Scandal

Stupid is as stupid does

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That’s one small backward step for man. One giant backward step for women. What a foreign concept that some women might be smarter than men? Surely pursuing best in class healthcare means striving to grade students based on merit. Not so in Japan. The Tokyo Medical University was found to have deliberately marked down women in entrance exams to limit their numbers.

The scandal broke during an investigation into the admission of a ministry official’s son, who essentially bought his way in. He was given 20 extra points after failing the exam multiple times so he could pass. What a proud moment to know one has to buy influence to make up for a lack of ability.

It has been revealed that the share of female doctors passing Japan’s national medical exam has remained at about 30% for the last two decades.

Sadly class actions don’t produce much other than a token slap on the wrist. Of course all Japanese women just want to marry, become housewives and raise kids for their salarymen husbands. None should have ambition other than to serve their men. No wonder maid cafes do so well in Japan  – the girls say, “yes, my master!” in order to allow men with inferiority complexes to have fantasies of being dominant.

Playing down a mass suicide note

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With the release of the Nunes memo, do top Democrats honestly believe that such collusion by the DNC with the nation’s judiciary and intelligence services doesn’t expose the hypocrisy of a party which proclaims its platform is all about equality and liberal ideals? Does it not expose that these politicians are only in it for themselves? Is it any wonder the Democrats are proclaiming this memo is ‘misleading’ or worse that Americans are too stupid to understand the memo? On reflection they probably had wished they’d stood and applauded during the SOTU address instead of childish frowns of bitterness and playing Candy Crush on their smartphones.

While many Americans probably suspected corruption (so brilliantly conveyed in ‘House of Cards’) for decades, they have had it transparently confirmed.  The DNC hope was that the illegal and doctored FISA application would sink Trump as a candidate and lock in a Clinton White House. By then the scam could be lost as easily as 33,000 emails. Power corrupts. Absolute power corrupts absolutely.

Who could forget Bill Clinton’s chance meeting on a Phoenix tarmac with Attorney General Loretta Lynch the day before her testimony on Hillary’s email scandal? Did anyone honestly believe they just talked about grand children? Lynch downplayed the severity of the private server as ‘careless’. Conservative watchdog Judicial Watch has found 30 pages related to the encounter at the FBI, after being caught for hiding them in another lawsuit.

Obama was front and centre of the Clinton campaign. Hillary caught the jump seat on Air Force One numerous times. Are we to believe that this dossier was never discussed on board? That Obama, so obsessed with protecting his legacy,was in no way complicit in making sure Trump wouldn’t get in the Oval Office?

If we go back to mid 2006, news broke that the NSA was tracking the calls and emails of tens of millions of Americans to create  the “largest and most comprehensive database ever assembled in the world.” In the summer of 2007, the Bush administration pushed FISA amendments known as the “Protect America Act” through Congress which authorized the surveillance of any phone call or email by any American suspected of ‘suspicious dealings’ with ‘foreigners’.

As a presidential candidate in the 2008 election, Senator Barack Obama pledged that there would be “no more illegal wiretapping of Americans”. Post the election win, Obama reversed his position and continued the Bush-era surveillance via FISA. Obama’s Department of Justice aggressively defended court challenges from anyone who suspected their phone calls or emails had been illegally traced.

In his last days as president, Obama authorized the NSA to share its volumous databank on Americans with other federal agencies, opening a can of worms for politicians to dig up dirt. Talk about muddying waters in an already dirty swamp. This seems like a move that could badly backfire if a cleaning house of the FBI and DOJ is undertaken. What option has the president but to do it? What better way to talk of transparency to the American people than lop heads of such duplicitous people.

Therein lies the problem. When the state’s own intelligence services are working so closely hand-in-hand with political parties to keep dynasties alive one has to question democracy. Despite Wasserman-Schulz stabbing Sanders in the back, a mainstream media overwhelmingly behind Clinton, a p*ssy grabbing opponent, we now learn that not even a dossier paid for by the DNC in cahoots with the FBI and DOJ to cheat FISA got Democrats across the line – what a hatchet job.

