Thursday, September 28, 2017

Contradictory Comments on Health Insurance as Unethical: The Case of Newt Gingrich

Newt Gingrich said on May 15, 2011 that people should be required to buy health-insurance. He added that he would like to see the mandate implemented at the state rather than the federal level. These comments unleashed a torrent of criticism from Republicans, so the former Speaker of the U.S. House of Representatives spent the following week “walking” his comments back by denying that he had said that he was for a mandate.  The media was in a feeding frenzy, astounded that the former Speaker could simply deny that he might get away with the contradiction. However, in such cases, is it the person or logical contradiction itself that gets us so steamed?

Although we tend to point to the person who has made a contradiction without acknowledging it, ascribing possible sordid motives, it could be that the logical contradiction itself lies at the source of the angst in the beholder. More specifically, the logical contradiction itself may be in its substance an uncomfortable emotion rather than reason. In other words, violating logic may be an emotion that appears in the form of twisted reason.

Otherwise, it would be a case of reason causing an emotion. For example, “You logically contradicted yourself and that makes me mad” is typically taken as something of reason causing a particular emotion. It is difficult to link reason and emotion because we take them to be different things. It is a bit like Descartes’ mind-body problem.  Were logical contradiction itself an emotion, however, then to say that a contradiction caused anger might be easier to explain as one emotion would be giving rise to another—both being of the same type of thing (i.e., emotion).

Going even further, the observation that logical contraction is an emotion distinct from the anger may be an illusion.  Because the anger comes so quickly and naturally, it could be that what we take as the anger is simply part of the complex emotion of experiencing a logical contradiction. Similarly, when a person says that he feels confused, a cognitive condition is really an emotion because it is felt. Like confusion, experiencing logical contradiction does not feel good.

In general terms, talking about logical contradiction as an emotion of disapprobation reconciles Kant’s first formulation of his categorical imperative to Hume’s psychological theory of morality.  To Kant, moral principles are universal because of the role of universality and necessity in reason, so maxims that involve a logical contradiction if they are universalized cannot be moral. To Hume, moral judgment just is the sentiment of disapprobation.

Typically, Kant’s ethical theory is viewed as rationalist, whereas Hume’s is portrayed as psychological. However, if logical contradiction is itself an emotion having the form of reason, then it could be said that the moral sentiment of disapprobation applies to the uncomfortable emotion that the experience of logical contradiction. Reason turned against itself only seems to be cognitive rather than emotion. If what we have in a logical contradiction is essentially an emotion (or even an emotional reaction), then Kant’s rationalism and Hume’s sentimentalism are no longer antipodal. To say that logical contradiction is unethical is to say that it gives a rational and emotional being a sentiment of disapprobation. Logical contradiction itself naturally gives us a bad feeling; indeed, the contradiction may simply be a way of labeling a particular emotion.

So when we say that Newt Gingrich should not have contradicted himself (or he should own up to having contradicted himself), the basis of our moral judgment could be the emotion that we feel when we are confronted with a logical contradiction—the contradiction being that sentiment of disapprobation.


Kant’s Groundwork of Metaphysics and his Critique of Practical Reason.  See also David Hume’s Treatise of Human Nature.

Naftali Bendavid and Jonathan Weisman, “Medicare Revamp Exposes Divisions Within the GOP,” The Wall Street Journal, May 17, 2011, p. A6.

Too Big to Fail: The Trillion Dollar Club

Banks with assets over $50 billion are considered “systemically important” according to the Dodd-Frank law of 2010. The act is geared to shoring up protection against systemic risk. The U.S. Government deems certain banks (and companies) systemically important if they are big enough to threaten the entire financial system should they fail. Such enterprises are subject to higher capital standards and stricter rules. Roughly three dozen banks in the U.S. had been classified as systemically important by mid-May 2011.

A major flaw in the law is its failure to sufficiently distinguish the banks having assets at just over $50 billion (the floor of systemically important) from the banks with assets over $1 trillion. For example, Bank of America ($2.28 trillion), J.P. Morgan Chase ($2.2 trillion), Citigroup ($1.95 trillion), and Wells Fargo ($1.24 trillion) can be clustered and distinguished from Huntington Bancshares ($52.95 billion), CIT Group ($50.85 billion), Zions Bancorp ($50.81 billion), and Marshall & Ilsley ($49.68 billion). If just one of the institutions in the over $1 trillion club fails, the financial system worldwide could be toast. In contrast, the system would be more likely to remain viable if just one of the banks with assets of around $50 billion were to fail.

