removed the restrictions from the banking and investment sector--that is where/when it started

Steven Pearlstein: That doesn't sound very convincing to me.


Manassas, Va.: Here's a real perfect storm:

-Executives from private companies refuse to admit mistakes (ex. Big Three CEOs) -Politicians refuse to admit their policy mistakes (ex. executives of Freddie Mac, Congress) -Heeding the example, the public is starting to demand a piece of the bailout pie as well.

Result? Hardcore US socialism (as opposed to socialism lite we presently have).

Steven Pearlstein: Not an implausible scenario.


Minneapolis, Minn.: Why has the financial services industry been blocking the adoption of transparency both here and in the EU (to the point where news accounts say that the lobbying against the transparency provision proposed by Charlie McCreevy has led to the greatest opposing effort witnessed in the past five years) when it is crucial to restoring investor confidence, restarting securitization, and ending the credit crisis, as indicated last March in the Presidential Working Group Report, Project Restart in July and now the McKinsey study just released by the ASF?

In other words, why has nothing been implemented? It's like the dog that didn't bark.

Steven Pearlstein: The financial sector is deathly afraid that more transparency at this point will only spook investors because it will reveal how bad things really are. They may be right about that, even though restoring long-term investor confidence will require more transparency. In truth, corporations and Wall Street have, through their behavior, consistently opposed transparency, even while giving it lip service in public. All you have to do is read a 10-K report and you realize that the last thing these firms and their lawyers have in mind is giving a true, candid and full assessment of the business to its owners. And a big disappointment to me is that the SEC, through many administrations, has allowed them to get away with this. Frankly, it is an outrage.


Laurel: "Before long, analysts, investors and the press would agitate for a management shake-up."

Much as I'd like to jump on the executive bashing-bandwagon, I can't help but assume that every company's performance is being constantly held up against its competitors to evaluate the executives every quarter.

Could a major mortgage lender have forsworn subprimes for representing too much risk three years down the road while Countrywide was making money hand-over-fist. (And getting good press for the "flexible underwriting standards" that made credit available to under-served markets.)

Could an auto executive have decided they need to cut back on dealership and concentrate making on the "green" cars of the future?

Didn't the fact that whole industries were judging their performance against the same yardsticks (and based on very small time increments) guarantee that there would be no real leadership?

Steven Pearlstein: Yes, as I thought I indicated, this was a big problem -- that all the financial and career incentives were working in favor of going along with the crowd.

But here's a different view: In fact, there is enough of the public, including the investing public, that appreciates good judgment and good leadership that any company that dared to go the other way, criticize the industry practices loudly and publicly and announce that it wouldn't participate in them -- I bet this company could have found a nice audience among the press and careful investors. And I bet that if one had had the guts to show this kind of leadership, other leaders would have joined in. Can I prove this? No. I just have a bit more faith in the system and in the public than they do.

This is what real leadership is about. It's about not taking the conventional wisdom and the usual parameters as a given, but changing that wisdom and those parameters in a way that benefits customers or investors or the country at large. And there has been absolutely no leadership coming from Wall Street, even now.


Baiting Hollow, New York: I don't expect Wall Street executives to behave differently. But why do our policy makers tolerate and even encourage the destruction of trillions of dollars of wealth every 75 years or so? Is it amnesia, or is it a deliberate determination that the price is worth paying in pursuit of ever more sophisticated financial innovation?

Steven Pearlstein: I think you assume that policy makers have more power than they really do. No question they fell asleep at the switch. But I doubt they could have totally prevented this.


Re: Equal bailouts: Of course it was natural that if you bailout one industry, you would need to bailout another if the government is to appear even-handed, because the depth of this economic crisis has affected everyone. Thus, if people like the CEO of Merrill Lynch is going to use part of the government's bailout money to get a $10 million bonus, it would seem fair that the workers at Republic Windows and Doors, in Chicago, should get their severance pay from Bank of America which also got a gargantuan bailout. In short, the anger and resentment of ordinary people is just coming to the surface, and the government's bailouts need to, at least, start looking equal, wouldn't you say?

