The perils of the collective shrug

One thing I've found quite curious is that despite unemployment in the building industry estimated as high 80%, there just doesn't seem to be much anger among the rank and file who lost their jobs due to greed, short-term gains and, if the New York Times is to be believed, in part due to the veritable crime wave created by Beazer Homes with its mortgage subsidiary.

I call this "the perils of the collective shrug," and I think it's dangerous because it means we're learning few lessons from this last cycle of boom and bust. Despite its importance to the economy, the building industry for housing is actually small enough that expressing an opinion (as I do here) could alienate future employers (or clients). And expressed anger simply doesn't pay for the mortgage, the car payment or the college tuition.

Although some of the industry's media companies do attempt to maintain some objectivity in their reporting, they also must be mindful of their advertisers -- mostly suppliers to homebuilders -- as well as to homebuilding executives they can't afford to alienate if they want to interview them, throw their face on the cover of a future issue or get them to speak at an affiliated conference.

That's also why I don't think you'd ever see this article by the New York Times' Floyd Norris on the behavior of Beazer Homes -- and its aftermath -- in an industry publication. I think that's sad, because perhaps if insiders boldy went on the record -- and consequences be damned -- we could prevent such things from happening again.

As such an insider, I certainly can't condone what went on at Beazer as well as at many other homebuilding companies whose mottos all seemed to be "See no evil, hear no evil, speak no evil," and if I could apologize on behalf of an industry which tends to look the other way, shrug its shoulders and effectively say, "What are you gonna do?", I would. But I'm only one voice.

From the article:

For years, Beazer Homes USA was much more than a builder of houses. It was a veritable crime wave.

The company defrauded buyers, particularly poor people being sold homes they could not afford. It defrauded the federal government by getting government-guaranteed mortgages for those buyers. It created subdivisions now dominated by dozens of foreclosed homes.

And while it was at it, Beazer lied to shareholders about how much money it was making. First, it lied by claiming it was making less than it was. Then it lied by hiding losses when the housing bubble began to burst. To keep the lies going, the government says, the company prepared fraudulent documents to mislead its auditors.

Last week, Beazer settled the legal problems stemming from its crimes. It entered into a remarkably generous deferred prosecution agreement with the Justice Department, in which the company will pay $15 million, and perhaps more if it manages to earn profits enough and does not decide to file for bankruptcy... Beazer’s crime wave might have gone on longer than it did but for a North Carolina newspaper, The Charlotte Observer, which in 2007 reported what had happened in some sad subdivisions outside Charlotte. Fraud was committed in numerous ways, and now some of those subdivisions are filled with empty, foreclosed homes...

Mr. McCarthy, the chief executive, is paying a penalty. He agreed to contribute the after-tax balance of the $600,000 bonus the company paid him for fiscal 2008, when Beazer posted a net loss of $952 million, or $24.69 a share. The shares trade for less than $2 each, and have slipped since the deferred prosecution agreement was announced.

In announcing the deferred prosecution agreement, the Justice Department said that had it sought more money it might have risked driving the company into bankruptcy, costing the jobs of innocent people, and it praised the company for getting rid of the people responsible for the crimes. The determination of who was responsible evidently is largely based on the company’s own investigation, which was shared with the government but not made public.

The charges the company admitted say the accounting fraud and the defrauding of the homebuyers were under way by 2000, and continued until 2007.

I have no reason to believe that either Mr. McCarthy or anyone on the board understood the crimes the company was committing, year after year.

But Mr. McCarthy was running the company for the entire period, and the junior member of the board, Peter G. Leemputte, became a director in 2005. If neither Mr. McCarthy nor any board members had any inkling of what was going on, they were not doing a very good job, to say the least...

If a boss can preserve his deniability about crimes committed by his company — perhaps by showing little curiosity about just how the profits are being earned when he is taking in millions from cashing in stock options — then he can escape being held accountable if the crimes are eventually uncovered.

Or, as Sergeant Schultz used to say on the television sitcom “Hogan’s Heroes,” “I see nothing. I know nothing.”