Fiorello
(Chico Marx): Hey, wait, wait. What does this say here, this thing here?
Otis
B. Driftwood (Groucho Marx): Oh, that? Oh, that’s the usual clause that’s in
every contract. That just says, uh, it says, uh, if any of the parties
participating in this contract are shown not to be in their right mind, the
entire agreement is automatically nullified.
Fiorello:
Well, I don’t know...
Driftwood:
It’s all right. That’s, that’s in every contract. That’s, that’s what they call
a sanity clause.
Fiorello:
Ha-ha-ha-ha-ha! You can’t fool me. There ain’t no Sanity Clause!
-Quoted from A Night at the Opera
(MGM, 1935)
Multimedia Communication
Multimedia
Communication—some combination of written word, audio and video recordings,
projected software presentations, live performance, and other forms--has
emerged as a popular means to reach colleagues, staff personnel, and students
in business, government, and academia. Those who have been out of the
educational system for more than a few years may not comprehend the
proliferation of media in and beyond the classroom.
Here,
multimedia online course offerings flourish in the distance-learning
environment. These courses and their media content have grown greatly in
popularity. They reach learners who face physical and time constraints that
make it too difficult or expensive to attend a brick-and-mortar institution.
Of
course, the use of media for communication and learning is nothing new. It has
advanced over time. Film and some electronic multimedia for learning and
education in offices and shops have been known available since the Second World
War. At that time, government-training films helped viewers learn how to
assemble components intended for military hardware as well as how to prevent
contracting certain social diseases.
Film
and audio discs (78rpm and 33 1/3rpm records) were carried forward into the
school systems of the 1950s. In one notorious example about dating produced by
Coronet Instructional Films in 1950, Nick Baxter takes Kay to the high-school
scavenger hunt and they have lots of fun! In addition, Nick discovers that he
and Kay share a passion for miniature golf, taffy pulls, and weenie roasts.
Mmm! Pass the relish.
Though
some advancement was made throughout the 1950s and 60s, phonograph records and
16mm film remained the status quo for multimedia (well before the term was
widely used) for the next few decades. As a result, production of audio and
video materials remained prohibitively expensive for the average individual or
small business due to the high cost of the technology.
However,
this situation changed rapidly with the introduction of portable video
recorders, recordable audio discs, and other devices in a new generation of
media. During the past quarter-century, the technology has advanced while the
cost to users has plummeted.
Through
computerized digital technology, most of us can produce high-quality audio and
video content for business and educational applications for an investment of a
few hundred dollars or less.
PowerPoint
Currently,
PowerPoint and its rivals remain the most used--and most abused--multimedia
tools in the classroom, conference room, and courtroom. Too often,
presentations in the form of “slideuments” (documents embedded into
presentation slides) leave many viewers as victims of Death by Bullet-Point.
However,
there are many good books by presentation gurus to help us defeat this beast. A
simple and free place to begin the transformation to good PowerPoint is at Pecha
Kuccha 20x20 (www.pecha-kucha.org),
an international organization dedicated to using twenty PowerPoint slides that
last twenty seconds each. The idea is to create a story and tell it with
graphically relevant slides. These 20x20 slides contain six to ten words each
to form a presentation of six minutes and forty seconds.
The
most recent quantum leap in multimedia communication has come in the form of
short videos that are viewable on computer screens and are shared with others
on social-media Web sites such as YouTube.com. Professors make videos to
integrate into their lecture materials. Small businesses and professional
practices (including law offices) use this media to help to market their
services and to communicate with peers.
One
of a few books that we recommend on this topic for professional use is YouTube
and Video Marketing: An Hour a Day by Greg Jarboe (2nd. ed., John W. Wiley
& Sons, 2012).
No
longer is YouTube just a venue to view silly backyard stunts or the antics of
cute kittens. Today, more than 100 million people take social action on YouTube
every week.
In
the U.S., nearly two-thirds of YouTube viewers are between the ages of
twenty-five and sixty-four, with the largest group—28%--being between thirty-five
and forty-nine.
The
most popular type of online content remains news and current events. Recent
studies indicate that 70% of YouTube viewers visit the site to find information
or to learn how to do something.
By
the way, if you communicate best through PowerPoint (PPT), there are a number
of inexpensive or free software programs that allow you to convert a PPT
presentation to video easily. I use Wondershare PPT2Video (www.wondershare.com)
for the animated portions of many of my own videos.
Though
the technology of creating communication videos has grown relatively
inexpensive and easy to use, the major challenge remains how to develop
engaging content.
Producing
a good video for use in the courtroom could delight a jury whose eyes have
glazed over from the events of the day. If that video helps an attorney to
communicate the argument of his/her side of the case more effectively, then
that video becomes demonstrative evidence on steroids.
Popular Films
Explaining
technical evidence often presents the most daunting challenge in professional
communication. As with many fields, Economics can be understood best when
explained in plain, common language.
We
find some of the best examples of this approach appearing in feature films. Dr.
