Archive for February, 2010

Common Language

An Episcopalian priest, a GE guy and a Consultant are in a bar…..I know it sounds like the beginning of bad joke but here’s how it really happened.  

I vacillated for weeks about going to the networking event in Manhattan.  I always have to be careful about the events I attend because in our business, management of time is paramount.  

I finally decided to take a gamble and off I went to an exclusive club in New York to meet and network with “leaders of industry.” 

I got there, checked my coat and entered the ballroom.  I found the usual types milling around the (open) bar.  Slick investment bankers, staid corporate types and the annoying bubbly personalities from the non profits. 

As I made my way around the room, I ended up chatting with (you guessed it) an Episcopalian priest and a mid level guy from General Electric (GE).  After we gave the obligatory elevator pitches about our backgrounds, the subject of executive travel came up.  I don’t really remember how.  

“Yea, Jeff takes the helicopter between Fairfield and Crotonville all the time”, the GE guy said.  

“Jeff?…. Who the *%^$# is Jeff?”, I wondered.  

The priest was looking at me smiling, nearly laughing actually, as he was undoubtedly aware that I had just cussed the guy in my head.  Geez, the sixth sense of the clergy…go figure.  

Anyway, all of the sudden it clicked with me.  I knew who the GE guy was talking about. 

“You mean Jeffrey Immelt, The Chairman and CEO of GE”, I asked. 

“Yea, Jeff”, he responded. 

The GE guy’s story continued and he continually referred to the CEO by his first name, as if he were an old college roommate. 

 During the following week, I thought about this peculiar behavior.  I relayed this story to a good friend.  I figured my friend would have some commentary and insight, he’s a smart guy, Ivy league MBA, a lot of common sense and very down to earth.  

“Those guys do that all the time” he said about GE employees.  They always refer to the CEO and CFO as Jeff and Keith, regardless of their position in the company and whether or not they actually know them personally.  

“It’s almost like there’re talking about an uncle or something,” my friend said with a tinge of annoyance.  He finished by saying that GE must have such a strong culture in order to influence the language that people use.  

Language is after all what binds people together.  Language is one of the hallmarks of a common culture.  Without a common language people no longer feel connected to one another.  Indeed, they even lose the ability to relate to one another. 

In our business, one of the things we do best is explain highly technical and complex accounting and finance concepts to managers outside of the financial realm.  General Managers, Engineers, Marketing types, etc., typically do not have an accounting background and find some financial concepts confusing.    

Explaining these concepts has been getting harder and harder lately, as accounting has become more complex.  Not only more complex, but the connection between accounting and tangible utility has become much more fragile.  

OK..ok..even the Episcopalian priest is probably cussing at me right now.  Let’s get to the point.  

A college professor of mine once described accounting as the “language of business.” “Profits, losses, cash, liabilities and assets, are all words used to describe the results of business operations.  When executives “talked business” they used accounting to express themselves.  Nowadays, there is a big difference between talking business and talking accounting.  They are no longer the same.  


In many cases accounting is not performed to better reflect the results of business operations but for an amorphous concept called “better disclosure”.  More likely than not (no pun intended), this “better disclosure” results in the financial statements becoming indecipherable.  The “language of accounting” now includes such strange terms as Special Investment Vehicle and Off Balance Sheet Debt.  

In many cases, accounting is no longer a means to an end, i.e explaining the results of operations to managers, shareholders and investors, but has become an end in itself.  

I once sat next to a financial services executive on a plane ride home.  This guy was one of the top 50 people at one of the largest financial institutions in the country and was the head of a major profit center.  

We exchanged greetings and so forth.  After finding out what I did for a living, he initially wasn’t that interested in chatting with me.  Oddly enough, after a few vodkas he became a lot more talkative.  

Doing his best to humor me by “talking accounting”, he made the following confession: 

“I guess I’m at the point where I understand the income statement, but I still don’t get balance sheet…..nah.. I need my CFO to explain it to me.” 

Weekly Recon readers might be aghast at this high ranking executive who doesn’t really understand his financial statements. 

