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NOT AGAIN: California’s Unemployment Rate Rises For Second Month In A Row

by AP on September 17, 2011

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By Don Thompson, Associated Press SACRAMENTO, Calif. (AP) — California’s jobless rate grew for the second straight month in August to 12.1 percent, led by continued sluggishness in the construction industry, the state Employment Development Department said Friday. The unemployment rate had been declining since March until it spiked back to 12 percent in July. California’s rate is the second highest in the nation, behind Nevada’s 13.4. “I would say it’s a flat market,” said Brad Kemp, director of regional research with Beacon Economics in Los Angeles. “I just think we have to get used to the fact that slow growth is the path that we’re on, and I don’t think that’s going to change anytime soon.” Nonfarm payroll jobs fell by 8,400 during the month, with the construction industry suffering the biggest decrease, down 7,200 jobs. The unemployment rate was a slight improvement from a year ago, when it was 12.4 percent. During the 12-month period that ended in August, California gained 171,000 jobs, even as nearly 2.2 million residents remained jobless. Kemp said the uptick in last month’s unemployment rate shows the state should not expect any dramatic improvement for at least the next year. Two factors are contributing to the slow recovery, he said. First, employers began adding jobs last year when it looked as if the economy was rebounding. With uncertainty prevailing, they are absorbing those jobs before hiring again. Also, any growth in private industry jobs is being offset by public sector layoffs, as state and local governments adjust to lower revenue. The state reported that six categories lost 17,500 jobs in August: construction; information; financial activities; educational and health services; other services; and government. Five categories added 9,100 jobs last month. They were mining and logging; manufacturing; trade, transportation and utilities; professional and business services; and leisure and hospitality. “You’ve got to have a long-term vision of the economy getting better before you see employers making any significant moves,” Kemp said. Aside from California and Nevada, Florida, Georgia, Michigan, Mississippi, North Carolina, Rhode Island and South Carolina all had unemployment rates of greater than 10 percent. The national unemployment rate remained at 9.1 percent for a second month. While construction firms and governments have been dropping jobs, retail hiring was up last month for only the second time since January, said Kevin Callori, a spokesman for the state’s Employment Development Department. Moreover, manufacturing jobs have increased in nine of the past 11 months, adding 22,000 jobs over that 11-month period. That reverses a trend that saw a loss in manufacturing jobs in 34 of the 38 months ending Sept. 2010. “Over the year, we’re still doing pretty well,” Callori said.

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NOT AGAIN: California’s Unemployment Rate Rises For Second Month In A Row

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Citigroup To Start Charging Customers For Not Having Enough Money

by on September 16, 2011

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Citigroup Inc said it will start charging a monthly fee of $10 on checking and savings accounts with combined balances of less than $1,500, joining a growing list of banks seeking to recoup revenue lost under new financial industry regulations. The fee will be waived if a customer completes one direct deposit and one online bill payment per month through an account, or maintains a balance of at least $1,500 in checking and savings accounts, Citigroup said on Friday The change takes effect in December. Under Citi’s current fee structure, customers are not required to maintain minimum account balances but must complete five transactions a month through an account to avoid a monthly fee of $8. Citigroup said it will not charge for debit card use or online bill payment. Stephen Troutner, head of banking products for Citi’s U.S. consumer bank, said free debit card use could woo customers from other banks that are weighing whether to charge for debit card use, such as JPMorgan Chase & Co and Wells Fargo & Co. “Customers have told us in no uncertain terms that is a huge source of irritation,” Troutner said. New York-based Citi is the latest bank to tinker with its fee structure following changes in U.S. consumer banking regulations and laws over the last two years. New regulations — part of a broad financial sector reform effort — limit overdraft fees and other penalty fees banks can charge. In response, many banks have begun introducing monthly service fees for accounts, debit card use and visits to branches. Bank of America Corp, the largest U.S. bank by assets, added checking account fees last year. The BofA changes include an ebanking account, which allows customers to use ATMs and online banking for free but charges a monthly fee of $7 for teller visits or receiving paper statements. (Reporting by Joe Rauch in Charlotte, N.C.; editing by John Wallace) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Citigroup To Start Charging Customers For Not Having Enough Money

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Southerners Less Likely To Visit The Dentist, Gallup Finds

September 16, 2011

Residents of Southern states are less likely to visit the dentist, indicating that their household income may be lower, according to a Gallup poll released Thursday. Slightly more than 50 percent of people living in Louisiana and Mississippi got their teeth cleaned in the last 12 months, according to the Gallup study. Massachusetts and Connecticut led the states in dental visits with about 75 percent of residents in both states reporting that they visited the dentist in the last 12 months. The ranks of the American uninsured swelled to nearly 50 million in 2010, according to Census data released earlier this week , which could mean continued bad news for Americans’ dental hygiene, the Gallup poll found. More than 70 percent of residents of the top 10 states for dental visits have health insurance compared to an average insurance rate of 56 percent for the bottom 10 states. Lacking health insurance can often be an indicator of poverty, the Gallup report said. And many Americans aren’t willing to shell out for dental insurance even in good economic times. At least 100 million Americans lacked dental insurance before the recession, according to The Washington Post . Some dentists are finding creative ways to make sure the poor and uninsured have clean teeth. The Georgia Dental Association hosted a free clinic at a church in Woodstock, Georgia last month, according to The Atlanta Journal-Constitution . Four thousand people showed up and many slept outside to get free dental care, the paper reported. Nearly 60 percent of Georgia residents saw a dentist in the last year, putting the state in the “lower range” of the country for dental visits, according to Gallup. Free dental care also drew thousands to an outdoor health clinic in an Appalachian region of Virginia last summer, according to The Washington Post . Even with the country marred in an unemployment crisis, many are flocking back to the dentist, not because they’re in any better position to afford it, but because their teeth hurt too much, according The St. Petersburg Times . The result: Patients paying more for dental care because dentists have to perform more complex procedures after years of neglect. Here’s a list of the bottom 10 states for dental visits in the last year, according to Gallup: Mississippi: 51.9 percent of residents Louisiana: 54.8 percent of residents West Virginia: 55.4 percent of residents Texas: 56.1 percent of residents Alabama: 56.3 percent of residents Kentucky: 56.3 percent of residents Arkansas: 56.6 percent of residents Oklahoma: 56.8 percent of residents Tennessee: 57.9 percent of residents Missouri: 56.8 percent of residents

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Unemployment Surpasses ‘The Economy’ As Country’s Biggest Concern: Gallup

September 15, 2011

It’s the unemployment, stupid, according to a Gallup poll released Thursday. Almost 40 percent of Americans said in September that unemployment or joblessness is the biggest issue facing the country, up from 29 percent in August, a Gallup Poll released Thursday shows. Americans now cite unemployment more than “the economy” as the nation’s most important problem, the report said. Not since last November has unemployment surpassed the economy as the top concern of Americans. U.S. employers added no new jobs in August as the unemployment rate held at 9.1 percent, the Labor Department reported earlier this month. And things aren’t poised to pick up any time soon, Douglas Elmendorf, director of the Congressional Budget Office told a congressional committee earlier this week . Elmendorf said his non-partisan agency predicts the unemployment rate will hover at 9 percent through the end of next year. Though the unemployment rate has been high for months, politicians may finally be coming to the realization that it’s a top concern for voters, especially President Barack Obama, who submitted his American Jobs Act to Congress earlier this week. The bills aims to use a combination of spending and tax cuts to spur job growth. President Obama’s re-election hopes might hinge on how quickly he can get the nation back to work. Ronald Reagan is the only president since World War II to win re-election with an unemployment rate above 6 percent, according to Bloomberg . The jobless rate stood at 7.2 percent on Election Day in 1984. For their part, some prominent economists in the Obama camp seem to agree with the American public that creating jobs is the key to turning the economy around. Larry Summers, the former director of the White House National Economic Council, wrote in an op-ed in the Financial Times in June that boosting spending, borrowing and lending would help to turn the economy around by increasing demand and creating jobs. While some other economists are doubting the effectiveness of Obama’s plan, many small business owners say that if passed, the proposal would encourage them to hire . Still, the Gallup poll found that the plan may not be enough to convince Americans that Obama can handle the issue most important to them. More respondents said Republicans are better suited to handle the nation’s biggest problem than said Democrats could deal with the issue effectively.

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Jason Alderman: Improving Your Credit Score

September 15, 2011

Many people suffered blows to their credit scores during the unstable economy of the last few years, whether because they missed payments, exceeded credit limits or, more seriously, experienced a home foreclosure or even bankruptcy. Is this a big deal? Absolutely. If your credit score drops significantly, you’ll likely be charged higher loan and credit card interest rates and offered lower credit limits — or perhaps be disqualified altogether. And, lower scores can also lead to higher insurance rates and harm your ability to rent an apartment or even get a cell phone. Fortunately, there are a few steps you can take that will begin improving your credit score almost immediately: Establish a baseline. First, review your credit reports from each of the three major credit bureaus ( Equifax , Experian and TransUnion ) to find out what negative actions your creditors have reported. While you’re at it, look for any errors or possible fraudulent activity on your accounts. You can order one free report per year from each bureau through the government-authorized AnnualCreditReport.com ; otherwise you’ll pay a small fee. You can also order a FICO® credit score (the score most commonly used by lenders) for $19.95 from MyFICO.com to know exactly where you stand. Generally, FICO scores over 740 are considered excellent, while those falling below 620 may make it tough to even qualify for a loan. “It definitely pays to have a good FICO Score,” says Greg Pelling, vice president of Scoring and Analytics at FICO, the leading developer of credit scores. “Based on today’s rates, a good score could save you almost $6,000 in interest payments on a three-year, $25,000 car loan. Or save you $30,000 on a $100,000 home loan over 30 years, if your score is above 740 rather than below 620. Lenders base their decision on many factors but your FICO score plays a major role.” Banish late payments. A single late mortgage payment could knock 100 points off your score, so set up automatic payments for recurring bills (mortgage, utilities, etc.). Also consider setting up automatic minimum credit card payments if you’re prone to forgetting or travel a lot. And sign up for text or email alerts from your bank or credit union for when your balance drops below a minimum amount. Monitor ‘utilization.’ Exceeding individual credit limits is another good way to get dinged. In fact, the lower your credit utilization ratio (the percentage of available credit you’re using), the better. Try to keep your overall utilization ratio — and the ratios on individual cards or lines of credit — below 30 percent. Although it usually it makes sense to pay down credit accounts with higher interest rates first, if you’ve tapped more than 30 percent of available credit on a particular card, bringing that percentage down first may help boost your score more quickly. Timing is critical. Even if you pay off your balance each month, showing a high utilization ratio at any time during the month could conceivably hurt your score if the statement balance is elevated when it gets reported to the credit bureaus. This is especially problematic for people whose credit limits were lowered after the recession began. A few suggestions: Spread purchases among multiple cards to keep individual balances lower — while still paying off as much as you can each month, of course. Make an extra payment midway through the billing cycle so your reported outstanding balance appears lower. Ask lenders to reinstate higher limits if your payment history has been solid — but don’t tap the extra credit just because it’s there. Be cautious with transfers. Transferring balances to a new credit card account to get a lower rate will ding your credit score by a few points — although it won’t take that long to recover. But, say you move a $2,000 balance from a card with a $10,000 limit to one with a $4,000 limit; you’ve immediately gone from a 20 percent utilization ratio to 50 percent on the new card. Plus, if you then close the higher-rate card, you’ll only compound the problem by both lowering your available credit and erasing a longer-term account from your credit history. Mix it up. People who demonstrate managing several types of credit earn higher scores, so if your revolving (credit card) payments are under control and you don’t have any outstanding installment loans (mortgage, car, student), consider taking out a small personal loan and paying it off on schedule. Just make sure the lender will report it to all three bureaus. A few other credit score-improvement tips: Make sure that credit limits on individual cards reported to credit bureaus are accurate. Don’t automatically close older, unused accounts; 15 percent of your score is based on credit history. In fact, make occasional small charges on existing accounts (paying them off, of course) to make sure the lender doesn’t close them out. Each time you open a new account there’s a slight impact on your score, so avoid doing so in the months before a major purchase like a home or car. Pay off medical bills, as well as parking, traffic or library fines. Once old, unpaid bills go into collections, they can cause major damage to your credit. There are many good resources for learning more about what you can do to repair and protect your credit scores, including MyFICO.com’s Credit Education Center , the FTC’s Credit & Loans page, and What’s My Score , a financial literacy program run by my employer, Visa Inc., which also features a free FICO® Score Estimator that can help you approximate your score. And check out my previous blog, Understanding Credit Scores. This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

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Solar-Powered Processor Offers Glimpse Of Green Future

September 15, 2011

SAN FRANCISCO — A solar cell the size of a stamp. That’s all Intel Corp. researchers needed to power a computer processor that could hold a tantalizing vision for the low-power chips of the future. The company showed off the feat this week at its annual developer conference in San Francisco. The achievement was less about the fact the chip ran on solar power and more about how Intel employees were able to create a chip that ran on little more than the power needed to turn on its transistors, the so-called “threshold” voltage. Intel’s chief technology officer, Justin Rattner, said the experimental processor was 5 times more energy-efficient than today’s processors. But he emphasized that it is nowhere near ready for prime time. The chip was based on a redesign of a Pentium processor that’s more than a decade old, and the underlying technology was so dated that employees needed to scour eBay for a motherboard to plug the chip into, he said. The decision to base their work on an old chip design speaks to the difficulty of the engineering challenge. The Pentium had a vastly simpler design than today’s chips, which made the task of redesigning nearly all of the circuits to work right at such low power a more manageable goal for a small team of researchers, Rattner said. The point of the research was to demonstrate that extreme power savings are possible. “People these days will kill for another 15 or 20 minutes of battery life, and here you’re saying you can improve battery life by a factor of 5 or 10,” Rattner said in an interview. The chip itself was the only part of Intel’s demonstration computer that was solar-powered. The computer itself, which was running Windows, ran on regular electricity. The concept of a solar-powered computer isn’t new, and there are already a slew of solar chargers for consumer electronics. But the promise of Intel’s research is that solar-powered processors could one day start tackling small projects, such as powering small sensors that communicate wirelessly with computers, and potentially be incorporated into more complicated computers to tackle bigger challenges. “The applications are almost endless for it,” Rattner said.

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Rocky Kistner: Intelligent Design; the Little Light Bulb Maker That Could

September 15, 2011

About an hour from  the birthplace of Thomas Edison, in a cul-de-sac of a suburban industrial park outside Cleveland, is the biggest energy-saving light bulb company you never heard of. That company — TCP Inc — is part of a money-saving lighting business  that is revolutionizing the way consumers think about light in their homes. For more than a decade, TCP (Technical Consumer Products), has been quietly stealing the thunder — and engineering staff — of its much more recognizable Cleveland neighbor, GE. But TCP has become the mouse that roared. It’s leap-frogged larger traditional lighting companies in a global quest to make innovative energy-efficient bulbs of the future. Thanks to companies like TCP, new watt-cutting lights are an easy way for consumers to slash their rising utility bills. And the bulbs will only get better.   TCP now produces more energy-efficient compact fluorescents (CFL) than any other, making in-house brands for giant consumer outlets like Home Depot. Company engineers continue to use their technical wizardry to improve light bulb characteristics, including new quick starting and dimable CFLs to highly efficient 50,000 hour LEDs  that will save customers big bucks long into the future.     And starting next year, TCP will be producing a new and improved incandescent that is 50 percent more efficient. For those fans of Edison’s original bulb design, people can stop  hoarding. TCP has solidified its role as an innovation leader by developing an energy-efficient incandescent  with the same traditional shape, but that uses half the watts.   TCP’s Ohio headquarters and bulb warehouse      All photos: Rocky Kistner/NRDC Also on tap next year are plans to expand  its Cleveland engineering and warehouse facility to start making highly efficient CFLs. That’s a welcome relief for an economy desperate for new employment opportunities. TCP officials say even more U.S. jobs will be created as light bulb manufacturing becomes more automated, reducing the incentive to base plants overseas.  Bringing home jobs is an important objective of Ellis Yan, TCP’s founder and president. As a U.S. college student, Yan recognized the value of a more efficient light bulb, a technology that hadn’t changed much in a century. Yan grasped the importance of the CFL after it was invented by former GE engineer Ed Hammer (now a TCP consultant) during the energy shocks of the 1970s.  GE didn’t actually produce the early CFLs since there wasn’t an efficient way to make them. Each one had to be made by hand. So in 1993, Ellis and his brother Soloman formed TCP and began manufacturing them in their native China, a country where labor was cheap enough to hire thousands of workers to bend the glass into curly-q-bulbs one by one. But times have changed. TCP quickly developed an automated system that now has the capacity to crank out nearly two million bulbs a day at its manufacturing plants in China. And more of those manufacturing jobs will be brought to the U.S. next year when the company begins making CFLs at a new production line in Ohio. TCP lighting assemblers and engineers in the lab Looking forward, TCP will continue to create more efficient bulbs, thanks in no small part to people like Tim Chen, TCP’s chief engineer. Chen worked for nearby GE until he was talked into joining TCP’s ambitious bulb designing team three years ago. Since then, Chen has helped the company overcome some of the most important CFL technical challenges; slow start up, no dimability and poor color temperature. TCP now makes bulbs that can be dimmed and start up quickly, producing different color temperatures of light that people can use in different settings of their house. The new designs and lighting technology advances have turned the sometimes ridiculed curly-cued CFLs into bulbs consumers have come to embrace. Chen says his engineering feats are due to the company’s philosophy of taking risks to solve specific problems. “I give all the credit to our founder (Ellis Yan),” Chen said. “He said this is the problem, you go solve it. Lots of companies aren’t willing to take that risk.” Tim Chen and his engineering colleagues are given free rein to solve the vexing problems that lighting engineers face everywhere. They huddle in their labs, tinkering with electrical components and gasses that squeeze more energy efficiency into each bulb and improve the color and lighting variability each one puts out. Vast trays of lights blink on and off in a ceaseless effort to create bulbs that are more efficient, durable and more pleasing to the eye.  TCP Chief Engineer Tim Chen and racks of bulbs undergoing testing in Ohio. Engineers say in the future, the light bulbs of the world may all talk to each other the way computers do now. They may be smart enough to turn on and off automatically, and perhaps even change the color and temperature of the light depending on the mood of the moment. Bulbs someday could even outlive the people who bought them. Who knows, maybe they will be passed down through the generations. These are the kinds of things TCP engineers will be grappling with as the demands of the world change. But one thing is for certain; the light bulb of the future will in no way look and act like the common incandescent light that dominated the world for so long. They no longer will be your grandfathers’ bulbs.  For future generations — and a sustainable planet — that is a very good thing.

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Peggy McColl: Are You Serving Time Instead of Serving Yourself?

July 26, 2011

When you think about launching a product, venturing out on your own as an entrepreneur or even trying to lose those last 10 pounds, what holds you back? It’s not simply a lack of willpower or fear of taking risks that stands in your way. I would challenge you by asking the question, “Are you serving time?” When I say “serving time” I am referring to the prison you have put yourself in. Let me explain. 33 years ago I was in prison. I know if you’ve read any of my books or been through any of my programs, I share the story of how I was locked away in an emotional prison, and I didn’t even know I was in one. Chances are you haven’t recognized it about yourself either. What was going on for me 33 years ago is I was a very insecure, unhappy, angry, frustrated, broke young woman. I was in my late teens and I was going through this incredibly challenging time, to the point where I lost the will to live. I was working for this company that hired a gentleman by the name of Bob Proctor to be a keynote speaker at a company event. I was not into personal development at the time. I had never read a personal development book in my life. I didn’t even understand the whole concept that we are creative beings and that we’ve got the ability to create. Because I had never even been open to any of this material, I had an attitude about it. So when Bob Proctor came in to address the company, I looked for a seat in the back of the room because I thought it was a waste of time. Of course, as fate would have it, the only seat left was in the front row, directly in front of him. That day Bob Proctor said something that changed my life forever. “You cannot escape from a prison unless you know you’re in one.” Just as I was back then, and many people are right now, you could be serving time in a prison of emotions that are holding you back from manifesting or creating the life that you desire. I didn’t even realize it, and the first step to all of creation is really becoming aware. Becoming aware that we are creative, that we have the ability to make changes in our life, and that we can choose to do something about it. So are you in an emotional prison? Do you put limitations on yourself because you believe things about yourself that are untrue or unfounded? Perhaps you think you need to know how your goals will be accomplished, and if you don’t know the how, you don’t believe it’s possible. That’s not true at all. Not every desire you have or goal you set has a logical, organized method of accomplishment tied to it. Many times it is more about setting the intention than it is about knowing what steps to take at each stage. Remember the old adage, “Where there is a will (desire, intention) there is a way.” Another lesson I learned from Bob Proctor was the only reason why someone who makes $50,000 a year isn’t making $50,000 a month is because they haven’t chosen to do that. I thought, “Whoa!” Now, there’s a stretch, right? Maybe that’s a goal that you’re going to set for yourself. It’s possible. It starts with the desire. The first thing you have to do is set the intention, using only positive language to describe your desires and then believe you deserve it and that’s already yours. The rest will come. God (the Universe) will acknowledge your beliefs and will help you put your intentions into actions. If you are aware that you are in an emotional prison and you would like to do something about it, join me on my Manifestation Creation Program . I have created a 10-week program that may change your life forever. We will do it together. We will co-create taking your life to the next level. You have the ability within you to create whatever it is you want for your life, for your family and for your business. I hope you will join me in the Manifestation Creation Program .

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Olivier Blanchard: What I Learnt in Rio: Discussing Ways to Manage Capital Flows

June 3, 2011

Last week I traveled to Rio de Janeiro in Brazil to participate in a conference on managing capital flows. Organized jointly by the Brazilian authorities and the IMF, the conference brought together experts from both the demand and supply sides of the issue, including many with a wealth of hands-on experience. The discussion was rich and informative. Clearly we still have a lot to learn about the optimal approach to managing capital flows, about the right policy tools, and the right combination of tools. To start with two general, but important observations. First, while the issue of capital controls is fraught with ideological overtones, it is fundamentally a technical one, indeed a highly technical one. Put simply, governments have five tools to adjust to capital flows: monetary policy, fiscal policy, foreign exchange intervention, prudential tools, and capital controls. The challenge is to find, for each case, the right combination. This is not easy . Second, we need to better understand the costs and benefits of capital flows. The costs depend — more than is generally understood — on the institutional framework in each country: things like the exchange rate regime, the degree of dollarization of the economy, and the credibility of the central bank. Even costs related to ‘ Dutch Disease ‘ — the bogeyman still much in the minds of policy-makers — are in fact not well established. Over the past 18 months, we at the IMF have done some rethinking about the nature of the risks capital flows may bring, and how best to respond. The most recent research attempts to develop a conceptual framework to weigh the benefits of different policy responses, including capital controls. Like the re-examination of many economic principles in the wake of the global crisis, this work is just the beginning of a conversation. The Rio conference highlighted the importance of consulting and debating the issues more broadly, particularly with financial sector experts who understand and influence intermediation, but also with academics and outside researchers. The conference gave me a better appreciation of the universe of issues, and of the outreach and research still to do. I took 32 pages of notes during the conference; I will not impose them on you, but here are some highlights. On the nature of flows… Looking at the relevant set of investors suggests higher flows to emerging markets are here to stay. This is the “new normal,” and is based on a ” fundamental re-rating of global risk ” in favor of emerging market assets with better fundamentals and higher returns. But, it remains to be seen whether, for example, the new appetite of foreign investors for local currency debt comes from a durable shift in demand, or the more temporary expectation of appreciation. The nature of specific investors must inform the policy choices. We often think of inflows and outflows as coming from primarily from decisions by foreign investors. The reality is that many of these inflows and outflows often come from decisions by domestic investors . When this is the case, targeting nonresidents is largely misguided. On the policy options… None of the tools — be they reserve accumulation, prudential measures, or capital controls — are water-tight . So we should move away from strict policy orderings toward a more fluid approach of using “many or most of the tools most of the time” instead of “this now, that later.” It is not clear that the diversity of approaches we observe in practice comes from different circumstances, or from suboptimal responses. It was interesting to observe, for example, that Chile relies on foreign exchange intervention, not on capital controls, but India, instead, relies on capital controls, not on foreign exchange intervention. Are these corner solutions really optimal? There were many other important technical issues beyond these and I’d encourage you to read some of the interesting presentations by the participants and speakers, including remarks by Professor Jagdish Bhagwati, on the Rio conference website . There were some issues that I would like to have seen explored more fully. One was the multilateral angle. As my IMF colleague Min Zhu said in his opening remarks , “ensuring that countries reap the full benefits of capital flows is a shared responsibility between advanced and emerging market economies, between surplus and deficit countries, between capital-exporters and capital-importers.” The challenge is to translate this into practice. What is the actual responsibility of source countries? Should they take it into account in conducting monetary policy, and if so, how? Should we worry about the “beggar thy neighbor” effect of controls? Some of the evidence presented at the conference suggested that these spillovers across recipient countries were not very large. Theoretical and further empirical work is badly needed here. Nor did we have an opportunity to revisit, or even discuss, the current wisdom on capital account openness. In light of new research, what should we be telling policy-makers, those with mostly open and those with mostly closed capital accounts? Should Chile and China eventually converge to the same point along the continuum? And, if so, at what rate? We cannot avoid coming to views on this fundamental issue. Overall, our discussions in Rio were a positive step toward a more constructive, updated approach, away from the contentious legacy of the capital controls debate. We look forward to continuing the conversation as we work with members to find a way toward the right combination of policies. From iMFdirect blog

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DSK Replacement Should Come From Developing World

