March 5, 2021

High & Low Finance: S.&P. May Have Tempted Arthur Andersen’s Fate

They were the gatekeepers, with a clear conflict of interest — the people they were supposed to check up on were also the ones who hired and paid them. The need to protect their reputation was supposed to assure that the conflict would not lead to bad behavior.

But it did not. Those within the firm who wanted to be tough found themselves outmaneuvered by those who wanted to make compromises to keep business that might otherwise be lost to competitors — competitors who were not above making compromises themselves. It was not that they wanted to act badly, only that they did not want to offend important customers. They had no idea that the corners they were cutting would blow up into a scandal that would dominate the news, shock the nation and lead to the demise of the firm.

That is a description of what happened to Arthur Andersen, the accounting firm, more than a decade ago.

It may turn out to be a description of what will happen to Standard Poor’s, the ratings agency, as a result of its behavior during the housing boom.

The good news for S. P. is that it faces only civil liability from the suit filed this week by the Justice Department. It was the criminal complaint against Andersen that sealed the firm’s fate.

But the allegations in the suit are reminiscent of what happened at Andersen, whose image had previously been of being the most independent, and most committed to quality accounting, of the major firms.

Until now, the role of the credit ratings agencies in the financial crisis had seemed — to me, at least — to be defensible. They may have been foolish or even stupid, but they were not venal. They applied their models in good faith in rating mortgage-backed securities. Their models proved to be overly optimistic, but the housing collapse was an unprecedented event. Being wrong is not a crime.

The Justice Department suit offers a different sequence of events. As the housing bubble grew, and the revenue from rating the deals skyrocketed, S. P. was determined to stay competitive with other agencies — Moody’s and Fitch — in getting the business. That led to tinkering with models and ignoring inconvenient evidence so as to produce the ratings that were desired by the banks putting together the deals. Even when it became clear that new deals did not deserve the ratings they were getting, S. P. chose to issue high ratings.

By not filing criminal charges, the government got a lower burden of proof — preponderance of the evidence rather than beyond a reasonable doubt — while the potential for a $5 billion fine provides punishment as severe as any criminal case against a corporation could.

It is important to understand the financial alchemy that was involved in rating mortgage securitizations.

In the corporate world, to get a top rating a company has to have a sterling balance sheet and good prospects. But not in the world of securitizations. The logic was that a lot of clearly risky subprime mortgages could be put together and — presto, become mostly AAA in a residential mortgage-backed security, or R.M.B.S. Since it was extremely unlikely that more than, say, 20 percent of the mortgages would default, 80 percent of the money that financed them could be raised by issuing AAA-rated securities.

And the agencies took that one step further. Put together junior securities from a bunch of such deals and issue a new securitization, called a collateralized debt obligation, or C.D.O., and most of it was AAA too.

The result was that the boom in subprime lending was financed by investors who were told they had supersafe securities. The bubble would not have happened without S. P. and its peers.

The Justice Department has evidently been through every memo, e-mail and text message sent out by S. P. analysts and executives from 2004 through 2007, and found some that sound as if bosses were putting the short-term commercial interests of S. P. — both the fees it got and the need to maintain good will with the investment bankers who chose which rating firm to use — ahead of truth.

The most recent events the government complains about happened in 2007, and there are five-year statutes of limitations in some fraud laws. So the government turned to a 1989 law that makes it illegal to defraud a bank — a law passed during the savings and loan scandals — that has a 10-year statute of limitation, and cites case after case where banks bought the securities S. P. rated, and lost money. Some of those cases sound real, but as Jonathan Weil of Bloomberg News has pointed out, in some cases the bank that S. P. is supposed to have defrauded is the very same bank that put together the securitization, and kept part of it. It seems like a stretch.

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Media Decoder Blog: Fox Shelves ‘Ben and Kate’ on Tuesdays

The dismal year for new television comedies continued Wednesday with Fox pulling “Ben and Kate” — one of the few modestly praised new comedies of the year — from its schedule

The show, about a brother and sister living together with her young daughter, has posted weak ratings all season, but Fox executives said earlier this month that they would remain committed to it. That was before this week, when “Ben and Kate” attracted only 2.6 million viewers and a low 1.2 rating in the audience group Fox most seeks, viewers between the ages of 18 and 49.