Steven Pearlstein: Great point. The worker takeover of the Chicago factory is a good indication of the social and political unrest building beneath the service here, which has its root in legitimate grievances against the titans of industry and the entire model of Anglo-American capitalism. And you notice that the public is in total sympathy with the workers. The primary responsibility being assigned to Bank of America I think is misplaced. But I hope the state of Illinois, if it can get its attention away from its sleazeball governor, will go into court and seize all the assets of the owners of the company and force them into bankruptcy if necessary. There needs to be a strong message here that in this time of crisis, that kind of selfish behavior won't be tolerated, and this is a time when we need to all pull together to get through a national crisis.

If I were those workers, I'd find out where the guilty executives live and camp out in front of their house and harass their wives and children every time they leave the house until they agree to settle up.


Chattanooga, Tenn.: Another spot on column from our friendly neighborhood Pulitzer Prize winner, which came about, by the way, because of your superior vision in recognizing the financial ramifications coming our way well before any of the folks you refer to in your column today.

But you left unsaid the impact of the leadership and accountability, or lack thereof, demonstrated consistently throughout both terms by the soon to be departing Bush administration. They led (or didn't) by example, with their corporate constituency being all too happy to follow.

Steven Pearlstein: Thanks for the kind words. As I said, I wouldn't assign the majority of the blame to government.


Wimberley, Tex.: I've watched regional newspapers self-implode over the past four or five years.

One added more pages to the newspaper, then laid off the news staff to I guess pay for the extra pages. But this made the newspaper weaker, not stronger. Who wants to read articles from Timbuktu that local people cannot relate to?

Then after that, they cut back the reporting staff even further. Do they really think readers want more pages of garbage than local reporting?

It should be no surprise newspaper companies want to dump the Chicago Tribune and Miami Herald when newspaper companies run newspapers in a way that doesn't relate to their readers.

Are newspaper companies as dumb as the auto industry in producing products nobody cares about anymore?

Why aren't newspaper companies and their boards smarter in finding ways to connect with their audience? Do you think newspaper companies are going the way of network television -- irrelevant?

Steven Pearlstein: This is a big problem, and one that I think about every day. The newspaper business is in a death cycle, as you indicate, and it needs to find a way to pull out of it. There has been a dramatic deterioration in the quality of the product. The reason, as I see it, is very simple: the only way to produce a good product is for there to be massive consolidation in the industry, so that economies of scale can be achieved. But to date, we cling to these outdated notions that every city of 25,000 people needs its own daily newspaper. Not only can't those papers be very good at delivering a full range of local, national and international news and features, but their existence makes it difficult for even the big metro papers to have enough circulation (scale) to do that. Unfortunately, consolidation takes a long time, especially when so many papers remain in family ownership. So what is going to happen is that you hare going to have a huge amount of destruction of value and waste of talent until things get so bad, and newspaper prices get so low, and so many papers go out of business, that a few successful consolidators can finally come in and create the new model. What is also needed, however, is for the public to finally realize that there is no free lunch, that advertisers are no longer willing or able to pay for the cost of news collection, and that if people want quality news, they are going to have to pay for it just like any other good. If they are willing to pay $2 each morning for a cup of coffee, then they should willing to pay at least that much for a good newspaper.


Washington, DC: Is the problem an example of "group-think" where everyone knew the problem, but chose to ignore it, and sailed into the "perfect storm" together?

Steven Pearlstein: You betcha.


Encino, Calif.: Why is it that Americans the Stupid have been given a pacifier of beer, entertainment, a credit card and a promise they will go to heaven while our leaders in government, business, religion and the media follow the philosophy of Omar the Tent Maker of "Take the cash and let the credit go"?

Steven Pearlstein: Interesting way of thinking about it.


Falls Church, Va.: Thank you for another insightful article regarding our economy. One of the things that strikes me about this crisis is that the root causes can really be summarized as a lack of ethics. Lack of ethics for mortgage brokers, consumers, our politicians and a host of others. Our current crop of leaders were taught that government is the problem and profits trump everything. Each generation resets these values to its liking but one of the outcomes of this mess has to be a new moral order governing business. The CEOs responsibility should still be the shareholder but we should also temper that with some basic rules about honesty and social responsibility. My question is how much talk have you heard about such a new governing philosophy and what are the chances we will openly design a new set of morals to guide us to a better future?

Steven Pearlstein: There is some. Ben Heineman, who used to be general counsel at General Electric, has a new book out High Performance with High Integrity, or something like that (I left it at home, sorry). And there is a big push toward Corporate Social Responsibility, which some people take seriously (I'm a bit of a skeptic). I think you are right, though, that ethics is a big part of leadership and that maybe there will be a demand, now, for more of it.


