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The Comey Letter

Latest from Bethany McLean ’92:

When F.B.I. director James Comey reopened the investigation into Hillary Clinton’s e-mails in the final days of the campaign, many saw it as a political move that cost Clinton the presidency. But some insiders suspect Comey had a more personal concern: his own legacy.

Read the whole thing.

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Lurking Anger

Fun Bethany McLean ’92 article:

The anger is always lurking just below the surface for David Ganek. And as the pugnacious money manager begins to recount the events that led him to lose his hedge fund business, his influence as a patron of contemporary art, his status in Manhattan society, and some of his longtime friends, it threatens to boil over.

Read the whole thing.

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Stepford Eph

Interesting Bethany McLean ’92 essay:

Earlier this fall, I was conducting a bunch of interviews at a conference. After I finished one perfectly pleasant interview, the person I was interviewing, who is a prominent business leader, turned to me and said, “You are such a Stepford Wife.” Shocked, I responded, “Well, I can assure you no one has ever said that about me before!” The person, unfazed, continued to the audience and crew, “She’s really good in bed. All women who are like that on the surface are.” I totally lack the superpower ability to deliver the perfect zinger, and I felt like it would make things worse if I made a fuss, and frankly, I didn’t know what to do. So I tried to laugh it off. The business leader walked away, shouting back to everyone, “Use protection!”

This person wasn’t a man. It was a woman who, for whatever reason, wanted to humiliate me.

Women humiliating other women is not exactly something new under the Purple Mountains. Indeed, from a distance, it always appeared that female Ephs got more grief/criticisms/meanness from other female Ephs than they ever did from male Ephs. Would readers agree?

Read the whole thing. I especially loved the ending . . .

If there’s a moment where you can be a bitch or be gracious, where you can denigrate or congratulate, where you can shoot down or lift up, for heaven’s sake, do the latter. (And if you’re the recipient, please respond in kind.) If you can’t or won’t, then don’t complain about Donald Trump’s attitudes toward women. Because that’s just hypocritical.

By the way, the woman who was so awful to me was a prominent supporter of Hillary Clinton.

Quelle surprise!

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McLean ’92 on Martin Shkreli

Fun Vanity Fair article by EphBlog favorite Bethany McLean ’92 on Martin Shkreli.

“I don’t mean to be presumptuous, but I liken myself to the robber barons.” So says Martin Shkreli, the 32-year-old hedge-fund manager turned pharmaceutical-company C.E.O., who achieved instantaneous notoriety last fall when he acquired the U.S. rights to a lifesaving drug and promptly boosted its price over 5,000 percent, from $13.50 a tablet to $750. The tsunami of rage (the BBC asked if Shkreli was “the most hated man in America”) only got worse when Shkreli said he would lower the price—and then didn’t. An anonymous user on the Web site Reddit summed up the sentiment bluntly: “Just fucking die will you?”

“The attempt to public shame is interesting,” says Shkreli. “Because everything we’ve done is legal. [Standard Oil tycoon John D.] Rockefeller made no attempt to apologize as long as what he was doing was legal.” In fact, Shkreli says, he wishes he had raised the price higher. “My investors expect me to maximize profits,” he said in an interview in early December at the Forbes Healthcare Summit, after which Forbes contributor Dan Diamond summed up Shkreli as “fascinating, horrifying, and utterly compelling.”

Read the whole thing.

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McLean ’92 on Productivity

Worth the diversion on social media: a recent essay by Bethany McLean ’92, author of “The Smartest Guys in the Room” and “All the Devils are Here,” on LinkedIn. She writes “In Praise of Being Unproductive.”

A subject after EphBlog’s own heart!

Whenever I read something about the glories of productivity, I wince.

