Asymmetrical Information - Megan McArdle

05.14.13

The Administration's Taking a Big Bath on Scandals

HHS. The IRS. Benghazi. Spying on reporters. Scandals abound, which just might be good for the administration in the long run.

I confess, when I woke up this morning, I half expected to find that Obama had confessed to being one of our lizard overlords, or made an offhand mention of the time he'd had the CIA price out a drone attack on Mitt Romney's headquarters.  Between Benghazi, the discovery that Kathleen Sebelius has been leaning on insurers to finance their Obamacare PR, uncovery of a freelance political inquisition by the IRS, and last night's revelation that the Department of Justice had been trolling through the phone records of AP reporters, this has been the most scandalicious week in living memory.  I mean, sure, none of it rises to the level of Watergate.  But while the gravity may pale in comparison, the volume is breathtaking.  So breathtaking that it's tempting to think that the administration is doing this deliberately.

In finance, there's an art known as "Big Bath Accounting" which is used to manage earnings expectations.  Here's how it works:  if you know you're going to have a bad quarter, you look around for anything else that might go wrong in the future, and you decide to "recognize" that bad news now.  Inventory looking a little stale?  Write it down, man!  Customers getting a little slow to pay?  Now would be a good time to write off their accounts as bad debt.  Is there some uncertainty in the projections about depletable assets like oil stores?  For heaven's sake, why not use the low end of the projections rather than the medium or high end? And we should really book some sort of charge to account for the risk that the Yellowstone supervolcano will explode, killing hundreds of thousands and covering the entire western half of the United States in volcanic ash, and in the process severely dampening demand for our premium line of Wyoming-themed memorabilia.

Corporations call this "cleaning up the balance sheet".  Accounting professors call it things I can't print because this is a family blog.  

The theory is that there is only so much bad news people can take in all at once, so you might as well cram all the bad stuff into one action-packed earnings call.  As a bonus, later, when it turns out that the Yellowstone supervolcano is actually just producing extra-spectacular geysers at the moment, causing your premium line of Wyoming-themed memorabilia to soar to new sales records, you can "reverse the charge" and enjoy a nice bump in your earnings per share.  

The Obama administration are past masters of this strategy on the budget, and it almost makes me wonder if they didn't decide to dump bad news about the AP phone searches and the IRS scandals while Benghazi and Sebelius were already making news.  There are only so many hours on the cable news channel, and by definition, if people are talking about one scandal, they can't be talking about another.  So while a lot of commentators are calling this "a very bad week for Obama", I sort of suspect he's having a very good week.  He's managed to get a lot of scandals off his balance sheet at what will probably be a fairly affordable political cost.

Of course, that's true even if the administration had nothing to do with the explosion of scandals, and it's all just a fantastic coincidence.  Each of these revelations would have hurt a lot more if they'd come out on their own, with nothing else to do but exhaustively explore all the nuances and implications.  Obviously, it would be better still for the administration if they'd never happened at all.  But if you have to have some scandals--and virtually all second-term presidents seem to--then all at once is the way to go.