Numbers for “New Girl,” Fox’s strongest comedy from last season, which has followed “Ben and Kate” on Tuesdays, have deteriorated all season; they hit a new low Tuesday with just a 2.1 rating in that 18-to-49 audience and only four million viewers.

Starting next week, “Ben and Kate” will be replaced on Tuesdays by repeats of “Raising Hope,” another Fox comedy that is struggling in the ratings. (It drew only four million viewers and a 1.7 rating in the 18-to-49 category this week). The night’s other Fox comedy, the new entry “The Mindy Project,” is also barely surviving. On Tuesday it reached just under three million viewers and scratched out only a 1.5 rating with the 18- to 49-year-old viewers.

Comedy on Tuesday appears to be nearing complete rejection: NBC’s two new series, “Go On” and “The New Normal,” both sank to new lows this week, even though Tuesday’s strongest network, CBS, was offering only repeats all night. Both new NBC comedies have had their ratings plunge since they were separated from the powerful lead-in of “The Voice.” Their once-secure status as shows set to survive the season could now be threatened.

Fox is promising to bring “Ben and Kate” back later in the season to finish its run of episodes, but its fate — cancellation — seems sealed.

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Media Decoder Blog: National Book Awards to Diversify Judging Pool

Looking to broaden its appeal to the public and increase its impact on sales, The National Book Foundation, which presents The National Book Awards, announced Tuesday that it would increase the number of finalists and diversify the judging pool.

The changes to the prestigious American award were widely anticipated. For years, the foundation has confronted criticism that it was too insular, often skipping bestselling authors in favor of unknowns. Not only did that make the award less relevant to the public, it hampered its ability to lift book sales.

Board members had come to feel that the awards needed a model more like that of the Man Booker Prize, Britain’s top literary honor, which is more integrated into popular literary culture.

“When a book is shortlisted for the Man Booker prize, it sells another 50,000 copies,” Morgan Entrekin, president of Grove/Atlantic Press and vice chairman of the National Book Foundation’s board, told The New York Times last November. “It can transform the fate of a book.”

“The winner of National Book Awards succeeds,” he added. “But I would like to see it have that kind of effect on the shortlist as well.”

For over a year, the Foundation has been soliciting input from consultants and other members of their industry — ranging from agents to booksellers — to see what changes would help increase its profile.

The awards will continue to be given to books by American authors published in each of four genres – Fiction, Nonfiction, Poetry and Young People’s Literature. But the foundation will split the finalist process into two parts. Six weeks before the award, the foundation will announce a “long-list” of 40 finalists, 10 for each category. About four weeks later, it will narrow the list in half.

In addition, judging will no longer be limited to writers, but could include other literary professionals such as critics, librarians, and booksellers.

“In the 1950s, ‘60s, and ‘70s,” Harold Augenbraum, Executive Director of the National Book Foundation, said in a written statement, “such prominent critics as Malcolm Cowley, Irving Howe, Alfred Kazin, and Helen Vendler served as National Book Award judges, bringing a breadth of knowledge and expertise to the panel discussions. By enlarging the judging pool new and exciting voices will again deepen and enrich the process.”

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DealBook: WebMD Takes Down For-Sale Sign

The online health company WebMD said on Tuesday that it had taken itself off the auction block, after failing to attract satisfactory offers from potential buyers.

The company also said its chief executive, Wayne T. Gattinella, had resigned. He is being succeeded on an interim basis by Anthony Vuolo, the company’s chief financial officer, while the board looks for a permanent successor.

The announcement comes follows months of speculation about WebMD’s fate, after the company said last year that it had put itself up for sale. In its statement, WebMD said it had held discussions with several potential buyers and allowed them to conduct some due diligence. The company has a market value of $2 billion.

Among the juicier speculation of late was that WebMD could factor into a potential spinoff of Yahoo‘s holdings in Alibaba of China and Yahoo Japan. As part of the requirements of any spinoff, the Asian companies would need operating assets — fully functional businesses — that they would essentially swap for Yahoo’s stakes.

