Stop the Presses

Lost somewhat amidst the tectonic shifts that JP Morgan Chase’s acquisition of Bear Stearns had on global capital markets was the far-sighted and proactive legal and communications initiative JP Morgan put in place to quell any negative fallout from the all-too-easy to anticipate shareholder litigation that is sure to follow.

Indeed, JP Morgan Chase moved aggressively to build a firebreak around any issue that could have distracted regulators, shareholders, analysts, employees, and countless other key audiences. With a swift and steady hand, the bank included among its first announcements that it would set aside $6 billion to cover potential litigation–a good strategy given that Bear Stearns went from a company valued at $3.5 billion at the close of trading on Friday to selling for a mere $240 million the following Monday. And that included their Madison Avenue headquarters, valued at $1 billion in Manhattan real estate circles. The fact that they’ve now upped their buyout bid to $10/share is another positive sign that JP Morgan Chase wants to get this deal done as soon as possible and reduce a prolonged discussion of it in the media.

Given that the entire focus of this effort was to calm global markets, JP Morgan Chase adroitly recognized the need to limit any discussion of liability (and its subsequent impact on the bottom line of the new entity) by discussing–and disarming–the issue immediately.

JP Morgan Chase also sent a powerful message to potential judges and jurors, the financial media, and the public at large that it is accepting responsibility for rectifying a situation it played no part in creating–thus helping to neutralize the ability to paint the company as a cold, unfeeling entity.

JP Morgan Chase’s anticipation of strike suits alleging everything from material misrepresentation to cooking the books demonstrates the need to communicate with clarity and speed given the fear and uncertainty that permeate the marketplace today.

From Capitol Hill to the White House, federal lawmakers and regulators are talking tougher than ever about regulation. The crisis in the nation’s housing market, the roller-coaster ride on Wall Street and the series of safety scares and recalls involving spinach, toys, toothpaste, beef and pet food are driving both political parties to call for stricter regulation of consumer products and financial services.

“We’re in for a potentially significant regulatory response,” Glenn Hubbard, dean of Columbia University’s business school and a former chief economist for the Bush White House, told The Wall Street Journal this Monday.

Simply put, 2008 is shaping up to be a very scary year. Increased scrutiny of product safety and efforts to punish unscrupulous service providers is a priority at the Consumer Product Safety Commission, the Food and Drug Administration, the U.S. Department of Agriculture, the Environmental Protection Agency, the Securities and Exchange Commission and any other government agency that has oversight authority.

Most important, recalls are attracting ever more media attention to any manufacturer, retailer or wholesaler that issues a recall. And with words like “E. coli”, “salmonella”, “mortgage meltdown” peppering newspapers, magazines, the airwaves and the Internet, one can safely assume that every corporate logo potentially looks like a bull’s-eye to lawmakers, regulators and journalists eager to make headlines.

Smart companies need to have their crisis plans in place and tested now so that they aren’t caught flat-footed when the spotlight inevitably hits them. In recent weeks, we saw the bankruptcy of the Hallmark Westland meat company, which took appropriate steps to protect consumers during the largest beef recall in history, but was overtaken by events because it had no crisis communications plan in place.

We’re not just talking about mere message points and creating a call-list for reporters. What’s your Internet blogging strategy? Has your website been optimized? How are you tracking what your adversaries are saying about you online? Who’s working with the regulators in Washington or in your state capital? Who’s on speed-dial to prepare your team to testify before a Congressional committee? All these questions and more need to be answered BEFORE the crisis hits. So, use your peacetime wisely and prepare your crisis plan now. It could mean the difference between your company’s survival and its demise.

When rumors were swirling and investors were feeling nervous about an impending cash crunch at investment banking giant Bear Stearns last week, CEO Alan Schwartz was quick to try and reassure the market, a move right out of the crisis communications playbook. Unfortunately, he didn’t read the part in the playbook where it warned against obfuscation and/or lying when he made the following statements:

“Our balance sheet has not weakened at all.”
“We don’t see any pressure on our liquidity, let alone a liquidity crisis.”
“That [$17 B] cushion has been virtually unchanged. We have $17 billion or so excess cash on the balance sheet.”