The sad truth is he doesn’t have to.  He can operate the business using some common sense metrics that comport with reality: revenues, cash, expenses, gains and losses.  He simply leaves the meaningless (to him) accounting esoterica to his CFO.  

Supporters of an increasingly Byzantine accounting system will say accounting differs from the real world in order to provide greater clarity.  I doubt that greater clarity is achieved when the majority of financial statement users cannot fully understand their contents.  

As a shrewd CEO (with a wry sense of humor) once said after a lengthy accounting discussion, “This is all for clarity of course.” 

But back to our little party at in Manhattan….. 

The GE guy, sensing my amusement at him for calling the CEO by his first name, decided to confront the issue.  

“Is something wrong”, he asked.  

“Not at all” I replied.  “I’m on a first name basis with our boss as well.  In fact, when I get home I’m going to chew our Managing Director out for making me come to this event!” 

The priest then bowed his head in prayer.   

Have a great week, 

Michael Bechara

Managing Director

Granite Consulting Group Inc.


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For a thousand years various princes and kings tried to form the scattered Germanic fiefdoms and principalities into one nation. 

They all failed. 

The German people were ruled by dozens of sovereign states in various phases of despair and prosperity.  Though the people shared a common language and culture they remained fragmented and susceptible to internecine conflicts. 

Until the arrival of Otto von Bismarck.  

Rising from his native principality of Prussia, Bismarck became the first man in a thousand years to unite the disjointed German kingdoms into one nation.  Becoming the united country’s first Chancellor (Prime Minister), not only did Bismarck create a united Germany, he also made Germany into one of the most powerful and prosperous nations in Europe.  

A central ingredient in Bismarck’s success was his pragmatic foreign policy.  A skilled hand on the international stage, he knew when to remain cautious and when to press his advantage.  His pragmatism and unswerving pursuit of Germany’s best interests earned Bismarck his famous nickname: 

The Iron Chancellor 

Apparently, German women can be just as tough.  In recent weeks, German Chancellor Angela Merkel has been unswerving in resisting the pressure to bail out Greece from its fiscal crisis.  

Many within and outside the European Union (EU) have been calling for a bailout of Greece.  As the Germany is the EU’s largest economy, the burden of this proposed bailout would disproportionately fall on the shoulders of the German people. 

For the full background on the Greek fiscal crisis see this post:  Alexander the Broke.  An excerpt from this post follows: 

Over the past years, the Greek economy went through a boom period of rising property values and increased consumption.  During this time private sector debt ballooned, or simply stated, individuals and businesses took out loans.  

As the boom gave way to the predicable bust, public sector debt increased precipitously.  Why did the Greek government go into so much debt?  There are two reasons: 

  • As tax revenues fall the government closed the budget gap by borrowing. 
  • The government chose to bailout and/or backstop private institutions (banks)  

Greece accumulated so much debt that the government’s ability to make the payments is in serious question 

Many are expecting Germany to come riding to the rescue with saddlebags full of cash to save their fellow EU member from insolvency.  

Chancellor Merkel; however, is doing something you don’t see much of these days.  She is looking after the interests of the people who elected her.  We quote from the Guardian newspaper in the UK (emphasis added): 

“Angela Merkel, the German chancellor, mounted stiff resistance tonight to any swift bailout of Greece, as a rift opened up between European capitals over how best to tackle the risks posed to the euro.” 

“Germany is stepping totally on the brakes on financial assistance,” said a senior EU diplomat. “On legal grounds, on constitutional grounds and on principle.” Another senior diplomat said of the Germans: “They’re not waving their chequebooks.” 

Folks, we really like this lady.  She is very cerebral (PhD in Physics) and seems to be one of the few leaders on the international stage that has some sense of history and is not willing to subordinate her nation’s interests to another.  This is not the first time she has taken a principled stance.  See this post for some past commentary:  Blood on the Highway.  

Why should the average German pay to bail out Greece?  What will likely follow such a bailout?  