Laura Jean Bhadra of North Virginia Community College has compiled a list of
movies that she uses in her Economics courses and has shared them online with
other economists (http://www.nvcc.edu/home/lbhadra/).
One
of my all-time favorite clips from a film is a scene from Miracle on 34th
Street (20th Century Fox, 1947). This classic monologue by screenwriter George
Seaton takes place in the chambers of Judge Henry X. Harper (portrayed by Gene
Lockhart). It demonstrates what economists call the multiplicative effect of
negative externalities.
In
this scene, the judge’s political manager, Charlie Halloran (played by William
Frawley), is giving a tongue lashing to Judge Harper about the consequences
that will befall the judge if he returns to the courtroom and rules that there
is no Santa Claus. Halloran says “[I]f you go back in there and rule that
there’s no Santy Claus,…we won’t even be able to put you in the primaries.”
Judge
Harper responds “[L]isten to reason. I’m a responsible judge. I’ve taken an
oath. How can I seriously rule that there is a Santa Claus?”
Halloran
retorts by saying, “All right. You go back and tell ‘em that the New York State
Supreme Court rules that there’s no Santy Claus. It’s all over the papers. The
kids read it and they don’t hang up their stockins’. Now what happens to all
those toys that are supposed to be in those stockins’? Nobody buys ‘em. The toy
manufacturers are going to like that.
So,
they have to lay off a lot of their employees—union employees! Now you got the
CIO and the AF of L against you. And they’re going to adore you for it. And
they’re going to say it with votes. Oh, and the department stores are goin’ to
love you, too. And the Christmas-card makers and the candy companies.
(chuckling) Henry, you’re going to be a very popular fellow.”
In
addition to providing an eloquent example of a difficult economic principle,
this passage underscores the value of starting a media production with a
well-written script.
TARP, HARP, and Margin Call
Over
the past few years, economists have been grappling with the task of how to
explain exactly what happened in the economic debacle that killed two Bear
Stearns hedge funds in 2007 and led to the Lehman Brothers collapse, the Wall
Street Confidence Crisis of 2008, and the Troubled Asset Relief Program (TARP)
bailout of 2009.
This
has been a tough one to explain because of the obtuse technical complexity of
derivative hedge funds. However, when we watched the film Margin Call
(Lionsgate, 2011), we were mightily impressed.
Although,
at moments, the dialogue gets a bit dicey for the financially uninitiated, we
found that director/writer J.C. Chandor nails the matter on its head. The drama
involves the day that the “music stopped” on Wall Street and how the decision
of one firm to pull the plug caused the hedge-fund market to tumble.
At
the end of the 7.5 minute climax scene in chapter eight of the DVD, CEO John
Tuld (portrayed by Jeremy Irons) decides to open the floodgates and sell off
all of the Mortgage-Backed Securities owned by his company (which Chandor
describes in the Director’s Commentary as an amalgam of actual Wall Street
houses and investment bankers).
In
this scene, the board of directors is holding a middle-of-the-night emergency
meeting. Peter Sullivan, a young analyst (played by Zachary Quinto [the new Mr.
Spock in Star Trek]), is called into the boardroom. He must explain to CEO Tuld
that the firm is at grave risk of bankruptcy if the value of sub-prime
mortgages that make up the bulk of their hedge funds drops by 25%.
(Within
the dialogue of this key scene from Margin Call, I, Dr. Sase, have placed my
annotations within brackets.)
Tuld
begins his interview with Sullivan by saying “Maybe you can tell me what you
think is going on here. And, please, speak to me as you might to a young child
(pause) or to a golden retriever.”
Sullivan
responds, “As you probably know, over the last thirty-six to forty months
[since 2004], the firm has been packaging new MBS [Mortgage-Backed Security]
products that combine several differentiated tranches of rating
classifications in one tradable
security”
[in
other words, layers of low-, medium-, and, mostly, high-risk mortgages bundled
together. Imagine a foot-high Dagwood sandwich with layers comprised of lots of
low-quality bologna that is beginning to spoil and a few slices of high-quality
corned beef on top].
Next,
Sullivan says, “The firm is currently doing a considerable amount of this
business every day. Now, the problem… is that it takes us, the firm, about a
month to layer these products correctly…. We have to hold these assets on our
books longer than we might ideally like to.
But
the key factor here is these are essentially just mortgages.” [This means that
they were expected to pay a constant flow of returns over a long period of time
and that their value is backed by home values. However, these values started to
fall in July 2006.]
Sullivan
continues by saying, “So that has allowed us to push the leverage considerably
beyond what you might be willing or allowed to do in any other circumstance,
thereby pushing the risk profile without raising any red flags.”
[In
other words, because the bond-rating agency over-rated these decaying, cheap-bologna
sandwiches as it would a fresh, high-quality deli beef sandwich, the unknowing
market believed them to be of high quality, even though they were not. Due to
this erroneous belief, the firm was able to borrow heavily against the
inflated, perceived value of these funds. However, as sub-prime mortgages began
to go into default and the homes attached to them became abandoned and
plummeted in value, the cheap bologna was beginning to stink and the market was
catching on to the scam. In this perspective, it was primarily leverage that
precipitated the failure of these funds.]
