Ben Stein Watch: April 27, 2008

Ben Stein’s column this week is the first since the NYT kicked off its formal review of his film thusly:

One of the sleaziest documentaries to arrive in a very long time, “Expelled: No Intelligence Allowed” is a conspiracy-theory rant masquerading as investigative inquiry.

Stein is maybe a little bit chastened, since he seems to have given up on trying to impart his own ideas in his column. Instead, he gives himself a reading-comprehension test, taking a widely-circulated speech by David Einhorn and trying to boil it down to its most salient points.

Naturally, Stein fails the test.

Einhorn’s speech is worth reading, but Stein’s self-described "CliffsNotes version of it" isn’t. For instance, Einhorn makes the point that since employee compensation is a function of revenues, investment-bank employees are incentivized to maximize those revenues by adding leverage:

The managements of the investment banks did exactly

what they were incentivized to do: maximize employee compensation. Investment banks

pay out 50% of revenues as compensation. So, more leverage means more revenues,

which means more compensation.

Clear and simple, right? Here’s the SteinNotes version:

The fellows who run big investment banks have a strong incentive to maximize their assets and leverage themselves into deep trouble because their pay is a function of how much debt they can pile on. If they can use relatively low-interest debt to generate slightly higher returns, the firm earns more revenue and executive pay increases. Often, an astonishing 50 percent of total revenue goes to employee compensation at Wall Street firms.

Longer, more convoluted, and – in the last sentence – utterly missing the point.

There’s nothing "astonishing" about the 50% figure, in an industry which relies on human capital. Stein calls himself a lawyer, so he probably knows that the employee-compensation-to-revenue ratio at law firms is closer to 100%. And in any case, the 50% figure is well known to anybody who follows the investment banking industry, and long predates the credit crunch. That Stein is astonished by it only goes to show how ill-qualified he is to write about this stuff.

Stein also has no idea what "capital" is in the banking industry. Banks ‘can hold some scary “assets”,’ he says, making sure to put the word "assets" in scare quotes just to reinforce just how scary it is. He then continues:

What do they hold as capital against such risks? You would think it would be cash or Treasury bonds, wouldn’t you? But no…

The S.E.C. — acting as one of Wall Street’s chief regulators, mind you — also allowed such things as “hybrid capital instruments” (much riskier than cash or Treasuries), subordinated debt (ditto) and even deferred return of taxes, to be counted as capital.

Once again, Stein has managed to mangle one of Einhorn’s points. Here’s Einhorn’s clear English:

Only tangible equity, not subordinated debt should count as


How Stein managed to read that bit about "tangible equity" and decide that it referred to "cash or Treasury bonds" is beyond me. Stein is clearly too dim to realise that cash and Treasuries are assets, which means that they can hardly be used as capital to hold against assets. The point about cash and Treasuries, of course, is entirely Stein’s, it’s never made by Einhorn.

But Stein isn’t really trying to channel Einhorn, he’s just using Einhorn as an excuse to bash the same old drum all over again. This is 100% Stein, for instance, and appears nowhere in Einhorn’s speech:

Henry M. Paulson Jr., the Treasury secretary, is calling for merging the S.E.C. with the easygoing Commodity Futures Trading Commission, in the financial equivalent of setting off a Doomsday Device.

A Doomsday Device? It would be great if Stein could tone down his language just a tiny bit, because while merging the SEC with the CFTC may or may not be a good idea, I don’t think anybody (except perhaps for Stein) considers it to be tantamount to the End of the World. But then again, as the NYT itself pointed out, Stein is something of a master when it comes to such cheap rhetorical devices:

Blithely ignoring the vital distinction between social and scientific Darwinism, the film links evolution theory to fascism (as well as abortion, euthanasia and eugenics), shamelessly invoking the Holocaust with black-and-white film of Nazi gas chambers and mass graves.

No doubt Stein would do the same to Hank Paulson if he were allowed to incorporate B-roll into his columns. Let’s just be thankful the NYT’s multimedia push hasn’t gone that far.

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