Of the $50 billion club, Stephen Steinour, chair and CEO of Huntington, stresses, “We are not vital to the economic system of the U.S.” The chair and CEO of Bank of America could not make the same claim. However, Steinour is ignoring the possibility that Huntington could be a domino in a line of similar banks whose failures altogether could challenge the viability of the financial system; yet even this risk can and should be distinguished from the inherent systemic risk in just one of the banks in the $1 trillion plus club.  Furthermore, those big banks have grown even larger since before the financial crisis—meaning that their systemic risk is higher rather than lower after the crisis. At the end of 2010, the top ten banks in U.S. had 77% of the banking assets in the U.S.

In 2007, Bank of America had assets of $1.54 trillion; by 2011 that number had moved to $2.28 trillion. J.P. Morgan Chase had gone from $1.46 trillion to $2.20 trillion, and Wells Fargo went from $539 billion to $1.24 trillion. Citigroup bucks this trend, moving from $2.22 trillion down to $1.95 trillion. Generally speaking, this cluster of banks represents more rather than less systemic risk after the crisis of 2008.  Were one of these banks to founder, a government-arranged orderly liquidation as per the Dodd-Frank law might not be sufficient to keep credit markets from freezing up. The very existence of a bank with more than $1 trillion in assets should be questioned. Ironically, efforts to evade financial catastrophe in the fall of 2008 contributed to the increase in size. That is to say, staving off the crisis may have made another more likely in the future.

So especially after the scare in 2008, it is incumbant on us to question the sheer existence of the banks that have been allowed and in fact encouraged to get bigger. If a bank having more than $1 trillion in assets is deemed necessary for corporate capitalism to function in spite of such a bank's inherent systemic risk, one might ask how the system got along without them before they had grown so big. After all, it is not unheard of for a syndicate of banks to package financing on a mega-LBO (leveraged buy-out); one mega-bank is not necessary. Indeed, mega-LBOs themselves may result in unacceptable systemic risk. Finance itself, and particularly the increasing role of leverage, can also be subjected to question. 

Although distasteful from the vantage-point of the financial interests vested in the status quo, the trillion-dollar-plus club of banks could be treated differently than the banks of around $50 billion. Whereas the latter could be more strictly regulated, the former could be broken up not only in terms of management, but also in ownership (rather than the spin-offs having the same fractional owners, as was the case with Standard Oil after its “break-up”).  Considering that obviating financial collapse in 2008 included the byproduct of even larger banks, a second systemic-risk law delimiting a maximum size could complement existing anti-trust laws. Unfortunately, the Dodd-Frank law does not address this point, and is thus insufficient from the standpoint of obviating the systemic risk of firms being too big to fail.


Robin Sidel and Jean Eaglesham, “Vital? Not Us, Say Small Banks,” The Wall Street Journal, May 13, 2011, p. C1.

2007 Bank Assets,

Lehman's Dick Fuld as the Antagonist in the film, "Too Big to Fail"

The reporter-author of Too Big to Fail, Andrew Ross Sorkin, expressed the following fear as his 600-plus-page book was being made into a movie: "I went into the process I think worried – as I imagine most writers would be – that it would be sexed up and hollywoodized in some other way." To be sure, putting the Dick Fuld (CEO of Lehman Brothers) character into any sort of sex scene would have been counterproductive at best.

As it was, the director of the tv-movie based on Sorkin’s book let the drama inherent in the historical events to lead the narrative. The only quibble I may have with the historical veracity has to do with Bart McDade replacing Joe Gregory as President of Lehman. According to Larry McDonald, a former distressed-bonds trader at Lehman, the replacement also relegated Fuld even as he remained as CEO only to quell the markets. Specifically, on June 11, 2008, “Fuld was effectively deposed,” according to McDonald, “by Bart McDade with the support of the executive committee” (McDonald, p. 297). In the movie, however, Fuld was still in charge even in September of that year, with McDade still bowing to him in front of the Koreans.

While it could be that Sorkin and McDonald have different sources of information on whether there was a coup within Lehman, the film’s director and screenwriter could have kept Fuld in charge to maintain the character as the principal antagonist. Even so, McDonald’s description of McDade confronting Fuld in Fuld’s office and the subsequent decision of Gregory in the conference room to take the stunned CFO, Erin Callan, down with him in front of the executive committee would have made excellent scenes in the movie.

