Message Force Multipliers

Behind TV Analysts, Pentagon’s Hidden Hand

Internal Pentagon documents repeatedly refer to the military analysts as “message force multipliers” or “surrogates” who could be counted on to deliver administration “themes and messages” to millions of Americans “in the form of their own opinions.”

Though many analysts are paid network consultants, making $500 to $1,000 per appearance, in Pentagon meetings they sometimes spoke as if they were operating behind enemy lines, interviews and transcripts show. Some offered the Pentagon tips on how to outmaneuver the networks, or as one analyst put it to Donald H. Rumsfeld, then the defense secretary, “the Chris Matthewses and the Wolf Blitzers of the world.” Some warned of planned stories or sent the Pentagon copies of their correspondence with network news executives. Many — although certainly not all — faithfully echoed talking points intended to counter critics.

“Good work,” Thomas G. McInerney, a retired Air Force general, consultant and Fox News analyst, wrote to the Pentagon after receiving fresh talking points in late 2006. “We will use it.”

Again and again, records show, the administration has enlisted analysts as a rapid reaction force to rebut what it viewed as critical news coverage, some of it by the networks’ own Pentagon correspondents. For example, when news articles revealed that troops in Iraq were dying because of inadequate body armor, a senior Pentagon official wrote to his colleagues: “I think our analysts — properly armed — can push back in that arena.”

The documents released by the Pentagon do not show any quid pro quo between commentary and contracts. But some analysts said they had used the special access as a marketing and networking opportunity or as a window into future business possibilities.

John C. Garrett is a retired Marine colonel and unpaid analyst for Fox News TV and radio. He is also a lobbyist at Patton Boggs who helps firms win Pentagon contracts, including in Iraq. In promotional materials, he states that as a military analyst he “is privy to weekly access and briefings with the secretary of defense, chairman of the Joint Chiefs of Staff and other high level policy makers in the administration.” One client told investors that Mr. Garrett’s special access and decades of experience helped him “to know in advance — and in detail — how best to meet the needs” of the Defense Department and other agencies.

In interviews Mr. Garrett said there was an inevitable overlap between his dual roles. He said he had gotten “information you just otherwise would not get,” from the briefings and three Pentagon-sponsored trips to Iraq. He also acknowledged using this access and information to identify opportunities for clients. “You can’t help but look for that,” he said, adding, “If you know a capability that would fill a niche or need, you try to fill it. “That’s good for everybody.”

At the same time, in e-mail messages to the Pentagon, Mr. Garrett displayed an eagerness to be supportive with his television and radio commentary. “Please let me know if you have any specific points you want covered or that you would prefer to downplay,” he wrote in January 2007, before President Bush went on TV to describe the surge strategy in Iraq.

Conversely, the administration has demonstrated that there is a price for sustained criticism, many analysts said. “You’ll lose all access,” Dr. McCausland said.

Q. I am wondering if you have any statistics concerning the amount of taxpayer dollars spent on these so-called analysts?
— NHD, Ann Arbor, Mich.

A. It is difficult to assess the total amount of tax money spent on this effort. Significant sums were spent taking military analysts on trips to Iraq and Guantanamo. For example, when a group of analysts were taken to Iraq in 2003, they were flown each morning on military transport planes from their hotel in Kuwait to Baghdad, and then back to Kuwait at day’s end. They traveled around Iraq in heavily guarded convoys. In recent years, the Pentagon has paid the commercial airfare of some analysts who participated in trips to Iraq. The Pentagon also paid hundreds of thousands of dollars to a private contractor to monitor their news media appearances.

Is CAPM Dead?

From interview with Eugene Fama;

Region: With Kenneth French, you’ve said that the capital asset pricing model (CAPM) developed by John Lintner and William Sharpe has “fatal problems” in explaining stock market returns because of its reliance on beta [the volatility of an individual stock relative to overall market volatility]. And you’ve found that two other factors are crucial for determining prices. Can you tell us about these factors? Are they inefficiencies, or do they represent hidden risk? And is the CAPM truly dead?

Fama: Let me first tell you what the returns evidence says, and then we can talk about how to interpret it. The returns evidence basically says that if you look at the CAPM market beta, it’s not enough to describe the cross section of average returns.

The CAPM says that all you need to know are these market betas, market sensitivities, in order to fully describe the cross section of average returns. What you find is that other variables contribute to the explanation of average returns above and beyond what you get from beta. Indeed, over the last 50 years, you get very little at all from beta.

The two variables that we’ve focused on are market capitalization (the financial profession calls it size, a misnomer because it’s really market capitalization) and the book-to-market ratio, the ratio of the book value of a common equity to its market value. Now, there’s no magic in that ratio. The ratio of almost anything to price will work as well. These are the two variables.

So, small-cap stocks have higher average returns than large-cap stocks, and stocks with higher ratios of book value to market value have higher returns than low book-to-market stocks. Low book-to-market stocks tend to be growth stocks. High book-to-market stocks tend to be relatively more distressed; they’re what people call value stocks. That’s given rise to what the finance profession—academic as well as applied—calls the size premium and the value premium. The value premium tends to be bigger.