May 23, 2011

Nothing against French Finance Minister Christine Lagarde , who by all indications seems qualified to oversee the International Monetary Fund, but here’s a vote for anyone else who is qualified from the developing world. Let’s recap why there is suddenly a vacancy in the highest office of the IMF: Dominique Strauss-Kahn, a man reared in rarefied Parisian suburbs, educated at elite French academies and more recently occupant of an office that entitles him to fly around the globe fraternizing with fellow members of the powerful set, allegedly stepped out of the shower in a $3,000-per-night suite at a deluxe New York hotel. There, he encountered an African immigrant employed as a maid, who was presumably arriving to make the bed and remove the trash. The alleged sexual assault that followed is uncomfortably close to a workable metaphor for how much of the developing world has long viewed its relations with the Washington-based institutions at the center of the global financial order, the IMF and its sister agency the World Bank. Not without some merit, it must be added. Why was DSK the one stepping out of the shower and headed for an elegant lunch in a Manhattan restaurant? By dint of many reasons, to be sure, but surely in part because of his good fortune of being born in the capital of a wealthy nation and being the son of parents able to reinforce their own good fortune by sending him to the most exclusive schools. And why was this woman from Africa here on this day? Every life is complex, but one can assume that her decision to come to the United States, rent an apartment in the Bronx and ride the subway to Manhattan so she could scrub the toilets of the global elite amounts to her calculation that this was the best economic opportunity available to her. This is not a broadside against the World Bank and the IMF, whose histories and world views are far more complex than they are often made out to be by its legions of critics. The two institutions are full of dedicated and well-intentioned people who spend their days trying to build a more equitable economic order and spread the fruits of innovation to more parts of the globe (though the same cannot always be said about the leadership). Rather, it is a recognition that the inequalities that divide nations and the classes within nations are so deep and self-reinforcing that it is going to take some real doing to transform the centers of power into forces for greater good. That, and the recognition that it would be disgusting to fill a vacancy created by an alleged sexual assault of an African immigrant maid by a European master of the universe with another European — yes, even a woman — through the same secret, clubby process that has been used to staff the place since its inception. Over the weekend, the sense took hold that Lagarde’s appointment was gathering unstoppable momentum . But that would be a stay-the-course move. Why not reform from the top down? For far too long, the IMF and the World Bank have been perceived as institutions intent on perpetuating the privileges of wealthy countries while displaying callous disregard for the lives of ordinary people around the globe. Time and again, a fresh financial crisis in Indonesia, Argentina or Greece has prompted the IMF to prescribe its usual regimen of austerity as the condition for an emergency bailout, requiring government budget cuts, the elimination of subsidies for food and fuel and the cessation of other spending. This medicine has been served up as a needed salve for a global financial system lacking confidence, which is really a euphemism for the needs of the enormous banks who play an outsized role in the national affairs of the countries that pay most of the IMF’s bills: Its policies have ensured that lenders based in the United States, Europe and Japan are not forced to absorb losses on loans made recklessly in pursuit of emerging market riches. Better that ordinary people in Indonesia, Argentina or Greece should lose access to luxury items like rice and kerosene than that shareholders of Deutsche Bank or Goldman Sachs should forego dividends. One may be tempted to reject that portrayal as cartoonish, but every now and again a window opens up on the views of the people running the ship. Recall the memo that Larry Summers signed in 1991 , when he was the chief economist of the World Bank, advocating the bank encourage more toxic waste be transferred from wealthy countries to poor countries. Among the reasons? Poor people earn less than rich people, so the lost wages from their deaths are not as great. “The economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that,” the memo asserted. Summers later characterized the memo as a sarcastic retort . Hilarious. Whatever the tone, the logic of the infamous memo is the same sort that holds as a natural outcome the fact that African immigrants should serve the needs of European and American potenates inside delightful hotels: Every actor pursues their own economic self-interest, and thereby maximizes the greatest aggregate good. So speaks the text book. That is no justification for an attempted rape — the crime alleged — but it helps explain how these two individuals found themselves standing opposite one another in the same hotel room. We simply need the institutions that govern the world’s money to be representative of the world’s people. Yet the way the DSK episode has been absorbed by the power centers reflects a tendency to accept the sorts of assigned roles the IMF and the World Bank generally view people outside the most powerful countries as: cheap hands to be exploited, miserable wretches to be pitied and perhaps aided or, most of the time, rounding errors on the ledger books of a global economy. The New York Times keeps referring to the alleged rape attempt as a “tawdry” episode, as if implying that DSK was caught consorting with a woman of lower class and ill-repute, brought down by an unclean act — an embarrassment, as opposed to a crime of violation and brutality. In France, to judge from the polls and the press coverage, concern seems to focus on claims that DSK was set up — an exculpatory frame that turns him into the potential victim — and worries that he is being ill-treated as we glimpse him placed on the hardwood benches of a New York City courtroom or paraded in front of cameras on his way to being arraigned. “He’s not like everyone else,” the French intellectual Bernard-Henry Levi reportedly told a German newspaper , expressing his revulsion over seeing his friend DSK led into court in handcuffs. The French reaction speaks to the deep-seated sense of entitlement that governs the powerful class: The maid and her story are not even in the picture. Let us contemplate the injustice of being yanked from the front of the plane to the courtroom! Did DSK even get to finish his pre-takeoff cocktail? This is, frankly, one of the rare times I find myself feeling almost patriotically proud over the workings of the American justice system. The New York Police Department appears to be putting its nose to the ground and investigating the case as a straightforward crime, in which one human being allegedly violated the rights of another. Considerations of class and race and national origin appear to be trumped by a straightforward process of fact-gathering and deliberation. Isn’t this how the global financial system ought to work, too, as the IMF sets about finding a replacement for DSK? The clearest argument for giving prime consideration to someone from the developing world is the name for the process that has governed in the past — the “gentlemen’s agreement” that the World Bank chief must be American, while Europe has claim to the head of the IMF, as if these offices are colonial spoils to be divvied up among empires. The IMF has in recent years made a show of adjusting the byzantine system through which it allocates votes according to the financial contributions of its members, s lightly adjusting upward the shares that accrue to China, Brazil, India and Russia . But that is mere tinkering around the edges. We need something bold, a clear assertion that the gentleman’s agreement is no more. Four years ago, as Wold Bank President Paul Wolfowitz was forced to leave his post under an ethical cloud, prominent academics called for an end to the gentleman’s agreement and the adoption of a transparent process to replace him. But the old system was indulged again. Now, the same calls are being heard again. Over the weekend, the finance ministers of Australia and South Africa released a joint statement urging that DSK’s replacement be selected on the basis of merit, not nationality . “For too long, the IMF’s legitimacy has been undermined by a convention to appoint its senior management on the basis of their nationality,” the statement declared. “In order to maintain trust, credibility and legitimacy in the eyes of its stakeholders, there must be an open and transparent selection process which results in the most competent person being appointed as managing director, regardless of their nationality.” That’s a good start, but better yet, why not urge for the active pursuit of a managing director from the developing world? To which one might respond that the moment at hand is too fraught with peril to allow political correctness to dictate. Greece is in trouble again. Portugal remains a worry. Spain may yet need a bailout, with awful ramifications for the rest of Europe . But part of the clubbiness that prevails inside the IMF and the World Bank, not to mention the American Treasury, includes subscribing to the increasingly ridiculous assumption that the West knows best when it comes to prudent financial management. China, whose banking system is oft-described by the power set as a disaster in waiting, has now skirted two global financial crises in a row (Asia in the late 1990s, and the Grand Disaster of 2008) without a domestic meltdown. The knock on China is that relationships and insider deals determine where money goes. How to put this? France, Germany, the United States and Great Britain also seem to have this problem. That’s how the good taxpayers of the United States wound up giving money to AIG to bail out Goldman Sachs while letting the executives keep rewarding themselves with bonuses. India is a growing economic power that happens to be a democracy. South Africa has emerged from apartheid to assume a seat at the table among responsible nations. Latin America is increasingly integrated into the world economy. Surely, somewhere other than Europe or the United States resides a person capable of overseeing the IMF. Dominique Strauss-Kahn has shined a momentary light on something that was never really hidden to begin with, yet manages to go largely unseen — the degree to which institutional privilege perpetuates itself to the detriment of most citizens of the world. His demise presents us with an opportunity to address that, one that ought not be squandered.

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Penning A Rape Apology: A Guide For Important Men

May 18, 2011

Who would have thought there would ever be an issue in our modern lives that could possibly bring together the abundant talents of Bernard-Henri Levy and Ben Stein? The former is a louche French “public intellectual,” the latter a Nixon speechwriter-turned-droning commercial pitchman, so up until recently, I wouldn’t have imagined there were too many causes under whose banners the two would publicly unite. But that was all before IMF head and would-be French presidential candidate Dominique Strauss-Kahn was accused of raping a hotel maid. Now, Levy and Stein find themselves offering up the same response — two of the World’s Most Interesting Men, defending another Interesting Man, on the grounds that the privilege all enjoy makes the crime inconceivable on its face. Ahh, the vita is always dolce when you are an Interesting Man. And rape? This is not a crime that Interesting Men dismiss out of hand, necessarily. But it’s a tawdry and declasse sort of thing that happens to downmarket people. It’s not supposed to rile up the lives of the world’s elite. Game recognizes game, after all. And shame? That’s for lesser people. And so while it can be acknowledged that the possibility exists that DSK is the perpetrator of a crime (Levy: “I do not know what actually happened.” Stein: “…it’s possible indeed, maybe even likely, that he is guilty as the prosecutors charge.”), the important thing to do right now is remind the world that in this life, Interesting Men are never supposed to experience shame, let alone experience it publicly. Isn’t that the greater indignity? The good news for Interesting Men is that they need never again spend too much time wondering how to defend their fellows from such base charges, as Levy and Stein have discovered the formula by which such a defense can be mounted. 1. Always remember that a man’s importance is a defense in itself. Per Levy, DSK is “one of the most closely watched figures on the planet.” Oh, you didn’t know who he was until this week? Typical . He’s actually a “champion” of (some of) the French people. One of that country’s “most devoted and competent servants.” And the world “is indebted to him for contributing, for the past four years at the head of the IMF, to avoiding the worst.” So remember that as these accusations play out! Per Stein: “This is a case about the hatred of the have-nots for the haves, and that’s what it’s all about. A man pays $3,000 a night for a hotel room? He’s got to be guilty of something. Bring out the guillotine.” Indeed, this is our fault, for scheming up a way to indict DSK the moment he flashed us his platinum card. 2. And remember, the greater outrage here isn’t that a hotel maid may have been raped, it’s that an Interesting Man is being treated as a common criminal! Levy: “This morning, I hold it against the American judge who, by delivering him to the crowd of photo hounds, pretended to take him for a subject of justice like any other.” Stein: “Mr. Strauss-Kahn had surrendered his passport. He had offered to stay in New York City. He is one of the most recognizable people on the planet. Did he really have to be put in Riker’s Island? Couldn’t he have been given home detention with a guard? This is a man with a lifetime of public service, on a distinguished level, to put it mildly. Was Riker’s Island really the place to put him on the allegations of one human being? Hadn’t he earned slightly better treatment than that?” 3. On the other hand, the accuser is so common and ordinary! Stein: “People accuse other people of crimes all of the time. What do we know about the complainant besides that she is a hotel maid? … How do we know that this woman’s word was good enough to put Mr. Strauss-Kahn straight into a horrific jail?” 4. Your privileged perch gives you vast knowledge of the world, bearing on this case, that smaller people can’t possibly appreciate. This includes: stuff about high-priced hotels. Levy: “I do not know — but, on the other hand, it would be nice to know, and without delay — how a chambermaid could have walked in alone, contrary to the habitual practice of most of New York’s grand hotels of sending a ‘cleaning brigade’ of two people, into the room of one of the most closely watched figures on the planet.” Stein: “They were in a hotel with people passing by the room constantly, if it’s anything like the many hotels I am in. How did he intimidate her in that situation?” You people at the Days Inn couldn’t possibly understand how exculpatory these anecdotes are! 5. No, you’re not a criminologist, but you’re important , and so your extra special thoughts on forensics should be given more weight that the people who actually perform those tasks and apply that knowledge, for mere five figure salaries. Stein: “In life, events tend to follow patterns. People who commit crimes tend to be criminals, for example. Can anyone tell me any economists who have been convicted of violent sex crimes? Can anyone tell me of any heads of nonprofit international economic entities who have ever been charged and convicted of violent sexual crimes? Is it likely that just by chance this hotel maid found the only one in this category? Maybe Mr. Strauss-Kahn is guilty but if so, he is one of a kind, and criminals are not usually one of a kind.” How can you argue with this tautological reasoning? People who commit crimes tend to be criminals. But people who run the International Monetary Fund? THEY TEND TO BE THE HEAD OF THE IMF. And the whole idea of economists committing rape is just insane! The grand debate between Keynes and Hayek permit you no time for such pursuits. Stein continues: “The prosecutors say that Mr. Strauss-Kahn ‘forced’ the complainant to have oral and other sex with him. How? Did he have a gun? Did he have a knife? He’s a short fat old man.” As everyone knows, in the history of the world, men have always needed knives and guns to intimidate women. 6. What’s more, as an Important Man who can alone Divine the Mysteries of the Universe, you have special insight into the character of other Important Men, which is, in and of itself, exculpatory. Levy: “And what I know even more is that the Strauss-Kahn I know, who has been my friend for 20 years and who will remain my friend, bears no resemblance to this monster, this caveman, this insatiable and malevolent beast now being described nearly everywhere. Charming, seductive, yes, certainly; a friend to women and, first of all, to his own woman, naturally, but this brutal and violent individual, this wild animal, this primate, obviously no, it’s absurd.” Stein: “If he is such a womanizer and violent guy with women, why didn’t he ever get charged until now? If he has a long history of sexual abuse, how can it have remained no more than gossip this long?” SPOILER ALERT: It’s because women accused of rape often face such a steep climb in the criminal justice system that many rape surivivors are too intimidated by the long odds. Combined with the pain of reliving such a traumatic event, many can’t bear the burden. In this way, rape is a crime of double-intimidation, with the legal system providing the second blow. 7. The American legal system is something that ordinary people have no real trouble understanding, but if it suits your purposes, just say a whole bunch of things about it that aren’t anywhere near being true! Stein: “Did the prosecutors really convince a judge that he was a flight risk when he was getting on a flight he had booked long beforehand? What kind of high-pressure escape plan is that? How is it a sudden flight move to get on a flight booked maybe months ago?” The fact that someone once booked a flight in the past isn’t what people mean by the term “flight risk.” Someone is a “flight risk” if they have the ready means to flee the country. But never mind! Levy: “I am troubled by a system of justice modestly termed ‘accusatory,’ meaning that anyone can come along and accuse another fellow of any crime — and it will be up to the accused to prove that the accusation is false and without basis in fact.” Actually, the American system of justice is adversarial and typically, the burden of proof is on the accuser, but whatever! The unique thing about rape is that, like no other crime, the actions of victim go on trial as well. Did you get assaulted because you took, perhaps, an ill-advised shortcut home ? You may lament that decision, sure, but no one in their right mind is going to suggest that your actions provided the criminal the right to commit the crime. Rape, on the other hand, is much different — there, the actions of the victim are often deemed fair game, with the implication being that the victim accorded the attacker the right to commit rape. 8. Which reminds me, don’t forget to blame the victim! Stein: “I love and admire hotel maids. They have incredibly hard jobs and they do them uncomplainingly. I am sure she is a fine woman. On the other hand, I have had hotel maids that were complete lunatics, stealing airline tickets from me, stealing money from me, throwing away important papers, stealing medications from me.” That’s just the way hotel maids are! You don’t have to limit your victim blaming to just this one victim, either. Levy: “I hold it against all those who complacently accept the account of this other young woman , this one French, who pretends to have been the victim of the same kind of attempted rape, who has shut up for eight years but, sensing the golden opportunity, whips out her old dossier and comes to flog it on television.” Yes, what a golden opportunity, to relive a traumatic time in one’s life, and get pilloried. It’s like winning the lottery! Depending on your taste, you can season the piece with talk of grand political conspiracies. And there’s always room to blame the media, for daring to report the story. But that’s basically how you do it. Heck, you Interesting Men no longer have to write these defenses yourselves anymore — just hand this guide to an underling and they can write it up for you. One final note: at some point, someone might tell you that every time one of these rape apologias makes it into print, it has the net effect of stealing away one more portion of courage from women the world over who have survived rape, who might ordinarily confront their attackers in an attempt to bring them to justice. You’ll be told that every time a victim gets smeared or discounted, it makes it that much more clear to rape survivors that this is acceptable public treatment. A simple application of logic might inform you that enabling — indeed, ennobling — rapists helps clear the way for more rapes to be committed. But surely such concerns are well beyond the purview of Interesting Men. [Would you like to follow me on Twitter ? Because why not? Also, please send tips to tv@huffingtonpost.com -- learn more about our media monitoring project here .]

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Marty Kaplan: Who’s Afraid of a Countdown Clock?

May 13, 2011

Please don’t run a countdown clock on the debt ceiling. For weeks , that’s what Jack Lew, the Obama Administration’s director of the Office of Management and Budget, has been urging the television networks not to do. You know the kind of clock he means. It’s what we saw on the cable news channels in April as the absence of a deal on the federal budget raised the prospect of a government shutdown. To boost ratings, few things beat whipping up a little Perils of Pauline suspense about whether the Washington Monument will be shuttered and Social Security checks will stop. In 18 hours and 42 minutes, it could be cat food for Granny. Stay tuned! Sometimes the clock starts after the event. “This is the 143d day of the Iranian hostage crisis,” the network anchors said, flipping the pages of the nightly humiliation calendar during the last 444 days of the Carter Administration. Keith Olbermann did something similar with the number of days since “Mission Accomplished” was declared in the Iraq war. Does it matter? In the Carter case, it may well have cemented his 1980 loss to Ronald Reagan. (Double-digit inflation and gas rationing also didn’t help.) In the recent wrangling over the budget, the looming deadline mattered, but it’s hard to believe that the deal the negotiators reached was actually affected by the Nielsens stunt. This time, though, it’s different. That’s Jack Lew’s point, which has also been made by Democrats like Obama economic advisor Gene Sperling and House minority whip Steny Hoyer (D.-Md.), and by liberal columnists like E.J. Dionne . The reason they want the networks to abjure debt ceiling countdown clocks is the fear that they will spook the markets. If the full faith and credit of the United States is in doubt, then no one will trust our bonds, interest rates will spike, unemployment will climb, our fragile recovery will be derailed and the world will be plunged into an even deeper recession. I can see why Republicans aren’t clamoring for the media to can the clocks. They insist that they won’t raise the debt ceiling unless Democrats couple that vote with an agreement to cut spending by at least $2 trillion. Cutting tax expenditures, say the Republicans, won’t count as cutting spending; the top six publicly-traded oil companies made a staggering $38 billion in first-quarter profits, but the GOP has taken the $4 billion-per-year federal subsidy to Big Oil off the table, as well as the $1 trillion in Bush tax cuts for the wealthy that President Obama wants to eliminate. It’s in the Republicans’ interest to portray anything less than total capitulation by the Democrats as an invitation to global collapse. If doomsday clocks incite a little pre-midnight foretaste of economic meltdown, all the better: the Democrats will have no choice but to cave. The clocks would have the perverse virtue of transforming a GOP bluff into an actual game of chicken, with the Republicans taking the steering wheel off and throwing it out the window. What puzzles me is why the markets would be spooked by a TV clock. These are the same markets that are universally said to have already discounted any event that you and I find out about. A wheat fungus in Ukraine, a class-action defeat, a movie that bombs, a CEO ouster, a bad quarter: whenever I think I have a bead on the future, the financial chattering class tells me that the institutional investors, private wealth managers and arbitrageurs have been yawning about that news for months. So you’d think that the wizards of Wall Street, the gnomes of Zurich and the other masters of the universe would by now be totally blasé about some ticking widget that Bloomberg, Fox and MSNBC might use to scare up, and scare, an audience. Is it really conceivable that the people who actually pull the strings of the international economy — not the day-traders and duffers who watch cable to find out what’s going on, but the Davos crowd who truly move markets — is it possible that a cornball countdown clock could cause them to panic? I don’t think so. My bet is that Beijing, Brussels and the rest of the financial capitals decided some time ago that John Boehner (R-Oh.) and Mitch McConnell (R-Ky.) are neither nuts enough nor politically fearful enough to permit the Tea Party to make them accomplices to an economic apocalypse. Sure, there’s a psychological element to the market, but no cable network’s catastrophe-porn chyron is going to be influential enough to jeopardize any media mogul’s fortune. So why are Democrats playing the clock card? My guess: To spook the media about giving the Tea Party a free ride. If cable coverage of the debt ceiling negotiation is framed as a fight over how much spending should be cut, the Republicans win, no matter where the number comes out. But if the question of whether running a clock is civically reckless gains some traction, then the story becomes whether the Tea Party is taking the American economy hostage. Whether cable stations run a countdown or not, the controversy draws viewers, so the networks win either way. I just wish that were also true for the country. This is my column from The Jewish Journal of Greater Los Angeles . You can read more of my columns here , and e-mail me there if you’d like.

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Paul A. London: Unemployment and the Deficit: The Disconnect

May 6, 2011

A recent Gallup poll shows that Americans view unemployment as the biggest economic problem facing the country. So why are Republicans letting Tea Party zealots put out in their name a draconian plan to cut the deficit that would do nothing to bring joblessness down? Today’s painfully high unemployment — over 14 million jobless and millions more forced to work part time — has nothing to do with budget deficits. The surge in unemployment at the end of the Bush Administration had nothing to do with the budget deficits he ran every year of his administration. Spending on Medicare, Social Security and aging Baby Boomers that the Tea Party deficit plan in its sights has nothing to do with joblessness. The “war of choice” that George W. Bush opted for in Iraq has nothing to do with unemployment, although it is adding trillions to the deficit. The Tea Party’s focus on deficits is not about jobs. To the contrary, it is a way to shift attention from the real cause of joblessness — egregiously greedy behavior by the American financial community and anti-regulation regulators — to the government. It burns me that the Tea Party invokes the history of patriots who threw British tea into Boston Harbor and ignores the history of a dozen American financial speculations that led to mass unemployment when they collapsed. In the late 1980s, a speculation in housing on President Reagan’s watch led to the collapse of almost a quarter of U.S. Savings and Loan institutions and required a $90 billion government bailout. The recession and unemployment that followed probably cost George H.W. Bush the presidential election of 1992. President George W. Bush learned nothing from his father’s experience. He and Alan Greenspan, the overrated chairman of the Federal Reserve, stood by and cheered a much larger financial speculation in housing from 2002 to 2007. The Great Recession that followed is the reason the U.S. has 8.8 percent unemployed today. Tea Party Republicans act as though the 2002-2007 housing speculation and the unemployment that followed had nothing to do with them. They refuse to accept responsibility for cheering on the hucksters, the erstwhile “masters of the universe,” whose wealth they would not touch. Like Huck Finn’s drunken father, the Tea Party blames the “govment” when the problem is the culture of quick enrichment that they continue to encourage. It is not the deficit that is causing unemployment. What happened is that private lenders loosened credit standards so that they could make more money. Taking advantage of peoples’ trust, they made loans to millions to buy houses knowing that many of them would not be able to pay back the loans. These lenders then packaged the dicey loans into mortgage-backed securities and got rid of them. CEO’s at the nation’s leading banks, who should have known better or been better supervised had their institutions buy the risky securities because they paid high interest rates. Many bankers only pretended that they knew what was in the packaged securities they were buying. They did not want to look a gift horse in the mouth. Wiser ones knew what was in the securities but hoped to sell them before others found out. They minimized in their minds, no doubt, the outsized risks they were taking to “earn” returns that would justify bloated compensation. Real students of American history — although clearly not the Tea Party — know the same thing happened in almost identical fashion in the late 1920s. In 2007 and 2008 the gravy train stopped. The ordinary Americans who had been suckered into borrowing at high rates were unable to pay the lenders back. The mortgage-backed securities the banks had bought became unsalable and lost much of their value. The value of the capital in bank vaults, therefore, fell drastically reducing their ability to make loans to solid non-speculative businesses. The government had to step in to keep essential credit flowing to non-speculators. Unemployment soared in the housing industry, spread to raw materials linked to building, and then to manufacturing and the service sector. Did this soaring joblessness have anything to do with government deficits? Absolutely not! Alexander Hamilton was the American Founder who understood best what makes an economy work. He built the foundations of America’s modern free enterprise system while serving as George Washington’s Secretary of the Treasury. Hamilton had a friend, William Duer, who was speculating in government bonds in the early 1790s, and borrowing heavily to do so. Hamilton had nurtured a market for government bonds because he understood that it would help the young country grow. He knew the difference, however between prudent investment and speculation. He warned his friend Duer repeatedly not to go too far. Duer, like the “masters of the universe” the Tea Party is hiding behind the deficit smokescreen, did not listen. Duer lost everything when the speculation collapsed: He was not protected by corporate law that today limits liability, allowing modern speculators to stash gains away where the people they fleece can not get them. Duer was sent to debtor’s prison where he was almost lynched by other New Yorkers whose money he had lost. Hamilton, unlike the Tea Party zealots, took care of the country and did not pretend his businessman friend was innocent. He made sure that the banks that the speculators could not repay had enough money in their vaults to continue making worthwhile loans to others. He put customs and other government revenues in their vaults to tide them over until they had made up for the speculative loses. Lending for worthwhile projects continued and no depression followed. As for William Duer, he died in the debtor’s prison 7 years later. Hamilton remained his friend but despite Duer’s entreaties he would not get him out of jail or absolve him of responsibility. There are lessons in this history that are lost on today’s Tea Party-led Republican Party. They have not learned from Hamilton’s behavior toward Duer 220 years ago that belief in free enterprise does not require us to believe that financial markets don’t need to be supervised. Hamilton also could teach them that government debt for real investments — public works, education — is worthwhile and is not, as they so foolishly say, just another word for “spending.” Hamilton led American troops in a dangerous assault on British trenches at the climactic Battle of Yorktown when he could have stayed out of harm’s way. He had matching political courage that he displayed in building a tax system to fund the government, something a majority of Republicans have not had the political guts to vote for in three decades. Most important, Hamilton understood that job creation depends on releasing the energies of all the people not on get-rich-quick speculations that benefit only a few sharpies. Sadly in the Tea Party distortion of American history real causes of unemployment — the sins of financial wheeler-dealers like Duer left unsupervised — are covered up by rhetoric about government spending, and the government whose vital role Hamilton understood gets smeared.

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Robert Lenzner: Warren Buffett Is Human, After All

April 29, 2011

The media loves to fall in love with Masters of the Universe — such as the former CEOs of Tyco, Enron, Worldcom, GE, Citigroup, Lehman Brothers and Merrill Lynch. Only some of them are in prison. That is, until they fall from grace and then the media dons its armored lances and savages their fallen Gods of Mammon. Just like that. If you doubt me, try to conjure up in your head all those cover stories of bygone heroes. I’m guilty of the same superficial hosannas. Now comes the Oracle of Omaha, the darling of CNBC, the beneficiary of innumerable Fortune covers — some jointly with Bill Gates. Imagine the relish with which the media fastens on to the 80-year-old stock picker’s trust in a long time aide and heir-apparent, Mr. Sokol. Oh my God, a flaw in the Great Buffett. Let’s scrutinize his corporate governance bylaws. Let’s see if he’s morally or ethically fallible. Let’s go over it and over it and over it to tantalize the Bloomberg TV audience, because it is such a grave matter. The controversy is being treated as The Last Act of a formerly perfect human being. Hasn’t anyone read the biography that reveals many of his personal weaknesses and idiosyncrasies. Indeed, why didn’t he just fire the great betrayer Sokol, when he discovered the louse had bought $10 million in Lubrizol shares before putting a move on the boss to buy the whole company? That’s what I want to know. From Asia yet. Tell the bum to pack up and be gone. And then instruct Robert Denham of Munger Tolles to draw up a lawsuit demanding that Sokol return his undeserved gains to the innocent sellers of Lubrizol. I just hope tomorrow Warren and Charlie don’t have to answer questions about Sokol for 6 hours. I just hope we can learn what they think about the end of QE2, the way to balance the federal budget, and some of their concepts for the future of Berkshire. Should we be told who would take over for Warren and if the structure of the leadership should be overhauled? There will be demands for more future guidance from a hungry pack of Buffett followers. When it’s far more important that Buffett has warned that the glory days of Berkshire’s stock exploits are over. Does that mean the $100 peak for BRK B- that was hit in 2007 won’t be matched for quite a while? Better note that the stock is holding in the $83-84 range and hasn’t really fallen in the face of the Sokol controversy. Better yet, read Buffett, July 26, 2010 to his Managers(“The All-Stars”) and the Directors: “The priority is that all of us continue to zealously guard Berkshire’s reputation. We can’t be perfect but we can try to be.” Amen. “We can try to be.” That’s all.