The other change I would have made to the screenplay would give the viewers an improved insight into how the sub-prime crisis could have been allowed to get so bad. Specifically, the Fuld character could have had a flashback to Mike Gelband’s warning on June 7, 2005 in defiance of Fuld that Lehman should get out of the housing-related CDO market; the bank was then leveraged twenty-two times its net worth (McDonald, p. 136). Meeting with Gelband and other senior executives on the 31st floor on that day, Fuld and his allies insinuated that Gelband had some kind of attitude problem that needed to be changed “real fast” (McDonald, p. 138).  As a flashback, this scene would have shown the viewer Fuld’s recklessness in terms of risk (and leverage), and thus how the financial system could have been put in such peril by the “experts”. In fact, in the spring of 2007 Fuld decided to bully and belittle Gelband publically at the bank in order to get him to take on even more risk (McDonald, p. 235). This could have been fused into the “attitude problem” meeting, showing the viewer Fuld’s pathology, which goes beyond a bad temper.

Whether one points to Jim Cayne at Bear Stearns or Dick Fuld at Lehman, the role of pathology in the near-demise of Wall Street could uncover for us how recklessness could have gained such traction. In other words, HBO’s Too Big to Fail could have delved into Fuld’s character beyond having him drop some F-bombs. Speaking on Charlie Rose on the evening of the movie’s premiere, Sorkin marveled that it must be difficult for actors to convey their respective characters in just a few scenes. That is true; however, the director and screenwriter could have brought out Fuld’s pathology (beyond his anger) by a few well-chosen additional scenes. Sometimes what a character says, and to whom, can be more damning than how loud he or she says it. Concerning Fuld, the viewers could have been shaking their heads in utter disbelief rather than simply concluding that the guy is arrogant and has a temper.

Lawrence McDonald, Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (New York: Three River Press, 2009).

Wednesday, September 27, 2017

Did Pandora's IPO Eclipse Fiscal Gravity?

Pandora, an internet-based radio company oriented to music, sold its initial public offering at $16 per share late on June 14, 2011. The shares opened the next day at $20 and rose as high as $26, only to fall into the teens before market close. At $26, the company had a market value of $4.2 billion, more than the value of AOL at the time. Just two weeks earlier, Pandora’s management had been looking at the $7 to $9 range.  Despite offering only 9 percent of its shares to the public, the company raised twice as much money as it had expected.

Astonishingly, Pandora had not made a profit in its 11 year history. On June 15th  when the share price was over $20,  Pandora’s CEO, Joe Kennedy, refused to say whether the company would make a profit in the next five years. Instead, he pointed to the operating margin and cash flow, and to the business model, as reasons to invest long-term in the company. "Our focus has always been to build a great company. That’s our dream, that’s our passion, that’s our focus," he said, according to CNBC. It can be asked whether investors were engaging in irrational exuberance or on the rational expectation that it can take time for a company to begin showing profits.  

With all the attention typically paid to quarterly earnings, it is refreshing to hear a CEO stress the long-term nature of investing in his company. It would be nice if Pandora’s owners also had had a passion in Pandora as a going concern pushing along the technological wave by providing music tailored to individual listeners’ tastes. Such long-term investment would have bode well for corporate governance as owners take more of an interest in holding their management accountable through directors and stockholder referendums.

At the same time, Pandora’s reliance on advertising revenue even as an increasing proportion of use on smart phones may suggest a flawed business model. For internet companies in general (as well as bloggers!), it is difficult to turn non-paying users into subscribers. At the time of its IPO, Pandora had 94 million registered users, most of which were non-paying customers. "The excitement for Pandora is driven by people's usage of the service and the enjoyment of the service," said Richard Greenfield, an analyst with BTIG Research. "But in order to justify a high valuation, they need to get far more advertising, and they need to get more people paying for the service." But this can be difficult in a marketplace where users can simply switch to a free service. While a nice set-up for us users, I’m not sure the business model is viable, given how much internet advertisers pay for clicks of their ads (which in turn is a reflection of users being able to ignore ads).

My understanding is that the phenomenon wherein a very high proportion of customers can use a product for free is pretty much limited to the internet. Tangentially, free wifi at coffee shops and even some restaurants (e.g., McDonalds) has given rise to customers “camping out” for hours to use the free service long after finishing their drink.  Incidentally, as I write this essay, I’m using Starbucks’ wifi long after my ice tea and slice of coffee cake. I’m watching the 100-minute full lunar eclipse live (just showed the video feed to the store’s manager and another customer—both of whom are amazed) as I contemplate Pandora’s business plan relative to fiscal gravity here on earth. It is just such amazement at the marvels of technology that a long-term investor in a company like Pandora can have while participating in the innovation; but lest we lose too much perspective, it is well to observe that a business model is trite, artificial and even profane next to the translucent liminality of the eclipsed rock otherwise known as our moon.