Ah yes, we come to one of our favorite topics.  Moral hazard.  The risk that by saving someone (or some country) from the result of their bad decisions you create an incentive to repeat the bad decisions over and over.  

Many people seem to believe moral hazard is no longer a relevant construct.  Maybe it’s because to understand moral hazard you have to have morals to begin with….but that’s a discussion for another day. 

Now back to Germany.  If the Germans bail out Greece, not only will they create a disincentive for fiscal reform in that country, but a message will be sent to other members of the EU as well.  

Spain, Portugal, Ireland and possible even Italy, are all on shaky financial footing.  After witnessing the assistance given to Greece they will demand the same treatment.  Will the Germans have the will and the resources to bail out these countries as well?  

A monetary union like the EU cannot continue to exist when certain countries shoulder the burden of fiscal responsibility while others thumb their noses at the other members by spending wantonly.  

Over the past year we have heard over and over that if the taxpayers do not continually cough up more money to bailout those who have engaged in irresponsible behavior, terrible things will happen.  These tenuous threats seem to be bouncing off Chancellor Merkel with a dull clank.  Evidently there is one world leader willing to take a stand for her citizens.  

In contrast to the anemia that seems to be affecting world leaders these days, Germany’s newest Iron Chancellor seems to be doing a fine job.  Perhaps she should send some vitamin supplements to North America.  

Have a great week,

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


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Threats, Lies and Videotape

“They’ll forgive you lying but they’ll never forgive you for telling the truth” – Unknown

A hasty meeting was called between the company and one of its key suppliers.  As the president of the company regally made his way into the room, the customary greetings were exchanged.  Taking his place at the head of the table, all deference was given to a man of his position.  He began the meeting by outlining its purpose and some guidelines. 

“We are meeting today to discuss some invoices we haven’t paid to you”, he gestured towards the suppliers.  

“Now I realize that I said I would pay these invoices, but you see, I have had a change of heart”, he continued.  

“I’ll tell you what I’m going to do, I’m going to make you my partners..yep that’s right, I’ll try to sell that prototype you built for me and if I do, well then you’ll get paid, and if I don’t then ….tough cookies.”, he finished with a smile.  

As the meaning of his words sunk into the consciousness of the suppliers, the company president released his final comments, a stroke of pure genius. 

“During our meeting today we won’t use the word risk nor we will refer to the concept of risk in any fashion”, he declared.  

Now here’s a man who knows what he’s doing.  A true visionary.  

As this story was relayed to me by a colleague, I felt  

Here we are at Granite Consulting, taking an intellectual approach towards identifying and evaluating company risks, literally doing what has never been done before with our neural network risk assessment tool,  and all we had to do was simply….will the risk away.  

Brilliant…simply brilliant.  

Folks, we have reached the epoch of audacity when we as adults believe that if we don’t want to deal with a troubling issue we can simply deny its existence.  

Its common knowledge that businesses that have a firm grasp on reality tend to outperform those enterprises that willfully refuse to recognize the facts as they are. 

 Self delusion is rarely an effective strategy.  In our story above, does the company president think that the suppliers will forget about the risks that he has forced them into?  Does he believe he has changed anything by his childish refusal to talk about an issue that is an big as an elephant? 

Of course not.  He knows the truth and the truth hurts.  He has deceived his suppliers and burned a key business relationship.  Unfortunately this company president’s attitude toward the truth seems to be widespread across the nation.  

Recently President Obama apparently committed an egregious act by making the following statement during a speech in New Hampshire.  

“You don’t blow a bunch of cash on Vegas when you’re trying to save for college. You prioritize. You make tough choices. It’s time your government did the same.” 

The reaction condemning these words was swift and severe.  Las Vegas Mayor Oscar Goodman reaction was as follows: 

“Goodman, angry at the time, fumed to reporters during a same-day press conference in his office that Obama would get “the boot” if he tried to visit the city again, saying “he is not our friend.” 

Commentators on many news channels picked up on the story and piled on by criticizing Obama’s comments as bashing Vegas or “bad for business.”  