Even Turkish President Erdogan would blush at the level of ‘duplicity’ of this scandal. This is abuse of power on an industrial scale.  One wonders whether the often made claim that the ‘Obama administration was one without scandal’ maybe tarnished with one of the worst. We haven’t heard the last of this.

Trust in Japan? Strangled by sontaku 忖度

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Trust and Japan used to go hand in hand. It was a hard earned reputation.  A mining executive once told me that “when you sign a contract with the Japanese, that is the contract. When you sign a contract with the Chinese that is the beginning of the negotiations.” Hardly a subtle difference. Yet here we are in the last few years where a plethora of scandals from Japanese companies have come to light. Houeshold names too – Olympus, Toshiba, Kobe Steel, Subaru, Toray, Nissan, Mitsubishi Motors, Takata, Mitsubishi Materials, Asahi Kasei, Obayashi, JR Central, Nomura etc etc. It is almost as if there is a coming-out of sorts so the crimes are somewhat diluted in the midst of others. Syndicated scandals? Expect more to come out. Perhaps the worst part about it is the limp wristed approach by the regulators. ‘Sontaku’ (忖度) in Japanese is a word meaning ‘glossing over’ which is exactly what the regulator is doing over scandals involving household names. Hear no evil, see no evil, speak no evil.

In October I was invited to give a lecture to 70 bureaucrats at the Ministry of Finance’s attack dogs – the Financial Services Agency (FSA) and the Securities and Exchange Surveillance Commission (SESC) on foreign perceptions of Japan’s handling of corporate  crime. In the interests of objectivity the first slide pointed to how no corporate governance system is perfect citing the minefield of foreign corporations caught up in bad behaviour – VW, Petrobras, Parmalat, HealthSouth, Lehman Brothers etc etc. I also highlighted the sentencing of executives who commit crimes – many received lengthy jail sentences, personal fines while the corporates faced eye-watering penalties.

Ironically much of the crime committed by corporates here is at a relatively pithy level. Instead of billions being massaged into or from the books, Japanese corporates tend to commit the equivalent of falsely submitting a $20 taxi receipt to your boss as a business related expense. One almost could conjure up a scenario that if Toshiba was ever able to make back the money to cover the accounting fraud they’d have broken into corporate HQ in the dead of night to put it back in the safe.

I touched on Kobe Steel which conveniently broke the news that it had falsified the true contents of its products to customers. While pointing out such behaviour was regrettable a chart which showed a heavy shorting of the stock on the day it announced it to its duped clients displayed the bigger problem. A question was asked directly to the regulator – “do you intend to investigate the heavy short selling of Kobe Steel stock 3 weeks before the company announced this to market?” No answer.  The following slide showed that a person that was able to short the stock 3 weeks before the announcement would have cleaned up a tidy 60% profit. Again no plans to investigate the insider trading. Why bother having the FSA if it is a toothless tiger?

The following slide showed the types of fines dealt to both the broker (Nomura was a regular feature in the leaks) and the investor (at the time Chuo Mitsui Asset). The fines were the equivalent of $500 and no suspension of license was pursued by the regulator, When the following slide that compared it to the types of fines meted out to foreign banks – lengthy jail terms, lifetime suspensions and monster fines in the the millions and billions jaws didn’t so much drop but celebrate the idea “thank God we live in Japan”. Truth be told the FSA did punish one dying asset manager $150mn but that is an exception. That is the problem. It is too conditional where convenient.

Rolling onto the next slide the discussion looked at how ‘sontaku’ was a problem. Whereas the FSA & SESC heavily pushed for license revocation of foreign investment companies that it found to break rules, it let off all the domestic companies that had ‘brand names’ to protect. What message is the regulator sending if local corporations know they can pretty much get away with anything. In what way is that a fair system? If foreigners will be turfed on a whim then why do the locals get special protection?

When looking at agency funding, the FSA was put up against the US SEC and Australia’s ASIC equivalents. The US was there for illustrative purposes. Yet Australia was the market that made the point clearest. Despite having a total market cap 5x the size of Australia and 30% more listed companies, Japan spends 20% less than the antoipodeans. Even worse it had fewer numbers of staff and its budget was shrinking.