So the issue then is, Are these risk factors or market inefficiencies? One group of people says they’re market inefficiencies—particularly the value premium. The behaviorists tend to say the value premium is a market inefficiency. Their story is: The market overreacts to good and bad past times. It doesn’t understand that things tend to mean revert. So growth companies that have done very well tend to be overpriced, and value companies that have done poorly tend to be underpriced, and then the market realizes this and corrects it. And this story says, basically, that people are dumb; they never learn. So every generation of growth stocks and value stocks goes through the same sort of cycle.

That’s not too appealing to an economist—the idea that people never learn about these things—but that is the behavioral story. And initially they said these are arbitrage opportunities because if you go long value stocks and short growth stocks, you get something with a variance close to zero.

But French and I pointed out that if you do that, you get something with a variance very close to the market variance, not zero. It’s quite a risky strategy. And the premium is about the size of the market premium. So it looks and smells like a risk premium. And we developed a three-factor model with a size premium in addition, basically the difference between the returns on small stocks and big stocks.

So, our model has three factors. Every asset pricing model says you need the market in there. Then they differ on how many other things you need. The CAPM says you only need the market. We basically say a minimum of two other factors seem to be necessary. And these two do a pretty good job.

There’s still a third explanation, which is not based on overreaction. It says that people just don’t like small stocks and value stocks. There’s some amount of utility that people get from the nature of the stocks that they hold. So they like big stocks and they like growth stocks, and they’re willing to hold them even though they have lower average returns.

Now you can’t have an arbitrage opportunity there because then there’d be a sure profit. But the fact that they look like risk factors can sustain that story. You can’t tell the difference between that story and a risk story.

Related;
New book: Sharpe's 'Investors and Markets'
The Asset Pricing and Portfolio Choice Simulator

Perry Mehrling, Fischer Black, and Finance
Asset Prices and Portfolio Choice


Books:
Draft chapters of William Sharpe's Investors and Markets: Portfolio Choices, Asset Prices and Invetment Advice

Fama's two books are online; Foundations of Finance, 1976; The Theory of Finance, with Merton Miller, 1972

Assorted Accounting

Great Moments in Accounting;

Thanks to a relatively new accounting rule, firms like Morgan Stanley, Lehman Brothers and Goldman Sachs last quarter booked hundreds of millions of dollars in gains based on worsening perceptions of their own creditworthiness.

How does that work? If the market decides a company is a bigger credit risk and starts demanding fatter risk premiums to buy its debt, the value of its existing debt falls. Under a rule being phased in throughout corporate America known as Financial Accounting Statement No. 159, that same logic applies to a company’s own debt. Companies that mark their liabilities to a market price, as Wall Street usually does, thus record as revenue a drop in the value of their own debt obligations.

In essence, they make money because they owe less.

Accounting experts said the exercise is perfectly legitimate, particularly if firms that mark liabilities to market do the same with their assets. At the same time, it highlights one of the ironies of so-called fair value accounting. “If you have a liability that declines in value because your credit worsens, you have a gain,” said Stephen Ryan, associate professor of accounting at New York University’s Stern School of Business.

But Moody’s Investors Service said buyers should beware of gains booked when brokers mark down their own debt liabilities. “Moody’s does not consider such gains to be high-quality, core earnings,” it said in a report issued Friday.

A misleading obsession with share prices

Ignore the wisdom of accounting at your own risk;

It was - rather surprisingly - Goethe who declared that double entry bookkeeping was the loveliest invention of the human mind. I doubt if the great German intellectual was thinking of his country's trading relationships with the US or the fiscal policy of the newly founded American republic. But double-entry bookkeeping is the key to understanding when deficits matter and when they do not.

The double-entry principle is that whenever there is a debt there is a credit. If there is a deficit, there is a corresponding surplus in the same column of someone else's books, and a corresponding surplus in a different column of your own books. America's trade deficit is, necessarily, a trade surplus for the rest of the world. The deficit that attracts attention is a deficit on current account: Americans buying more goods than they sell. There is therefore a matching surplus on capital account: the corollary of the current account deficit is that the rest of the world buys more dollar assets than it sells. These principles are as relevant to the public sector as to the books of private companies.

A good system of management accounts defines its categories so that deficits signal when management action is required. If a shop makes a profit on men's clothing and a loss on women's clothing, it needs to do something about the women's clothing division. But accounting expertise requires business judgment. An airline may lose money on its short-haul routes and make profits on long-haul operations, but only by understanding the business will you learn whether this is bad management or good strategy. Whether deficits matter depends on the context.

Three distinctions are particularly important to national accounts - those between capital and income items, those between public and private activities and those between domestic and foreign transactions. The capital-income balance indicates whether you are building for the future, the private-public balance spells out the implications for future levels of taxation and the domestic-foreign balance is a guide to the future course of your currency.

Auditors need to escape the Prisoner's Dilemma

Why don't Accountants Blog

Why can't I find good accounting blogs on the web- if you all know let us know.


Some that I came across;
McLelland
Accounting for a Detoured Economist

Energized Accounting
All Things Account