And now it isn’t just jilted investors who are taking a closer look at what Schwartz said and what he may have told others behind closed doors. The Securities and Exchange Commission is interested in speaking with potential Bear Stearns buyer JP Morgan about “investigations and potential future inquiries into conduct and statements by Bear Stearns” and in learning more about a surge in options contracts betting. In other words, the SEC wants to know what JP Morgan knew and when.

And the larger point here is that Bear Stearns seemed to practice obfuscation out of habit. According to The New York Times, the company’s most recent annual report showed $46 billion in mortgages and mortgage-backed securities. However, $29 billion of them were valued via computer-generated models “derived from” or “supported by” some kind of “observable market data.” The leftover $17 billion worth of mortgages appears to have been based on “internally developed models or methodologies utilizing significant inputs that are generally less readily observable.”

What does it all mean? Times author Morgensen opines, “Your guess is as good as mine.”

With billions of dollars at stake, and the mood of the market hanging in the balance, making opaque statements in a time that demands clarity is about as smart as leaving the front door of your house wide open while you’re on vacation.

Recognizing that markets detest losses and fear ignorance, the best solution is a powerful dose of the disinfectant called transparency. Letting the sun shine in gives companies a way to control and shape the debate and the opportunity (although seldom taken) to be “for” something, and not “against” it.

Today, the global marketplace is more transparent that it has ever been before. Fighting that trend is surely an unwise battle.

The world moves faster today than it has ever before. And while that’s good in some cases, it can prove disastrous in others. Investment bank Bear Stearns recently learned a hard lesson when it comes to how quickly news travels. The rise of online media, the increasing interconnectedness of global financial markets, and healthy dose of fear all played a large part in nearly bankrupting that venerable institution — and scarring global markets in the process.

When a stock that had been trading at $160 less than a year ago is all-of-the-sudden valued at $2 — the fear spread faster than the facts, and quickly got a life of its own. No question that Mark Twain was right about rumor moving faster than the facts — he just couldn’t have fathomed how fast. The global marketplace offers virtually 24/7 buying opportunities and information travels as fast as the liveblogger can type.

In a world that offers a plethora of opportunities for ongoing anxiety, and with a volatile marketplace, we’re conditioned to believe the worst — and to take action on that instinct alone. The only difference is that now, we can take action the moment we hear the news, and we no longer have to wait for the news to be delivered.

And this is truly a self-fulfilling prophesy. If people believe a bank is shaky, they withdraw their money and — poof, the bank becomes shaky.

A reputation for being an honest broker of information, an investment in strong relationships, and a credible and easy-to-understand story can make the difference in swaying public opinion — especially when you only have nanoseconds to spare.

A colleague of ours in Buffalo, NY has observed something extraordinary going on in his local media market. Comments by consumers — especially comments they’ve posted on media blogs — are having an unprecedented effect on what the newspapers and especially Buffalo’s three local TV news stations are choosing to cover.

The good news is that the Internet is allowing the public to directly feed the dominant mainstream media with story ideas and tips, and that editors and reporters are willing to take public concerns so seriously.

The bad news is that consumer tips may not be properly vetted or verified. The tipsters may have an ax to grind or dishonest intentions. No matter. When their comments appear online, they take on a greater semblance of credibility than an ominous phone call to the consumer desk. Authoritative reporters wind up pursuing leads they would not have pursued in the past, potentially damaging reputations in the process.

The fact that we’re talking about a heartland marketplace like Buffalo only adds to the importance of a trend that is nonetheless evident everywhere. Consumer-generated coverage migrates from the Web and back into the land of mainstream media in a vast cross-pollinating process that is impossible to stop and difficult to manage.

Among other effects, time pressures are ratcheted up in the instantaneous world of the blogosphere. Being the first or getting on a story early is more important than ever, and truth and fairness are more vulnerable as a result. For anyone in the public eye, including companies that depend on consumer good will for their survival, the lesson is…Be aware and beware.