When analyzing market surveillance, in 2014 the Aussie market issued 36,000 speeding tickets (alerts to potentially suspicious trading). The sophisticated systems are designed to catch any wrong doing. The Japanese issued around 180 speeding tickets. I suggested the FSA go cap in hand to ASIC and the ASX and ask if they can buy the software off the shelf. Safe markets attract capital because all actors feel adequate protections are in place to prevent crime. Higher liquidity attracts more liquidity. It is a win win.

Several years ago the fanfare of the Corporate Governance Code was thrust into the faces of the intenational investment community that Japan Inc was changing. After visiting multiple staff inside the FSA and the TSE there is absolutely no pulse of proactively to be seen anywhere. Even my slight nudge to get the FSA to tap the shoulder of the TSE to suggest listed corporates provide English language materials to encourage more transparency for foreign investment met with the response, “it might help if you spoke directly to the Deputy PM & Minister of Finance Taro Aso.”Not a word of a lie.

How can the Japanese authorities look to appropriately handle a slew of corporate scandals if the encouragement of English language documents requires someone (a gaijin no less) outside the agency to ask the Deputy PM to suggest it back down to them. It is an embarrassment.

In closing perhaps we can look to these corporate scandals breaking out as endemic of a greater underlying problem. While the knowledge that the regulator is likely to do next to nothing provides mild comfort, the reality is that Japanese companies have been strangling themselves for decades. The corporate fabric is fraying. The world is far more competitive than it was. For Japan to assert its ‘quality and/or engineering gap’ dominance now means profits likely suffer. In order to  get around that hurdle it seems that to maintain profit margins, corporates now lie about specifications hoping a history of ‘trust’ and ‘time honoured’ traditions can keep the bluff going. As mentioned earlier the scale of the ‘cheating’ is pitiful yet the shame it brings is multiples larger.

Japan’s cultural rigidities are on full display. Unfortunately they couldn’t arrive at a worse time. Clumps of companies confessing crimes to soften the collective blow is only the start of many more. I suggested in my speech that the authorities introduce a 3 month amnesty period for companies to fess up to any wrong doing. That way they can clear the decks and make it clear that any wrong doing after that date will be met with harsh repercussions. Of course it won’t happen but expect the list of companies above to have many join them at the table of shame.

Tokyo Gov Koike shows powerful ad spurning the old guard

Tokyo Governor Yuriko Koike has released a powerful video which will likely capture the mood of what is going on in Japan’s political sphere. The cigarette chugging old men in the ad are screaming along the lines of “you wanna rise against us?”, “you wanna spurn our organizations?” and “if you change things it will be so problematic”. The model designed to look like Koike strides past ignoring them. With the stench in national politics (a long stream of scandals and corruption) her message is indeed powerful. It is still very early days and her success will rely on how ready some politicians are ready to defect. Koike is getting massive airtime and even if she chooses not to run it will be pitched as a Koike vs Abe campaign. Remember the hugely popular former PM Junichiro Koizumi was a backer of Koike. Let the games begin. This video will resonate.

Abe’s LDP smashed in Tokyo Municipal Assembly election

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Has populism has found its way to Tokyo? Not really. PM Shinzo Abe’s LDP, which has ruled Japan at a national level for decades) bar a few periods was smashed in the Tokyo Municipal Assembly elections yesterday. Tokyo Gov Yuriko Koike had split from the LDP to form the Tomin First (Tokyo-ites First) Party. She won 49 seats (out of 50 contested) from 6 held before the election in the 127 seat Municipal Assembly. The LDP went from 57 to 23, 15 less that its worst ever showing to date. Even the Communist Party gained seats at the expense of the LDP.

Koike’s popularity (despite sliding from 74% to 59%  over the dithering around Tsukiji Fish Market redevelopment) has been driven by the idea of ‘transparency’ in government policy decision making, a clamp down on wasteful spending and accountable government.

Abe’s LDP on the other hand has been embroiled in scandal after scandal and citizens of the capitol were not prepared to be taken for mugs (although only 33% showed up to vote). Whether it be the out-of-control screaming of recently resigned LDP member Mayuko Toyoda to her staffer, the favouritism shown in the Kake Gakuen scandal to PM Abe’s long term friend, the sale of government land at a 90% discount to set up a nationalist school (Moritomo Gakuen) or even the PM being booed on the campaign trail, voters let the LDP know that they’re sick of old school establishment politics. A national election is still some 18 months off.