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Madoff Chronicler Discusses The Mind Of America’s Most Notorious Swindler

April 26, 2011

Perhaps the only individual more qualified than veteran New York Times financial reporter Diana Henriques to write the book on Bernard Madoff’s epic Ponzi scheme is Madoff himself. Hardly a stranger to the devastation wrought by white-collar crime, Henriques covered the Enron aftermath and a host of financial misdeeds and foul-ups and twice has been a Pulitzer Prize finalist. Henriques was born in Texas, grew up in Virginia and has lived in Hoboken, N.J. with her husband since 1988. Over tea in the study of her Hoboken brownstone, she discussed her experience writing “ The Wizard of Lies .” She said the book, for which she interviewed over 100 sources, was the most difficult project she’s ever undertaken. Unflinchingly cordial, Henriques speaks with a measured, authoritative tone, occasionally pausing to contemplate her answers. Every now and then, for a fleeting syllable or two, the remnants of a southern accent make their presence known. In “Wizard of Lies,” out today , she describes her prison meetings with the disgraced financier in detail, identifying what she calls the “Madoff magic,” and attempts to uncover what Madoff’s wife Ruth and his two sons knew about his decades-old scheme. She said the family made characters “straight out of Shakespeare.” You were the first reporter to visit Madoff at Butner Federal Correctional Complex and interview him face-to-face. I was. The Financial Times reporters visited him in March, but I was the first. It took about 18 months to set it up. Tell me about how you got the interview. Well, I started asking for the interview when he was at MCC [Metropolitan Correctional Center] in Manhattan, right after he pleaded guilty. I had a mailing address for him. I wrote him my first letter requesting it and I just kept after it. Note to young reporters: never give up. I kept asking and then he was moved to North Carolina, and I kept asking again. I didn’t even get an answer back for months. Then, I got a letter in September ’09, handwritten from the prison, full of flattery, saying that he’d followed my career, admired my professionalism — all this stuff. He wasn’t free to talk right now, he said. But when he was, I would be at the top of his list. So I folded that up and continued research on the book, assuming I was going to have to write this book without Bernie Madoff. So I interviewed everybody in the world that I could. Finally, in the early summer of 2010, his lawyer reached out and suggested to me that it was looking a little more promising that he would talk to me. He eventually agreed and then it took a month to get the prison paperwork done because the warden has to approve any media visit. Eventually the warden approved it; I got a call that gave me six days notice to be down there on the particular day. That was in August 2010 and that was my first visit. It was a little over two hours and I still had pages of questions. And he volunteered — he said, “Write them out and I’ll answer them by letter.” And he did. I exchanged letters and then emails and a phone call or two between that visit and my visit in February, which was my second visit. And we continue to trade emails. I just got one from him yesterday. Have you given him an advance copy of the book? No. So he has no idea. He hasn’t seen it yet. And do you expect that he’ll read it? He says he wants to. He’s asked if the publisher can ship him one. They have restrictions in prison on what they can receive through the mail. But he certainly wants to get one. He didn’t like the title, though. He did tell me after the interview in February he thought the title was “too sensationalistic.” [Laughs] Come on? A Times reporter sensationalizing the title? I didn’t pick the title, but, you know, we changed the title actually, after the first visit. It was originally going to be called “A World of Lies” to reflect this global Ponzi scheme, this web that he had stretched from Palm Beach to the Persian Gulf. But after I visited him that first time and really got a taste of the Madoff magic, and began to see how he tried to manipulate people and how he dealt with selling his story, it was clear to me and my editor that he belonged at the center of the title, because he kind of shifted the center of gravity for the book. So that’s when we changed the title to “The Wizard of Lies.” And once I heard it, I knew it was the right one. I like it even if he doesn’t. How did he strike you at first as a human being? Well, I had known him slightly, before he was arrested. He had been a middling prominent figure in a topic I covered for the Times back in the 1990s, when stock exchanges were going through this great upheaval, similar to what newspapers are going through now — where technology was radically changing the way of doing business, the cost of doing business. And Madoff was quite visionary and quite a pioneer in the effort to computerize stock trading. And I covered a number of conferences where he was on the panel or he was a keynote speaker. I talked to him. I got to know his firm because they were pioneers in after-hours trading. When he was first arrested, the name instantly rang a bell with me and I immediately went to the [ Times ] business editor and said, “We’ve got something big here. Bernie Madoff’s just been arrested for fraud.” So, I knew him before. And then I thought of him as a very down-to-earth, plainspoken, very approachable person. A typical trader, a typical roll-up-your-sleeves, up-from-the-neighborhood kind of guy. When I first met him in prison, my first impression was how polished he had become since I had known him 15 years earlier, even in his prison uniform. Every crease is crisp, every button is buttoned. His belt is shiny, his shoes gleam. Very much the dandy, even in prison. And very much in control of our conversation. He had a very engaging, low-key style. Never took his eyes off of me. [He] leaned forward and was very interested in everything I had to say. A few little jokes, a little bit of flattery. But very much on-message. When I saw him the second time, after his son’s suicide, I was stunned at the change in him. From across the room, I would not have recognized him as the same man. So much thinner. In fact, the uniform involves one of the those web belts and he had the belt pulled so tight that the end of it was folded under to keep it from flopping. One of his buttons on his shirt was undone and he didn’t notice it until about halfway through. He buttoned it up. This had been an immaculately groomed, crisp, confident man back in August. In February, he seemed to holding on to his control with both hands. Fiercely. No jokes. No humor. Barely a smile. And this was two months after his son’s suicide. He was clearly devastated by that. I want to come back to that, but you mentioned a minute ago the “Madoff magic.” Can you elaborate on that? Is he a charming guy? You know, he isn’t. And that makes him a very unusual Ponzi schemer. I’ve covered at least half a dozen Ponzi schemers during my career. Unfortunately, there are a lot of them around. Nothing on this scale, of course. But they are typically bon vivant, swashbuckling, charismatic guys. They’re the guy over in the corner telling the funny stories that everybody wants to hear. Madoff was never the most charming man in the room. But, he could make you feel like you were the most charming person in the room. That was the magic. He could reflect back on you a very attractive image of yourself that made you feel good. I felt it. I’m sitting there interviewing him in this prison and I’m feeling like I’m one of the best reporters he’s ever known. He bounces it back — that feeling of, “Oh, you’re so interesting, you’re so competent, you’re so professional.” It’s an amazing gift. And I’ve never before met a Ponzi schemer who’s so low-key in terms of his gregariousness and yet able to sprinkle that pixie dust on you and make you feel like, suddenly, you were so special. It’s an amazing gift. And he is so believable. I did not ask him to grant me an exclusive interview. But when he asked that the interview in August and emails and conversations be embargoed for use in the book, and his lawyer explained why, I agreed to that. But I also explained to him that an embargo is a two-way street. If he broke it, then I’m off the hook. He repeatedly assured me that he would not talk to any other reporters, that he would not let any other interviews get ahead of my book. Well, of course he was lying. But you know, he had me for just a little while. Here I know he’s the biggest liar in North America, but for just a little while, I said, “Phew, there’s one less thing I have to worry about. Good. That’s fantastic. Thank you, Bernie!” And, of course, it wasn’t true and I realized the next morning, you wake up and say, “Oh yeah, that’s Bernie Madoff giving me this promise. I can’t rely on it too heavily.” He is a fascinating character. Do you like him? Did you find that you built a rapport with him after the meetings and emails and phone calls? No, I did not. To be candid, he frightened me a little because he was so unpredictable and so untrustworthy. Absolutely no predictability. And he’s extremely intense. When he seizes on a topic, it’s hard to pry him away. But, I didn’t expect to like him. It was relatively easy to work with him, but I was always uneasy about it because he was so unpredictable and untrustworthy. I owe it to him to say that he’s an extremely bright man, he’s extremely intelligent. So there’s a level at which you can converse with him about things that is satisfying. He knows an enormous amount about financial history, which is one of my favorite topics, so we had that in common. He is smart and engaging to talk to. On that level, I felt we found a little common ground. But just in terms of dealing with him as a human being, [there was] something uncomfortable about him. Were you able to interview any of his immediate family members — Ruth and his kids — for the book? Everyone I interviewed on the record is identified by name in the book. People who are not identified by name in the book — and the immediate family members are not — either did not talk to me or spoke with me in confidence and it would not be fair to either group to start playing guessing games like that. But my research about the family was pretty intense and pretty broad. And I feel confident that I have a fairly clear picture of the family dynamics. There’s no doubt the family has been shattered by this crime. It’s almost a blinding glimpse of the obvious to say so. Madoff’s sons were deeply upset that Ruth did not walk out on him. I worked very hard to try to understand, through as many confidential sources as I could, why she didn’t go. And I asked Madoff himself why she stayed. That’s the one point in the first interview where he broke down and cried. And I do think it was genuine. He didn’t even have a Kleenex with him. His lawyer had to find some little paper napkins in the snack bar area. But he said all her friends told her she should leave, which I knew to be true. He told her she should leave, that she didn’t have to stay. As the firestorm of criticism and vitriol was growing, he could see that it was hurting her to stay with him. But she would not walk out on him. And, as I understand it, how she has explained it, is that she had a love affair with this man for 50 years and she just felt she couldn’t abandon him at this time of his near destruction. You know Larry and I have been married for 42 years and I can sort of understand it. I don’t think younger couples can. She met and fell in love with Bernie when she was 13 years old. He was a lifeguard, she wasn’t even in high school yet. Pretty girl. And he was handsome, sun-bleached hair. She fell in love the first time she met him and married him at 18. You have to keep that in mind when you weigh the decisions she made after his arrest. It was a lifelong love affair. Everybody who knew them agreed that they were still like sweethearts. One person said that the only person who thought more of Bernie than Ruth was Bernie. She really worshipped him. Do you believe the story that she had no idea about the Ponzi scheme? I do. What about his sons? I do not believe they knew and I explain in the book my reasoning. My goal with “The Wizard of Lies” was to assemble the available evidence, offer my analysis of it and let the reader make the decision. My starting point was: innocent until proven guilty. Fairness requires that. And then as a reporter, I began looking for the evidence that would change that verdict, if you will. I couldn’t find it. I couldn’t find one victim that could ever remember talking to Ruth, Mark or Andrew about their investments. And there are some pretty strong and, to me, convincing bits of evidence that argue in the opposite direction. For example, Frank DiPasquale, Madoff’s key lieutenant, is facing a 125-year sentence, having pleaded guilty. He has given grand jury testimony that has resulted in five indictments of people who worked at the firm, none of them are Madoff family members. None of the employees who have been indicted have made any move to try to get leniency or to cut a deal to make a plea bargain by providing evidence implicating the Madoff family members. But even more telling to me, there’s a scene in the book where Bernie is notifying Ruth, Mark and Andrew that it’s all falling apart, that the firm in insolvent, that he is ruined, that it is all a fraud. Now, if they’re his accomplices, what happens next? They pack their bags, they empty the bank accounts, they take the keys to the private jet, they fly off to the ocean-going yacht in the Mediterranean and they wind up in some country with no extradition treaty with the United States and live the life of the comfortable fugitive. I mean, it’s worked for [indicted commodities trader] Marc Rich for decades. That didn’t happen. They had the means to flee. They had the time to flee. And if they were his accomplices, they certainly had the motive to flee. Nobody fled. That’s pretty telling to me. After he confessed to his sons and his wife, they acted like people who suddenly learned they were financially ruined. They did not act like people who expected to be arrested and locked up for the rest of their lives any minute. And if they were his accomplices, it’s hard to believe that would not have been their fear. Frank DiPasquale was in a lawyer’s office within less than 24 hours of Madoff’s arrest. Everybody on the staff was hiring lawyers and looking out for themselves. The reader will make their own decisions. I could not find any convincing evidence, really almost no evidence at all, that they knew. I pored through every lawsuit that’s been filed against them, both by the Madoff trustee and by the private litigants. There’s not an email, not a conversation, there’s nothing presented in any of that litigation that casts any doubt on them at all. My conclusion is the odds-on likelihood is that they didn’t know. How does that speak to the pressure he was under, not being able to share the secret with his wife, his kids, who worked for him? Did you sense a really strong individual when speaking with him? He is a strong-minded man. Even after Mark’s death, in the first few emails we exchanged, there was no mention of it. There were things he wanted to talk to me about, questions he wanted answered, research he wanted me to do about something he remembered reading that he thought was significant for his case. He’s operating on this completely cerebral level and only about the third email after Mark’s death did he even acknowledge that I’d sent a condolence note. He is what psychiatrists call a very well-defended mind. He has defended himself against that which with he cannot cope. I think that defense — his ability to lock things away and not acknowledge them — which I’ve seen dealing with him in prison, is the same quality that enabled him to live with what he was doing on a daily basis. Were you able to interview Harry Markopolos, who repeatedly tried to notify the SEC that something was up with Madoff. I know Harry. In fact, I attended Harry’s book party when his book came out. Harry was helpful to my research. I think that’s as much as I can say. After being brushed off by the SEC many times, why do you think he didn’t seek out a reporter? Or did he? It’s a wonderful question and I put it to his lawyer and everyone who knew him. It almost seems like you’d want to do something like that just to stick it to the SEC for rebuffing him so many times. There are any number of places that might’ve taken his accusations, if acted on. But he didn’t, and I have never found his explanations particularly satisfying. He claimed that he and his investigative friends were in fear for their lives. That Madoff had so much to lose that he would think nothing of snuffing them out in order to avoid detection. And yet he kept reporting this allegedly murderous criminal to a civil regulatory agency that doesn’t even carry handcuffs. The explanations never made any sense to me. He publicly acknowledges that he’s a failed whistleblower. What’s the state of the SEC today? Have they improved since the Madoff scandal broke? Certainly they’ve addressed many of the management problems that the Madoff case exposed. It’s a much flatter management pyramid. More boots on the ground, fewer people behind desks. They have recruited some very impressive talent. Trying to hire top-flight accountants, forensic lawyers and investment experts at a time when the economy is so bad is pretty easy. They were able to pull in some talent they might not have been able to get in an earlier age. They have really amplified their technology, their computer analysis, their ability to use data analysis. They certainly have become far more aggressive about the cases they’re taking on. If you look at the cases they’ve brought in the two years since Madoff, look at who’s been sued and settled: Goldman Sachs, UBS — I could go on and on. I think the foundation is there to rebuild, but the SEC wasn’t undermined in a day and it won’t be rebuilt in a day. It’s going to be a process that’s going to take time and continued budget commitment. And that’s what I’m not sure we’re seeing — a continued commitment by Congress to provide the SEC with the money everyone thought it should have in the aftermath of the financial meltdown and the Madoff scandal. Stay tuned to see whether the promises of reform at the SEC get financed. Do you think there’s another similar type of fraud out there the SEC doesn’t know about, but is kind of under their nose like Madoff was? I would be surprised for this reason: A whistleblower like Harry Markopolos knocking on the door of any SEC office in this country today is going to get a very different reception. One of the things the SEC did was to completely revamp how it deals with incoming tips, whistleblowers, anonymous letters. It has created a new structure for incoming tips and whistleblowers so that they don’t get lost and don’t fall off the table. Fool me once, shame on you. Fool me twice, shame on me. I can guarantee you that there is another Ponzi scheme out there that we haven’t heard about yet. Ponzi schemes are, to me, one of the most fascinating crimes on Wall Street, one of the most fascinating financial crimes that there is. The air they breathe is trust. A Ponzi scheme cannot grow in an environment that’s devoid of trust. Nothing else can either, so in order to eliminate Ponzi schemes, you’d have to create a world completely devoid of trust. And when you’ve got a world like that, number one, none of us wants to live in it. And, number two: You can’t run a modern economy without a minimal level of trust. But that level of trust is exactly the level of trust a Ponzi schemer needs to get away with it. Now, Ponzi schemes are a peculiar crime in that you don’t feel any pain until the very end. I think the Madoff story introduces a new species of Ponzi scheme. Traditionally, we’ve thought of Ponzi schemes as the classic, too-good-to-be-true fraud. Fifty percent returns a month. Double your money in 10 days. The classic Ponzi scheme, all the way back to the first one in the 1920s, appealed to our greed. The get-rich-quick itch. The Madoff scheme did not appeal to people’s greed; it appealed to their fear. Through most of the Madoff scam, you could’ve made more money somewhere else. There were years when the Magellan Fund at Fidelity was producing much better results that Madoff’s investors were getting. It wasn’t that they were greedy: He was so consistent. He was so safe. They felt safe with Bernie in an increasingly volatile, scary, complicated market. If a Ponzi scheme appeals to your greed, a Madoff scheme appeals to your fears. I can’t tell you how many people told me, “He made me feel safe.” Those are the kinds of frauds I worry we’re going to see more of. Should the SEC just hire Bernie Madoff to help investigate tips that come in? No, I don’t think we would go there. Why not? When they finally caught up with him after all those years, the FBI hired Frank Abagnale, Jr. to help it investigate forfeiting crimes. Could Madoff do the same for the SEC? That’s an intriguing question. No one’s ever asked me that. I guess it’s a two-part question. Would he want to do something like that and would the SEC ever entertain something like that? I think he would. In fact, some academics have written to him in prison and asked him to contribute his thoughts on Wall Street ethics. They essentially are asking him, “What do you think would have helped alert people to what you were doing?” And Madoff has told me he’s interested in talking to them, corresponding with them. So, I do think he feels like he’s got something to teach. But I don’t think he understands himself well enough yet to teach people how to avoid con artists like him. Would the SEC ever entertain the idea? Not in this universe. Is there any way he can redeem himself, even in the smallest sense? Is that something he’s expressed to you that he’s interested in doing? He does. He certainly says he wants to. He claims he’s tried to help the bankruptcy trustee recover assets for Madoff victims. Would that amount to a form of redemption? Well I think Irving Picard could say, “Thanks, but no thanks.” Picard and his legal staff are doing a pretty remarkable job of going after assets without much help from Madoff, although I think that Madoff has provided them with some information. I know that Picard’s lawyers have met with him and spent 16 hours interviewing him in prison a couple of weeks before I was down there. And I’m told he was a confirmatory source, as lawyers say. He confirmed much of what they thought they knew, confirmed that, in some cases, they were on the right track. But he has subsequently said things that in many cases contradict the allegations they are making in the lawsuit they’re filing. He told me in the very first visit something that shocked me so that I included it in the prologue of the book: He said that with the money that investors had already gotten out of the Ponzi scheme and with the money that the bankruptcy trustee was going to be able to raise for them and return to them, his victims were probably going to make out better than people who were legitimately invested in the stock market during the meltdown of 2008. He thinks that about all of them? Not the ones who committed suicide and their families. Not the ones who’ve had to uproot their entire lives and sell their beloved homes. The human cost of the crime is part of the equation that he just doesn’t see. He’s utterly in denial about that. And what should the finance industry, lawmakers and America at large take away from this story? A moral if there is one? Self-deception is an extremely dangerous practice. Lying to ourselves is how we get in the most trouble. If there is a lesson, it is the oldest human lesson. To thine own self be true. If people take nothing else away from the book, I hope they take that. Lying to yourself is a luxury that you just can’t afford. How’s it feel to get this project done? I’ve never worked harder on any project. This is my fourth book, but without a doubt the most laborious, most fascinating. This is like a novel, but it’s true. Bernie had four near-death experiences before he was finally caught, some of which people will read about for the first time in the book. I fell in love with the story. At the beginning of this process, I kind of flippantly said that to do this story justice would take a collaboration between Shakespeare and Woody Allen, without the jokes. But it truly is such a timeless drama. I felt kind of humbled at the challenge of trying to live up to the potential.

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Gemma Godfrey: Hedge Funds — to Be Feared or Favored?

April 21, 2011

As the biggest hedge fund insider trading case comes to a close, we are reminded of the risks of investing in the asset class. Ever since generating losses in 2008, the reputation of these ‘absolute return’ vehicles has been damaged. The Madoff scandal which topped off the year did not help. Nevertheless, whilst clarity in the markets remains illusive and with a wider range of tools to exploit opportunities, are they a form of investment to be feared or favored? A Tainted Asset Class Disappointed and disillusioned, many investors are reluctant to revisit the asset class run by managers once hailed as the new ” masters of the universe “. Sold on the promise of generating positive performance in any market environment or at the very least preserving capital in times of stress, losses generated in 2008 came as a shock. With the Madoff scandal came the realization that even funds that did consistently generate steady returns were not immune to trouble. There is even an aptly named ” Hedge Fund Implode-o-Meter ” website tracking the number of major funds which have “imploded” since late 2006 (out of interest the number at last look stands at 117 , although this includes all funds suffering any form of ” permanent adverse change “, not just total shutdown). But Not All Are Created Equal Not all hedge funds should be tarred with the same brush and although grouped within the same category, they can differ tremendously. From the investment vehicles in which they invest to the stringency of their risk management, not all are created equal. The Hedge Fund Association summed the situation up succinctly with the assertion that “investment returns, volatility, and risk vary enormously among the different hedge fund strategies. Some strategies which are not correlated to equity markets are able to deliver consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds.” Losses Were Often Greater Elsewhere Putting aside the often misleading ‘absolute return’ banner, the average hedge fund was better able to preserve capital through the market downturn than a regular ‘long-only’ mutual fund. Whilst the MSCI World Index fell 42% in 2008, the Credit/Suisse Tremont Hedge Fund Index fell 19%, More impressive still were the 21% of funds which posted positive returns for the year (the majority of which were up double digits). Crucially, over a more appropriate investment horizon of 3 years, according to figures by EDHEC Business School, ” The majority of hedge funds delivered better returns than the S&P 500 index “. Hedge Funds have shown themselves able of generating highly attractive returns. The Tide Has Changed Investors have demanded more. In 2008 they ‘spoke with their feet’ and the hedge fund industry suffered $782bn of redemptions. The Hedge Funds had to listen. What was requested, according to a report by Scorpio Partnership , was ” transparency, simplicity and liquidity “. Likewise, the Hedge Fund Scandals were a wake up call to investors and much more focus is being placed on operational due diligence , to avoid investing in any future hedge fund failures. Investment Conclusion: Well-Positioned to Exploit Opportunities With the risk of future macro shocks clouding the horizon (read: Japan , Middle East , EU Sovereign Debt ), the direction of the markets is somewhat hard to predict. Therefore investing with flexible managers able to react to the quickly changing environment and nimble enough to exploit opportunities when they present themselves seems an attractive move. Not all investments are created equal, but some are more equal than others.

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Kenneth Kales: The Petals and Thorns of a Recession

February 1, 2011

I’ve been working much harder these days, and my friends and colleagues say they are too. Are you? One colleague told me she doesn’t know anybody who isn’t “super busy.” She lives in Colorado but works at a New York City pace. I thought for a moment, and said I didn’t know anyone either. Some of it no doubt is the economy. Many people work two and three jobs to make ends meet. Others I know, again prompted by the economy, have day jobs or have gone back to school, or are trying to start a sideline business. Today I was in the Apple store fixing my website. It pained me to take off from more important work in front of me but things needed to be done before I embarrassed myself any longer publicly showing truncated photographs and font glitches on the site. On my way out I stopped for a minute to look at the new iPhone. It’s self-imposed I know, but I’m feeling some pressure to understand the increase in mobile commerce and how apps are becoming dominant on the web. The iPhone is at the center of the universe in those regards. The salesman told me about some of its features, and continued adding on more until I stopped him and asked, “When does anyone have time to use all this stuff?” “They don’t really,” he answered. Then went on about talking to friends face to face on Skype, accessing data wifi like checking e-mails or surfing the net. “You mean this is for people who can’t wait until they get home to check their e-mails?” “Yeah, pretty much,” he answered. With his abundance of riches he went on about listening to music, watching movies, recording videos, reading books, playing games, and checking out the 30,000 and counting apps available that can be seamlessly integrated. He said he just returned from a 10-day vacation without being connected, in the digital sense, and was happy then. Now that he’s back, he said he’s anxious with iPhone in hand. There seems to be a point of diminishing returns with all of this consumer technology. Is it gadgetry or is it really useful to our lives? It’s still winter in much of the country. Rose bushes are trimmed back as they wait in dormancy. There’s a certain irony to not being able to stop and smell the roses now, particularly since there aren’t any. We never go dormant. It would be nice if we could take a lesson from nature and have some dormancy, to recalibrate and come back in fuller bloom in season. Instead, we rush through all four seasons, now more than ever on a 24/7 cycle. I look forward to smelling the roses in a few months more.