I am not productive. In fact, sometimes I waste entire days. I talk to people for hours, and not one thing from that conversation makes it into anything I am writing now — or will ever write in the future. I expend tons of emotional energy mustering up the nerve to call people who do not call me back. I work on stories that die a deserved death. Sometimes — may the gods of productivity forgive me — I even take an extended online shopping break because I’ve decided that my attempts to make sense of something are resulting in nonsense. I read things that have nothing to do with my work. I daydream. A lot.

Never afraid to tell the truth, McLean uses this opening to rail on journalism’s business pretensions and the idea that writing is an industry in which productivity can be measured:

I’m not sure journalism is meant to be quantifiably productive. You need to call everyone … need to spend hours talking to people because it’s as important to understand what you don’t use and why you don’t use it as it is to understand what you do use… [and] be able to chase a story and be honest about the fact that it isn’t working… The best story is not necessarily the one that gets the most bang for the buck, at least if you think that “best” means something other than cheap click bait.

I read McLean’s essay as somewhat tongue in cheek: even if the activity inputs she describes may not be directly productive, that doesn’t mean a writer’s output can’t be measured in some way.

But it’s a good reminder: in the ideas business, the work of producing ideas is often orthogonal to the objective rather than linear. If you’ve never gone back to read your James Webb Young, put it on your reading list.

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Lying Liars

Great article on the scam behind stock options from Bethany McLean ’92.

From Bill Gurley to Marc Andreesen, Silicon Valley’s smartest are asking if we’re in round two of the dotcom bubble. Many things are different this time around. But one thing is disconcertingly reminiscent of the late 1990s: The way stock based compensation is treated.

You may think, that can’t be! After all, in 2004, the Financial Standards Accounting Board, or FASB, mandated that the estimated cost of stock options be reflected in a company’s income statement, not buried in the footnotes.

But in present-day Silicon Valley, almost every company, from Twitter to Yahoo to Facebook to Google presents its earnings excluding the cost of stock based compensation. These are called “non-GAAP” earnings because they don’t follow the accounting principles mandated by FASB.

Back in 2004, a hedge fund manager named Cliff Asness, who is not known for mincing words, wrote a piece called “Stock Options and the Lying Liars who Don’t Want to Expense Them.” At the end of 2013, he listed his top ten peeves in a piece for the Financial Analysts Journal. Coming it at number 9 was “Antediluvian Dilution Deception and the Still Lying Liars.” In it, he wrote, “It’s amazing how hard it is to kill a scam even after you make it illegal to use it on the front page.”

Indeed.

Read the whole thing.

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A House Is Not a Credit Card

Bethany McLean ’92 has an excellent op-ed in the New York Times: “A House Is Not a Credit Card.”

This fall, federal regulators made a controversial decision to back down from tough new underwriting standards for mortgages. Some affordable-housing advocates, allied with parts of the corporate housing industry, had successfully argued that the proposed standards would make it too hard for people to qualify, thereby reducing homeownership and hurting the housing market. Last summer, that same trump card stopped a bipartisan bill to reform the mortgage market, more than six years after Fannie Mae and Freddie Mac had to be taken over by the government.

All of this ignores a crucial fact: Much, and at times most, of what happens in the mortgage market doesn’t have anything to do with homeownership. A sizable percentage of mortgages — including most of the risky ones that were made in the run-up to the financial crisis — are not used to buy a home. They’re used to refinance an existing mortgage. When home prices are rising and mortgage rates are falling, many homeowners choose to replace their mortgage with a bigger one, taking the difference in cash. In other words, mortgages are a way to provide credit.

Read the whole thing. McLean is exactly right on the history and politics of home mortgages.

One of the most abjectly false narratives about the financial crisis is that risky mortgages proliferated so that people who couldn’t afford homes could nonetheless buy them. Modern subprime lending was not about homeownership. Instead, the 1990s crop of subprime mortgage makers allowed people with bad credit to borrow against the equity in their existing homes. According to a joint HUD-Treasury report published in 2000, by 1999, a staggering 82 percent of subprime mortgages were refinancings, and in nearly 60 percent of those cases, the borrower pulled out cash, adding to his debt burden. The report noted that “relatively few subprime mortgages are used to purchase a house.”