The bigger issue being debated is whether Koike’s party could make serious inroads into the LDP at a national level putting Abenomics and ultra loose monetary policy on the back burner. The LDP’s national junior coalition party (Komeito) had backed Koike’s Tomin First since last year after the LDP balked at salary cuts for Tokyo Municipal Assembly politicians.

Abe tried to hose down the talks of the rise of Tomin First arguing they were like the Japan New Party which floundered after success in the 1993 Tokyo Municipal Assembly elections. They promised much but ended up disbanding despite Koike being 2IC.

Abe will no doubt crank up public spending in the regional areas to support prefectures with rapidly aging populations. What many overlook is that Japan is still backed by an aging society. Despite all the wishes of the youth for reform, the elderly will continue to grow as a % of the voter base as the population decreases. This means policy will need to be serving the silver-haired.

Abe can’t dismiss these dreadful results out of hand. The citizens of Tokyo are livid at the LDP’s antics. Yet a 33% (+2%) turnout suggests voter apathy is still alive and kicking. Abe isn’t going to be finished by this but the party needs a long hard look at itself. The voters are suitably upset. Is this a wave of populism a la Trump or Brexit? Not really. Japan continues to suffer from lacking a credible opposition which means inexperienced parties often fail in their first term. Every now and again the LDP gets sent a warning shot before business as usual returns.

Hinomaru Hard Drive proves Japan Inc’s memory is too short

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It seems the Japanese government is trying in earnest to launch a local based consortium to fend off foreign attempts to buy Toshiba’s memory business. Taiwan’s Hon Hai, which recently acquired Sharp, is in the running to buy it. It begs the question that if the technology that resides inside Toshiba’s memory division is so state of the art (Hon Hai seems to think so), why aren’t Japanese corporations lining up to buy it? Affordability may be one argument but why isn’t there a Softbank Masayoshi Son styled mega-scale leveraged buy out? Where is the risk taking corproation that can see the future value? Why does the government require an orchestrated syndicate to launch a group bid? We only need to look at the long history of failure of this type of consortium formation.

Exhibit #1. Elpida Memory. Originally the love child of the failed DRAM businesses of Hitachi & NEC in 1999, it adopted Mitsubishi Electric’s struggling DRAM operation in 2003. It listed in 2004 and went bankrupt in 2012. Put simply Japan’s DRAM business, already buried by foreign manufacturers with lower costs, required regular capital raisings which dfailed to deliver the rosy future painted by the charismatic CEO Sakamoto. Hinomaru DRAM died.

Exhibit #2: Japan Display (JDI) which is the listed LCD JV of Sony, Hitachi & Toshiba is yet another mish mash of companies that is trying to keep an uncompetitive product on life support. While it might have Apple as a customer it has margins which scream lap dog. JDI’s market capitalization is 1/3rd of its listing value. Once again Hinomaru Display shows signs of remaining an uncompetitive sloth. Yes, tech analysts will tell me it has best in class technologies. Sad thing is they aren’t getting paid a fair rent for it.

Exhibit #3: Renesas Electronics was formed as the rejected love-child of NEC Electronics which was bought by Mitsubishi Electric and Hitachi. The lack of profitability saw the government’s Incubation Network Corporation of Japan take a c.70% stake in the group to help revitalize it. The shares have performed well in the last 12 months but remain 90% below the peak when it was conceived. Much of the performance is weighing on the expectation of automotive electronic systems requiring more of their chips.

Minister of Economy Trade and Industry (METI) Hiroshige Seko said recently that Toshiba’s memory chip technology could be used to wage destructive cyberattacks if installed in corporate data centers. National security issues should always be entertained as they are in many countries but corporate data centre vulnerability is a much broader problem. Protecting memory chips won’t necessarily stop hackers – in individual, underworld and state sponsored forms – from carrying out cyber attacks.