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Critics Call New Job Network An ‘Economic Recovery Killer’

January 22, 2011

A new online job network is on the scene, with the kind of webwide reach that has older job recruiting sites in a tizzy. The huge new job network –consisting of over 40,000 sites, and continually growing–is actually its own domain that will use the suffix “.jobs” to designate sites that display job opportunities by profession and location. For example, sanfrancisco.jobs or engineer.jobs would take you to a page listing job openings in San Francisco, or for engineers. Or you might go to sanfrancisco.engineers.jobs for engineering jobs in San Francisco. Though there’s something absurdly intuitive about labeling a job-seeking domain with .jobs, the move has career-building sites like Monster.com wrathfully worried over what they perceive as a massive threat to their own profitability. Actually, the .jobs domain has existed since 2005, when it was licensed by a company called Employ Media. But until recently, it functioned primarily for established companies to list the job opportunities in their own organizations–a prospective photocopying maven might go to xerox.jobs to find a position with Xerox. Last year, Employ Media decided they wanted to expand the domain’s use to job-seeking organized more generally by region and occupation. To do so, they turned to the Internet Corporation for Assigned Names and Numbers, or ICANN . ICANN is the group responsible for maintaining the virtual infrastructure of the web by coordinating the use and registration of web domains like .com and .edu so that the global network can function smoothly. ICANN approved their request, but a number of job-seeking websites and related organizations calling themselves the .JOBS Charter Compliance Coalition viewed the proposed expansion as unjustly dangerous to their own interests. They in turn filed with ICANN to reverse the decision, arguing that the expansion violated the charter Employ Media had agreed to back in 2005. In December, ICANN ruled that they would allow the expansion , but would also keep a close eye on Employ Media. The site universe.jobs, a central point for the .jobs network, is live. In a strange twist, the company partnering with Employ Media to execute the universe.jobs initiatives, the DirectEmployers Association, is led by a former Monster.com president, Bill Warren. The coalition warned ICANN that the .jobs domain was “causing substantial and continuing harm to numerous members of the Internet community, including many smaller, regional and niche job boards that are suffering immediate and irreparable harm from the operation of the Charter-violating Dot Jobs Universe.” But there’s a divide between those who see .jobs as a jobsite-killing beast circumventing the code of business competition, and those who see it as simply another step forward in the continually morphing landscape of our World Wide Web. Peter Weddle, the executive director of the International Association of Employment Web Sites, was unreserved in his fear. “This is an economic recovery killer,” he told the Washington Post . “It’s going to infringe on the trademarks and undermine thousands of small businesses who have spent the last 15 years serving job seekers very well.” But others note that .jobs is merely doing exactly what job recruiting websites did back when newspapers were the go-to source for job information: taking the industry into a yet-unrealized future. “It strikes me as rather disingenuous of the online job recruitment sites to cry foul over the creative destruction caused by broader applications of the .jobs domain. These very same online job recruitment sites were the former disruptors themselves, and the great beneficiaries of the Internet domain name land grab. They were all for disrupting the traditional models of job recruitment companies ten years ago. Now that they are the entrenched players in job recruitment, they are crying for support to curb the new disruptors,” said Jonathan Askin, a professor at the Brooklyn Law School, who compared the job seeking sites’ push to block .jobs to a counterfactual scenario where the “government outlaw[ed] the automobile because it would destroy the horse and buggy industry.” Ultimately, .jobs will test the way that domain use and registration functions, especially if the imbroglio draws scrutiny to ICANN’s activity. Though ICANN does not control content, or access to the Internet, its role as a coordinator of the naming system puts it in a unique position to aid or forestall the growth and transformation of the web. The .jobs squabble is not the first, nor will it be the last of the battles to come as new Internet practices inevitably supplant or transform old ones. “Every technological leap leaves a few dead companies in its wake,” Askin said.

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Paul A. London: Unemployment and Economic History

December 27, 2010

If you want to understand what the U.S. faces today with no prospect of bringing unemployment down to 3 or 4 percent you need to read Since Yesterday, Frederick Lewis Allen’s book written in 1939 about the Depression years in America. Allen was the editor of Harpers magazine. In 1930 he had written a classic book about the events and attitudes that marked the Roaring 20s. Since Yesterday, on the Depression decade is more relevant today. What Allen shows is that the businessmen of the 1920s, who had inspired awe, those who Calvin Coolidge called the “Big Men” of the country, and who the country had admired and trusted, were completely discredited by 1933 when Roosevelt took office. Herbert Hoover had gamely taken the advice of the Big Men and it failed him. They had no idea how to end the Depression. Andrew Mellon, Treasury Secretary to Coolidge and Hoover and one of the richest men in America, and Samuel Insull, the Chicago-based “leverager” of utility stocks were facing de facto exile. Richard Whitney, once head of the NY Stock Exchange would eventually go to prison in handcuffs. By 1932, these erstwhile “masters of the universe” were the object of almost universal scorn. Americans forget this history. When I hear people say that Obama has to listen to business leaders I wonder what they think these leaders have learned since 1933. They and their followers are recommending word for word the policies their predecessors recommended to Hoover — balance the budget, cut spending, don’t tax business. What the American public should learn from this repetitive baloney is that there is a big difference between believing in competitive private enterprise, which we should, and believing that business leaders have insights about policies to end joblessness which they do not. Frederick Lewis Allen did not stop at revealing the uselessness of the “Big Men’s” locker room incantations. He saw the weaknesses of the New Deal too: It never hit on a fully successful approach to unemployment. Joblessness fell from 25 percent when FDR took office to just over 14 percent 4 years later but then went back up to 17 percent in 1938. Allen acknowledges that the New Deal was an improvement, but it was not satisfactory anymore than a few percent reduction in unemployment to 8 or 7 percent will be satisfactory in the next three or four years. Roosevelt’s advantage over Obama is that Americans felt he cared for them. In “the legislation which he sponsored,” Allen says, “(ordinary Americans) read a genuine friendliness toward them, a genuine desire to help them.” . Since Yesterday was published in 1940 so Allen had not seen what finally ended the Depression. What did was World War II. It put 13 million Americans in the armed forces and millions more into defense jobs making ships, planes and munitions. It was financed largely by the Federal Reserve bond-purchasing program far larger than the New Deal’s “pump priming” and today’s modest “stimulus” programs. Financing the war took roughly 25 percent of Gross Domestic Product for four years. What the U.S. needs today to drop unemployment to a politically acceptable 3 or 4 percent is the peaceful equivalent of that war, a very large infrastructure bank charged with modernizing the public plant — transportation, power and water systems, communications, recreation facilities, and more. The Fed should buy the bonds of such a bank, charging it low interest rates, just as it bought Treasury bonds at low interest rates to fund World War II. (This is fundamentally how the Chinese are funding the impressive explosion of public works in their country.) If the U.S. does not create such a large works program, I believe we are going to face a long period similar to the 1930s with corrosively high unemployment. This will discredit democratic governments just as it did during the Depression with all the attendant risks. The argument for a big works program is based not on economic theory but on concrete historic experience. The history is there for us to draw on. What about today’s business heirs to Mellon, Whitney and Insull? A massive infrastructure program financed by the Fed would be the best thing that could happen to American business. Unfortunately historic experience and even the memory of money in their pockets has never been enough to convince the egotistical “Big Men” of business that they are not as important as they believe they are and that sometimes the country needs government to play this role.

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John Robbins: Who’s Done More Damage, Bernard Madoff or Alan Greenspan?

December 11, 2010

Exactly two years ago today, I received a phone call from hell. My financial adviser and close friend, with whom I had invested all of my family’s life savings, called to tell me that overnight we had lost 95 percent of our net worth. It turned out that our life savings had been invested in a fund that had been handled by Bernard Madoff. Because we weren’t direct investors (I didn’t even know who Madoff was prior to his arrest), there was no hope of our ever recovering a penny. Tragically, what happened to my family overnight is happening to many, many people today, only more slowly. It is one of the darkest nightmares of our times that so many people are losing their homes, their pensions, their jobs, their savings, and any semblance of financial security. The official unemployment rate is 9.8 percent, but if you include the underemployed (those who have part-time work but can’t find a full-time job, though they need one), and add in also the huge numbers of unemployed people who have given up looking for work because they feel the search is hopeless, the figure rises to above 22 percent. There are already 19 million vacant homes in the country, with another 10 million foreclosures in the pipeline. The average household credit card debt is nearly $16,000. And the U.S. dollar, which has been the world’s reserve currency for almost 100 years, is losing value and appears increasingly unstable. How did we ever get into such a mess? Last year, a Newsweek poll found Bernard Madoff to be the most despised person in history. Having been a victim of his fraud, I understand. But some people think that when it comes to wreaking financial havoc, Madoff was a piker compared to the man who was dubbed history’s greatest Federal Reserve chairman upon his retirement in 2006 — Alan Greenspan. Why? Because Greenspan may be more responsible than any other single human being for the disastrous developments in our nation’s economy. Author Matt Taibbi doesn’t mince words on the subject. In his new book about how bubbles and bailouts have decimated the U.S. economy, he none-too-subtly calls Greenspan “the biggest asshole in the universe.” Madoff lived high and mighty as a billionaire as long as he kept his Ponzi scheme afloat. Greenspan was revered as long as he kept the party going for the ultra-rich, as long as he kept one bubble after another inflated. But with every party, there’s always the morning after. The collapse of Madoff’s Ponzi scheme bankrupted not just tens of thousands of families, but many charitable foundations, nonprofit organizations, and hospital and school endowments. The bursting of Greenspan’s bubbles, on the other hand, decimated the entire U.S. economy, bankrupting tens of millions of families. In his biography of Greenspan, appropriately titled Greenspan’s Bubbles , MSN Money columnist William Fleckenstein recounts the devastating series of bubbles and crashes that directly ensued from Greenspan’s policies. The Savings and Loan scandal was the first tip-off. As a paid consultant for Lincoln Savings and Loan, Greenspan was an ardent advocate of Savings and Loan deregulation. When Lincoln’s parent corporation went bankrupt in 1989, more than 21,000 mostly elderly investors lost their life savings. This was, however, peanuts compared to what was to follow. With Greenspan as the head of the Federal Reserve from 1987 to 2006, and with his policies running the show, the tech bubble was inflated only to burst in 2000, closely followed by the real estate bubble that began to burst in 2007, and the credit bubble that burst in 2008. Greenspan’s policies contributed massively to each of these bubbles, and thus to their inevitable collapse. Like Madoff’s Ponzi scheme, they provided illusory returns, not based on any real goods, services or value provided, but rather on the attraction soaring returns have for new entrants into the game. The costs of each of these market collapses are measured not in the billions but in the trillions of dollars, and they’ve come so quickly on the heels of one another that we may think of them as business as usual. That’s why it’s important to grasp that, prior to Greenspan’s arrival, the U.S. had been nearly bubble-free for more than 50 years. The only exception? A brief mania for gold and other precious metals in late 1979 and early 1980. Prior to running the Federal Reserve, Greenspan headed the National Commission on Social Security Reform. The original intent behind Social Security was generous and benevolent. At the height of the Great Depression, our society resolved to create a safety net that would pay modest benefits to retirees, the disabled, and the survivors of deceased workers. It was the formalizing of the long-respected tradition of supporting elders and others who are less able to fend for themselves. The idea was to create less fear and more economic security. But once Greenspan got involved, things immediately began to change. His policies triggered a staggering transfer of wealth from the lower and middle classes into the hands of the richest members of society. It is not an exaggeration to say that the resulting concentration of money and power in the hands of the few is undermining the economy, corrupting democracy, deepening the racial wealth divide, and tearing communities and families apart. It was primarily due to Greenspan’s proposals that the Social Security tax rate went from 9.35 percent in 1981 to 15.3 percent in 1990. Social Security taxes are borne primarily by the lower and middle economic classes. They only apply to wage income, not to investment income, so people who work for a living pay through the nose while those who invest for a living pay not at all. Fair, right? Social Security taxes are currently capped at about $106,000. This means that a married couple who earns $106,000 a year will pay more than $16,000 in Social Security taxes. They will pay the same amount that Oracle CEO Larry Ellison and his wife will pay, even though Ellison’s income over the past 10 years was nearly $2 billion . A couple near the bottom of the economic ladder, earning $30,000 a year between them, obviously has nothing to spare, yet they pay $4,590 in Social Security taxes. Billionaire investors and hedge-fund managers, meanwhile, may pay nothing, because they can usually structure their income so that none of it is subject to Social Security or Medicare taxes. The policies that were implemented following the recommendations of Greenspan’s commission have produced, in the last 20 years, $1.7 trillion in new taxes borne almost entirely by the lower and middle class. There might have been some justification for this if the amount of benefits you would eventually receive was directly related to the amount of money you paid into the pool, and if the money was set aside for future Social Security recipients. Prior to Greenspan’s reforms, that’s essentially how things were done. But thanks to his innovations, this is no longer the case. The money is no longer held separate from the rest of the budget, and has been used instead for other government spending. It was George W. Bush’s first Treasury secretary Paul O’Neill who publicly announced the bad news. “I come to you as managing director of Social Security,” he said. “Today we have no assets in the trust fund. We have the good faith and credit of the United States government that benefits will flow.” It’s hard to avoid noticing that Social Security is increasingly taking on some of the characteristics of a legally-mandated Ponzi scheme. Bernard Madoff was a liar and psychopath who recklessly stole tens of billions of dollars. He will spend the rest of his pathetic life in prison. Alan Greenspan, on the other hand, is still widely admired. Not that long ago, he was almost considered a candidate for Mt. Rushmore. He was certainly the most influential proponent of financial deregulation in the last century. But a generation from now, who will history judge with more scorn? For practical, down-to-earth advice on how you can thrive in these hard economic times, see John Robbins’ new book, The New Good Life: Living Better Than Ever in an Age of Less . John’s other bestsellers include The Food Revolution and Diet For A New America . He is the recipient of the Rachel Carson Award, the Albert Schweitzer Humanitarian Award, the Peace Abbey’s Courage of Conscience Award, and Green America’s Lifetime Achievement Award. To learn more about his work, visit www.johnrobbins.info .

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Robert Creamer: Wall Street Hopes to Use Republicans to Re-Purchase Congress

October 15, 2010

For many years the “titans” of Wall Street could pretty much have their way with Congress. They — and their huge campaign contributions — had convinced the Republicans, and many of the Democrats — that what was good for Wall Street, was good for the country. Then came the financial collapse in September, 2008, and the sudden realization that the emperor of Wall Street didn’t have any clothes. Turned out that the policies that allowed reckless Wall Street traders to run wild — and gave a tiny number of Wall Streeters the ability to claim a bigger and bigger share of our national income — weren’t actually so smart for the rest of us. Democrats in Congress and the Obama Administration turned on Wall Street and — from Wall Street’s point of view — had the “audacity” to pass legislation that reined in the recklessness that had cost eight million Americans their jobs. Many among the Wall Street types — who actually think of themselves as the “masters of the universe” — were shocked. They — and much of the conventional wisdom in Washington — assumed that the Wall Street reform bill would be watered down into thin gruel by the massive army of lobbyists they sent to do battle on the Hill. Wall Street spent almost a half-billion dollars lobbying to stop Wall Street reform. But the bill actually got tougher and tougher as the battle went on. That was because Progressives held political ground so high on the issue that even the most “moderate” members of Congress were terrified to stand up for the Wall Street elite. But this November, the Wall Street Empire plans to strike back. According to Politico : The vilification of bankers, what one bank lobbyist called the ‘show trials’ of congressional hearings and especially the outcome of financial regulatory reform has prompted an all-out effort to wrest Congress from Democratic control, several financial industry insiders told Politico.” Karen Klugh, spokeswoman for the American Financial Services Association, told Politico : “Our target ratio for the 2010 cycle is 80-20 Republicans…” She said this ratio, “reflects our deep concerns with the work of the 111th Congress.” You betcha. And the amount Wall Street is directly investing in campaigns is almost certainly just the tip of the iceberg. It is likely dwarfed by the massive secret contributions they have made to the various Republican attack groups. And you can bet they are encouraging their partners in the huge outsourcing deals — on which they make billions — to pony up as well through secret contributions to the Chamber of Commerce that can spend unlimited amounts to distort the records of their Democratic targets. Many of those contributions, as ThinkProgress has documented, come from foreign corporations that profit from outsourcing of American jobs. The thing that is especially galling about Wall Street’s approach to politics is that it so brazenly plays upon the fears of the very people who are often the biggest victims of their greed. It is no small irony that the very people whose recklessness caused so many everyday working class families to lose their jobs – who have systematically skimmed off a larger and larger portion of our national product and left smaller and smaller pieces of the pie for everyday Americans – are now stoking the anger caused by their own actions and directing it toward Democrats who have brought them to account. In the Tea Party fantasy world everyday Americans are oppressed by bureaucrats with eyeshades who go to work on the Washington Metro. They are abetted by crunchy academics who spend their days dreaming up “social engineering” schemes in their offices at Yale or Harvard. And their oppressive regime is supported by liberal news anchors and the nihilistic denizens of Hollywood who spend their nights in hot tubs surrounded by Playboy Bunnies. That is the Tea Party version of class warfare; everyday Americans versus these “elites.” This is a very convenient mythology for Wall Street. It ignores the existence of the real “elites” in America. They aren’t the bureaucrats who go to work on the Metro but rather the men and women who go to work in chauffeur-driven limousines, jet around the country in Gulfstream G-Vs, and make more on the first day of the year, before lunch, than a minimum wage worker makes all year long. The gang on Wall Street wants normal Americans to forget that they — and the top one percent of the population — control 34.6% of net assets, compared to only 15% for the bottom 80%. They want you to ignore that 42% of the financial wealth is controlled by the top 1% of the population, compared to only 7% controlled by the bottom 80% — or that 62% of the business equity that controls corporations is in the hands of the top 1% compared to only 7% for the bottom 80%. Remember all of the reckless speculation in financial securities that sunk the economy? Well 61% of financial securities are owned by the top 1% — and just 2% by the bottom 80%. And when it comes to income, the share going to the top 1% had grown from 12.8% in 1982 to 21.3% in 2006 while the percent going to the bottom 80% shrunk from 48.1% to 38.6%. When you look at numbers like that, in broad strokes it’s pretty obvious why the economy sunk into recession. The greed of the top 1% sucked the buying power out of the rest of the population who were needed as customers to keep levels of demand high enough so that investors found it profitable to expand employment, create jobs and generate more consumers to demand more goods and services. Their greed killed the goose that laid the golden egg. Of course the latest example of the consequences of Wall Street’s reckless greed is the mortgage foreclosure documentation disaster. Seems that they were in such a hurry to make more and more on their exotic mortgage-backed securities that they simply neglected to properly document the changes in ownership for the mortgages they packaged up and sold on financial markets. Why would the brilliant graduates of some to the finest universities in America make such an obvious mistake? You have to assume it’s because they figured that they would make their millions and pass the risk of their actions on the “the market” at large rather than take the time and expense to do it right. Now that their actions have come to light they may once again threaten the stability of the financial system. And let’s remember that when you fall behind in your credit card payments, these same guys are the first to invoke every provision in the fine print of your credit card agreement so they can charge you a fortune in fees. But when it comes to transferring titles of mortgages correctly, turns out they couldn’t be bothered. One more example of how Wall Street thinks it’s exempt from the rules that apply to the rest of us. Now, Wall Street is trying to harness the anger of ordinary people — who are furious because of the economic disaster that Wall Street itself created — to allow them to use the Republicans as a vessel to take back the control of Congress. It’s up to us to stop them. The plain fact is that there are more of us than there are of them. But if we don’t vote, we don’t count. Time for Progressives to get out of a defensive crouch and march — along with everyone we know — to the polls. As the MTV s slogan says: Vote again in 2010. In most jurisdictions early voting has already begun. The time to vote is now. I know a guy who trades on Wall Street, call him George, who is absolutely disdainful of ordinary Americans. He thinks that anyone who can’t get rich, like he is, must be a chump. He’s happy to exploit anyone and anything to make money for himself. Don’t let George make us all into chumps. Don’t let Wall Street use the anger caused by the economic disaster that they themselves caused, to elect Republicans and take back control of Congress. Robert Creamer is a long-time political organizer and strategist, and author of the recent book: Stand Up Straight: How Progressives Can Win, available on Amazon.com .

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Mastin Kipp: ‘The Social Network’: 13 Lessons Entrepreneurs Can Take Away

October 15, 2010

I’ve seen “The Social Network” twice and plan on seeing it again at least two more times. I am taken by this movie. It took me about a week to understand consciously why. There is so much jammed into this film that it’s hard to take it all in in one sitting. Ever since I walked out of the movie on opening night, I have been more inspired than ever to continue my entrepreneurial path in technology, media and textiles. As an entrepreneur watching this film, here are the lessons I see from watching “The Social Network”: 1. Sometimes there are more important things in life than school. As a college dropout myself (I dropped out during my junior year at USC), there has always been a little voice telling me I did the wrong thing. I’m not bashing education; I’m just saying that the system as is isn’t for everyone. Bill Gates and Mark Zuckerberg both left college to pursue their dreams and went on to establish Microsoft and Facebook, respectively. Here are some other surprising billionaire college dropouts: Steve Jobs (Apple), Paul Allen (Microsoft), Ralph Lauren (designer), Michael Dell (Dell Computers), Kirk Kerkorian (Vegas entrepreneur), Barry Diller (IAC) and many more. People like Richard Branson (Virgin), Walt Disney, Milton Hershey (Hershey Chocolate), Coco Chanel and Henry Ford didn’t even go to college. The lesson here is that being pulled by the inspiration of a big idea within you is more important than doing what the “system” tells you to do. My advice is to follow your dreams, and as you go along, surround yourself with the smartest and most talented people you can find. I personally chose my education to be the act of having a business instead of learning about it in school and then having no real-life experience at graduation. I wanted a head start at the experience of having a business instead of just knowledge about business. Obviously this isn’t true for all professions. If you want to be a doctor, for example, school is a must, but for budding entrepreneurs with big ideas, school can be a dead-end choice. Dropping out of school is a big risk. You have to to have a major belief in yourself and the determination and persistence of a warrior. It’s not an easy path, but for people like me, it’s the only path. You can always go back to college later in life after having gained so much from your life experience in the real world. 2. It’s not about who has an idea but who can execute it. There’s a phrase that says, “There are no original ideas.” Also, a lot of mystics, saints and sages believe that all human beings are tapped into the “Universal Mind” and that we all have access to the same ideas and inspiration. It’s all about who is listening and who has the chops to pull it off. Aaron Sorkin, the writer of “The Social Network,” has said that no one knows the exact truth of what happened between Zuckerberg, the Winklevai and Saverin. But the truth is in the outcome. Facebook happened because Mark Zuckerberg had the chops, the confidence, the vision and the discipline to make it happen. So if you have a big idea, you should know that you probably aren’t the only one. Your job is to get busy making it happen. Look how fast Zuckerberg created and put Facebook online. It wasn’t years of slaving away; it was weeks of hard work to create the first version — the most important weeks of his life. 3. Change can happen fast. The phase “from idea to execution” doesn’t have to be forever. Zuckerberg is living proof that with enough vision, talent and hard work, you can change your life in the blink of an eye. If you have an idea, don’t wait on it. Throw yourself into it. Ideas, once executed, have a way of pulling you up out of your current circumstances and elevating you to a whole new level of living that you were never aware of before. Enough lollygagging; start now. Half of me understands why Eduardo Saverin’s stake in the company was reduced when others’ weren’t. The other half feels that Mark betrayed him as depicted in the film. That being said, the guy did move to New York and stay in school as Facebook was blowing up. Mark took action. He moved to Silicon Valley, dropped out and dove into his passion. If I were Mark, I’d feel like my partner had abandoned me and that although he had contributed to the beginnings, he wasn’t showing up when I needed him most. The lesson here is that in any relationship, business or personal, if you want it to blossom, show up. Your time, presence and attention are valuable commodities. 5. Figure out how to be of service. Facebook’s popularity and quick rise has nothing to do with Mark Zuckerberg’s programming chops. He could have easily programmed a million different sites. But the site he chose to program provided so much value to the users that the product sold itself through the strongest way possible: word of mouth. Facebook unites us. Facebook allows us to express ourselves. It helps us keep in touch with the world and our loved ones. Sometimes, Facebook even helps us get laid. That’s being of service. If you want to rise in your business endeavor, figure out how your product can solve problems and be of service. This is the key to your success. Everything else is just details. 6. Content and community first, revenue second. I am totally inspired by Zuckerberg’s decision to not go for ads in the beginning. One of the best lessons in the movie is that if you have something cool, don’t sell out too quickly. Yes, we are all entrepreneurs and we want to make a buck, but Sean Parker’s analogy of having all the little fish versus the big fish is correct. Keep the bigger vision and shoot for the big fish. Keep your product cool. Put out the best content, build a large community of trusted consumers and users. If you focus on that, the numbers will organically grow. And then, as my partner Malcolm CasSelle says, “where traffic grows, revenues will follow.” Put content and community first. Revenue will come. 7. Visualize success as your final result. One of the great things about “The Social Network” is that from the beginning, you know that success is on the other end of Zuckerberg’s efforts. That gives a wonderful perspective for the viewer, because we know that no matter what struggles he went through, the end result was success. This is a great view to take on your life. No matter what struggles you have in your life, see it all working out and that success will be your end result. It might work on idea one or idea 10,000, but the important thing is to keep success in mind and know that is how your story will end if you choose it to be. 8. When you have a great product, money finds you. When you’ve created a great product that gives great value and is of service to your consumers, they will tell their friends. If you keep delivering the same high level of value and also constantly improve the value you are giving, money will find you. Money will find you from your consumers as well as your investors. Investors want to invest in companies with momentum and a story. Because of the Internet and relatively low costs and barriers to enter into many businesses these days, investors want more than an idea. Consumers can’t buy an idea; they can only buy hard goods and services. Focus on making the product as amazing as possible and it will begin to sell itself. Let money chase you; don’t chase the money. 9. Sex is fun but can hold you back. In ” Think and Grow Rich ,” one of Napoleon Hill’s main reasons why men are successful later in life is because they spend their early years chasing tail. Your creative energy can be used up with too much sex and dating. Entrepreneurs should cherish their creative energy the same way they would cherish an angel investment. Focus on your business and love will follow. 10. Not getting what you want can be a blessing. Along the same lines as number nine above, sometimes we are meant for greater things. Imagine what would have happened that fateful night if Mark Zuckerberg had gotten the girl. It’s quite possible that Facebook wouldn’t exist. Many times, creativity is born in the anger of rejection. See the events of your life as playing out perfectly, and if you aren’t getting what you want, try to detach and see the bigger picture. From now on, see not getting what you want as a gift from the universe that leaves room for something much greater to enter. And don’t sit around and mope; get creative! Make something happen. Use that “poor me” energy and dive into your creative mind. Who knows, that one person rejecting you could be the start to your own multi-billion-dollar, world-revolutionizing venture. 11. Focus, young Jedi. I love how after getting an inspiration for Facebook, Zuckerberg totally dove into the creation of it. He was so focused and dedicated that he changed his life forever in less than a month. How many of us can say that? If you have a great idea that lights you up, don’t fear what will happen if you focus all your energy on that. What we think about expands; what we focus upon expands — focus on your idea! Give yourself over to it and let the journey of following your idea take you into a wonderful and brand new land. You can be sure that on the other side you will be a stronger and wiser person. Don’t take your ideas lightly. Cultivate a burning desire to make it happen, yesterday. Time waits for no one. Get busy getting busy. The universe respects focused and bold action. You’ll be surprised how much progress you can make when you focus on one thing at a time. 12. Not everyone is going to be happy with you. You are going to ruffle some feathers if you want to fly. Since no one knows what really went down, it’s hard to draw a real conclusion about the morals of everyone involved. But the fact remains that to be successful, you need to develop an energy shield that reflects the negativity that you will certainly encounter as you rise. When you stand up and begin to shine, you become a target. Shine on anyways. Who gives a damn about the negative opinion of others. Get used to critics and haters. Sometimes they have really good things to say and can help you grow. Remember that your haters are still watching you and are most likely your number-one fan. I heard a statistic that over 50 percent of Howard Stern’s audience back in the day hated him but tuned in to hear what he would say next. They might hate him, but who’s laughing all the way to the bank? 13. Don’t screw over your friends. Money changes people. Don’t be that person. Make your friendships way more important than money. Money comes and goes but friendships are priceless. You don’t want to be the person who is sitting on top of the money pile all alone. Put the top value on building strong relationships and less value on money. Amazing people and love are priceless. Don’t take these very precious resources for granted. They make life worth living.