I’ll always remember seeing a bank ad blowing in the windy, bleak Chicago winter of 2009. “Let your home take you on vacation,” it read.

Exactly correct.

Putting the financial crisis aside, the logic behind this is completely messed up. If we want homes to be a vehicle for saving and building wealth, as they used to be, why are we instead encouraging people to increase their indebtedness? Even worse, we now know that too much credit results in people who once owned their homes losing them. It creates homelessness, not homeownership.

The problem, of course, is that the conflation of homeownership and consumer credit is so convenient for the powers that be. It allows lenders to cloak themselves in the American-as-apple-pie mantle of homeownership, thereby making it less likely that anyone will crack down on their practices. It allows members of Congress, many of whom depend on the financial industry for campaign contributions, to pretend that something that’s bad for us is actually a good thing for which we should be grateful.

Solutions?

One possible solution would be much tougher standards for cash-out refinancings than for mortgages used for purchases, such as requiring far more equity in a home, or making lenders keep the loan on their own books instead of selling it. Or perhaps Fannie Mae and Freddie Mac shouldn’t be allowed to guarantee payment on a mortgage unless it is used to purchase a primary residence.

Or, even better, wind down Fannie Mae and Freddie Mac. If there were no government guarantees, there would be a lot fewer people with poor credit using refinancings to take vacations.

In Washington, there’s been scarce public discussion of this. But if we’re going to put government resources behind homeownership, and engage in practices that threaten the safety of the financial system in the name of homeownership, shouldn’t we at least talk about the fact that we’re actually encouraging the opposite?

We should.

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Blogosphere is a Goldmine

From Felix Salmon:

Really good journalism is being written about such things every day — it’s just that a lot of it isn’t coming from old-school media outlets. Vanity Fair’s Bethany McLean was also at the breakfast, and she confirmed that the blogosphere is a goldmine for people like her who want to understand the crisis, both in hindsight and as a way of working out what people were thinking and saying contemporaneously.

The fact is that a huge universe of great material is being published every day, by old media and new media alike. And increasingly, tools like Twitter are doing a good job of helping the public find the really good stuff. It might be a smaller percentage of the whole than we’re used to, and there might even be less of it on an absolute basis than there was in the past. But there’s much more great journalism available to the average member of the population than there ever used to be. In the olden days, if you didn’t get the NYT or the WaPo, you didn’t read their journalism.* Nowadays, when they publish something great, you read it. Just like when Gawker publishes something great. Or Yahoo blogs. Or some guy in Australia with a blogspot account who can move a stock 20% overnight by sheer force of argument alone.

Still, the biggest thing that’s missing in the journalistic establishment is people who are good at finding all that great material, and collating it, curating it, adding value to it, linking to it, presenting it to their readers.

And the same applies at Williams. As an institution, Williams should be creating very little new content. Doing so is too expensive and time-consuming. Instead, Williams — meaning the Alumni Office, Public Affairs, Admissions, the Dean’s Office and any other department that need to communicate, either externally or internally — should be linking and collating, organizing and transmitting. That is the future of communication in the world of elite academics. When will Williams figure that out?

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Bethany McLean ’92: 11 Hours in Omaha …


Photograph by Annie Leibovitz. Vanity Fair, January, 2011

… perhaps seems like a long time in the Gateway to the West, but not when those hours are spent with Warren Buffett.

Already alert for mentions after reading Eric Soskins’ review of her new book All the Devils are Here on EphBlog http://www.ephblog.com/2011/01/08/eph-bookshelf-10-all-the-devils-are-here/, I was delighted to see her in print again in Vanity Fair, when the mailman carrying a Prada bag dropped off the January issue (I think that Conde Nast insists on certain standards of delivery).