Washington, D.C.: How do we design a system which benefits long term goals? At the individual level both executive and workers compensation seems far too focused on short term data. Why should a banker write fewer good quality loans when they will get much greater compensation for writing more loans regardless of quality? Why should an executive invest long term money when it will adversely affect the company's short term numbers? We can all see the benefits of these long term goals but while all the reward focuses on the short term gain then the system is broken. We do this in all aspects of society, both private and public. So again how do we rebalance to start to favor long term versus short term goals? Note, I am not trying to undervalue short term data I just think we over emphasize it importance compared to the big picture.

Steven Pearlstein: We could start by having a much higher capital gains tax rate on short term profits. Some have suggested eliminating quarterly reporting by corporations in favor of semi-annual, which might be worth it if we also insisted that the reports be more than boilerplate written by lawyers intent on obfuscation. A bank on earnings guidance would be another.


Frederick, Md.: As far as lessons learned, the most interesting part to me--you touched on it--is the argument that if a lending executive didn't go along with the herd in 2005 and 2006 there would soon have been calls for replacement. I think it's true but what does it say for how we should reform things?

In theory Boards of Directors should be looking for outsize risks and provide counsel about the long-term dangers but I doubt part-time Directors--many of which are running other businesses--really get beyond what management feeds them to a depth that would provide systemic protection. Better regulation could help but that presumes that oversight agencies have a better understanding of the market than the participants do. More likely, they'll regulate in a way that reduces risk in some areas and misses others while precluding innovative approaches that might have merit but never get the chance to be tested in the marketplace.

I come back to the idea that we really need to hold Boards accountable and we need to reform governance structures and processes--not only in ways that limit the influence of CEOs to decide who sits on their Boards--but to really give Board members responsibility and sufficient tools to understand and limit the risks companies are taking.

It's not enough but it's one place to start.

Steven Pearlstein: Indeed it is a great place to start. I wonder why, for example, the very distinguished people who are on the board of Citigroup or General Motors haven't had the good manner to tender their resignations, given their utter failure to provide good, long-term guidance to, and control of, management. The reason is that they all buy into this perfect storm thing -- that its not their fault, that it's an act of God or nature. The truth is that we demand more personal responsibility from welfare mothers in this country than we do of corporate directors making hundreds of thousands of dollars a year for what amounts to very little real work.


Troy, NY: I am attending a conference in Washington DC -- and read your article this morning in the Post. My perspective is that I am a CPA involved in professional activities -- AND an owner/operator of fast food restaurants, where I am involved daily with entry level employees -- adults and teens. Your comments about leadership are true from the top to the very lowest level. For example, a new employee at one of my restaurant may require several coaching/counseling sessions before learning to say: "I apologize, I am late, it was my fault, and I plan to be on time in the future. " Their FIRST inclination is to explain that the error is not THEIR fault.

I feel passionately that we need to "get a grip" on the concept of personal responsibility and honesty throughout society.

I would like to see age appropriate curricula in schools -- as low as elementary school -- to address these issues.

Steven Pearlstein: Those are lessons that are taught through example, at home, at school, in the public arena. There is no need for a curriculum. It needs to be cultural.


Rochester, NY: What do you think of the idea of some kind of FDIC insurance program for making sure those dealing with investment banks that go bankrupt don't lose their shirts? Wouldn't that restore faith in the system somewhat?

Steven Pearlstein: There aren't really any pure investment banks left.


Washington, D.C.: Re the economic plight of newspapers: I think papers also shot themselves in the foot by rushing to put all their content on the Internet before finding a way to reap sufficient profits from it. I am certain that circulation declines for the print editions of the Washington Post, NY Times, Chicago Trib and nearly every other big city paper can dovetail almost exactly with those papers putting their material online for free. Add in the way that online listings have decimated classified ads (formerly a huge profit center for papers) and you can see how new media have cut old media off at the knees.

Steven Pearlstein: There's some truth to that, but what alternative did they have? Getting readers to pay for content is a hard thing and will take a while -- readers will have to lose something before they realize how much they value it.


Rockville, Md.: Never admit to making a mistake?