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Peter Schwartz: We could see it coming

September 20, 2010

The New York Times writes today about the deceleration of the Wall Street Money Machine this summer, one that many did not see coming. Stock offerings, mergers, and other transactional activities that yield massive fees for investment banks and law firms have dipped below last year’s plunge, providing further evidence that even Wall Street is not recession-proof. Revenue from Wall Street’s core businesses is expected to fall from $56 billion in 2009 to $42 billion in 2010. The banking industry could lay off up to 10 percent of its workforce in the next year. We did see this contraction coming. The revival of Wall Street fortunes this spring was a classic Dead Cat Bounce . Wall Street traders like to imagine themselves as Masters of the Universe. But they are no longer Masters on their own Street. Here’s why. * US debt owned by foreign countries shifts financial power overseas. * The era of liquid access to capital – stretching from the early 1980s – has ended. * Financial regulation – self-imposed, federal, and cross-border – further tightens the handcuffs. No power, no capital, and more oversight equals fewer deals, smaller deals, and lower fees on deals for bankers. We expect this to be the new reality for the indefinite future, with enormous implications for the banks and law firms that have built their businesses around transactional services.

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Europe Science Programs Fall Victim To Austerity Cuts

September 6, 2010

MEYRIN, Switzerland — Using a machine kept colder than space, scientists at the world’s most ambitious international research facility are puzzling out the questions of the universe, working to re-create the cosmic soup served up by the Big Bang. But the famous institute is also facing a far more earthly conundrum: how to pay the bills.

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Robert Creamer: Another Reason to Break up Big Wall Street Banks

September 3, 2010

Ever wonder how Wall Street bankers manage to make tens — and sometimes hundreds — of millions of dollars? How do people who really don’t produce anything manage to siphon such gigantic sums from the pockets of the people who produce goods and services — who actually create the wealth? The answer is that they have managed to gain almost monopolistic control of the keys to world financial markets, to sources of capital that are necessary to finance equity investments and bonds for everyone from the largest international corporations to new start-ups. But, you may ask, how can this be? In the kind of competitive financial markets envisioned by Adam Smith, competition should create multiple gateways to these capital markets. What’s more, price competition should prevent massive overcharges by the underwriters of big financial deals. On Friday, Aug. 20, Washington Post financial columnist Steven Pearlstein published an insightful article examining the reasons why there is so little price competition on underwriting deals between Wall Street’s big banks. He points out that the big investment banks would normally stand to make almost $450 million in fees on the $15 billion stock offering by General Motors. In this case, though, the federal government owns most of the stock. Goldman Sachs — convinced that it would never be named lead underwriter because of its legal and PR issues — decided to do something that is never done on Wall Street: undercut the fee structure. It shocked its rivals by violating an unwritten law of the investment banking world — it engaged in price competition. It turned out that Goldman’s competitors Morgan Stanley and J.P. Morgan got the opportunity to underwrite the offering. But the Treasury Department insisted that they do so at Goldman’s price — .75 percent of the stock sale — which is one quarter of the normal fee. Now even three-quarters of a percent is a huge haul of $112 million — but it’s not $450 million. The normal fees charged by investment banks are 6 to 7 percent for deals of less than $200 million, 4 to 5 percent for middle range deals, and 3 to 4 percent for those more than a billion. Pearlstein explains that the fee structure is divided into three pots: Twenty percent is an underwriting fee for the banks’ guarantee that they will buy the entire issue even if nobody else will. That was once an important consideration, but in today’s markets, the investment banks ensure that no IPO goes forward unless it is pre-sold. As a result, the underwriting fee is now a pure windfall. Sixty percent of the fee represents a sales commission, which also turns into something of a game, particularly when it involves highly desired shares of well-known companies such as GM. Since all the major relationships with all the major institutional buyers, it’s hard to say which sales force actually makes the sale. So once Fidelity or TIAA decide how many shares they want to buy, they can divide the commission among the investment banks any way they choose… The final 20 percent is the management fee, which goes exclusively to lead underwriters. This is for helping to prepare the prospectus, organizing the 10-day road show to market the issue to prospective buyers, keeping the order book and advising the company on the offering’s price and size. For a big deal such as the GM offering, it might involve incredibly intense work by as many as 30 professionals for as long as four months — let’s say generously, 30,000 hours of work. On a $15 billion IPO, that works out to $3 million per banker, or $3,000 per hour worked. Not bad pay. These “masters of the universe” make more money in six hours than a minimum wage worker makes all year. But the question is, how can they demand such massive fees? Do they have special skills that are so rarefied and valuable that they can demand such numbers? Are they the intellectual equivalent of precious stones? Of course not. They do it the old fashion way. They have cornered the market. Pearlstein notes, “A handful of established firms control access to global financial markets and use this power to extract monopoly-like profits and funnel them to their executives and employees.” These firms don’t engage in price competition because they have a “gentlemen’s agreement” between them not to kill the goose that lays the golden egg. If one of them starts undercutting the other they will drive down these fees and all of them will see less money. The big Wall Street banks can limit the size of the investment banking club because it is very difficult for upstart firms to establish themselves. Part of the issue is size. And these firms have managed to convince potential clients that if they go around Wall Street’s gatekeepers — say, selling IPO’s at auction as Google successfully managed to do with its IPO — they will not get full price for their offerings. In addition, with the end of the Glass-Steagall Act that once put a firewall between commercial and investment banking, companies worry that if they cut the investment banks out of the deal, they will be charged higher prices for their loans. Bundling of services is a classic means of fending off market entry from lower-priced competitors. Pearlstein argues that one way to break through this semi-monopoly pricing structure is for companies themselves to do what the Treasury did — demand lower prices from their underwriters. But they haven’t done it up to now, and there is no reason to expect they will take that risk any time soon. Why, you might ask, should anyone care if a big corporation pays a huge fee to investment bankers? Because the money they pay really represents the control of a huge quantity of the society’s goods and services. For the corporations in question it becomes a cost of doing business that is passed along to the average consumer. And, of course, these fees represent dollars that the corporations might pay to their employees who are paid maybe $25 per hour, instead of $3,000 per hour that goes to the Wall Street bankers. Remember each “Wall Street Banker hour” (at $3,000) represents 120 hours of an employee who makes $50,000 per year. In either case these are dollars siphoned out of the hands of everyday Americans who work for a living producing the goods and services of the economy — and concentrated into the pockets of a tiny elite on Wall Street. And mostly they are not paid for adding value to a product or service. They are paid a toll for having gained semi-monopoly control of the gateway to financial markets. They are the sophisticated version of a bunch of bandits who stop you on the road and demand to be paid before you can pass. The only way to end this oligopoly of corporate finance is government action. It is just one more compelling reason why the big Wall Street banks should be broken up and we should reimpose a strict firewall between commercial and investment banking. The new Wall Street reform bill went a great distance to rein in the power of the big Wall Street Banks. Now Congress must take the next step. The government must set up new rules to assure that corporate finance is a competitive marketplace. It clearly isn’t today and will never be so as long as a few gigantic players are allowed to maintain “gentlemen’s agreements” not to compete on the basis of price. Congress needs to act to break these institutions up, and the Antitrust division of the Justice Department should take action to enforce the antitrust laws. And that isn’t the only reason to break up the big Wall Street banks. There is no real competition in the credit card sector either. The top three issuers control 52.82% of the market (JPMorgan Chase 21.22%, Bank of America 19.25% and CitiBank 12.35%). Add American Express (10.19%) and Capital One (6.95%), and it becomes clear that five firms control almost 70% of American’s credit card market. The new Wall Street reform has gone a long way to prevent the kind of recklessness and financial sector meltdown that collapsed the economy and cost eight million Americans their jobs. Democrats passed that bill over virtually unanimous Republican opposition, on the strength of massive public support. There is plenty of political support among the voters to take the next step and break up the monopoly power of the big Wall Street Banks. After all, the only way to completely guarantee that no financial institution is ever again “too big to fail” is to invoke the yardstick that if it’s too big to fail, it’s simply too big. For a long time a group of sharp guys and gals on Wall Street have run one hell of a game on everyday Americans. We’ve been played for chumps. Isn’t it time for us to wake up and end a system where a few Wall Street Bankers have a license to siphon money out of the pockets of the middle class? Robert Creamer is a long-time political organizer and strategist, and author of the recent book: Stand Up Straight: How Progressives Can Win, available on Amazon.com .

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Liz Ryan: Boundary Setting and Gut-Checks for Job-Seekers

July 20, 2010

Dear Liz, I got a call from a recruiter mid-last week about an interview out of town that was wonderful (a great opportunity) and horrible (the world’s worst timing, disrupting my life in a big way) at the same time. I tried to change the date of the interview, but the CEO was about to go on vacation for six weeks. The company’s recruiter was talking to the third-party recruiter about having me arrive at the local airport at noon and do a two o’clock interview at their office, one hour away. I told him (my guy, the third party recruiter) that was way too tight for my comfort level. They pushed back and wanted me to interview at three at the latest. One problem with the flight, my cab, or my luggage and I’d have missed the interview. I wanted to fly in the night before and rest, but they wouldn’t do it. As you can guess, the flight was delayed and the interview was rushed. Now I’m mad at myself more than them. When your gut is screaming BAD THING but the only rationale is “I don’t like to rush,” what can you say? Thanks, Gerald Hi Gerald, Thanks for writing. I’m sorry you had to go through that! One of these days, we’ll do a course or a tele-seminar on just this topic: the sticky awkward negotiations around job interviews. It’s a minefield, as you know! For starters, if the CEO is about to go out of town for six weeks, the burning question on my mind as your career advisor would be “So, are they planning to make an offer before the CEO takes off?” I wouldn’t let you go on an interview where the deal is “You come and see us, and then the CEO goes on vacation while you twiddle your thumbs for six weeks and wait for the CEO to get back before we make a decision.” Concerning the fly-in specifically, it is always fine to say “That time unfortunately won’t work for me, but I can come the following week and meet everyone except the CEO. After that meeting, if your people feel I’m a good fit for the company and if I feel the same way, I can talk with the CEO by phone or even fly close to where he or she is vacationing so that we can meet live.” (If they’d balk at the extra airfare, you’ll know a ton about how much pain is involved and how dearly they’re valuing your abilities.) Assuming you agree to interview on a certain date, it is absolutely appropriate for you to have time to prepare and to rest before the interview. If it’s more than a quick Boston-to-New-York or Chicago-to-Kansas-City type hop, your request to fly in the night before was totally reasonable. Look at the message they sent you, in mathematical terms: X (where X equals your need to get a good night’s sleep before an interview) is less than Y (where Y is the $149 cost of your one-night stay in a Residence Inn). That’s a huge, radioactive, glowing red flag. We often “shush!” our gut when we should be leaning in more closely to ask “What’s that you’re trying to tell me?” In a situation like this, you could say “Oh! One hour’s cushion isn’t enough time. One problem with the cab or the baggage handling and we’ll both have wasted time and money. Let’s have me fly in the night before.” If they say “No, can’t do it” you’ll play not-even-really-all-that-hardball and say “What a shame, I was looking forward to meeting your team.” The universe sets up these situations for us to remind us of our power. When the flight is delayed (inevitably!) your gut says “Heh heh, guess you’ll listen to me the next time!” We only feel our power when we use it. It’s the most wonderful feeling in the world. With respect to these jokers, don’t feel bad, because you dodged a massive bullet. How important is this opening, anyway? What, the CEO sprung a six-week vacation on them at the last minute? Heck, no. They all knew his or her vacation was looming. The little matter of getting you into town for an interview just wasn’t quite important enough for anyone to focus on until crunch-time. Then, the pressure was on you! Remember the old placard people used to hang in their cubicles, something like “A Failure to Plan on Your Part Doesn’t Constitute an Emergency on My Part?” We can hold these folks to the same standard. Imagine the hubris that it takes to call a talented job candidate like you and say, “Yes well, out of the blue we have decided that we need you here just a few days from now, and bee tee dubs we’re too cheap to put you in a hotel the night before.” Forget them. It was a painful learning experience, but you won’t be bitten by this snake again. Ah, boundaries! We only see them when we’ve already blown past them them, at least half the time. Your sturdy gut (we can say instinct if we want to be refined) has guided you very well this far. Listen to it! If you ‘only’ have your gut-check and no data at your disposal at the point of need, you can always say “I’m not sure I’m comfortable with that.” Let them wonder and stew. I’m sorry that you had to go through the stress but delighted that the universe put its little universe-foot down and got you away from those people before something horrible happened (a job offer appearing, for instance). You might want to double-check your relationship with your headhunter, too. With advocates like him or her in your corner, who needs corporate bulldozing amoebas? Cheers, Liz p.s. Our online courses “Your Human-Voiced Resume,” “Build Your Personal Brand,” “Crafting Compelling Pain Letters” and “Stop! Don’t Send That Resume” begin on August second. More info here.

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Gary Liberson: A Tale of Two Worlds

July 14, 2010

Today’s Wall Street Journal has my kind of headline: “Fed Sees Slower Growth – Officials Debate How to Respond if Recovery Falters; Softer 2nd Half Is Seen.” I like the use of the word “sees.” If you roll it around a little, it almost sounds like seer (i.e., a person with the supposed power to foretell events or a person’s destiny, a prophet). You might think of “sees” as in sage wisdom based on experience and insight. I prefer to think of “FedSees” (I’ve written the term in its more formal compound Germanic form) as a guess or hunch based on talking to like-minded individuals. Often newspapers or commentators talk about “Inside the Beltway.” The concept is that the Federal Government and Congress are rather insular, only paying attention to thinking within Interstate 495, the highway system that encircles most of the Washington, DC metropolitan area. I think this is a bit narrow. I would add Wall Street to inside-the-Beltway. Now before you start thinking this is a Wall Street bashing article, it is not; sorry. It is, however, about two economic worlds: Global and Main Street. The two worlds intersect at times, but are often light years apart. More importantly, Wall Street and Inside the Beltway belong to the Global Economics world, not to Main Street, the universe that represents the vast majority of the US population. It is true that we all benefit in some way when Wall Street does well. It is also true that individual benefit is not immediately evident to most people nor easily explained to the general public. When Bernanke came running to Paulson and Congress to plead for a bailout, he was doing so because the global economic world was imploding and taking Main Street with it. However, the bailout was used solely for the global economic world. If that hyper world interacted in some tangential way with Main Street, then the bailout would perhaps help the entire country. We are now 18 months past Professor Bernanke’s epiphany and like the old commercial: “Where’s the beef?” The above graph compares annual housing completions and annualized unemployment since 1968. Construction has always been the basic US-centric component that put people to work. Almost every time construction completions are at a low (i.e., preceded by a steep decline and followed by a steep increase), unemployment goes up. The fact is that housing completions are at a 50-year low and our unemployment is at a 50-year high. When the FedSees slower growth, I think it’s not worth the headline. It’s similar to writing: Active trumps passive. Seeing is not doing. I am sure the Fed will do the worst thing possible, cut interest rates. We do not have an interest rate problem. We have a bank problem. Anyone involved in selling or buying a home knows that banks are establishing criteria so stringent that no matter how much money is available, demand is suppressed. The true constraint is the banks. The Fed and the Treasury are Global Economics folks. The President’s policy advisors are Global Economics geniuses. Come November, “Where’s the Beef” should be the rallying cry of any candidate running against an incumbent. Tip O’Neal said: “All politics are local.” Nothing is more local than construction. November is one of those times the global world meets Main Street.

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Michael Tasner: Virtual Reality Worlds: The Hows and Whys of This Unique Marketing Universe

July 8, 2010

Marketing using virtual reality worlds and methods is one of the more advanced Web-3.0 tactics that you can use to generate leads, close business, even to communicate with your team. It also takes the biggest time commitment, requiring the most work and the largest initial expense to get the platform designed. The upside: when put into place, these 3-D worlds can prove to be your most effective lead generator, sale closer, and cost saver. Let me take a step back now that I have your eyes curious, your ears more attentive and your full attention. Virtual reality worlds are just that. They are 3-D, Web-based communities that allow interaction among users and devices by way of the Internet. In general, virtual reality has a variety of uses. The whole intent of virtual reality is to convince you and your mind that you’re actually there, alive in this make-believe world. It brings the experience and interaction to life, even though you are behind a computer or another device and not there live, in person. Picture this: •3-D people walking around, interacting and talking. They don’t really exist, but they represent people who do in some way. • Communication using webcams, headsets, microphones and text chat. • People from all walks of life and from around the world who might never have met otherwise. • Houses decked out with all the latest electronics. • The ability to walk around, drive cars, purchase goods and services and do pretty much anything you would do in your actual life. • A world that seems so real, you start thinking it is real. Sometimes your mind continues to believe this can’t be real, it isn’t real, and it’s fake. It will take some conditioning of your mind (after you start engaging in these virtual worlds) to understand the concept. Here are some of the common myths of virtual reality worlds: • Everyone is fake or acts fake. Eighty-four percent of people reported that when they join the various virtual worlds, they create people — avatars — that represent themselves. Yes, that does leave 16% of avatars who are not entirely representative of their true selves. Typically these people make minor adjustments, rather than entire modifications of their real persona. • It’s nowhere near real life. Many times this is more like real life than your own real life. People host parties and business events. Attend trainings. Interview for jobs. Shop. Practice foreign languages. Work in global teams. All virtually. • It’s only for kids. The average age across most virtual reality worlds is just over 30. The only thing to do in these communities is play games. Yes, you can play games, but this is only a small fraction of what’s done in these worlds. Why should you care? Here are the key driving factors to the rise in virtual reality usage: • Limited time. • Less discretionary income (across the map). • Further adoption of the Web by everyone, including consumers, businesses and even the government. • It’s user-generated content. People, businesses and agencies are continuing to move to using virtual reality worlds because they are tired of traveling, have less money to spend on travel, and are realizing the power associated in these worlds. My motto is, “Essentially everything that can be done in person can be done over the Web using various technologies.” This is the concept that people are finally starting to understand. Everything continues to move to the web. So instead of simply resisting, both consumers and businesses are starting to jump on the bandwagon. An additional factor that has helped the rise of virtual reality worlds is their ease of use. Two to three years ago you needed to have a very fast computer and connection just to view one of these worlds. Today things open up much quicker and are much more intuitive. Anything you would want to do in person (yes, everything) can be done over the Web in the comfort of your own home or office. Why do you think Amazon.com had one of its best holiday seasons ever in 2008, while Circuit City closed its doors? Granted, there were a variety of outside factors as to why Circuit City failed. But from the customer’s perspective, if I can buy the same products on Amazon.com and save time and money (including sales tax and shipping charges), there is absolutely no need for me to visit a real store, deal with a salesclerk who probably doesn’t know what he’s talking about, stand in line, and risk having my credit card information misappropriated. And so, virtual reality-world usage continues to climb. According to The Gartner Group, it’s anticipated for over 250 million people to be in virtual worlds by 2011. There are hundreds of popular virtual communities and worlds with thousands of users in existence that are much less popular. Let’s zero in on the most popular ones that you need to be concerned with. There are a variety of common threads among most virtual worlds: • Typically they are run by user-generated content rather then people at the particular company adding content. • Users can purchase and own virtual land. • Currency can be exchanged and typically needs to be converted. • There are various e-commerce applications and functionality so you’re able to buy products and services in real time. • They are regulated to comply with the various, real, international laws. Here are some of the virtual-world terms you should be aware of: • Avatars: The term is derived from Sanskrit and relates to a “mental traveler” in Indian fairy tales. In the virtual world, it is the character you use to represent yourself and communicate with others. • Community: The people or residents who inhabit the virtual space. • Currency: Most of the virtual worlds have their own form of currency which typically can be converted into USD or other forms of real money. • Emotes: Expressing emotions in a virtual world (laughing, crying, smiling, etc.). • Grid: The technology and platform behind the virtual world. • Latency: The lag of movements in motion. It’s measured in the delay of the actual change of position versus the response time. The faster your computer and Internet connection, the lower the latency you will experience. • Teleport: The ability to fly to another location in the virtual space. • Universe: The collection of all entities and the space they are embedded in for a virtual world. Each virtual reality site has it’s own “universe” so to speak. Here are some of the most popular and growing Virtual Reality Worlds: SecondLife.com Let’s start with the community that has received the most media attention. SecondLife.com does not have the largest amount of registered users, but it has received more media coverage than most of the other major players as they have poured money into PR and have also had some notable people use their site. Second Life was launched in June 2003 by Linden Labs. It allows its residents to interact with each other, socialize, conduct business, and so on, across its grid. You must be 18 or older to use Second Life, and between the ages of 13 and 18 to use Teen Second Life. This is an important distinction for marketing purposes to know that users are 18 and older. They have over 15 million registered users. Registration is free for personal use. If you want to purchase land, there are monthly fees ranging from $5 to $295 per month, depending on the amount of space you are looking to purchase. For $295, you can have your own private island. A big advantage to purchasing land is to start controlling the marketing space. Most of your competitors will not be on these virtual sites. Get your land before them. Much like the other virtual worlds that will be outlined below, currency can be exchanged. In Second Life the currency used is Linden dollars. The exchange rate from Linden dollars to USD and to other currencies varies based on market factors — buy and sell rates. There have been live concerts in Second Life, government embassies established and education and training going on pretty much 24/7, just to name a few of the applications. Keep a close watch on this virtual reality world, as it has the most potential for continued and massive growth. ActiveWorlds.com Active Worlds is a little bit different than the rest. It is a 3-D world platform with a browser that runs on Windows. (Yes, this helps Bill Gates’ wallet grow even larger!) Originally, Active Worlds’ programmers wanted to integrate a 3-D browser. Think of Firefox or Internet Explorer in 3-D. Instead, it has morphed into another Second Life. For consumers, they can play around with their avatar in one of the 1,000 different worlds across the platform, interacting with each other, playing games or purchasing goods and services. For businesses, this has been a solid platform to develop buzz, sell products, support customers and to provide demos and training. The advantage of ActiveWorlds.com over SecondLife.com is that the cost to develop a presence is easier and much less expensive. To develop a full-blown store on SecondLife.com you are looking at upwards of $5000-$10,000 or more. Your time to market will be much quicker than on SecondLife.com. They also are very business-centric. They understand virtual reality-world marketing is growing in popularity and have catered many of their offerings and support to businesses while making it effortless for consumers to buy They are trying to bring the Amazon.com experience to their virtual world! EntropiaUniverse.com Entropia Universe is in a different league than the rest as they have a real cash economy. Some consider this a good thing, others do not. Entropia Universe is an online, 3-D, virtual universe for entertainment, social interaction and trade, using a real-cash economy. The virtual world was developed by the Swedish software company MindArk, based in Gothenburg. What MindArk really understands is monetization. Instead of charging a subscription price, they use an alternate micropayment model, asking people to buy in-game currency (the PED) which then, in turn, can be exchanged back to USD. MindArk claims to offer the first virtual universe with a real-cash economy. They want people coming to the site to spend money, rather than just to be playing around. And this is stressed across their website and promotional materials. Entropia Universe has been quite busy attracting various businesses and even government entities. In May 2007, they were chosen by the Beijing Municipal People’s Government endorsed online-entertainment company, Cyber Recreation Development Corporation, to create a cash-based virtual economy for China. This is huge in terms of adoption and possible numbers. They have been working toward creating the largest virtual world ever. Their proposal was accepted over many others, most notably Second Life. This was a blow to Second Life as they assumed they were the front runner! Entropia Universe has a goal to attract 150 million users from around the globe. Even more impressive, they expect to generate over $1 billion annually in commerce. But this is not the go-to place for business meetings. Instead, it has been a good place for entrepreneurs to sell their E-Commerce products and services to consumers and businesses. But, to date, they have some new plans in the works to make the site less gaming-intensive and more centered on business. Check out the site for free and get a feel for it, but don’t make a major investment of your time or money just yet. The above is an adapted excerpt from the book “Marketing in the Moment: The Practical Guide to Using Web 3.0 Marketing to Reach Your Customers First” by Michael Tasner. The above excerpt is a digitally scanned reproduction of text from print. Although this excerpt has been proofread, occasional errors may appear due to the scanning process. Please refer to the finished book for accuracy. Copyright © 2010 Michael Tasner, author of “Marketing in the Moment: The Practical Guide to Using Web 3.0 Marketing to Reach Your Customers First”

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Liz Ryan: That’s Definitely Not Networking

July 6, 2010

I love to meet new people — love it love it love it. Ninety-six or ninety-seven percent of the time, I meet a new person and I leave the coffee shop glowing, because the new person is fun and cool and lively. Three or four percent of the time I leave the coffee shop saying “That was an hour? It felt like six months in the prison from “Midnight Express.” There are networkers, and power networkers, and people who should never be allowed to meet unsuspecting new people in coffee shops. Here are ten things that are not, never have been and never will be networking: Writing to a stranger to say “I read about [your new job/your promotion/your blog] in the paper — let’s talk about ways to collaborate. Here are six of my articles for you to read, then call me!” Meeting a new person at a networking event and saying “Say, you should come over to my office [thirty miles away from your office] so we can talk and learn more about each other. We have a conference room and coffee!” Writing to an unsuspecting employed person through LinkedIn to say “Do you know which hiring manager in your company is in charge of hiring Purchasing Agents?” Sending out marketing blasts en masse via Facebook. Spamming every person you ever met in your life with your appeal for sponsorship for your Walk or Run or Bike Ride or Canoe Race. Writing to someone with a note saying “We met at a networking event last year and I just found your card. I wasn’t job-hunting then but I am now and I’d love to get together and get your advice since you work in the same field. How about next Thursday?” Going to a networking lunch or coffee with a person who didn’t know you from Adam before you made the outreach, and saying “I know we’re both busy, so let’s get down to business. I need you to [introduce me to the most important person you know/critique my resume/read my business plan].” Calling a person you haven’t talk to in seven years to say “Doesn’t your sister work at Acme Dynamite? I’m job-hunting and saw a good job there. Can you ask her to recommend me?” Friending a very slight acquaintance on Facebook and then suggesting forty-five groups they need to join and sixty applications they can’t live without. Bushwhacking an ostensibly social conversation for biz-dev purposes, like the young woman who called me up and suggested coffee to talk about her career — only to spring a not-to-be-missed business opportunity on me in mid-cup of coffee. (I bailed, using an imaginary next appointment as an excuse. I know the universe will forgive me.)