What we are dealing with here is yet another last ditched attempt to save face in an industry which has lost its competitive edge. Instead of being an IP owner that outsources production it insists on keeping the entire model in a state that can’t compete. Ultimately market economics is a tough judge and jury. Putting together such Hinomaru structures only leads to inefficient capital allocation that hopes to survive as two drowning men trying to make one swimmer. It misses all of the points of making it competitive. Instead of taking hard decisions, it wants the board of Toshiba to accept a lower bid from national interests as preferable to a better bid from a foreigner. How that plays into Japan’s wish to foster best in class corporate governance one will never know? Like Daiko Henjo, such rearguard actions only support the idea that running businesses inefficiently is OK because eventually government backed bailouts are there to save them.

That doesn’t foster risk taking so desperately needed to turn the tech industry’s in Japan around. Is it any wonder that Intel made 50% more net income over the last 25 years than all of Japan’s largest 20 tech companies combined?…

Toshiba should be left to rot as a warning to others like Captain Kidd. Sadly Japan Inc is Captain Kidding

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In the olden days, pirates and criminals were left to rot and die as a gruesome warning to others. Japan should adopt the same policy for corporates which no longer reserve the right to function. I once conducted a study that showed that Intel by itself made more net profit over 25 years in aggregate than the largest 20 Japanese technology firms combined over the same period. Yes, that is right Intel made 40% more net profit than Sony, Panasonic, Toshiba, Mitsubishi Electric, Nidec, Canon, NEC, TDK, Hoya, Nikon, Kyocera, Ricoh, Olympus, Konica Minolta, Sharp, Tokyo Electron, Advantest, Fuji Film, Ibiden, Fujitsu and Brother combined.

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Fuji Film once boasted that it was a better company than Kodak on the announcement of its bankruptcy. The reality is that as a shareholder the decade preceding Kodak’s bankruptcy had higher total returns (dividends, buybacks) than one who held Fuji Film. Not exactly a proud boast to say you’re superior only in terms of survival. That is the problem many corporates face. They do not properly understand the importance of shareholders.

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I have lived in Japan for too long to know that foreign investors remain right to hold such a negative outlook on corporate governance here despite the introduction of the Corporate Governance Code I wrote about in 2015. Toshiba is without a doubt a poorly run company that has become an uncompetitive mess of its own doing. It is decades of poor business decisions that has led to its demise. Not bad luck . The way the government is trying to protect Toshiba and its 200,000 employees is exactly why foreigners will stay away. All such rearguard actions do is send a strong message to all other large Japanese corporates that there is a safety net if they screw up.

Toshiba tried to appeal to investors after the initial accounting scandal that a majority of independent directors would prevent it happening again. Reality is that they were completely ineffective. To that point the Japanese stock exchange (JPX) asked me to fill in a survey on what I thought of corporate governance and whether it should be made mandatory instead of ‘comply or explain’. 98% of listed corporates have volunteered to hire two independent directors so I asked why would you make law what almost all are already in step with? Talk about not understanding what the point of shareholder needs are from the exchange itself. It is embarrassing. I made the point that the “quality” of independent directors was most important. I wrote in the corporate governance report the following,

“Companies must focus on qualitative aspects when hiring independent directors over quantitative parameters. Soft options to meet minimum regulatory requirements to protect the status quo is a recipe for failure. Independent directors should not be viewed as an ‘unavoidable cost’ but as a ‘wise investment’ for firms. Which company would rationally choose inferior staff for its operations? Would an airline actively seek unqualified pilots to fly its passengers? That is not the way of sustaining good reputation in the long run.”

Toshiba is to all intents and purposes insolvent. It bit off way more than it could chew in nuclear. Westinghouse looked a huge boon at the time and many analysts fawned over the Japanese giant becoming a monster player in nuke power. Now the massive costs of building plants, the delays, the requirement for trained personnel to build them etc has become too much to bear,. Yet the government sees the banks propping it up through syndicated convoy support is the way forward.

I wrote in Jan 2016 about Toshiba as its market cap slipped below Y1 trillion.