My dear friends, we don’t think the country has been managed properly by this administration or the last.  We also question the sincerity of the remarks themselves, but I can’t think of a more non controversial statement than the one the President made above.  To paraphrase: 

Saving money for college is better than gambling.  It’s tough for people to stop spending and start saving.  Government should stop spending impulsively as well.   

I truly fail to see the scandal in making such an assertion, but we will nonetheless address the main counterargument.  

Critics have been screeching about the President’s statements having the effect of discouraging people from spending money to help the economy and being “bad for business” in general.  

As far as discouraging people from spending, this can be construed as nothing other than a positive trend in this environment.  Before the Keynesians begin to hyperventilate, let’s state the case simply.  College, retirement, and sometimes even daily living expenses, are more expensive than most people can afford.  If people continue to want these things they either to have to save for them or borrow money.  

People in the United States have borrowed all they can.  People do not have the capacity to take on any more debt.  If they did, we would again be able to paper over our problems and we would not be in this economic situation.  The only alternative is saving money and people are beginning to do just that.  To quote from the financial website “Seeking Alpha”: 

“The rolling 4-quarter average rate hit an all-time low of 1.5% in Q1 2008 when the recession began. As of last quarter it had reached 4.6%. This increase of 3.1% in 7 quarters is without precedent. 

Bottom line: we have witnessed an increase in the savings rate the likes of which we have never seen since data tracking began.” 

Now as for the President’s comments being “bad for business”, we have a few questions: 

Have we really reached the point where we are depending on vacationing and pleasure trips as the bedrock of our economy? 

Is it true that the only American industries we are willing to defend are gambling and prostitution?  Was there any outcry about the dismantling of American industrial power over the past two decades? 

Is it so risqué to suggest our own children are more important than some pleasure trip? 

Finally, why are politicians forgiven for breaking so many campaign promises but not for …..besmirching Vegas? 

Perhaps it’s because we have trained our leaders to tell us what we want to hear, rather than the truth.  

Have a great weekend, 

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


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Alexander the Broke

Despite the stormy relationship with his son, Phillip of Macedon would have been awfully proud of his boy. 

The young Alexander was tutored by the great philosopher Aristotle who conveyed the secrets of medicine, philosophy, morals, religion, logic, and art.  

Upon his ascendancy to the throne of Macedon, many of the Greek city states revolted against his rule.  Through a clever combination of diplomacy and force, the revolts were put down and Alexander consolidated his rule over the Greek people.  

What followed were some of the most spectacular military campaigns in history as Alexander expanded the Macedonian Empire into Asia Minor, the Levant, Egypt, Persia and finally to the gates of India itself.  There his army stopped, not because they were defeated, but due to the sheer exhaustion of his troops.   

Alexander’s military accomplishments, although great, were eclipsed by longer lasting cultural effects.  Greek thought and culture were brought to the East and cast a significant influence on the peoples of the empire for generations.  

Man, it’s a good thing old Alex isn’t around today to see what has become of his once mighty Greece.  

Those that are temporarily able to peel themselves away from the popular circus of televised talent shows, know that Greece is currently embroiled in a severe fiscal crisis.  

The background?  Roll the tape as they say.  

Over the past years, the Greek economy went through a boom period of rising property values and increased consumption.  During this time private sector debt ballooned, or simply stated, individuals and businesses took out loans.  

As the boom gave way to the predicable bust, public sector debt increased precipitously.  Why did the Greek government go into so much debt?  There are two reasons: 

  • As tax revenues fall the government closed the budget gap by borrowing. 
  • The government chose to bailout and/or backstop private institutions (banks) 

Greece accumulated so much debt that the government’s ability to make the payments is in serious question.  

So Greece is reduced to groveling before the European Union (EU).  Various plans to raise taxes and cut spending are submitted by the Greek government and coldly scrutinized by the bureaucrats at the EU. 

Wait a second…..the EU?  What do they care?  How are they related to this?

Ah, yes the good old EU.  The former magical answer to every poor European country’s problems.  

