GP 21 January 2009: US Air 1549:
Looking for a Soft Landing on the Hudson
Honesty is such a lonely word.
Everyone is so
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
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
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
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
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
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
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
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
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.