So long as a large part of our population wants to fire anyone for the first mistake, I would not admit any either. We need an environment where we can look at mistakes and find solutions - not someone to blame and fire immediately. Well, not all the time.

Steven Pearlstein: That's a very, very important point. Totally agree.


Washington, D.C.: I have a friend who is an investment banker who was always wrapped up into the worst nonsense investments. He made six figure profits during the dotcom boom on "day trading" of companies that had no business model to speak of and sold it all in 1999 and 2000. Then he bought pre-sale condos and sold them for quick profits in DC and Miami. Then he was into Chinese companies. He always seems to be making money, but none of it seems to be helping the business world in any way- every company is clearly junky and I feel like he's at the top of a pyramid trying to get my money to prop him up in time to sell. To me, that's the big problem- there is no sense on the street that companies should make a product that will keep them in business or provide a necessity, they are promoted in IB as nothing more than a horse race and when the race is over and people move into real estate there's no concern that the chits they're trading are people's actual houses.

Steven Pearlstein: You are on to something. To the guys on Wall Street, its all really a game and the point of the game is really to beat the other guy, meaning the other guy on Wall Street. The money is how they keep score as much as anything else. That's why I think we need to encourage moving the financial sector out of Wall Street, and disperse it around the country a bit, because that culture has become so poisonous. You'll never get rid of it entirely, but it is in its most concentrated form in lower Manhattan, where they really don't really give a flying fig about products or companies or clients or investors.


Baltimore, Md.: An interesting advertising trend: It seems, Steven, that the financial institutions that managed to dodge the faux "perfect storm" are beginning to use that in their marketing. There is a one branch savings bank in Baltimore that is, no kidding, telling folks via TV ads to come in and talk to "Miss Dottie" about opening up a CD. They show Miss Dottie, who has obviously been employed by this neighborhood thrift since the Truman presidency. Very, very effective, I can tell you.

Steven Pearlstein: We have a bank in northern Virginia, Burke & Herbert Bank, that does the same thing. I'm convinced there is a good market there for firms that can exploit it.


Colorado Springs: Harass their wives and children?!? Come now, Steven. I doubt that mob rule will offer a truly constructive solution. This isn't consistent with your usual sensible even-handed analysis.

Steven Pearlstein: Verbally harass. It won't last long, trust me. The guy will cave.


TROY NY (again): you dismissed my point about lack of appreciation of ethics and such with the comments that these things can't be taught -- they should be cultural. I agree -- except that they are evaporating from our culture! HOW do we nourish them into re-growth?

Steven Pearlstein: Through conversations like this.


Nellysford, Va.: You briefly mentioned the legacy costs of retirees. Isn't that cost more of a statement of the number of jobs the automakers provided our past economic success in building a solid middle class? There was a time where industries were more long term thinking about their employees rather than viewing them as disposable labor.

Steven Pearlstein: You can't build a solid middle class by overpromising benefits to the point where your company becomes uncompetitive.

There is no free lunch here. The tradeoff in the golden years of the 1950s was that GM created solid middle class jobs, but there were lots of people who couldn't afford cars and those who could wound up overpaying for them, given the lousy quality. Your middle class paradise is that Americans have fewer things and smaller house and fewer bathrooms and fewer airplane trips and restaurant meals, but that some more people people have higher wages and more generous benefits even while those working in small companies or non-union companies would be much poorer. Not sure that is the right model.


McLean: Have you read Henry Blodget's article in the December Atlantic? It's a micro-economic perspective of why the immediate interests and motivations of every player contribute to the inflation of bubbles, which is why there will always be bubbles.

Steven Pearlstein: Got it at home but haven't read it yet.


New Jersey: Re: local vs. regional newspapers. That is not a solution that looks like it will work, either. The Star-Ledger in NJ is a really good paper that serves numerous large communities and cities over half the state - yet it is going under, or nearly so.

Steven Pearlstein: It still has to split the market with other papers. And it suffers from the fact that readers are not yet willing to pay for content.


Arizona: Mr Pearlstein,

Thanks for making time this morning.

I agree with the poster from Severna Park, but I would take it one step farther. Do you think one of the root causes of our current economic circumstance is that for almost a generation companies have been managed not with strategies for earning sustained profits but with schemes to manipulate share price and individual quarterly reports?

Steven Pearlstein: Yes.


Steven Pearlstein: Sorry but our time is up. "See" you all next week.


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