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Jan Phillips: Sparking the Collective Imagination

June 30, 2010

I read about an executive who had a real flat response from his employees when he put out the question “How can we best the best company in the world?” There was a long pause and a deep silence in the room until a worker said, “How about this: how can we be the best company FOR the world?” And that was the question that charged everyone’s imaginations and started everyone thinking creatively. It’s not about what we can get. It’s more about what we can give. And it’s our giving that opens the door to all the abundance we are going to receive in the world, as a person or a corporation. Just as a battery is charged by the union of positive and negative forces, just as a child is conceived by the union of a male sperm and female ovum, just as a thought issues forth from the union of right and left brain, so does original thinking emerge from the practice of joining “us” and “them” into a “we.” Our imaginations are the most potent engines of change in the universe. There is no doubt that we can evolve ourselves forward once we replace our dualistic thinking with thought processes that re-pair the opposites and cause convergence. In this matter, emotions are essential. They are our guide, our body’s means of instant messaging to the brain. Yes, this decision is wise. No, that choice is unwise. Our bodies are hardwired for survival of the species, and if we listen deeply to them, if we are wise enough to trust the feelings they emanate on our behalf, then we will find the clarity necessary to make inspired choices that are as good for the whole as they are for the one, which is an absolute prerequisite for thought leadership today. And because the work of transforming our own thought processes is so evolutionary an act, it requires the total engagement of body, mind, and spirit. This is not business as usual. This is reorienting to a new star. We are organisms in a constant state of flux, exposed to an ever-changing environment, and the more we inquire into our own state of consciousness and notice the evolution of our own ideas, the more aware we become of our place in the family of things. As a civilization, we are shifting out of an industrial, assembly-line mindset of isolated units into an organic, knowledge-based network of communities. There is a tectonic shift of consciousness occurring and an evolutionary tendency away from the mechanical and back toward the natural. This may be seen as Mother Nature’s mid-course correction. As the thinking neurons of the planet, biologically oriented toward survival, we are finding ways of connecting and communicating with unimaginable speed and precision. Someone has calculated that we can globally transmit the contents of the Library of Congress across a single fiber optic line in 1.6 seconds. Science and nature have announced their engagement. It is not the task of creators to know the answers, but to articulate the questions we face as a people and to call us together to create our solutions. This is the potential of corporate America–to re-think their structures and processes in such a way that they become furnaces of inspiration, centers of creative ingenuity, arbiters of a culture conscious enough to bring the whole human family into the picture. The profits from such an endeavor–materially, culturally, spiritually–could overwhelm the most skeptic imagination. Thought leaders do not think in terms of “me” and “mine.” They think in terms of “we” and “ours.” They do not think outside the box, they live outside the box. No matter what their address, they think of themselves as global citizens, responsible to the earth, responsible to the human family, and aware that their well-being is tied to the well-being of others. They are balanced and in tune with their own inner life, and they are awake to the immense possibilities that erupt when the inner lives and imaginations of their colleagues are fully engaged. These are the kinds of alliances that can emerge when we change our questions from “What can we gain?” to “What can we give?” Businesses have always been on the cutting edge of creative innovation, and finding ways of bridging their bottom line concerns with the basic needs of the poor opens up whole new avenues for win-win solutions. There is a tremendous opportunity here for commercial enterprises that balance commerce with compassion, that reframe “the poor” from a category of charity to a category of collaborator, and that imagine new ways of working with and in these communities so that everyone benefits. -from The Art of Original Thinking

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People Didn’t Drown The Markets; A Bad System Did

June 27, 2010

The temptation is to see the 2008 Wall Street implosion that helped trigger the broader economic crisis as the consequence of individual idiocy and avarice. That thesis is emotionally appealing — nowadays everyone loves to hate and, better still, feel superior to wealthy Masters of the Universe. It is intellectually appealing, too. Blaming the crisis on human error is a lot easier than trying to work out the systemic problems it laid bare. But just because something is easy doesn’t make it accurate. Call it the Michael Lewis fallacy. His book The Big Short deserves its place on the best-seller lists; it offers the best insight yet into the lunacy of subprime borrowing and the intricate world of structured financial products used to bet on those dreadful home loans. But the fabulous human stories of greed and stupidity Lewis tells are a seductively dangerous basis for understanding the global economic meltdown.

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Obama’s `Man’ Goes Nuclear as Global Fixer: Alexandre Marinis

February 24, 2010

Commentary by Alexandre Marinis Feb. 24 (Bloomberg) — Barack Obama couldn’t have imagined that a casual exchange with Brazil’s president would complicate U.S. efforts to prevent Iran from developing nuclear weapons. On April 2, when world leaders convened in London for a G- 20 meeting, Obama approached President Luiz Inacio Lula da Silva and said, “That’s my man right here. I love this guy. The most popular politician on earth.” Lula, who doesn’t speak English, didn’t understand Obama’s friendly banter. The following day Brazil’s press reported that Obama called Lula “the man,” which in Portuguese translates into not “my buddy,” as Obama intended, but rather “the most important leader in the universe.” This mistranslation of an off-hand remark turned out to be no small deal. Many Brazilians viewed it as a case of Obama conferring first-world status on a nation that usually doesn’t get the respect it deserves. Afterward, Lula’s already strong approval rating shot up to 80 percent. Lula endears himself to Brazilians by reminding them that he’s one of them, someone who grew up poor and is tired of being treated as a second-class citizen of the world. He enjoys telling people that the global financial crisis was caused by the U.S. and other rich nations, not by Brazil. This is true, of course, and Brazilians love hearing their leader repeat it in speeches. Inflated Ego No one has ever accused Lula of lacking a healthy ego. So it’s no surprise he embraced this inflated interpretation of Obama’s bonhomie. Since the encounter in London, Lula has come to believe he can solve most, if not all, the world’s major problems, from an internal political crisis in Honduras to the Arab-Israeli conflict, global climate change and now even Iran’s apparent pursuit of atomic bombs. On Feb. 8, following Iran’s announcement that it was producing 20 percent enriched uranium — which paves the way for the higher grade material used in nuclear weapons — European diplomats told Le Monde that the Brazilians were making it more difficult for the United Nations Security Council to impose economic sanctions on the Islamic nation. Sanctions require approval of nine of the 15 council members. The five permanent members — China, France, Russia, the U.K. and the U.S. — have veto power. The Chinese, who buy oil from Iran and have other business interests in the country, such as the construction of a $3 billion refinery, oppose sanctions. They may veto the initiative, unless the other four permanent members can win the support of five additional temporary members. This would help to isolate the Chinese, possibly leading them to abstain from a vote. That’s where Brazil comes in. Lula’s Diplomacy Without the support of a strong emerging nation such as Brazil, persuading the council’s smaller members to approve economic sanctions against Iran will be difficult. Historically, Brazilian diplomacy has been recognized as effective and managed by a foreign service staffed with highly qualified professionals. Under Lula, though, the country’s foreign policy has proved ineffective in several ways. Lula’s approach hasn’t always supported Brazil’s best economic interests. It’s failed to swiftly adapt to changing circumstances. And it has been infused with an outdated anti- U.S. mentality. All these shortcomings are present in the way Brazil is responding to Iran’s nuclear program. Just last week, for example, when Lula was asked why he supported Iran’s government, he turned his response into an attack on the U.S. for waging war on Iraq. ‘Dangerous’ Assumptions Brazilian diplomats, like their counterparts in China, believe pressuring the Islamic nation is counterproductive, and they are probably right. “Unfortunately, the prospect of crippling the Iranian economy is a fallacy, and a dangerous one at that”, former U.S. State Department policy adviser Suzanne Maloney , an expert on Iran, wrote in a report in January. Nonetheless, at least so far, Brazilians have been unable to come up with an option other than economic sanctions. On Nov. 23, while under attack by the international community for hiding a uranium enrichment facility from the UN, president Mahmoud Ahmadinejad visited Brazil and was welcomed by Lula. The Brazilian president defended Iran’s right to pursue peaceful nuclear technology. Ahmadinejad, however, rejected Brazil’s offer to help Iran enrich uranium for civilian use. Earlier this month, the U.S. announced new unilateral sanctions against Iran. Lula, who recently received the first Global Statesmanship Award from the World Economic Forum , may still be able to help mediate a diplomatic solution to this conflict during an official trip to Iran in May. But his prospects don’t seem too bright. Backing Ousted Leader In 2009, Brazilian diplomats tried unsuccessfully to reinstate ousted Honduran President Manuel Zelaya. Violating international laws, the Brazilians allowed Zelaya to occupy their embassy in Tegucigalpa and to use the place as his political headquarters to spread social unrest throughout Central America’s second-poorest country. As was clear from the day he was ousted in a coup, Zelaya lacked sufficient public support to regain power. Finally, in November Hondurans democratically elected a new president, whom Brazil refuses to recognize. That’s the sort of diplomacy that grows out of an inflated ego. And all thanks to a couple of words lost in translation. (Alexandre Marinis, political economist and founding partner of Mosaico Economia Politica, is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Alexandre Marinis at amarinis1@bloomberg.net

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Robert Creamer: What the Iconic Labor Battle at Hugo Boss Means for Our Economic Future

February 8, 2010

It’s the red carpet season in Hollywood. That means high-end apparel companies like Hugo Boss are promoting iconic celebrities to wear their clothing line at the Oscars and other award ceremonies. But for the workers who make these suits in Cleveland, Ohio, it’s a season of a different shade — that of the pink slip. And the result is an iconic labor battle that is emblematic of many of the most important issues facing our economy. Just after Christmas, Germany-based Hugo Boss messengered pink slips to the 400 employees at its Cleveland, Ohio manufacturing facility. The employees were told that they were being laid off and the plant was being closed. Hugo Boss was not closing the facility because it was losing money — or, for that matter, because the company was in bad financial condition. Quite the contrary. Its annual report says that: “Despite the global economic crisis… HUGO BOSS held its ground over the course of the year. In particular, toward the end of the year some initial positive trends were visible. In the fourth quarter sales revenues were slightly above the previous year’s …” Not only is the whole company profitable, there is every indication that the Cleveland plant is profitable as well. So why is Hugo Boss shuttering its Cleveland operation and sending 400 American workers onto unemployment lines? Simple. The workers at the plant refused a company demand that their wages be cut by almost a third — from $12 per hour to $8 and change. The company refused to discuss counter-offers, and rejected out of hand a package of incentives proposed by state and local officials to save the plant. Now let’s remember that these workers weren’t making exorbitant incomes to begin with. Twelve dollars an hour is only about $25,000 a year. The average CEO of a large American corporation (making $10.5 million per year) earns that much in the first five hours of the first work day of the year. No matter, the executives at Hugo Boss think they can make more money if they move the jobs of the Cleveland workers to Turkey and China, where they can get workers to manufacture their suits for even less. If something isn’t done to alter their decision, the Hugo Boss plant in Cleveland will stop making suits in April of this year. There are four key lessons for the American economy from the Hugo Boss story: Lesson # 1. Every time we allow the executives of international corporations to maximize their own wealth by paying their workers less and less, we allow them to place all of us in economic jeopardy. The root of the current Great Recession was the reckless speculation of a bloated financial sector that was swimming in the money it has squeezed from ordinary Americans who actually produce things for a living. That shift of income from everyday people to corporate CEO’s, insurance companies and Wall Street banks left wages stagnant for the last decade. All of the economic growth of the Bush years went to the top two percent of the population. That left consumers without expanding incomes to buy new products, forcing the economy to rely on growing consumer debt and a housing bubble to finance its relatively anemic expansion. The fruits of increased productivity must be widely shared in order to sustain long-term economic growth. A high wage economy is the foundation of a bright economic future – not a Bush era economy where income is concentrated in the hands of a few. The evidence is crystal clear. Economist Paul Krugman has noted, at the beginning of the Great Depression, income inequality, and inequality in the control of wealth, was very high. Then came the “the great compression” between 1929 and 1947. Real wages for workers in manufacturing rose 67% while real income for the richest 1% of Americans fell 17%. This period marked the birth of the American middle class. Two major forces drove these trends — unionization of major manufacturing sectors, and the public policies of the New Deal that were sparked by the Great Depression. The growing spending power of everyday Americans spurred the postwar boom from 1947 to 1973. Real wages rose 81% and the income of the richest 1% rose 38%. Growth was widely shared, but income inequality continued to drop. Compare that to the Republican policies of the Bush years — trade policies that allowed corporations to send manufacturing jobs abroad, and to lower wages at home; policies making it harder to organize unions; and tax cuts for the wealthy. Of course, throughout the heyday of Reagan’s “supply side revolution” and Bush’s tax cuts, the Republicans and the right wing intellectual establishment have held fast to their foundational belief that these policies — and especially tax cuts for upper income Americans — would create private sector jobs. Well, the great experiment in “trickle down economics” is over and the results are in. The New York Times reports that, “For the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring.” These Republican economic policies didn’t just produce fewer jobs than advertised. They didn’t produce any private sector jobs at all. The whole experiment in handing over money to the wealthiest people in America so they could use it to benefit the rest of us was a colossal — empirically verifiable — failure. But our economy is not doomed to have more and more low-paying jobs, greater income inequality and economic stagnation. There’s a great deal that can be done to prevent corporations from lowering the incomes of American workers in the future — and to stop Hugo Boss from laying off 400 workers in Cleveland right now. Lesson #2. America’s trade policies have to change . The international rules of the economic road must and can be changed. Fundamentally, the rules of international trade must require that wages for employees are not solely subject to market forces. Human beings are not commodities like beans and corn. Most people agree that we need child labor laws, health and safety laws, laws protecting the right to organize, and the minimum wage. That’s because without them, “the market” — left to its own devices — would force companies to drive down wages, and incentivize unsafe working conditions. The same is true of the international market place. The international rules of the economic game that are reflected in trade agreements need to be changed to recognize that human beings are the point of the economic system — not just an “economic input.” Labor agreements must have labor and environmental protections — not just protections for the rights of capital and “intellectual property.” Lesson #3. Our tax and regulatory policies need to be changed to reward true economic production and discourage the reckless speculation of the financial sector. It is the exploding financial sector that insists that a profitable company like Hugo Boss produce even more short-term profits — even though it damages the American manufacturing base. We’ve seen this movie over and over again. A few months ago Simmons — a 133-year-old profitable bedding maker — was forced to file for bankruptcy protection because it has been milked dry by a succession of buyers and Wall Street investment banks. The investment banks made millions through leveraged buyouts that made good financial sense for Wall Street, but left the manufacturing firm deeper and deeper in debt. The New York Times reports that “the financiers borrowed more and more money to pay ever-higher prices for the company, enabling each previous owner to cash out profitably.” This time, Hugo Boss is being milked by a private equity firm called Permira. The changes in financial regulation proposed by the Obama administration would be a start in the right direction. But everything from tax policies to compensation practices need to change if we are going to re-establish the priority of productive work — including manufacturing — over the needs of the “Masters of the Universe” on Wall Street. Lesson #4. We have to remember: it ain’t over ’til it’s over. It’s up to all of us to use our collective political and economic power not only to make changes in our economic policies, but to stop the destruction of 400 productive jobs at Cleveland’s Hugo Boss. Workers at Republic Windows and Doors in Chicago sat down on the job in order to preserve their jobs — and with the help of public officials like Congressman Luis Gutierrez and my wife, Congresswoman Jan Schakowsky — they won. Last year workers at another apparel company, Chicago-based Hartmarx, which makes President Obama’s suits, faced their own fight. Thousands of jobs were put in jeopardy when the company’s bankers sought to liquidate the company entirely. The workers fought the banks again — and with the help of Illinois State Treasurer and current Senate candidate Alexi Giannoulias they won, too. The workers in Cleveland realize they must engage in that same type of fight against the corporate greed of Hugo Boss, and they need all of our help. We should demand that each of the glitterati that attends the Oscars publicly refuse to wear Hugo Boss clothes, so long as the company continues to put its own greed over the interests of American workers. Each of us should foreswear Hugo Boss clothes until the workers at the Cleveland plant get back their jobs. Retailers should be asked to stop carrying Hugo Boss products. Investors in the private pension fund Permira should sell their holdings. All of us should stand shoulder to shoulder with the members of Workers United, an affiliate of Service Employees International Union, and help them demonstrate to America, once again, why a strong labor movement is our country’s principal defense against a low-wage economy and economic stagnation. Robert Creamer is a long-time political organizer and strategist, and author of the recent book: Stand Up Straight: How Progressives Can Win, available on Amazon.com .

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Stiglitz `Negative Value’ on Bankers Means Pay Doesn’t Equal Joy in Davos

January 27, 2010

By Jacqueline Simmons and Ian Katz Jan. 27 (Bloomberg) — The one-time masters of the universe may need to become masters of self-delusion if they hope to find happiness along with their paychecks. Bankers created “negative value” with innovations such as mortgages that homeowners couldn’t afford, said Nobel laureate Joseph E. Stiglitz , who is speaking today at the World Economic Forum in Davos, Switzerland, on the economics of happiness. “Most people try to see what they do as having intrinsic worth,” said Stiglitz, 66, a professor of economics at Columbia University in New York. “The fact that there’s no evidence doesn’t bother them. If you keep it to a high-level discussion, you don’t have to look at the gizzards of what you actually did, and you can feel better about yourself.” The psyche of bankers and the subject of executive pay will be on the examining table at this year’s gathering of the world’s power-brokers in the Swiss ski resort — as they have been in boardrooms and on newspaper front pages since the start of the worst financial crisis in 70 years. Two sessions related to compensation are scheduled for today. One panel, titled “Rethinking Compensation Models,” features Peter Weinberg , a founding partner of Perella Weinberg Partners LP, and Shumeet Banerji , chief executive officer of Booz & Co., a corporate consulting firm. Stiglitz, Matthieu Ricard , a Buddhist monk based in Nepal, and Nariman Behravesh , chief economist at IHS Global Insight in Lexington, Massachusetts, will speak at a dinner billed as “The Economics of Happiness.” ‘Demoralized Profession’ Two-thirds of Americans say they have an unfavorable view of financial executives, making bankers less popular than lawyers or members of Congress, according to a Bloomberg National Poll taken in December. More than half of those surveyed said big financial companies are only out to enrich themselves and shouldn’t have received government aid. U.S. banks that got taxpayer help through the Troubled Asset Relief Program, the $700 billion financial rescue plan passed by Congress in 2008, shouldn’t pay any bonuses, according to 75 percent of those polled. Of those, 51 percent say even banks that have repaid the government shouldn’t be rewarding their employees so soon. “This is a demoralized profession, where bankers are seeing themselves as stigmatized,” said Nigel Nicholson , a professor at the London Business School and a psychologist who advises banks on motivational techniques. “It’s gotten to a point where they don’t really want their kids going off to school saying, ‘Yeah, my dad’s a banker.’” Goldman, JPMorgan Some banks have responded to criticism about near-record compensation. Goldman Sachs Group Inc. set aside $16.2 billion to pay employees, the smallest portion of revenue since the firm went public in 1999. The New York-based bank subtracted $519 million from its compensation pool in the fourth quarter and made $500 million in charitable donations. JPMorgan Chase & Co. , the second-biggest U.S. bank by assets, slashed the proportion of revenue set aside for compensation at its investment bank in the fourth quarter to 11 percent, reducing the full-year portion to 33 percent from 62 percent in 2008. Morgan Stanley went the other way, allocating 62 percent of revenue for compensation in 2009, the highest ratio in more than a decade. With lower revenue and more employees than Goldman Sachs, it ended up paying less on average than its rival did — $235,193 compared with $498,246. Chief Executive Officer James Gorman was awarded deferred stock grants valued at about $8.6 million for 2009, when the shares rose 85 percent even as profit lagged peers. Gorman doesn’t plan to come to Davos. At New York-based Citigroup Inc. , the cash portion of employee bonuses has been capped at $100,000 and the remainder will be paid in deferred stock, Chief Financial Officer John Gerspach said. ‘Excessive’ Pay “We think excessive CEO pay is just a symptom that the board of directors is no longer doing its job,” said Richard Trumka , president of the AFL-CIO labor federation in the U.S., who was originally scheduled to be on the panel about compensation. “They’re allowing management to get off and actually control the company without any checks by them. It’s a symptom that the board needs to be brought back into place.” Trumka, 60, whose federation has 11 million members and who makes $260,781 a year, decided not to attend Davos so he could focus on the U.S. health-care debate, according to AFL-CIO spokesman Eddie Vale . Easterlin Paradox In recent months, politicians have targeted new fees and taxes at banks that got public bailouts. The U.K. said it will slap a 50 percent levy on 2009 bonuses of more than 25,000 pounds ($40,408), and France will impose a 50 percent tax on banks for bonuses paid out in 2010 that exceed 27,500 euros ($38,924). The Obama administration this month proposed charging a fee on all banks holding assets exceeding $50 billion to recoup costs for the bailout. It also called for limits on the size and trading activities of financial institutions to reduce risk-taking and prevent another financial crisis. “The objective is to have a conversation on whether executives are paid too much,” said Booz’s Banerji. “The vilification of bankers has gone too far. The bankers had a big role to play in this crisis, but as far as bringing the world to its knees, they’re good but they’re not that good.” The question of whether bigger bonuses can make bankers happier will be on the menu at the economics of happiness dinner. Behravesh, the IHS economist, cites the so-called Easterlin paradox, named for University of Southern California economics professor Richard Easterlin , who in 1974 wrote that after certain basic needs are met, happiness does not necessarily increase with wealth. Easterlin argued that income relative to those around you was more important to people than so-called absolute income. Stiglitz Report If a banker’s pay rises to $20 million from $10 million, “the increase in happiness is not twice as much as when he was making $10 million,” Behravesh said. “It’s probably less than 5 percent higher.” Stiglitz, who advocates a broader measure of gross domestic product that takes social well-being into account, studied the issue last year for French President Nicolas Sarkozy , who has said that relying on GDP to gauge the state of an economy helped trigger the financial crisis. In his report to Sarkozy, Stiglitz pointed to the inadequacy of statistics. A driver stuck in traffic would use more gasoline, increasing GDP without creating an improvement in well being, he said. Similarly, time spent doing household work can improve well-being without showing up in national output. Gross National Happiness Sarkozy, who ordered the French national statistics office , Insee, to come up with a new array of measurements, isn’t the only global leader who has questioned current metrics for wealth. Barack Obama raised the issue during his campaign for the U.S. presidency, and David Cameron , leader of the U.K.’s Conservative Party, has called for thinking about “general well-being” instead of just output. So far, some banks and at least one country, Bhutan, have used quality-of-life indicators as a measure of a nation’s success and as an alternative to GDP. Bhutan employs an economic model it calls Gross National Happiness. “After 30 years of applying this ancient principle, we’ve discovered it’s more important than gross domestic product,” former Prime Minister Kinzang Dorji said in a March 2008 interview. “GNH is a method of balancing sustainable growth against the often damaging results of rampant wealth.” The Happy Planet Index , compiled by the London-based New Economics Foundation, an independent group promoting alternative forms of economic thinking, ranks Costa Rica, the Dominican Republic and Jamaica as the countries with the highest happiness rankings among 143 countries surveyed in 2009. The U.S. ranked 114th and Zimbabwe last. The HPI takes into account factors such as life expectancy, life satisfaction and resource consumption. ‘Paid in Marbles’ Two economists at University of Pennsylvania, where Easterlin taught when he wrote his study, challenged the paradox in 2008, citing studies showing that people in richer countries were happier than the residents of poorer ones. Niall Ferguson , a professor of history at Harvard University in Cambridge, Massachusetts, and author of “The Ascent of Money: A Financial History of the World,” says the debate over whether money makes you happy remains open-ended. “It’s a closed game involving an elite group of people, and the satisfaction comes from winning the game,” Ferguson said. “Those with the most gain satisfaction from that. They could be paid in marbles, so long as they get more than the other guy.” To contact the reporters on this story: Jacqueline Simmons in Paris at jackiem@bloomberg.net ; Ian Katz in Washington at ikatz2@bloomberg.net .