Sullivan
concludes by stating, “If these assets decrease by just 25% and remain on our
books, that loss would be greater than the current-market capitalization of
this entire company.”
[Therefore,
a decline in the actual value of the assets of this one division of the
firm—hedge funds over-loaded with sub-prime mortgages of degenerating
value--would be large enough to drive down the entire company into negative
worth. The company would owe more than it could pay off and hence would be
bankrupt.]
As
a result of Sullivan’s information, Tuld decides to sell off all of these toxic
assets as quickly as possible in the hope of stemming the losses to his
company.
However,
this course would destroy the reputation of the firm for years to come while
knowingly putting the other companies that are buying these now-toxic assets
out of business.
In
order to accomplish this in Margin Call, Tuld must pay off his key people to
keep them incommunicado until the “Fire Sale” is over. If a successful fire
sale is to happen, 40% of the sell-off must occur by 10:15AM. The sale must be
done by 11:00AM because the word will be out on the street by lunchtime.
In
order to get his salespeople to sell a month’s worth of inventory in less than
half a day while destroying their own jobs and reputations, Tuld offers to pay
them huge performance-based bonuses (potentially more than $2 million per
person).
In
effect, the merry-go-round has broken down. The music on Wall Street has
stopped. Tuld concludes, “And standing here tonight, I’m afraid that I don’t
hear a thing. Just silence.”
Now
is a good time to summarize the specifics of the actual Bear Stearns case: This investment bank/brokerage house got
burned from using leveraged-credit investment, a common strategy in the
hedge-fund universe.
In
leveraged-credit investment, a company purchased a special form of
Collateralized Debt Obligations (CDOs) that paid an interest rate greater than the
cost of borrowing. In the Bear Stearns case, the CDOs were Mortgage-Backed
Securities (MBS), containing large percentages of risky, low-rated, subprime
mortgages.
However,
these MBS had been rated erroneously as AAA securities by Moody’s Investor Service.
Next,
the firm leveraged—borrowed against the MBS just purchased—at a lower interest
rate than the additional securities that they would purchase would pay out.
Since
the new MBS would pay out interest in an amount greater than the cost of borrowing
against the present holdings, every incremental amount of leverage increased
the total expected return at Bearn Stearns.
This
can be compared to an automobile jack. A person repeatedly pushes down on a
lever in order to turn a ratchet that incrementally raises the car higher and
higher. In other words, the more leverage that the firm uses the greater its
expected return.
By
borrowing against its current holdings in order to buy more Mortgage-Backed
Securities, Bear Stearns became highly leveraged. The company had exposed
itself to an enormous amount of risk.
Therefore,
the firm sought out insurance to protect itself in case the value of their MBS
fell. In the institutional investment market, this kind of insurance comes in
the complicated form of what is called Credit-Default Swaps (CDS).
Bearn
Stearns planned to “watch the money roll in!” However, their profit margin was
thin. This was due to the interest paid on money borrowed for the purchase of
additional MBS and to the cost of the insurance that came in the form of Credit
Default Swaps. The latter was obtained to cover possible minor losses in the
market value of holdings of Bear Stearns.
Under
normal conditions and the assumption that the Mortgage-Backed Securities had
been rated fairly in terms of their value, Bear Stearns probably would have
been protected. However, the market learned about the scam of over-rating the
MBS, which should have been rated initially around BBB rather than AAA.
Then,
the MBS should have had their rating lowered after underlying home prices began
to decline around July 2006. As a result, the market value of the
Mortgage-Backed Securities held by Bear Stearns plummeted and put the company
into the red.
This
was the tragic end of a story with aftershocks that continue to spill out into
Main Street America and beyond.
(For
additional information on the Bear Stearns case, see Dissecting the Bear
Stearns Hedge Fund Collapse (posted on www.investopedia.com, 6 September 2007).
View
an informational video of the Mortgage-Backed Securities crisis and related
events at www.youtube.com/saseassociates and look at Mortgage Markets, or enter
http://youtu.be/wpwSMnMKIj4.)
Conclusion
When
looking at complex issues such as the collapse of an institution on Wall Street
or elsewhere, the facts become easier to understand and to digest when a
balance of different media are used together effectively.
People
learn best when their different senses—especially visual and aural—are fed.
Therefore, attorneys may be wise to use a mix of sensory inputs that include
projected audio and video along with physical demonstrative evidence.
When
presenting to a jury, it is important to remember that many potential jurors
have grown up either as part of the MTV Generation or as members of the iDevice
Legion. Consequently, multimedia communication could be a deciding factor in
winning or losing a case.
One
wallop of an example is Ernst v. Merck, a Wrongful-Death case involving Vioxx.
The plaintiff attorneys won a $253 million verdict because their engaging
PowerPoint trumped the Death-by-Bullet-Point presentation by the defense.
Enough said.