Here is a short shot for non-subscribers direct from the open to the public Vanity Fair website:
http://www.vanityfair.com/online/daily/2011/01/warren-buffett-speaks-candidly-to-vanity-fair-about-who-might-succeed-him-at-berkshire-hathaway.html

Ed note: spelling of Ms McLeans’ name corrected. Swart must have been thinking of Mr Clean. Thanks to Eric!!

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Eph Bookshelf #10: All the Devils Are Here

With All the Devils are Here, Bethany McLean ’92 has likely landed herself atop the list of best-read Eph authors of 2010. All the Devils are Here is a highly-readable primer on the pre-history of the financial crisis. In a tightly-wound 364 pages, the book demystifies the companies and financial instruments at the core of the financial crisis while providing illuminating sketches of many of the central personalities.

McLean and co-author Joe Nocera, a New York Times financial columnist, trace the converging narratives of the principal players: the real-estate market lenders and originators creating subprime (and higher-caliber, but similarly flawed) loans, the Wall Street companies investing in and securitizing these loans and related products, and the government-sponsored enterprises (GSEs, most prominently Fannie Mae) competing with the private players. Their account goes back thirty years to the beginning – the securitization of loans that allowed lenders to divorce themselves from their interest in loan repayment and reduce the importance of repayment ability in lending.

Read more

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Buy These Books

Incredibly, three out of the 100 NYTimes Notable Books of 2010 are written by Ephs:

ALL THE DEVILS ARE HERE: The Hidden History of the Financial Crisis. By Bethany McLean and Joe Nocera. (Portfolio/Penguin, $32.95.) More than offering a backward look, this account of the disaster of 2008 helps explain today’s troubling headlines and might help predict tomorrow’s.

CLEOPATRA: A Life. By Stacy Schiff. (Little, Brown, $29.99.) It’s dizzying to contemplate the ancient thicket of personalities and propaganda Schiff penetrates to show the Macedonian-Egyptian queen in all her ambition, audacity and formidable intelligence.

FINISHING THE HAT: Collected Lyrics (1954-1981) With Attendant Comments, Principles, Heresies, Grudges, Whines and Anecdotes. By Stephen Sondheim. (Knopf, $39.95.) Sondheim’s analysis of his songs and those of others is both stinging and insightful.

Do any Ephblog readers have recommended favorites from the NYTimes list (or, for that matter, other great reads for the holiday season)?  I absolutely loved One Day by David Nicholls, and I am not generally one for romantic stories …  very cleverly constructed novel.  My favorite recent fiction book not featured on this list (and it was released in hardcover last year, but the paperback came out in 2010, so I’m counting it), was Lev Grossman’s The Magicians.  Sort of a Harry Potter for adults, but that description doesn’t do it justice.  A really fun, quick read that you can’t put down once you are five pages in.

Speaking of literary Ephs, English Professor Jim Shepard’s’ latest story, Boys Town, was featured in a recent New Yorker.  Shepard was also interviewed regarding this story here.  Also keep an eye out for Carrie Ryan ’00’s forthcoming The Dark and Hollow Places.

Updated with Carrie Ryan’s correct year.  Also, here is a link to a running list of books published by Ephs.   Finally, here is an article (subscribers only, alas) about Caragh O’Brien, author of Birthmarked, and who along with Ryan may be the first two members of the Eph Post-Apocalyptic Dystopian Teen Novelist Mafia.

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All the Devils Are Here

Bethany McLean ’92 reads a chapter from her latest book: All the Devils Are Here: The Hidden History of the Financial Crisis. Book looks great, but I am a big McLean fan, so discount my opinion accordingly.

McLean would make an excellent Bicentennial Medal recipient, or even a Commencement Speaker. She is an engaging speaker with many amusing stories to tell.

Previous video of McLean here, here and here.

If Warren Buffet is a fan, then you ought to be too.

Too busy to listen to McLean read the chapter? You can read it here.

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Bethany McLean on Hedge Funds

Bethany McLean ’92 has an article in this month’s Vanity Fair on the rise and fall of a hedge fund.  You can also see her discuss the same topic via video here:

Not Williams-related, but I also recommend the Michael Lewis article on Iceland in the same issue.