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Lehman Liquidator Marsal Breaks Legal Tradition by Making Investment Bets

January 13, 2010

By Linda Sandler Jan. 13 (Bloomberg) — Bryan Marsal , whose Alvarez & Marsal firm has been paid more than $200 million so far to liquidate bankrupt Lehman Brothers Holdings Inc. , is proposing instead to invest in discounted loans on a gamble he can make more money that way for creditors and himself in the next five years. Marsal, acting as Lehman’s chief executive officer, wants to buy $3.5 billion in loans and mortgages, according to court filings. He proposes to pay $1.4 billion for the debt. A bankruptcy judge will review the proposal today in New York. “In most cases, a bankrupt company that is not planning on emerging as a going concern would see its assets liquidated,” Marsal said in an interview. “Had the assets of the Lehman estate been disposed of in a fire-sale liquidation, we would have realized maybe $10 billion to $20 billion.” By taking more time, he might recover $40 billion to $50 billion, he said. The more money Marsal brings in to Lehman’s bankrupt estate, the more its creditors can recover — and the more his New York-based restructuring firm will make in bonuses. The firm’s contract with Lehman entitles it to a bonus of 0.175 percent of all amounts above $15 billion recovered for unsecured creditors. That’s capped at 25 percent of the fees A&M gets for dismantling Lehman, according to court documents. Based on fees collected so far, the bonus cap would be $50 million. Lehman and its affiliates had $16.3 billion in cash on Nov. 30, according to a December filing in U.S. Bankruptcy Court in Manhattan. Creditors currently are claiming as much as $830 billion from the estate, Marsal said. Lehman, once the fourth-largest investment bank, said it foundered because of deteriorating subprime and structured investments. It filed the biggest U.S. bankruptcy in September 2008 with mostly unsecured debts of $613 billion. Goal: $50 Billion Marsal said he is “trying to clean up the errors and duplicates” in creditor claims and aims to raise as much as $50 billion from Lehman’s real estate, banking and other assets in the next three to five years. By buying loan participations and mortgages from Lehman’s German bank affiliate, insolvent Lehman Brothers Bankhaus, Lehman is enhancing its ability to sell the good loans as they recover, and to work out the bad loans, he said. The commercial and real estate participations range from development lending to a Japanese five-year term loan, filings show. Marsal said the investment involved “purchases of parts of the loan” that Lehman earlier shared with the affiliate, not a new venture “from scratch.” ‘Marsal’s job is not to take risks and speculate in a financial casino,” said Lynn LoPucki , a professor of bankruptcy law at the University of California, Los Angeles and Harvard. “That’s the ‘Masters of the Universe’ syndrome that got the country in trouble in the first place. The bankruptcy code doesn’t give him authority to speculate in assets with creditors’ money.” Creditors Support Lehman’s creditors support the purchase proposal, though they had initial misgivings. “It cannot be disputed that the transactions are extraordinary — both in terms of dollar amount and because liquidating debtors-in-possession are seeking authority to acquire assets,” said Lehman’s official committee of creditors in a Dec. 30 court filing. While Marsal is betting on higher prices later, creditors said the loans’ value “remains subject to market risk.” “Prior to conducting its diligence, the committee was dubious of the merits and propriety of the transaction envisioned,” they said in the filing. The bankruptcy judge will decide if the risk is worth taking, given the possible return. Marsal said he has no “crystal ball” to predict the future. “Do I know what tomorrow will bring? No. But the creditors were given the option of a fire sale or longer orderly wind-down of the assets, and they chose the latter because of the superior recovery prospects,” he said. Uranium Precedent Marsal showed his investment instincts earlier by hoarding uranium cake he found on Lehman’s books on a bet that prices for the commodity would rise. At about $40.50 per pound in April 2009, the stockpile of as much as 500,000 pounds was valued at $20 million. Uranium oxide concentrate or yellowcake was $44.50 a pound, Roswell, Georgia-based UxC Consulting Co. said in Jan. 11 report. Lehman has been raising cash at the rate of $1 billion a month by selling assets and aims to increase cash in the coming year by $500 million a month, he said. “Our hope is that the liquidity in the market will continue to improve and we can accelerate the liquidation process, including the Bankhaus loans,” Marsal said. His firm’s maximum 25 percent bonus is unusual for a liquidator, said Seton Hall University School of Law professor Stephen Lubben in Newark, New Jersey. In 2007, Alix Partners had to give up a $5 million success fee it sought on top of $25.6 million in professional charges while winding down futures- trader Refco Inc. Marsal’s company’s bonus has survived court scrutiny so far, although the firm withdrew a request for $2.5 million of it upfront, according to court filings. Fourteen months into the bankruptcy, Lehman had paid its bankruptcy advisers $533.5 million, with $202.4 million going to Alvarez & Marsal from September 2008 through Nov. 30, 2009, according to a December report in bankruptcy court. The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net ;

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Rabbi Shmuley Boteach: Mortgage Ignominy at JP Morgan Chase

January 6, 2010

In the heart of New York City, if you listen closely, you’ll hear a severe sucking sound, as if some magical and invisible vortex is pulling in all that surrounds it. Amazingly, it doesn’t swallow up your scarf, your briefcase, or muss you hair. It does, however, pluck every last dollar and cent from your wallet. It is an insatiable behemoth whose hunger can never be stilled. Shove hundreds of billions of dollars in the chasm and still it aches for more. Welcome to Wall Street, whose bankers, after nearly collapsing the global economy, have learned nothing from their greed and who have become more voracious than ever. Matt Taibbi of Rolling Stone coined last year’s most memorable journalistic phrase when he described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” But when it comes to screwing the American tax payer out of funds designed to alleviate his mortgage burden, JP Morgan Chase emerges as the great celestial black hole, sucking in every last particle of cash before it devours your very home into eternal foreclosure darkness. In 2008 JP Morgan Chase was given, according to CNN, $25 billion dollars in bailout money which was, along with Citigroup and Wells Fargo, ‘the largest amount given to any bank.’ In addition, the New York Times, in a story entitled, “Billions to Fight Foreclosure, but Few New Loans,” reported that JP Morgan Chase also participated in an Obama program begun ten months ago that distributed $75 billion in order to keep four million Americans in their homes ‘by persuading the banks to renegotiate their mortgages.’ But of one million applications filed, only 31,000 have thus far been converted to new mortgages. In New York City, lenders have offered new or trial mortgages to only three percent of those who sought relief. That’s a lot of taxpayer cash that seems to have facilitated JP Morgan Chase and others paying billions in bonuses its bankers while preventing even meager morsels from falling to those most in need. How badly does JP Morgan Chase fail at helping those whom the government’s money was meant to assist? Take just one story, reported by the New York Times on January 2, 2010. JP Morgan Chase acquired Washington Mutual, who owned the mortgage of one Jaime Smith of Lakeland, Florida. After giving her a trial adjustment that lowered her mortgage by all of $200 per month, Smith made every payment on time and submitted all required documents. She was therefore shocked to tears when she received a legal notice a few weeks later telling her that Chase has foreclosed on her home and sold it at auction for $100. The story gets only better. Who bought the house? Why, JP Morgan Chase, of course. Amid the appalling nature of JP Morgan Chase’s behavior toward her, Smith should at least be happy she ever got through to a live person at the bank who actually agreed to a modification. Most applicants are not nearly so lucky. As the Times wrote, “the lenders toss up daunting hurdles. Homeowners say they send and resend thick piles of documentation, only to be told that their papers have been misplaced, or that their pay stubs are out of date. Housing counselors dial a dozen times just to get a servicer on the phone… ‘It’s a constant Catch‐22: They never give you their name,’ said Gerald Carter, a counselor with the Parodneck Foundation in New York City, which receives city and state money to advise homeowners. ‘You call back and say, ‘No, I was talking to Bob last time,’ but Bob wouldn’t give his last name — not even an employee ID number. So you start over.’” I have, unfortunately, had my own experience with JP Morgan Chase that mirrors this exactly. I was born in Los Angeles and moved, as a boy, to Miami Beach in the wake of my parents’ divorce because there my mother had the support of her parents and brother. That’s where my siblings and I were raised and where my mother, brothers, sisters, nephews and nieces all still live. My wife and I always spoke of making Miami our permanent home where we could be close to family. Thus, in April 2006, while living in our New Jersey home where my radio and media commitments necessitated I reside, we realized our dream of purchasing a house in Miami Beach on the same block as my brother. Our kids were in Jewish day schools and one was in a special educational program, and we decided to delay our move until we could find a program that matched. In the meantime, we rented out our new home, receiving in rent only half the costs of the high mortgage but never defaulting on a single payment. By the middle of June 2009, having lost our tenant and with the economic downturn hitting especially hard, we sought a mortgage modification to make the home affordable. The home had already lost half its value. But interest rates had shrunk substantially to almost nothing, JP Morgan Chase had been given a massive bailout to assist homeowners, and we assumed it would be relatively easy to refinance and that the bank, which had received so much assistance from the American taxpayer, would welcome making our lives a touch easier in these very difficult times. Surely JP Morgan Chase would be happy to modify the loan since they were now borrowing money at significantly lower rates than before and they could still make a hefty profit even after the modification. How wrong we were. We quickly discovered that it was impossible even to get through to a living person or leave a message for them to call back. For five months we placed phone call after phone call but could not reach one person who would help us. When we did finally encounter a live human voice, we were told to send in reams of paper, which we did on numerous occasions, only to be told a few weeks later that the documents had been lost or never arrived. We finally hired a lawyer who sent the documents in multiple times. Still, JP Morgan Chase told us that they did not find our documents. Let me be clear that I never believed in the bailouts, not for we regular people and certainly not for billionaire bankers. Capitalism is going to have winners and losers and the latter, however painful, must sometimes take lumps. But what is so grossly unjust is that, having received billions of dollars to bail out regular taxpayers, banks like JP Morgan Chase decided to use the money to bail out themselves, paid billions more in bonuses, and are loath to help the very same taxpayers that rescued them. These banks are also now borrowing money at miniscule rates but refuse to alter the mortgages of those who are still stuck in very high payments. There is something cruel about a system that bails out multi‐millionaires but not average citizens who struggle to make ends meet. As a way of illustrating the obstructive nature of the bank, I took notes on a single December 2009 day of trying to get through to speak to someone at the bank. First I called the number of a written notice sent to us about our mortgage and was put on a long hold. I finally got through to Bob, who would not give his last name or employee ID number. He only said he was in Texas and could not help me because I had to speak to ‘The Imminent Default Department.’ He said he would transfer me and immediately cut me off. He made no effort to call me back although the first thing I did was give him my callback number. Having found the number for the department myself, I called and was put on hold for one hour and forty minutes. Andrea H from Jacksonville, Florida, who refused to give her last name and employee ID, immediately told me that I had to call Bob’s department back because she could not help me and I had been misinformed. I protested that I had just held on for the longest time and that Bob had told me her department would help me. Without so much as a word, she promptly hung up. Calling Bob’s number back I got through to Melissa T, who finally, after much pressure, gave her employee ID number. She agreed to look up my file. Predictably, a few minutes later she told me my documents were incomplete and I had to submit them again. I told her the name and number of my lawyer who could confirm that we had sent the documents in multiple times. She promptly hung up. Finally, in desperation I called the main number of JP Morgan Chase in NY and asked for the CEO, Jamie Dimon. I was transferred to Rosa Alderete in Texas who told me there was no direct number for the CEO’s office, which is curious since the bank is a public corporation. What was he hiding from? Could it be the nearly $20 million he took in total 2008 compensation (he smartly relinquished a monetary bonus, but more than made up for it by taking $17 million in stock awards), the year Wall Street brought America to its knees? I began to describe the hellish experiences I had had with her bank and demanded to speak to a supervisor. Refusing to take no for an answer, I was put through to Heather McLendon, a customer care analyst with the executive office. Only this time, I mentioned that I work in media and planned to write about my experiences. I was immediately transferred to her supervisor, Emma Huggins, in Florence, North Carolina. While on the phone my other office suddenly line rang with Michael Fusco of JP Morgan Chase’s press office telling me he would help me get answers. Surprise! Mentioning the media made me finally appear on the bank’s radar. Mr. Fusco, who has alone acted like a gentleman, later sent me the following statement: “We apologize for the delay and are continuing to add staff and invest in technology to better serve our customers. In 2009 alone, we hired 5,300 additional mortgage employees to handle the unprecedented volume generated by the troubled economy and housing market. This year, we offered more than 568,000 mortgage modifications to struggling homeowners, including 83,000 modifications that have already become permanent.” It sounded nice but was belied by my and so many others’ experience. I thought to myself that if I, who work in media and could thereby at least publicly expose some of their practices, could make absolutely no headway against a bank seemingly intent on obstructing any and all refinancing attempts in their desire to take my home, what chance does the average American, whose government has given this bank tens of billions of dollars to assist them with easing their mortgages, have in getting any relief? Apparently none. JP Morgan Chase is too busy paying their executives billions of dollars, all of which were facilitated by assistance they received from the taxes of hard‐working Americans who were going to lose their homes so that these guys could buy a new Ferrari. It amazes me that there’s so little public outrage. Sure, there is plenty of grumbling over the water cooler, but few of these financial giants have been publicly challenged. In addition to everything else mentioned, the government actually pays these banks $1000 for each loan modified. And still they refuse to extend relief, even as they give their employees colossal bonuses. This past June I published an article about why I was forced to file a lawsuit against Bear Stearns, another JP Morgan Chase subsidiary, the investment bank that had looked after my pension plan for many years as it rapidly deteriorated and as I was given barely any time by its chairman and my portfolio manager, Ace Greenberg. When in the course of 2008, the investment dwindled by about 40 percent and I still was given barely any time to discuss my dwindling investments with Greenberg, I decided I had to make a switch. I soon discovered that my new portfolio manager at Bear did his utmost to squeeze every last fee out of me, even as he handed the bulk of my investments over to mutual funds who charged their own fees to manage what he claimed to be doing for me. You might have thought that a bank whose gambling addiction and insatiable appetite for money brought it to the brink of bankruptcy and ended up being sold for what was initially $2 a share would have learned a lesson. But no. Aside from everything I detailed above, I called the office of CEO Jamie Dimon on multiple occasions and sent him a personal letter hoping to get just one of his lieutenants or secretaries to call me back. Not until I mentioned that I had a media platform was I deemed worthy of attention. Don’t get me wrong. Capitalism works and Wall Street has many people of high integrity and sterling reputations for honesty and philanthropy. But where, overall, is the gratitude? At least George Soros was honest enough to say that the billions of dollars of bank bonuses being paid out this year were all gifts from the government, without which so many of these banks would not even be around. Is it too much to ask that these millionaires share just a few of their government‐granted crumbs with the millions of people fighting to keep their homes? Wall Street needs a dramatic overhaul and it is for the Obama Administration, first and foremost, to demand change and reform. Using the term ‘fat‐cats’ is not enough. We don’t need name‐calling but real action. But a President who allows the heads of Goldman Sacks, Citigroup, and Morgan Stanley to disrespect him by missing a meeting (they cited fog) to which they were summoned – when they could easily have gotten into a car or train and shown the elected leader of the American people that they take him seriously – is demonstrating a kids‐glove approach that is weak and ineffective. President Obama may be the leader of the free world but he seems to be in awe of these masters of the universe. The toothlessness of the Obama approach is best captured in the quote Phillis Caldwell, chief of the Treasury Department’s Home Ownership Preservation Office and who oversees the Obama mortgage modification plan, gave to the New York Times after being asked about a lender who refused to modify customers’ mortgages. “If it is reported in The New York Times and someone chooses to audit it, that’s important,” she said. So she punted responsibility for enforcing compliance to the media. It seems as though even the Obama Administration concedes that only the shame of the press, rather than the integrity of the process or the enforcement of government, will work to bring change to the great vacuum in the heart of New York City. Rabbi Shmuley Boteach , a relationships counselor, writer, and broadcaster is the author of many books, his most recent being, “The Blessing of Enough: Rejecting Material Greed, Embracing Spiritual Hunger.” Find him on the web Shmuley.com and follow him on Twitter @RabbiShmuley.

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Leo W. Gerard: Q&A With Responsible Pension Investment Expert Thomas Croft

December 28, 2009

Leo W. Gerard: Tom, your new book, Up From Wall Street: The Responsible Investment Alternative , provides both cautionary tales for those responsible for investing workers’ pension funds and a field guide of practical assistance for institutional investors who want to use responsible investing (RI) techniques. Let’s start with the caution. Why should workers care how their pension funds are invested? Thomas Croft: As we discovered when we pulled together the original Heartland Labor/Capital Working Group in 1995, it’s incredible how much we don’t know when it comes to the investment practices and trends that affect workers’ retirement assets and other institutional savings. Before the crash, workers owned over $9 trillion in pension trusts, and, if we added it all up, working families owned $24 trillion in all institutional savings. So, steelworkers, teachers, insurance holders, students and college endowments, and the vast majority of our population have an interest in how these funds are invested. Since these funds control a majority of public stocks, we have an interest in how those corporations are governed. In terms of the general economy, we have an interest in the general direction of investment flows. The historian Kevin Phillips has written about the growing power of the financial services industry. In the 1970s, manufacturing led financial services by a two-to-one margin. By 2006, goods production had shrunk to just 12% of GDP while financial services jumped to a “swollen 20-21% of GDP.” So, f inancial sector profits , as a percent of domestic corporate profits, rose from 16% in 1973 to 41% in 2000s. That means that vast waves of our savings and assets–our money–has increasingly disappeared into a dark hole called financialization . I’ll come back to financialization. So, what it means in terms of the economy is that the country doesn’t build things anymore. Remember Allentown, and the song by Billy Joel that described the shutdown of Beth Steel? Bethlehem Steel was originally constructed to build the nation’s rail systems. And those workers helped build the skyscrapers in New York City, and they helped win WWII. After the Beth Plant was closed, a new Las Vegas Casino was to be built on the former steel site. Well, the casino couldn’t find the structural steel, at first, to build the casino. Kind of ironic, but also tragic If we can’t find enough steel to build casinos today, how in the world will we build the green jobs industries of the future? We need steel to build the Obama administration’s proposed new high-speed rail system, right? And how will the Allentowns and Homesteads and Youngstowns and Flints of this country, and all of our other rust-towns ever fully recover? We can’t depend on casino jobs, eds and meds, tourist and service jobs alone to replace the lost manufacturing jobs. We need a robust domestic manufacturing economy if we are going to benefit from the green jobs boom. As Lynn Williams once said, “The pension savings of American workers should not only guarantee good pensions. They should guarantee American workers jobs to retire from.” Beyond that, pension trusts were collectively bargained benefits that are long-term promises to workers so that they can retire with comfort and dignity. People gave up wage increases and other current benefits to pay for that promise. Before pensions, and before FDR created Social Security, older workers might be found scrounging through trash bins in the alley or living in poor houses. Along with Social Security, pension funds are part of a three-legged stool, as it’s called, so that workers can retire without the constant fear of deprivation. Do we want to go back to the days of the poor house? Gerard: You documented here, and in your earlier work, Working Capital: The Power of Labor’s Pensions , that workers’ pension money could cruelly be used to injure them. Isn’t that investment practice perverse? Croft: It’s not only perverse, it should be illegal. First, as our colleagues put it, there is a gigantic pension industrial complex that is centered on Wall Street that takes hundreds of billions of dollars in fees out of pension funds just to manage our pension funds. Then, time after time, our money have been sucked and suckered into risky financial schemes that are unsustainable, and eventually crash, destroying the hard-earned savings of tens of millions of workers and their families. As you have pointed out, before this crash, the country suffered through the savings and loans debacle and the dot-com bust, and similar made-on-Wall-Street catastrophes. When we come to learn that the CEOs and other financial geniuses who devised these crash schemes all made off with billions in CEO compensation and bonuses, then it’s apparent that we are putting the wrong kind of people in jail. I’d like to return to the concept of financialization. A large driver of financialization is the shadow bank system. The shadow banks include the large banks and investment houses that utilize un-regulated trading and derivative schemes to make immense profits. They also include the largely unregulated investment funds that invest in the private economy, such as real estate funds, the mega-private equity funds and hedge funds. These systems became so inter-related that the collapse of one sector then brought down many others. For instance, when Lehman Brothers went under, the credit default insurance plans that theoretically insured the hedge funds vanished, and the hedge fund market tanked. After AIG was nationalized, its business continued cratering due to its business selling these default swaps to Lehman and others. And the pension funds that had invested in these massive hedge funds and the AIGs, etc., then lost tons Our pension funds were siphoned into these shadow bank markets. When pensions invest in alternative investments–not stocks and bonds–there is a term for the ancillary benefits that might result from the investment. For instance, if a pension fund invests in affordable or workforce housing, the main reason is to achieve a good return on the investment. But the housing that is also built might be called a collateral benefit. In Working Capital , Dean Baker and a co-author discovered how hundreds of billions of our trust funds were invested in schemes that caused “collateral damages” for pension beneficiaries, other workers and our society. For example, our pensions were invested in off-shore sweat-shop corporations–many American owned — that not only exploited third-world workers but also then shipped cheap products back into the country, causing jobs to be ultimately lost here. And the lure of investing in the dot-coms that never had realistic business plans contributed to the last crash. There’s lots of examples, but collateral damage investing continued after the crash. We all know about the sub-prime mortgage and the housing bubble disasters. Well, CalPERS, the California public employees pension fund, along with many other state pensions, lost $1 trillion in one case alone by investing in securities backed by sub-prime mortgages. A lot of my research went into hedge funds and mega-buyout funds. Hedge funds were originally designed as an investment program for wealthy investors. Then hedge assets boomed over the last decade, growing ten-fold from 1998 to 2008 (to over $2 trillion). From 2002 to 2007, the share of dollars in hedge assets coughed up by institutional investors–including pensions, university endowments, foundations, and insurance funds, etc.–jumped from 2% to 50%. That’s a lot of money for what became, in essence, a Wall Street game to short markets and firms. And the money pouring into private equity, climbing by 2006-2007 to $301 billion, came disproportionately from institutional investors. In the case of the mega-private equity funds–which in reality looked like the large LBO funds in the 1980s—there’s ample evidence that many of the funds over-leveraged their portfolio firms, leading to firm failures and bankruptcies. Or worse, they stripped and flipped their acquisitions. That includes Simmons Bedding, a Steelworker-represented company that just filed for bankruptcy and closed plants. That includes Mervyn’s, Linens ‘n Things, and many others. The money that the Boston mega-fund used to destroy Simmons came from pension funds. Why? In addition, they have been privatizing many our longest-standing companies–firms that often had good labor relations. These new Wall Street barons–like KKR, Blackstone Partners and Apollo Partners–now own many of the largest employers in America and Europe; in essence, they have achieved a new stage in corporate ownership. What does that mean for those workers, communities and our economies? We should be investing our money to build up companies, not tear them down. They’ve also damaged many of our civic institutions. I don’t have to look far to see the damage. Here in Pittsburgh, CMU and the University of Pittsburgh recently filed fraud lawsuits against Westwood Capital –ostensibly a hedge fund– after their $114 million investment vanished. And the Pennsylvania public pension fund lost an additional $2.5 billion (than they would have otherwise, according to some estimates) by betting on an extremely large hedge fund gamble (almost 1/3 of total portfolio). Colleges, states and municipal pension funds are cash-strapped. That’s no reason to bet the farm. Worse, Congress and the White House have not passed meaningful financial reforms that might have prevented or moderated the 2008 crash and the ones before it. The author Tom Wolfe dubbed these new corporate owners the “New Masters of the Universe.” I call them the Shadow Bank Robbers . Not only should government and institutional investors force transparency, reasonable fees and prohibitions against practices that harm workers, companies and communities, we should re-regulate, bring back the New Deal protections that were discarded. And it wouldn’t hurt if we put the shadow bank robbers behind bars. Bernie Madoff got caught running what he called a hedge fund; thousands of uber -financiers are making off with billions running an even larger ponzi scheme that is perfectly legal. It’s crack finance, and it should be illegal. Gerard: What struck me in your book is these two sentences: “This book tells the story of a group of responsible enterprise and real estate investors who are profitably investing pension and similar assets in good jobs, affordable housing, and a green future. This book shows how workers’ capital, endowments, and other institutional investors, through responsible investment principles, can do well and do good at the same time.” My emphasis added because I think most people would not believe you could do both. They would think that if you made socially-correct investments, you would lose money. What did your research show? Croft: When I started writing the book, I traveled to towns and cities all over North America. I came to know some remarkable and innovative stewards of our capital…worker-friendly investors who have built projects and invested in ventures and companies in ways that make you proud. These investors were managing about $35 billion. And, in fund after fund, investment after investment, these responsible fund managers have been–for the most part–financially successful. None of the real estate funds that I surveyed in this field guide were investing in sub-prime scams. And none of the private enterprise investors were investing, as far as I know, in the LBO over-leveraging strategies that failed so dramatically. So, the book shows you can do well and do good. How? They’re making honest profits (for our pension funds) but also treating workers with respect, investing in affordable and multi-family housing, advanced manufacturing and green jobs. In Pittsburgh, for example, pensions invested some $3/4 billion in worker-friendly real estate funds that successfully built multi-family housing, revitalized brownfields and re-built new commercial workplaces all over the region. And worker-friendly enterprise funds have, in fact, saved steelworker jobs of two manufacturing firms that were bankrupt. So, thousands of jobs were created or saved just in this area. And these investments were the tip of the iceberg, as I’m sure many of the large redevelopment investors in the region were capitalized by institutional investors. So, my book shows that worker-friendly investment funds have indeed had singular and significant impacts on the regions, economic sectors, companies and projects in which they invest. Most of the funds met or bested their respective investment benchmarks. The portfolio investments showcased in the field guide yielded not just good returns-on-investment, but also collateral benefits for working people and the environment. Gerard: So that is terrific news for workers. You’ve given me the big numbers. In the book, though, you provide specific examples where these investments worked out both for the investors and workers. Would you give one here? Croft: There are so many important examples. The AFL-CIO Investment Trusts worked on efforts to rebuild New Orleans, including a factory making sustainable manufactured housing. The MEPT Fund rebuilt a burned down hospital on the north tip of Roosevelt Island, New York, and converted it into an award-winning green housing community with 500 units, plus a daycare center and essential amenities. The KPS Capital Partners Fund restructured a bankrupt transportation company with factories in towns like St. Cloud and Crookston, Minnesota, and Winnipeg, Manitoba, now employing 1,800 union workers making hybrid busses. And, let’s take a really big case that helped Steelworkers. On May 14, 1999, in the largest union-led buyout in the country since 1994, KPS Special Situations Fund partnered with other investors and a minority ESOP formed by employees to buy a pulp and paper mill, an extruding plant, and five converting plants from Champion International (for $200 million), which was distressed. The new company, Blue Ridge Paper Products, was launched with 2,200 new employee owners. Blue Ridge is a leading integrated manufacturer of liquid packaging, envelope paper and coated bleachboard used in food service packaging. The Company also produces specialty uncoated and extrusion coated papers. The Company had eight manufacturing facilities located in seven states, including the paper mill in Canton, North Carolina, the extruding mill in Waynesville, North Carolina, and in five Dairy Pak converting plants in Georgia, Iowa, Texas, New Jersey & Olmsted Falls, Ohio. Blue Ridge subsequently acquired another Dairy Pak plant in Richmond, Virginia from MeadWestvaco. And, this company became greener. The Canton mill became a charter member of the EPA National Achievement Track Program in 1999. Due to a $400 million investment in new technology over a decade, the facility is one of the most efficient and environmentally-friendly pulp mills in the world. In July 2007, Blue Ridge was sold to Packaging Holdings Corp. KPS returned approximately 2.5 times its invested capital to its investors–including pension funds– and employee-stockholders had approximately $30 million of cash deposited into their ESOP accounts. What a huge success! Gerard: Let me press you a little bit, though, because everyone will be asking this question when pension funds have suffered so badly during this downturn in the economy. Would responsible investing have made a differenc Croft : In my travels, I watched as great states and communities buckled from the weight of the Great Recession: Downstate New York. The auto towns of the Great Lakes states. The strapped communities of California. From years of working in Pennsylvania, I’ve come to understand what happens when investment markets red-line communities. Boom towns go bust, and rust towns take their place. When the economy falls as rapidly as it did, most sectors of the economy get dragged down. This was the largest market crash and recession since the 1930s. So, many of the investments by even good investors were bound to be weighed down. But my point has been that irresponsible investment practices–using our money–were a large factor in the crash, as they have been over and over. Some of the worker-friendly investors will inevitably suffer because the firms they’ve invested in are now having a hard time. Some of the real estate funds have suffered redemptions from pension funds having to re-balance their assets (since pension funds lost so much in the general markets). But as I said, the responsible funds did more due diligence, so their investments were not as risky. If they’ve had trouble, they’ll likely recover quickly. And some funds have actually done pretty well since the downturn started. So, we also know that it’s time that our assets are put to work for the long-term, and not in ways to destroy our economy. With the Obama Administration’s help and guarantees, for instance, we could co-invest real money to re-build our cities and towns, and re-grow and re-shape this economy. And our money should be invested so that markets serve society–community, in other words– and not the other way around. We indeed have the capacity to construct infrastructure, reinvigorate our cities, and create those highly-anticipated green jobs for our children. We just have to re-claim control of our money. Gerard: Well, let’s talk for a minute about California Public Employees Retirement System, then, the nation’s largest pension fund. CalPERS did engage in some responsible investing, as noted in your book. But it has suffered terribly and is expected to fire some of its real estate investment managers. Is that simply a result of the market and could not have been avoided? Or should they really, in your estimation, have been doing something else. Croft: For all the things that CalPERS did right in terms of double-bottom line investing, as it’s called–investing in green housing and buildings, urban investments, and clean technology– it may have been overly aggressive in alternative investments. And CalPERS was caught up in the sub-prime and real estate bubble markets. CalPERS is, in fact, suing Moody’s and other ratings agencies because the pension fund claims that it did not know that a $1 trillion investment in securities (that I mentioned earlier) were in fact backed by sub-prime mortgages. And some of their high profile investments in large real estate projects and overly-risky private equity have been slammed. But CalPERS has recovered to the $200 billion level, and, given the fiscal crisis in California, we’re all hopeful that recovery will continue. Some of my labor friends are now concerned that CalPERS is going back into the “dark pool,” doubling down in hedge funds and the mega-LBO funds to make up for the losses. Gerard: What kind of response have you gotten to the book and what do you hope will happen as a result. Croft: It’s really been great. We’ve started to get a lot of coverage, and the book is making the rounds. I’d like to see Heartland be able to create an ongoing “Center for Responsible Capital” so that we can continue to push responsible investments and act as a watchdog for union members and communities against investment abuses. Your earlier support and that of the union has allowed me to write this book. And, your leadership in capital strategies, rebuilding manufacturing, and kicking off the green economy has provided a lot of inspiration for the book, and we actually quoted you a couple of times–simply because it could not have been stated better. We’ve now come to understand that responsible investors have been, profitably, creating hundreds of thousands of good jobs, building hundreds of thousands of living spaces, and helping to rebuild cities and communities. So, as you said, our capital stewards can indeed invest in a responsible future–our future, and that of our children–and invest in a vision of the economy that’s more humane and sustainable. *** Thomas Croft is an international expert on innovative capital strategies and jobs-oriented economic revitalization policies. He serves as executive director of the Steel Valley Authority , a regional economic development organization for Pittsburgh and 11 municipalities in the Mon Valley. The authority uses creative techniques to preserve and revitalize companies in crisis. Croft also is director of the Heartland Network , a working group of responsible pension investment advocates in the U.S. and Canada. Croft was commissioned by the Heinz Endowments to write Up From Wall Street .

