CAMPAIGN OUTSIDER With friends like these ...
By Muhammad Cohen
HONG KONG - You can tell a lot about people by the friends they choose. For
candidates in the United States presidential race, that goes double for their
political friends. Last week, Republican nominee-in-waiting Senator John McCain
got a double whammy from two key allies he has chosen.
Former Texas senator Phil Gramm and former Hewlett-Packard chief executive
Carly Fiorina both shot off their mouths inopportunely. Gramm declared the US
is in a "mental recession ... we're becoming a nation of whiners". McCain said
he completely disagreed and suggested that Gramm, touted as a
potential McCain administration secretary of the Treasury, was more likely to
be banished to an ambassadorship in an obscure former Soviet republic.
Fiorina griped about insurers not covering birth control and told women voters
McCain would change that. But McCain has voted against that very item on at
least two occasions. When questioned about it, McCain was struck speechless
before pleading memory lapse on the votes. Even painful to watch, it had to
rank among his top 10 most uncomfortable moments since the Hanoi Hilton.
In the bigger picture of McCain's campaign for the White House, what Gramm and
Fiorina said matters last week less than who they are and what they've done in
their respective careers.
My way or the HP way
Fiorina was the first woman chief executive officer of a Dow Jones Industrial
Average firm when she took the reins at HP in 1999. Aside from the first
layoffs in company history, Fiorina used dubious arguments and trashed
Hewlett-Packard's founding families and its "HP way" culture to engineer a
dubious merger with Compaq.
The move, announced in 2002, was designed to make HP the world's largest
manufacturer of personal computers. The company that invented Silicon Valley
after Stanford University graduates David Hewlett and Bill Packard built a
precision audio oscillator in a Palo Alto, California, garage (now a state
historic monument), would stake its future on the low-margin business of
grinding out a commodity product. HP shares fell 18% on the day the merger was
announced.
The Compaq merger decision came after HP had failed to partner with a business
consulting firm and move the company more heavily into that space. IBM, which
sold its PC division to China's Lenovo, has just done that with great success.
In 2002, HP was the dominant player in computer printers, and, opposing the
merger, board member and founder's son Walter Hewlett urged focus on that very
profitable segment. But Fiorina was following the Vietnam War strategy of
destroying the village in order to save it. She wanted HP to unmistakably bear
her stamp, one way or another. On this matter, and all others, those disagreed
with her, well, they were simply wrong.
Fiorina got her merger but the results were predictably disappointing. In 2005,
Fiorina got the ax, with a US$21 million severance package. Since she's left,
HP has also prospered. It has firmly taken the top spot in PC market share and
acquired EDS, a leading computer services provider. The stock price, which rose
7% on the day Fiorina was fired, has more than doubled. In an unintentionally
comic turn, Fiorina said in an interview last week, "My choices and my
leadership had been completely validated by what happened from the moment I
left. And by the way, the best legacy of a leader is what happens after they
go. That's how you know the kind of foundation they put in place."
Selective legacy
So Fiorina is taking credit for the progress HP made thanks to her firing.
However, she's not taking credit for what happened after she left Lucent, the
telecom equipment maker spun off from AT&T, where she ran global sales. A
darling of Wall Street in the late 1990s, the company imploded amid
irregularities in sales reporting and accounting during her watch. (Nice hire,
HP.) Lucent shares lost more than 99% of their value, the company sold off
various pieces, and finally, in 2006, sold itself to Alcatel.
Fiorina's autobiography, Tough Choices, recounts an episode where she
stuffed socks into her crotch and declared, "Our balls are as big as anyone's
in this room." That would explain what can be charitably characterized her
conveniently selective memory in misrepresenting McCain's position on insurance
payments for birth control.