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Bethany McLean on the Daily Show Last Night

A couple of good lines in this interview by McLean, including:
“There’s something almost reassuring about Bernie Madoff.”
“Here’s the thing about the free market: it’s only a free market when the market is going in your favor.”

I agree that there is something reassuring about the Madoff story, because it shows that the times we are living in aren’t all that unprecedented. It would almost be more surprising to not uncover a massive fraud during the throes of a financial crisis.

To be honest, the whole subprime mortgage discussion feels like old hat. Subprime is no longer where the main story is. We’ve moved beyond a financial crisis by now.

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bethany mclean is beautiful

Always fun to see what brings people to EphBlog. Turns out that we are the number 2 hit on Google for “bethany mclean is beautiful”. Indeed. McLean is also an amazing writer, recently moving from Fortune to Vanity Fair. Read her latest article here.

Henry Nicholas isn’t just another tech-boom billionaire charged with backdating stock options. All the drive, arrogance, and aggression he poured into building microchip-maker Broadcom—one of the major success stories of the Internet Age—morphed into an increasing obsession with sex and drugs, according to federal prosecutors. The author investigates the allegations about Nicholas’s out-of-control world: the parade of prostitutes, the spiking of clients’ drinks with Ecstasy, and the secret lair he built underneath the Orange County mansion he shared with his wife and kids.

Read the whole thing. Or at least the ending.

You could argue that it was all necessary, that if Nicholas wasn’t such an extremist he also wouldn’t have built such a successful company. Or maybe not. Says one former executive, “Could he have done what he did without the insanity? I think he could have. He had a wife and kids and a wonderful company, and he let a piece of him take over.”

A few years ago, Nicholas, in a moment of self-reflection, said, “All I’ve done is make money. I’ve achieved none of my goals.” Now there’s a chance he never will.

Maybe the cartoon characters Calvin and Hobbes sum it up best: “Do you believe in the Devil?” Calvin asks. “You know, a supreme evil being dedicated to the temptation, corruption, and destruction of man?”

Replies Hobbes, “I’m not sure that man needs the help.”

Beautiful and a Calvin and Hobbes fan. All hail the Williams Math/Stat Department and its amazing majors!

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Bethany McLean ’92 on Colbert

Not one of Stephen’s better interviews. Bethany seems at times to be speaking to a kindergartener.

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Surplus of Optimism

Interesting interview with Bethany McLean ’92.

Great scarf and insightful comments.

McLean notes the responsibility of a journalist to “Say what you think.” Indeed. Same applies to bloggers.

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Book For The Ages

No hubris here.

Is it time yet to start pulling together books about last week’s catastrophe on Wall Street? Publishers are uneasy about making plans too soon, but the city’s finest financial journalists—and their literary agents—are eager to get moving.

“There’s a lot to be said for a timely book, but we don’t know what the book is yet,” said Simon & Schuster publisher David Rosenthal, noting that there are nevertheless writers out there whom he would agree to publish immediately just because he knows they’d do a good job with whatever ends up happening.

At any rate, proposals have started making the rounds.

One comes from Times business columnist Joe Nocera and former Fortune reporter Bethany McLean, who decided to write a book together the day Lehman Brothers declared bankruptcy and Merrill Lynch sold itself to Bank of America. Mr. Nocera was visiting Ms. McLean (co-writer of the Enron book The Smartest Guys in the Room) in Chicago at the time—he was there to attend a science conference, what kind he wouldn’t say—and over some white wine, the two of them decided that a definitive chronicle of the stunning financial crisis was in order, and that they were the team best equipped to produce it.

“We want to write the big book, and I’m not afraid of saying that,” Mr. Nocera said. “It will be a book for the ages and—I know this is going to sound egomaniacal, but—between our contacts and our reporting skills and our writing skills, I think we’ll be pretty tough to beat.”