As New York Times journalist Tom Friedman has put it, the whole world really is watching. Corporate communicators must now be prepared for unfair and even downright crank coverage, with a thinner and thinner line between the blogosphere and “traditional media” — not as a deviation from the norm, but as an increasingly constant price of doing business in a mass market.

If a company does all the right things in a crisis, yet still loses, there’s only one explanation: It failed to communicate its actions.

In the recent Westland/Hallmark Meat Company recall of 143 millions pounds of beef – the largest food recall in U.S. history — President Steve Mendell immediately cooperated with the U.S. Department of Agriculture as soon as he learned that two ‘downer’ cattle had been videotaped on their way to the slaughter line by an undercover member of the Humane Society.

The good news was that no one had been reported hurt by the mistake. But that’s the only good news Westland would be receiving.

Neither Mr. Mendell nor any of his executives would speak to the news media beyond issuing a terse company statement. The company fired two employees involved in the action, but never explained what it was doing. When a U.S. House committee investigating the event asked Mr. Mendell to testify, he remained underground, refusing to comply with the request. Most important, Mr. Mendell and Westland/Hallmark never sincerely apologized to their customers or the families they may have put in jeopardy.

Finally, this week, he was forced to testify only under a committee subpoena. And even then, he performed miserably. His wooden presentation made it appear as though he hadn’t even been prepared to appear before the panel — a glaring mistake in today’s age of instant, but lasting, impressions. When the undercover video was viewed during the hearing, he winced and held his head in his hands. Asked about why he was reacting that way to the video, which had been posted for more than a week on the USDA website and other Internet venues, he told astonished committee members that he hadn’t seen it before.
 
Today, Westland/Hallmark is shutting its doors and its employees have lost their jobs. It might not have had to end this way, if the company and its executives had only communicated what they had been doing right all along.

It’s with a heavy heart that I say that disgraced New York Governor Eliot Spitzer must resign. Recent allegations that he was ‘Client 9’ to high-dollar prostitution service Emperors Club VIP irreparably sullen the image that Spitzer had worked his entire career to cultivate: Mr. Clean, the noble knight riding in on the white steed and saving the day. In an instant, he transformed himself from prosecutor to prosecuted.

Too often people look for the “silver bullet,” but that gun is only shooting blanks now. You cannot talk your way out of what you acted your way into. There is no “spin strategy” that removes the blot of hypocrisy and arrogance, the two sins Americans will not forgive.

What happens next is that the paparazzi, print and broadcast media, and the blogosphere go on the warpath to find out who this woman is, where their dalliances occurred and how often, and every other sordid detail–preferably with pictures, and of course, the alleged audio tape. Who is Kristen? What does the room 871 inside Washington’s Mayflower Hotel look like? Where does Mr. Spitzer find the time to govern? And don’t forget how this investigation got started–with the FBI looking into the financial end of things and where the money came from to pay for services rendered. This time Little Red Ridding Hood caught the wolf and she is not letting go.

Traditionally in these situations, those on the defense look for allies who are willing to stand up for them, but how many friends does the Governor have left? The NY Times’ DealBook said it best with their headline that quotes a Wall Street trader, “There is a God….”

Precisely because of the persona he created, Governor Spitzer has lost the moral authority to govern. Another politician or a chief executive who didn’t make his bones on being the ‘nation’s attorney general‘ , beyond reproach, might survive this. His very brand is to purse criminals–how does he govern if he himself might soon be indicted?

If Governor Spitzer times his resignation, he still has something to trade to avoid a possible criminal indictment. Journalists will look elsewhere for targets, the Democrats can hope that this is forgotten before the November national election, and the Governor can leave with some sense of pride intact– “I failed to live up to the standards I set up for myself ” –and begin to rebuild his life. Prolonging this agony isn’t good for anybody.

Sometimes the best “spin” is no spin at all. Just a hard dose of truth and sacrifice.