Some investors had banked on WebMD being one of those operating assets. But that idea never had much basis in reality, and WebMD was not seriously considered to be part of that plan, according to a person briefed on the matter.

WebMD plans to remain independent, though its future as a stand-alone business is expected to be rough in the near term. The company said it expected to post lower revenue and higher expenses this year, as drug makers cut back on ad spending and competition increased from other Internet portals and social media sites.

WebMD said it expected to meet its previously published earnings guidance, but at the low to middle part of that range.

Shares in WebMD plunged nearly 28 percent in premarket trading.

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Bucks: All About Chase’s New United MileagePlus Explorer Card

For United Airlines customers wondering about the fate of their miles-earning credit cards in the wake of the airlines merger with Continental, the airline offered up an answer today. It’s a new Visa card called the MileagePlus Explorer.

The annual fee is $95, which is more than the $60 that many United customers are paying for the entry-level mile-earning Visa currently. But the new card comes with a number of benefits.

Cardholders (and traveling companions on the same reservation) who don’t already have elite status will be able to board early, albeit after everyone with status has already gotten on the plane. Still, this should be sufficient for everyone in that boarding group to find overhead bin space and avoid having to check their bags at the gate.

Big spenders will get an extra 10,000 miles each year once they pass $25,000 in annual spending (and earn the usual one mile per dollar they spend).

Cardholders and one traveling companion will each be able to check one bag for free on United flights, a handy perk for people who don’t carry everything on and don’t get free baggage checking due to their elite status on the airline.

You’ll also get two passes to United’s airport clubs each year. A one-day pass normally costs $39 if you buy it ahead of time online or $50 if you buya pass at the airport. They are good for one person per pass; you don’t get to bring traveling companions along for free.

One thing cardholders won’t get, however, is a waiver on those dreaded 3 percent surcharges for purchases that take place outside of the United States, something that Chase’s more expensive United Club Visa offers.

I asked David Gold, senior vice president for Chase Card Services, if Chase had determined that it didn’t need to offer that perk because customers would forget about the surcharge or shrug their shoulders and use that card outside of the United States anyway rather than switching cards for their trips.

He countered with a more benign explanation. “There are customers who that is a pain point for, and we have a product for that,” he said. “Not every product necessarily needs that.”

People who have the current $60 annual fee Chase United card can keep that card; Chase won’t upgrade you automatically. If you want to upgrade to the new one, you can call the number on the back of your card and ask to make the switch. Chances are, you will not have to change your credit card number (and redo all of your automated monthly payments with billers) if you upgrade.

So those are the basics. For the true mileage junkies out there, however, there are a few more twists.

With this announcement, United is revealing a couple of decisions about how it is settling conflicting rules between its loyalty program rulebook and that of Continental’s OnePass program, according to Mr. Gold.

First off, Continental miles never expire, but United’s do. United’s policy will prevail, but miles will never expire for people with any of the combined company’s credit cards that levy annual fees.

Second, United customers are able to use 50,000 miles to book any seat on the airplane for a domestic flight as long as it’s available for sale; Continental customers face capacity controls when trying to book those seats. Here, Continental’s policy will prevail, but annual-fee paying credit card customers will not face those capacity controls.

Implementation of these special privileges will likely present a formidable information technology challenge to the combined carrier, so watch your program statements closely and appeal up the supervisory ladder if you are not getting what you are supposed to.

If you’re a Chase Continental cardholder, you may be wondering what this all means for you. The combined airline intends for the United Explorer card to become the standard miles-earning card; people who have Chase’s Continental OnePass Plus card will soon receive whatever benefits the Explorer card offers that the Plus card doesn’t already.

Then, sometime next year, the Continental cardholders will receive new Explorer cards to replace their Continental cards. Here too, Chase hopes to spare everyone the hassle of having to switch credit card numbers.

As always, the mileage experts on FlyerTalk are picking these developments apart if you want to learn even more. Feel free to post your own assessment of the new card below as well. Will you elect to pay more than 50 percent more in annual fees to access these new perks?

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