The agency representing the Nocera-McLean book to publishers, Darhansoff, Verrill and Feldman is said to be asking more than $1 million (No one there picked up the phone when Pub Crawl sought comment).

McLean’s Smartest Guys in the Room is a great read but $1 million seems like a big advance. How many copies would need to be sold for this to make sense to a publisher?

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Business Books

New York Times columnists lists the best business books ever.

“The Smartest Guys in the Room,” by Peter Elkind and Bethany McLean. (O.K., O.K., they are former colleagues of mine, and I was deeply involved in editing this book — but I have to say, I think it turned out pretty well!)

Indeed. Below the fold is my list of the best finance books, given to my 3 Williams interns last week. Comments welcome.
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Capture Me

Looking for 60+ pages of pure lunacy on a long holiday week-end?

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Deep Capture

Bethany McLean ’92 is moving from Fortune to Vanity Fair. Congratulations! One of her last columns for Fortune may have been this one on the trials and tribulations of we beleaguered short sellers.

Think the life of a famous financial journalist like Bethany is all glamor? Consider the madness she has to deal with on a regular basis.

As will be explored in a subsequent piece, it would be fair to describe my relationship with Bethany McLean of Fortune as “strained”. However, it is not unusual for her to write or call me seeking comment, generally regarding allegations fed her by crony hedge funds which she dutifully regurgitates on command, and sometimes regarding other things, too. I make it a point to respond promptly. On rare occasion when I have contacted her, she has responded promptly as well.

Thus I was a bit surprised at the turn taken by the following correspondence:

Think that is just the rantings of some Internetty crackpot? Think again! That is Patrick Byrne, CEO of Overstock. Only read the whole thing if you have a lot of time on your hands . . .

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Barbie Loves Math

Our readers love stories about Bethany McLean ’92 and her central role in uncovering suspect accounting at Enron. Consider this 2002 op-ed column from Maureen Dowd.

Hollywood is trying to figure out how to turn Enron into a TV movie.

How do they take all the stuff about ”the contingent nature of existing restricted forward contracts” and ”share-settled costless collar arrangements,” jettison it like the math in ”A Beautiful Mind,” and juice it up?

Enron is such a mind-numbing black hole, even for financial analysts, that if you tried to explain all the perfidious permutations, you’d never come out the other end.

A movie executive asked Lowell Bergman, the former ”60 Minutes” producer who is now an investigative reporter for The Times and ”Frontline,” for the most cinematic way to frame the story. (Mr. Bergman had the ultimate Hollywood experience of being played by Al Pacino in another corporate greed-and-corruption saga, ”The Insider.”)

”It’s about the women up against the men,” he replied.

Before you know it, Enron will be Erined, as in Brockovich. Texas good ol’ girl, fast-talking, salt-of-the-earth whistle-blower Sherron Watkins will be Renee Zellweger in a Shoshanna Lonstein bustier. The adorable and intrepid Fortune reporter Bethany McLean, the first journalist to sound an alarm about Enron’s accounting practices, will be look-alike Alicia Silverstone.

Some [Enron executives?] privately trashed Ms. Lynch as ”an idiot” and coveted Ms. McLean, calling her ”a looker who doesn’t know anything.” But when they realized the women were on to them, the company that intimidated competitors, suppliers and utilities tried to oust Ms. Lynch from her job and discredit Ms. McLean and kill her article.

Which Enron insider said that? Or is Dowd talking about her vision for the movie?

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Journalistic Sex Symbol

This 2002 story on Bethany McLean’s ’92 Enron reporting contains the sort of insider-backbiting that EphBlog readers love.

If journalism were in the Olympics, the Enron story might well be pairs figure skating. Bethany McLean, the young Fortune writer who first wrote about Enron’s shady finances a year ago, has, of course, already been awarded the gold. And with that have come the requisite endorsements: In the past two months, she was hired as a consultant by NBC News and shared in a $1.4 million deal to co-author a book on the scandal.