While Fiorina wants to bring her brand of corporate megalomania to the
political arena - in addition to speculation she could be McCain's vice
presidential choice, Fiorina is considered a potential candidate to succeed
Arnold Schwarzenegger as California's governor - Phil Gramm has gone the other
route, bringing his extraordinary political ego to the corporate sector as a
vice chairman of Swiss banking giant UBS. But Gramm realized early on that
there was no need to have a corporate job to be on corporate payroll.
While railing against government involvement in the economy, Gramm's entire
career has about been making his involvement in government personally
profitable. His "mental recession" remarks fit a long-running pattern: Gramm
and his wife, Wendy Lee Gramm, embody Washington insiders brazenly feathering
their own nests and letting the public eat cake.
While gutting the rules that kept banking, securities and insurance separate as
a senator, Gramm took more than US$1 million in contributions from the
financial industry. Eliminating restrictions on financial services companies
has enabled them to become behemoths. It's also ensured that a problem in
banking or insurance or mortgages isn't a sectoral problem but a threat to the
entire US economic system.
Senator from Enron
Gramm was also known as the senator from Enron, but he didn't do that job
alone. Wendy Gramm headed the Commodity Futures Trading Commission, where she
approved many of the controversial strategies that Enron employed to make its
name synonymous with corporate malfeasance. Her government work done, she went
directly from her commission chair to a seat on the board at Enron. Phil Gramm
then picked up the torch, co-sponsoring the Commodity Future Modernization Act
that gave Enron even more scope for the fraudulent behavior that brought it
down, costing shareholders billions while executives escaped the carnage.
The Gramms, each with a doctorate in economics, kept their Enron money. From
1999, Wendy Gramm refused to accept Enron stock as payment for her work as a
director. With an audacious lie that would make Josef Stalin blush, she
declared that holding Enron stock created a conflict of interest for her as a
director, so she cashed in her stock and took all further payments in cash.
Corporate directors, by law, have a fiduciary duty to act in the best interest
of shareholders. Any economist not named Gramm will tell you the best way to
ensure they do that duty is to give directors the same financial interest as
shareholders, ie that directors should be shareholders, preferably substantial
ones.
Gramm's statement was complete and utter nonsense, the equivalent of declaring
only foreigners should vote since residents' choices would be impacted by
having to live with the outcome. If Gramm actually believes her conflict of
interest argument, then she can't believe in democracy or representative
government. But what matters is that she avoided getting stuck with worthless
Enron shares when the crash came. Her rake as an Enron director reportedly
totaled $2 million.
The Enron episode reveals much about Wendy Gramm's character. As a government
official and in her current position as a chairman of Regulatory Studies at
George Mason University's Mercatus Center (to which Enron was a donor), Gramm
champions the rough justice of markets to determine winners and losers. But as
a director at Enron, she found a way to insulate herself from not just the
market, but from the consequences of her own inadequate oversight as a member
of Enron's audit committee.To investors she was duty-bound to protect, Wendy
Gramm still preaches that Enron's demise was a triumph of market freedom (so
quit whining).
Phil Gramm is just as hypocritical but perhaps even less competent. His job at
UBS entails lobbying Washington and providing the bank with perspective on US
regulations and markets. You'd think the former chairman of the Senate Banking
Committee would have foreseen the subprime mortgage debacle and steered UBS
clear of it. Instead, UBS has been hit with losses estimated as high as $45
billion, and its shares have lost 70% of their value. Ask your bosses and
shareholders whether it's all in their heads, Phil.
In Phil Gramm and Carly Fiorina, John McCain has a pair of economic experts who
last week showed they can't talk the talk and over their careers have
demonstrated they can't walk the walk. Yet McCain hasn't cut either of them
loose. With so many experts out there, McCain needs to explain to voters why he
chooses to listen to what Gramm and Fiorina have to say.
Former broadcast news producer Muhammad Cohen told America's story to the
world as a US diplomat and is author of Hong Kong On Air (www.hongkongonair.com),
a novel set during the 1997 handover about television news, love, betrayal,
high finance and cheap lingerie.
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