“I once joked soon after Lehman shock that Apple’s overnight move of 5% was the equivalent of the vanquished Toshiba market cap. Now Apple only needs to move 1.29% to increase / decrease the equivalent amount of Toshiba’s mkt-cap. It shows just how far the Japanese tech giant (?) has slipped. When we look at reality, the accounting scandal, the appointment of 50%+ independent directors on the board and the likelihood of having to write down goodwill, the former tech giant faces further woes. Toshiba is in dire need of a ‘crisis’ manager to restore lost fortunes.”

I also argued in the same note:

“Toshiba may be trimming 16,000 odd staff into next fiscal year. Interestingly the decision to cut 6,800 employees from their overseas businesses highlights once again that domestic social harmony takes a front seat to shareholders. We’re not saying the action is not well intentioned but in a sense it is hardly the thing which will help get the supertanker turned around in the required time. Interestingly Nidec’s Nagamori has offered to hire software, communications and robotics engineers from Sharp and Toshiba to ‘help’. So the best engineers from Toshiba and Sharp will sign up for voluntary redundancy (aka tax effective bonus) and land a job with arguably one of the most profit focused Japanese tech companies, further gutting the ‘best assets’ from the ailing companies.”

Yet look at what Toshiba tried to do with fixing its ailing PC business. It’s independent directors voted to copy what abysmally failed in mobile phones, even worse teaming with an old partner. As I also wrote,

“One would have hoped that the independence of the majority of the board would lead to a heightened sense of urgency and crisis management. The recent news is that Toshiba is in talks with Fujitsu again to merge their loss making PC units where the two share 6% of the global market…There is a lot of precedent suggesting that this is a fruitless exercise. As one of my colleagues put it best, “two drowning men together don’t make a swimmer”. One would hope that Toshiba’s revived sense of corporate governance would see its board seek more severe action…

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“Japanese mobile handset makers have consolidated. Toshiba teamed with Fujitsu (surely a lesson in what a poor decision that has been), NEC with Casio and Hitachi, while Sony (albeit teamed with Ericsson until they merged) has had a rear guard action. Sanyo sold its handset business to Kyocera. Mitsubishi Electric just quit altogether in 2008. I remember a time when Japanese clam-shell phones were amazing. Friends from foreign lands would marvel at the designs, light weight and features versus the clunky Nokia and Motorola offerings of the time. They also were stumped at how these devices could get so much battery life. Alas, Japan kept them largely from overseas markets leaving them without the little scale efficiency from expansion abroad.”

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“As smartphones have caught on, Japanese handset makers have been left further in the dust. Sony has the highest global share among Japanese brands at 1.7% (Q1 2015), however even in the domestic market, Apple and Samsung command the leading shares. Japan’s market share in mobile phones globally has slid from 15% a decade ago to less than 4% in 2012. Japanese maker’s global share of flat screen TVs slump from 45% to around 20% over the same period. What magic can a Toshiba-Fujitsu PC alliance make?”

Alas Toshiba dithered and eventually knew that the government would throw out the emergency airbag to cushion its fall. How does throwing hands in the air and not taking more drastic action (selling cross shareholdings etc) sit with best in practice corporate governance and protecting shareholders’ best interests? Not a chance.

What Japan Inc should do is allow it to fail. Let the free market decide what assets they want. If Westinghouse is worth something to Hitachi or some other maker then so be it. Sharp was sold to a Taiwanese maker.  If Toshiba’s NAND flash business is only worth X to a foreigner or Y to a Japanese then that is reality. The market is there to match buyers and sellers. Somehow I fear that there is a ‘Hinomaru’ type structure that will form to absorb the chip businesses of several Japanese companies to form a burdensome partnership to appeal to social goals.

The government must understand that listed corporates are not there for national service. If that is the wish of the state then it should nationalise Toshiba. I’m sure the BoJ will be glad to add more toxic waste to its massive balance sheet which even dwarfs America. There is no way that foreign investors can glean any hope for true reform if protecting zombified atrophied elephants continues.

Japan is a shame culture. How is it that it doesn’t see that protecting Toshiba is in fact seen as so shameful to foreign investors and increasingly Japanese taxpayers.

Toshiba has till March 14th to find a solution before it gets put on the scheduled for delisting board. That I’d argue is even more embarrassing.