But another team is also vying for top honors — amid complaints about shoddy judging. Reporters and editors at the Wall Street Journal believe their work has been unjustly ignored, with some wondering whether Pulitzer rivals like the Washington Post and the New York Times have gone out of their way to praise McLean.

That’s the competition. Now for the judging. In January, Howard Kurtz, the Washington Post’s media writer, highlighted McLean as the first journalist to ask questions about Enron. Ten days later, the Times’ Felicity Barringer wrote her profile of “the financial reporter everyone loves to lionize.”

While McLean was being anointed as a journalistic sex symbol in a story hitherto dominated by a balding Kenneth Lay, folks at the Journal felt they were being robbed: “People are trying to queer the Pulitzer pitch for the Journal,” says one editor there. That’s sour grapes, counters Kurtz: “In this case, a 31-year-old reporter beat them and the rest of the world by a considerable margin.”

Read the whole thing.

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Rip Your Throat Out

Fortune editor Bethany McLean ’92 writes on Goldman Sachs and CEO Lloyd Blankfein

Over the past few months Fortune had the chance to learn of Blankfein’s worries and visions for Goldman firsthand, giving us an unusually personal view of the man who has the daunting job of sustaining Goldman’s winning streak in an increasingly treacherous market. What we saw was partly what you’d expect – a stunningly smart, demanding, and competitive executive at the top of his game – but also a surprisingly thoughtful, self-reflective leader with a wicked sense of humor. “Anything I haven’t asked about?” I say at one point in our conversations. “Virgo, blue,” he shoots back. (It took me a moment to figure that out, which probably explains why I left Goldman Sachs in 1995, after working as an analyst for three years.) Of course, the joke goes only so far. As a former Goldman executive puts it, Blankfein is “funny and self-deprecating and can reach across the table and rip your throat out when it’s warranted.”

Fun stuff. Alas, no mention of the critical role played by Mike Swenson ’89 in allowing Goldman to make so much money in 2007. Note the high quality of McLean’s prose and the way she ties the start and finish of the article together so nicely. Associated interview with McLean here.

Ronit wants more Bethany. We give him more Bethany.

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EphCOI:Finance – Bethany McLean on Enron

Here’s an old Daily Show interview, from 2002, featuring Bethany McLean ’92, mostly notable for Jon Stewart’s hilariously bad understanding of short-selling.

I hereby nominate Bethany McLean to displace Erin Burnett ’98 as EphBlog’s favorite financial reporter.

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McLean ’92 on CSPAN

Bethany McLean ’92, co-author of The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, is on CSPAN right now. Go watch her and stop surfing the web.

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Calling Bethany McLean ’92

Although I hesitate to start a new thread on topic of Schapiro/Roseman board service, there is much fun material here. Today the New York Times reports that

Board members and senior executives of Marsh & McLennan, the giant insurance broker that has been accused of cheating customers, put millions of dollars into a partnership that profited by buying companies from Marsh and investing in companies that work with Marsh.

Shades of The Smartest Guys in the Room, Bethany McLean’s ’92 marvelous book about Enron. I would wager the scandal here, if there is one, will involve the executive directors and not the independent ones like Morty. He is way too smart to get involved with anything that even looks like self-dealing.

The article also notes that

Experts on corporate governance have complained that Marsh’s board, which has 6 insiders and 10 independent directors, is extremely weak and has not taken leadership as the insurance broker’s legal problems worsen. Only two independent directors are employed by public companies: Lord Lang, a former British politician who is chairman of Thistle Mining, and Stephen Hardis, chairman of Axcelis Technologies.

Allow me to parse this. When people say that Marsh’s board is “weak,” they mean that the independent directors (the ones unconnected to the company) are not serious business people with useful experience and reputations to protect. When people say the board is weak, they are really saying that Morty, among others, is weak.