If Pandora’s advertising revenue is not sufficient to pay for the rights to the music the station plays, then not being allowed by the market to charge most users can mean eventual financial ruin for the company, especially given the extent of the competition facing the company. According to, “Pandora is going up against traditional radio companies, satellite radio provider Sirius XM, music services such as Rhapsody, not to mention services from Apple, Google and Amazon that allow users to access music from anywhere.” The internet platform itself can mean not only relatively low advertising rates, but also low barriers to entry for future competitors.

According to The New York Times, Pandora had just 3 percent of the market at the time of the company’s IPO and had lost $92 million cumulatively since it began. In 2010, revenue of $137.8 million was more than double from the previous year, but the company’s 2010 loss was at $1.8 million. Most significantly, the company had never earned a profit and yet investors were rushing to invest in the company’s IPO. "I think it's heavily overvalued," Anupam Palit, an analyst with GreenCrest Capital, said according to "It's a great company but what we're seeing right now is incredible investor demand for Internet IPOs and a lot of dollars chasing very little supply." In rushing to invest, investors may have been ignoring a fundamentally flawed business model—in effect defying fiscal gravity.

An unsustainable imbalance between relying on on-line advertising revenue rather than subscribers and having to pay labels substantial fees for content mean that Pandora may never earn a profit. According to The New York Times“the fees [Pandora] pays to record labels for songs remain its largest expense. The cost to acquire content more than doubled last year to $69.4 million. ‘As the volume of music we stream to listeners increases, our content acquisition expense will also increase, regardless of whether we are able to generate more revenue,’ the company warned.” According to The Wall Street Journal, “The company faces hefty payments to music labels and publishers, similar to traditional radio companies, and has yet to offset such expenses with advertising revenues and user fees.” It would seem that the labels and publishers were not making a sufficient allowance for the discounted nature of internet-advertising revenue relative to that of brick-and-mortar radio stations.

I would be remiss if this business analysis did not place Pandora in historical context. In the closing years of the twentieth century and during the first decade of the twenty-first century, managers of “dot.coms” grasped at how to monetize the internet wherein the norm was free content. That norm had such gravitas and the internet itself was so new that business practitioners had trouble simply grasping how to get a handle on the platform. Indeed, the internet itself was changing—prodded along by the likes of companies such as The New York Times that led the way to confining their internet-users to a subscription-basis. At the time, no one knew whether the momentum would shift to this basis across the internet; no one knew whether the free access to stuff on the internet would continue unabated or suffer a decline.

Theoretically, a movement toward “subscription-only” access could pass a threshold-point beyond which businesses (and bloggers) could discount the impact of alternative free vendors and the monetization trend would be irreversible. The more traditional, more financially-solid business model could then be applied by internet companies. By the end of the first decade of the twenty-first century, internet-company managers could not even be sure that such a threshold would be crossed. At the same time, relying on advertising revenue seemed to be an insufficient basis for sustained profitability.
In other words, the uncertainty in the air at the time of Pandora’s IPO was not limited to the company. Fundamentally, the world was still grappling with how to make money using a completely new platform. It takes years for such novelty to be understood and thus ably used, even if in hindsight it seems simple. The human mind is indeed quite finite, particularly as it struggles to make sense of a new environment.

 Those people willing to invest in Pandora in its IPO on the ides of June 2011 were indeed taking a risk, and the CEO was correct to stress the long-term (which is the best perspective for stock-ownership anyway). Unless or until the monetization threshold point is hit on the internet as a whole, Pandora’s management (and investors) ought to have been taking seriously the possibility that the company’s business model was not in balance. Content should be in balance with ad revenue, and negotiating with labels and publishers ought to reflect such a balance as even the suppliers cannot earn money from defunct distributors such as Pandora. A viable business model is indeed possible for internet companies before the threshold point unless they face an overwhelming amount of free-content by competitors and ad revenue is tiny (e.g., blogging). The question at the time of Pandora's IPO was whether the company would go down this route or be able to adjust its business model even without the internet itself reaching a monetization threshold-point. 


Margo D. Beller, “Pandora Soars, Then Falls in Market Debut,” CNBC, June 15, 2011.

Pandora Shares Surge at Their Debut,”, June 15, 2011.

Lynn Cowan and Don Clark, “Pandora IPO Is High Note,” The Wall Street Journal, June 15, 2011.

Evelyn M. Rusli, “Pandora Prices Its I.P.O. at $16 a Share,” The New York Times, June 15, 2011.