Greece joined the EU years ago and in doing so, gave up its dear currency (the Drachma) and adopted the Euro.  Of course, a common currency requires a common monetary policy, so the Greeks gave up control of monetary decisions to the European Central Bank.  

I hear the peanut gallery screaming, “English please!!” ….OK…so here is the rub 

If Greece were in control of their own monetary policy they would probably do the easy (and stupid) thing; print money, devalue their debt, cause an inflationary period followed by an economic collapse.  

A sad course of action, but at least the Greeks would be responsible for their own decisions.  By the way, anyone know another country that’s doing this? 

Unfortunately for the Greeks, they do not control the Euro.  So what are the choices (and the consequences): 

  • The rest of the European Union could bail out Greece.  (The message to Spain, Portugal and Italy would be, “Why pay your debts when the union will bail you out?”  This would set the stage for many more bailouts.)
  • The Greeks could print Euros on their own without consulting anyone.  (This would open the door to all member states to begin printing paper currency, making the Euro worthless.)
  • Greece could cut government spending and raise taxes in an attempt to honestly pay the debt.  (The current Greek plan is wildly unrealistic, about 75 percent of the deficit reduction plan comes from raising taxes rather than cutting spending.) 

The whole situation is problematic for the entire European Union as the whole idea of the Union is predicated on economic solidarity and cooperation amongst member states.  If Greece is bailed out, or defaults, the entire idea of the European Union is called into question.  

For what good is a union if some members pay their debts and others do not.  The very idea of coordination and discipline becomes laughable.  For now the EU is projecting solidarity.  Take a look at this:

“The fate of one is the fate of all,” European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said at a press conference today after a meeting of EU finance ministers in Brussels. “This situation in Greece is having effects on other countries.”

Will Greece be bailed out?  Will they force a fiscal austerity plan upon their citizens? 

We don’t know.  

We do know; however, that underlying this entire situation is another morality tale.  How did things get to this point in Greece?  Why wasn’t there any fiscal discipline? 

Modern Greek culture has been one of entitlement.  All gain and no pain.  Something for nothing.  University students rioted in the streets in late 2008 and nearly shut down the capital.  These young people caused nearly 1.5 billion Euros in damage.  According to some accounts, the students regarded the vandalism as a “fun social activity” and a legitimate way to communicate their grievances.  

What do they really want?  Writer Aya Burweila summed it up best in this quote from a recent article about Greece: 

“At the end of the day, The Greek dream has always been to graduate from a university you can’t get expelled from to getting a job in the civil service that you can’t get fired from.” 

In many ways the Greek government had the same hopes when they joined the European Union.  The Greeks gave up their collective destiny to some faraway union and expected a carefree life in return.  

Given their history it’s amazing to watch Greeks forget that a strong prosperous nation requires a long term outlook, cohesiveness and productivity from its citizens.  In economic terms, saving, building and investing are all actions that demand delayed gratification and are entirely unsuitable when your time horizon is very short and you have a “something for nothing” mindset.  

But there is always hope.  

Alexander’s genes have not entirely been extinguished.  To again quote Aya Burweila’s article, there does seems to some hope that some people in Greece still hold themselves accountable for doing their jobs and understand the responsibility they have for the future of their country.  

However, amidst the violence and vicious cycles, there is an enduring and rare inspiration in those charged with protecting The Tomb of the Unknown Soldier. Dressed in the traditional kilt worn by the men who fought the rugged and relentless resistance against Ottoman rule, the Evzones stand completely still at their posts, impervious to all threats and provocations—including cowardly terrorist attacks. Remarkably, even when they were warned of an imminent explosion, three Evzones guards refused to abandon their posts, an action for which they were given presidential recognition.  

It’s a cliffhanger for sure.  We’ll have to wait and see what becomes of Greece, and the European Union for that matter. 

As for us, thank heavens we do not have any of the troubling attitudes and circumstances that plague the Greeks.  A something for nothing culture, rampant government deficits, massive national debt….whew.. I’m sure glad there’s none of that stuff around here!

Have a great week,  

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


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