I am not sure that I believe this, and Morty is just 1 of 9 or 10 independent directors. But many people do believe that the board handled the Putnam mess poorly, and in a way that was excessively kind to company management.

Senior executives with low morals like weak boards because it allows them to get away with nefarious deeds more easily.

Meanwhile, the Wall Street Journal reports ($ req.) that

Meanwhile, some of the 10 outside directors on Marsh’s 16-member board, who received little notice before Mr. Spitzer filed his civil lawsuit against the company, have been in contact with Mr. Spitzer’s office, according to a person familiar with the situation. In announcing the suit, Mr. Spitzer said he wouldn’t negotiate with Marsh’s top management, headed by Chairman and Chief Executive Jeffrey W. Greenberg.

Hmmm. There is (another) Fortune article here for Bethany McLean.

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McLean ’92 on Enron

Ken Lay, former chairman on Enron, has been indicted. This isn’t something that we would normally care about at EphBlog. But, in this particular controversy, Bethany McLean ’92, author of The Smartest Guys in the Room, is one of the experts.

If you only have time to read one book about the excesses and scandals of the business world during the bubble years, you should read McLean’s.

Although I can’t find any comments by McLean on Lay’s indictment (most of her articles for Fortune are not accessible), she does note that:

Enron’s board of directors was infatuated with executives they hired.

“The board fell in love with the management at Eron,” she told the forum. “Enron’s board forgot who they worked for – the shareholders.”

She said the abuses occurred even though Enron’s corporate structure had a separate chairman and CEO in place. “There was a belief that these (management) people were just so incredibly smart,” she said.

You can read McLean’s original article on Enron here.

One of the reasons that I spend so much time on compensation issues at the College is that is seems obvious that the same forces that drove pay to such extremes in the business world are starting to have an effect at Williams.

As I always, we at EphBlog stand second to none is praising the job that Morty is doing. Yet is that really enough of a reason to pay him twice what we paid Frank Oakley just 10 years ago? I don’t think so.

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Recommended by Buffet

Bethany McLean’s ’92 new book, The Smartest Guys in the Room, about the rise and fall of Enron was recommended by Warren Buffet in his annual shareholder letter. There is an excerpt from the book here.

Buffet is the most successful investor of the last 50 years, so praise from him is high praise indeed.

Besides being an ace fortune reporter, McLean was one of the first to question the apparent success of Enron. She notes:

Enron didn’t stop claiming they were not a trading company. In Enron’s view, its core business, where the company says it made most of its money, is delivering a physical commodity. However, look at Goldman Sachs, one of the best trading outfits in the world — its stock rarely sells for more than 20 times earnings, vs. the 70 or so multiple that Enron shares commanded. Publicly admitting so would have been catastrophic to the stock. Enron’s valuation completely was based on its ability to generate predictable earnings, something not even Goldman Sachs could predict. However, when I went to the 10Ks, I found diminishing cash flows, smooth net income increases and exploding debt levels. Even worse, the return on capital invested was only 7%, lower than their cost of capital.

Of course, since Williams refuses to take accounting seriously, there are probably few if any current students who have a clue what McLean is talking about.

The whole story is quite interesting. McLean’s career path may have some lessons for current students.

McLean has been feted by cable talk show and late-night television hosts for her work in highlighting those. Her experience with Enron highlights the weaknesses of financial journalism, which tends to be sucked into ‘the gravitational pull of the stock market.” However, she was not a conventional journalist. She graduated from Williams College with a double major in math and English. For three years after graduating from college, she worked for Goldman Sachs’s research division, reviewing the books of companies being offered for sale and writing memorandums describing their virtues and faults. After three years, she joined Fortune’s corps of fact-checkers. Regularly, she corresponds with managers of hedge fund and short-seller companies, which sometimes leads her to investigate more certain companies.

I have no idea what “short-seller companies” are, but I have all sorts of opinions on companies whose bookkeeping is less than wholesome. Alas, the SEC wouldn’t want to see that in EphBlog.

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