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Jill Schlesinger: Fat Cat Bankers In A Fog

December 15, 2009

Yesterday’s meeting between President Obama and his favorite ” fat cat” bankers was one big show . The President was nonplussed that three of the execs couldn’t figure out how to actually make it to the meeting in person (any of these masters of the universe ever hear of Amtrak ?). Lloyd Blankfein of Goldman Sachs , John Mack of Morgan Stanley and Richard Parsons of Citigroup were stuck in fog, preventing them from making the White House con fab. What a perfect metaphor–bankers really do seem to be stuck in a fog these days. I don’t place all of the blame for the financial crisis; problems with mortgage modification ; or lack of small business lending squarely on the shoulders of Wall Street banks. They had lots of help from current and past members of Congress, previous Administrations, irresponsible borrowers and regulators. My problem is that in the aftermath of the crisis, bankers seem tone deaf. They have short memories and can’t quite understand why the public is so mad that they are making boatloads of money again after taxpayers bailed them out. As Americans struggle with stubbornly high unemployment , which can wreak both financial and emotional turmoil on families, they’re confronted with headlines of TARP repayments , mega-bonuses and massive lobbying efforts aimed at curtailing regulatory reform. While everyone wants a fully functioning financial system, we also want to see broad based participation in the recovery process. Until that occurs, fat cat bankers would be wise to keep those purrs down. Image by Flickr User Nesster , CC 2.0

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Heads Of Financial Crisis Commission Call Wall Street Bonuses Unjustifiable, Vow To Investigate (EXCLUSIVE)

December 8, 2009

The chair and vice chair of the federal commission charged with investigating the causes of the financial crisis had harsh words on Tuesday for the Wall Street banks that are preparing to grant their executives enormous bonuses. And they said that the huge profits some banks have made as a direct result of a massive infusion of taxpayer funds are going to be part of the panel’s investigation. “This dichotomy of record profits and bonuses on Wall Street while you have real unemployment of 15 percent-plus in this country is very striking,” Financial Crisis Inquiry Commission Chairman Phil Angelides said during a visit to The Huffington Post’s Washington bureau. “Our primary mission is not to re-litigate TARP, but I do think in examining the crisis it’s legitimate to look at where things stand today, and we’re going to do that.” Angelides, a Democrat and former California state treasurer, and the commission’s vice chair, former longtime Republican Congressman Bill Thomas, said the commission will produce a report on the causes of the crisis by next December. But in the meantime, they are plenty frustrated by what’s happening on Wall Street. “I think a legitimate question is: the bonuses are based on what? The ability to borrow cheap? And the ability to make money on that spread?” Angelides asked. The Federal Reserve’s near-zero borrowing rate has enabled banks to borrow for basically nothing yet lend it out at normal rates to households and businesses, pocketing the difference. “I’m not running those businesses, but the bonuses are offensive to me and to a broad segment of the American public,” he said. Angelides added: “Our job is to examine the meltdown. From a personal viewpoint, this disconnect between how Americans are faring and what’s happening on Wall Street with respect to bonuses is extraordinarily disconcerting.” Thomas lashed out at the Wall Street titans he mockingly called the “Masters of the Universe,” saying: “I am absolutely outraged at people who took government money, went to bed that night, woke up, and [then could say] that they didn’t need to take it.” He said the bailout has had the effect of encouraging the same kind of behavior that got the country into its current economic mess. “And now they’re making a lot of money, and they’re going to go back to the same old behavior that encouraged people to take inordinate risks with other people’s money,” he said. “What difference does it make if it comes from private [funds] or taxpayers? It’s money that can be fed into the mill that produced bonuses for me,” he said channeling a Wall Streeter. Angelides said the bonuses are “unjustifiably wrong,” to which Thomas quickly added, “And dumb! I mean, why do you draw attention to yourself right now?” he asked. Angelides said the banks benefited enormously from government intervention, including the ability to borrow cheaply and the deals they got in the taxpayer-funded bailout known as TARP: “The deal that those banks got was a stunning deal, un-gettable in the private sector,” he said. “The notion that a corporation could be on its knees, about to go to bankruptcy, and get money that they could effectively borrow at seven or eight percent is, you know, it’s just nothing that any private equity firm would have done, that any private source of capital would have done. And so I think it’s fair to say the American taxpayer enabled many of these companies to survive and be in the position they’re in today — and that’s not unnoticed.” Private investors, he said, would have wanted more like 30 percent interest. “Bank of America — they took $45 billion, right?” Angelides said. “They’re talking about a payoff. The government is saying they’re going to make two-and-a-half billion [in profit]. Annualized, that’s probably seven to eight percent interest.” To which Angelides exclaimed, “What a deal!”

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Have Fewer Headaches, More Sex: Tips From the Armchair Economist: Books

November 25, 2009

Review by James Pressley Nov. 25 (Bloomberg) — Steven E. Landsburg’s latest book of economic brain teasers resembles one of those Hanayama metal puzzles that you’re supposed to pull apart: They drive me crazy, yet I can’t put them down. Landsburg is the University of Rochester professor who brought us “The Armchair Economist” and “More Sex Is Safer Sex.” He put the pop in popular economics long before “Freakonomics” came along. In “ The Big Questions ,” he attempts something more ambitious and slightly less flip: to sum up his ideas about “the nature of reality, the basis of knowledge and the foundations of ethics.” Be prepared for a diverting journey into the maze of one man’s mind, a supply-and-demand version of the movie “Being John Malkovich .” Written as a chain of essays, the book dips into physics, mathematics and economics to answer the eternal questions of philosophy: Where did the universe come from? How do we know right from wrong? Why does my computer hate me? (Answer: “Your computer doesn’t hate you; it just seems that way when you run Microsoft products.”) The alpha and the omega of existence for this homo economicus all boils down to mathematics. I count, therefore I am? No, Landsburg means something much more fundamental. “I believe that everything — you, your consciousness, and the Universe that you and I inhabit — exists because everything is a mathematical structure,” he writes. Peano’s Axioms This assertion leads by degrees into discussions about Intelligent Design, Giuseppe Peano’s axioms, Kurt Goedel’s incompleteness theorem , and all manner of stuff that Landsburg can’t explain “without more mathematics than you want to see.” Landsburg can get a tad supercilious for a guy who’s often just rambling on, as he puts it, “not to make any particular point but because it seemed to fit in and I think it’s interesting.” Yet he kept me coming back for more, thanks to his wit and crisp explanations of why we see color, how to identify a spy, and what he calls the Economist’s Golden Rule, which bases decisions on costs and benefits. “Like more traditional versions of the Golden Rule, it enjoins you to love your neighbor as yourself,” he explains. “A cost is a cost and a benefit is a benefit, whether they’re felt by you, your neighbor, or a stranger in Timbuktu.” Quantum Mechanics Along the way, he explains quantum mechanics and reminds us of why “more sex is safer sex.” When the promiscuous few dominate the market for one-night stands, it raises the risk of infection for everyone, the argument goes. So if relatively chaste people would just loosen up and have a few more sexual partners, HIV would spread more slowly, Landsburg says, drawing on research by economist Michael Kremer. Whoever goes home with the relative prude is “destined for a night of safe sex,” Landsburg writes. “They’re getting even luckier than they realize.” Landsburg is an atheist, and he goes to great lengths to argue that believers are deluded. He doesn’t really define what he means by the word “God,” though his remarks suggest that he views deity as an anthropomorphic Zeus with a William Blake beard slinging thunderbolts from the heavens. If so, I have news for him: Many devout people see God as a Principle, not a Person. In that sense, his belief in the primacy of mathematics makes him more religious than he thinks. Headache Cure The convenient thing about being irreligious is that it frees you to think the unthinkable. Hence, Landsburg revels in discussing a paper in which a philosopher posed this scenario: “The Headache Problem: A billion people are experiencing fairly minor headaches, which will continue for another hour unless an innocent person is killed, in which case they will cease immediately. Is it okay to kill that innocent person?” The obvious answer is yes, Landsburg says. Here’s why: Virtually no one will pay $1 to avoid a one-in-a-billion chance of death. Yet most people would pay $1 to cure a headache. Ergo, most people “think a headache is worse than a one-in-a-billion chance of death,” he says. Killing one person would “replace your headache with a one-in-a-billion chance of death.” Sophistry is the word that comes to mind. Unless, of course, Landsburg is willing to sacrifice his first-born child on the altar of headaches. “The Big Questions: Tackling the Problems of Philosophy With Ideas From Mathematics, Economics and Physics” is from Free Press (267 pages, $26). To buy this book in North America, click here . ( James Pressley writes for Bloomberg News. The opinions expressed are his own.) To contact the writer on the story: James Pressley in Brussels at jpressley@bloomberg.net .

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CERN Starts Particle Collider After 14-Month Closure From Electrical Fault

November 22, 2009

By Paul Verschuur Nov. 21 (Bloomberg) — The world’s biggest particle collider resumed operations after an electrical fault caused a 14-month delay in the search for the universe’s missing mass. Scientists at the Large Hadron Collider, a 27-kilometer (17-mile) circuit that runs under the Swiss-French border near Geneva, succeeded in setting up a clockwise circulating beam at 10 p.m. last night, the European Organization for Nuclear Research said in an e-mailed statement late yesterday. A faulty electrical connection forced scientists to turn off the 6 billion Swiss-franc ($5.9 billion) collider days after it started on Sept. 10, 2008, according to the agency, known by its French acronym, CERN. The operating temperature of minus 271 degrees Celsius (minus 456 degrees Fahrenheit) was reached again last month, it said. “We’ve still got some way to go before physics can begin, but with this milestone we’re well on the way,” CERN Director General Rolf Heuer said in the statement. First results are expected next year, CERN said. The LHC will give physicists a chance to explore the makeup of some of the matter that went missing 13.7 billion years ago in the “Big Bang.” The facility creates an environment that resembles conditions one-thousandth of a millionth of a second after the creation of all of the universe’s building matter. “The LHC is a far better understood machine than it was a year ago,” CERN’s Director for Accelerators, Steve Myers, said in the statement. “We’ve learned from our experience, and engineered the technology that allows us to move on.” To contact the reporter on this story: Paul Verschuur in Zurich pverschuur@bloomberg.net

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Jill Schlesinger: Gasparino: The SEC is "INEPT"

November 16, 2009

Here’s my interview with Charlie Gasparino , author of ” The Sellout “. In addition to calling the SEC “inept,” watch to the end when he describes Wall Street CEO’s. Can you guess which of the former Masters of the Universe is: “The Iconoclast,” “Nasty,” “Nastier,” “Smart,” “Twerp-ish” “a Man’s man” and “King Lear”?!?

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Andy Stern: Goldman Sachs: It’s Time to Put Country Before Company

November 16, 2009

I love the America where women like Maria Guerra, a janitor from Chicago, who worked hard her whole life — paid her taxes, saved her money — could not only purchase a home for herself but also could lend her brother money and co-sign his loan so he too could buy a home for his family. Unfortunately, something has happened to the America we all love. After our economy collapsed, Maria’s brother was laid off and a few weeks ago his unemployment benefits ran out. The bank refused to rework the loan, he now faces foreclosure, and Maria is worried she may face the same fate. Sadly, for Maria and the 14,000 other hardworking, taxpaying Americans who will lose their home today, the American dream has become an American nightmare. Where were Goldman Sachs CEO Lloyd Blankfein and the rest of the masters of the universe when Maria’s family needed help? Out to lunch and out of touch — that’s where. They were off gorging themselves on billions of dollars in bonuses made possible by Maria and the rest of the hardworking Americans who contributed our tax dollars to rescue Goldman Sachs and the economy. That’s not the America we want and it’s not the America we need. It’s time for those of us who love America to stand up and take action to end this nightmare created by Wall Street and the big banks . That’s why I joined thousands of Americans in Chicago last month to launch a national campaign to start holding Wall Street accountable for their obsession with greed. And that’s why I’m joining hundreds of taxpayers outside of Goldman Sachs’ Washington, D.C. headquarters today . We’re taking to the streets because it seems as if companies like Goldman Sachs love their company more than their country. Goldman Sachs seems to salute no flag but their own corporate logo. And in the name of maximizing profits, and their huge bonuses, they will foreclose on our homes and take jobs from our families while short selling America without a second thought. And it just seems to be getting worse. Goldman Sachs has become so callous and so greedy that they just issued a report on health care reform recommending that the best thing for insurance companies is no reform at all. Does Goldman Sachs understand what nothing meant to Charlie Lang from Connecticut whose mother was diagnosed with lung cancer? The doctors told Charlie and his mother that they wanted to remove her tumor so that she would have a chance of surviving. But after the insurance company refused to pay for the operation and the family could not raise the money, Charlie’s mother died. I want to ask Lloyd Blankfein: Is the wealth of your company more important than Charlie’s mom and the health of our country? Is this really the “God’s work” that you claim you are carrying out? It’s not God’s work to kick families out into the street. It’s not God’s work to leave people without health insurance. It is not God’s work to put greed over human need and use other people’s money to pay yourselves huge bonuses. When we converge on Goldman Sachs’ office today, we will demand that Goldman place their expected $23 billion in bonus money into a fund to help Americans keep their homes in this time of need. We will ask Goldman to put country over company and to truly be their brothers’ and sisters’ keeper . Those 23 billion dollars could prevent every single expected foreclosure in America in 2010. That would truly be God’s work — and the American way. That is the America we want. And we mustn’t give up until that is the America that we get. Will you join me?

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Goldman Sachs CEO Lloyd Blankfein: "I’m Doing God’s Work."

November 7, 2009

Goldman’s reputation is suddenly as toxic as the credit default swaps and other inexplicably exotic financial instruments it used to buy with glee. That’s bad for the one thing it values more than anything else: business. Being the prime target for popular and political outrage could put Goldman first in line for draconian new regulation. So it has, reluctantly, decided that the time has come to speak out, to fight its corner. That’s how, on one of those bright autumnal New York mornings when anything seems possible — even an invitation to break bread with the masters of the universe — I find myself walking past the security guard who held up Michael Moore and into the building with no name.

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Arianna Huffington: Sunday Roundup

October 24, 2009

This week, Obama’s pay czar announced he’d be slashing executive pay at seven of the biggest recipients of bailout billions. So it’s no surprise that many of Wall Street’s Masters of the Universe didn’t turn up at the New York fundraisers President Obama spoke at — choosing instead to attend a party thrown to toast the release of Too Big Too Fail , Andrew Ross Sorkin’s blow-by-blow of the meltdown. There, indulging in cocktails and finger food, were many of the central players, including Jamie Dimon of JP Morgan and John Mack of Morgan Stanley. Which is kind of like Hannibal Lecter showing up for the opening of Silence of the Lambs . Perhaps they take comfort in Sorkin’s assessment that when it comes to reforming Wall Street “the Obama administration seems to have moved on to other priorities.” I need a drink.

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Robert Lenzner: StreetTalk — Weak Economy, Bull Market: A Cautionary Tale

October 20, 2009

Stocks are supercharging ahead, while home prices are stalled and likely to dip further. Asset prices in general are rising far above the economic reality that would rationally support them. Main Street Americans are struggling to pay their bills, while Wall Street executives are getting record bonuses. Two Americas; trust me it’s more than just a campaign slogan. It’s the cold hard reality. Look at the dichotomy another way. The FHA is handing out mortgages on the basis of a 3.5% down payment. That’s leverage approaching 30-to-1, the kind that brought down Bear Stearns and Lehman Brothers . About 15 million people are competing for 2.5 million job openings. The amount of time people are looking for a job has hit a new record high. Debt to GDP is still high. Trillions in household wealth have been lost. A bull market in a feeble recovery cannot last forever. At the Economist’s Buttonwood Conference this month, some masters of the universe sounded like serious worrywarts. Billionaire investor George Soros raised the specter of the U.S becoming another Japan with no growth and low interest rates, despite the stimulus program. The theme of my most recent StreetTalk column for Forbes.com, A Bull Market In A Weak Economy Doesn’t Last , was this divide between the

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Galleon’s Rajaratnam Charged in Biggest Hedge Scheme

October 16, 2009

By David Glovin, Katherine Burton and David Scheer Oct. 16 (Bloomberg) — Raj Rajaratnam , the billionaire founder of Galleon Group, and ex-directors at a Bear Stearns Cos. hedge fund were among six people charged in a $20 million insider trading scheme federal prosecutors called the biggest ever involving hedge funds. Also accused were Rajiv Goel , who worked at Intel Capital as a director in strategic investments, Anil Kumar, who worked as a director at McKinsey & Co., and IBM Corp. executive Robert Moffat . The former officials at Bear Stearns Asset Management are Danielle Chiesi and Mark Kurland , who were affiliated with the firm’s New Castle Partners, which managed about $1 billion. “The defendants operated in a world of, you scratch my back, I’ll scratch your back,” U.S. Attorney Preet Bharara in Manhattan said at a press conference today. “Greed, sometimes, is not good.” The case is the largest ever hedge fund insider trading case, Bharara said. It’s the first time wiretaps have been used to target insider trading, signalling the government will now use the same tools against Wall Street that it employs in organized crime and drug cases, he said. Bharara called the case “unprecedented.” Tips came from insiders and others at hedge funds, investor relations firms, and companies including Intel, IBM, McKinsey, and companies whose shares were traded in the scheme, Bharara said. The prosecutor said the investigation was continuing and declined to say whether others would be charged. Plane Ticket Rajaratnam earned between $17 million and $18 million from the fraud, Bharara said. In recent days, he may have been aware he was under investigation. According to one of two criminal complaints filed today, he told an acquaintance that he believed a former Galleon employee was wearing a “wire.” Rajaratnam bought a plane ticket on Oct. 14 for travel to London today, the complaint says. “Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment,” the firm said in a statement. “We had no knowledge of the investigation before it was made public and we intend to cooperate fully with the relevant authorities. Galleon continues to operate and is highly liquid.” The Securities and Exchange Commission sued Rajaratnam for engaging in insider trading. The SEC’s complaint said that Rajaratnam didn’t deserve his reputation for “ genius trading strategies” or “astute study of company fundamentals or marketplace trends.” Master of the Rolodex “Raj Rajaratnam is not a master of the universe, but rather a master of the Rolodex,” Robert Khuzami , director of enforcement at the SEC, said at the press conference. “He cultivated a network of high-ranking corporate executives and insiders, and then tapped into this ring to obtain confidential details about quarterly earnings and takeover activity.” Rajaratnam, 52, a graduate of the University of Pennsylvania’s Wharton School, was identified this year by Forbes as the 559th richest person in the world, with a net worth of $1.3 billion. Galleon Partners is based in Manhattan and has offices in London, Singapore, Mumbai, and Menlo Park, California. He faces 13 fraud and conspiracy counts, many of which carry 20-year maximum sentences. Rajaratnam lives in New York City, as do Chiesi, 43, and Kurland, 60. Goel is 51 and lives in Los Altos, California. Kumar is also 51 and lives in Santa Clara, California. Moffat, 53, lives in Ridgefield, Connecticut. Arrested Five of the defendants were arrested in the New York City area and are to appear today in Manhattan court today. Goel was arrested in California. “My client is shocked and distraught,” said Kerry Lawrence , Moffat’s lawyer, in an interview in court today. He said his client learned only this morning of the U.S. investigation. The six are charged with using insider information in two overlapping schemes to trade in shares of companies including Google Inc., Polycom Inc., Hilton Hotels Corp. and Advanced Micro Devices Inc., according to the complaints. Prosecutors said they’ve been investigating the case since at least November 2007, when a person they don’t name in the complaint began meeting with agents of the Federal Bureau of Investigation. The person, who has pleaded guilty and is cooperating with authorities, had used inside information to trade securities and tipped Rajaratnam since 2006, prosecutors said. The person, who had sought a job at Galleon in 2005, helped prosecutors by “making consensual recordings of four telephone conversations” with Rajaratnam, the complaint says. Listening to Landlines Authorities say they have other taped conversations of the billionaire as well. On March 7, 2008, the government got court approval to intercept a cell phone Rajaratnam used, according to one of the complaints. Prosecutors said they’ve also been listening to two of Chiesi’s landlines since August 2008. “A number of the calls intercepted over the wiretap consist of Rajaratnam either providing, receiving, or seeking material nonpublic information about various publicly traded companies,” a complaint says. According to one of the complaints, Chiesi got secret tips from an unidentified person at Akamai Technologies Inc. and from Moffat, who passed along information about IBM, Sun Microsystems Inc., and Advanced Micro Devices Inc. “Chiesi shared certain of this inside information with Kurland,” and they bought securities in the companies, the complaint says. Chiesi also passed along tips to Rajaratnam, “who in turn provided Chiesi with inside information regarding AMD and other publicly traded companies,” prosecutors said in the complaint. Authorities said that Chiesi made illegal insider trades with accounts affiliated with New Castle. Like Martha Stewart The complaint quotes from a conversation on or about August 27, 2008, between Chiesi and a co-conspirator not named as a defendant. “You just gotta trust me on this,” Chiesi is quoted as saying. “Here’s how scared I am about what I’m gonna tell you on AMD.” Chiesi and the co-conspirator talk a little more and Chiesi says, “I swear to you in front of God, you put me in jail if you talk.” Still later, she’s quoted as saying “I’m dead if this leaks. I really am _ and my career is over. I’ll be like Martha f—ing Stewart.” The complaint quotes from conversations between Chiesi and Rajaratnam, including a July 24, 2008, discussion that they had after she spoke to the Akamai executive. That day, Akamai stock had closed at $32.18. Keep Shorting “Akamai,” she told Rajaratnam, according to the complaint. “They’re gonna guide down. I just got a call from my guy.” After Chiesi said that the company would bring the stock down to $25 a share, Rajaratnam replied that he would be “radio silent” and asked when Akamai would report, the complaint says. “Just keep shorting every day,” Chiesi responded, the complaint says. “We got a lot of days.” The complaint says Moffat tipped Chiesi about an AMD venture in Abu Dhabi in which IBM participated, and she told Rajaratnam about that, too. “The firm was distressed to learn that Mr. Kumar was arrested and is looking into the matter urgently,” said McKinsey spokeswoman Yolande Daeninck . Goel, who had been working in the treasury of Intel Corp., the world’s biggest chipmaker, “has been placed on administrative leave as we look into this matter,” said Chuck Mulloy, an Intel spokesman. The company has started its own investigation and will cooperate if contacted by the authorities, he said. IBM spokesmen Ian Colley and Ed Barbini did not immediately respond to phone and e-mail messages seeking comment. Controlling Stake Galleon, which started as a hedge fund firm focusing on technology and health-care stocks, grew to more than $5 billion in 2001 from its start in January 1997. Rajaratnam founded Galleon with three other colleagues from Needham & Co. an investment bank that focused on technology and health-care companies. None of the other co-founders are still at the firm, according to a Galleon marketing document. Galleon Management, the company’s advisory business, oversaw more than $2.6 billion at the end of March, mostly on behalf of hedge funds, according to regulatory filings it submitted to the SEC at the time. Rajaratnam held a 50 percent to 75 percent controlling stake in the advisory, the documents show. The cases are U.S. v. Rajaratnam, 09-02306, and U.S. v. Chiesi, 09-mag-2307, U.S. District Court, Southern District of New York (Manhattan). To contact the reporter on this story: David Glovin in New York federal court at dglovin@bloomberg.net , and David Scheer at David Scheer in New York at dscheer@bloomberg.net .

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Russ Baker: Something to Sleep On

October 6, 2009

The New York Times lead story yesterday describes how a series of private equity firms managed to repeatedly flip the venerable Simmons mattress company, earning themselves huge profits while the company became increasingly mired in debt and ultimately forced into bankruptcy and massive layoffs, with ordinary investors, employees, and company retirees taking a huge hit. I thought it would be worthwhile to have a further look at some of the players cited briefly in the article, so here is a bit more on the private equity kingpin Thomas H. Lee, typical of the masters of the universe who so affect our lives yet generally fly below the radar. First, the Times “nut graph”: Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money. For many of the company’s investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year. But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise. Here’s what Forbes had to say about Mr. Lee ( who was involved with acquiring Simmons but left his own firm prior to the unraveling), listed as #717 on its 2007 roster of “The World’s Billionaires”: Fortune: self made Source: leveraged buyouts Net Worth: $1.4 bil Marital Status: married, 5 children Education: Harvard University, Master of Business Administration Soft-spoken buyout titan had a tough fall in 2005: After taking Warner Music public with Edgar Bronfman Jr., flipped commodities outfit Refco. Refco quickly fell apart; then-chief executive Phillip Bennett charged with securities fraud, conspiracy. Company’s assets bought up by London hedge fund Man Group. Lee claims he personally lost only $2 million. Harvard grad started investing with $150,000 inheritance 1974. Greatest hit: Snapple, bought for $135 million 1992, sold to Quaker Oats for $1.7 billion in 1994. Today invested in Dunkin’ Donuts, Michael Foods. Left Thomas H. Lee Partners to start Thomas H. Lee Equity Partners last March; believed to have been forced out by partners, he says he wants a fresh start. Now leveraging connections with hedge fund managers with his Blue Star fund-of-funds outfit. How are people like Lee able to turn a $150,000 inheritance into $1.4 billion? Some of it is smarts, and hard work, and good information. But if the practices themselves might otherwise face the wrath of the people’s representatives, it helps to have them on your side. Proving that the GOP is hardly the sole party of the moneyed, Lee’s donations over the years seem to have been almost exclusively to Democrats–including many senators and House members. Among his most recent contributions are between $100,001 and $250,000 to the William J. Clinton Foundation, $28,500 to the Democratic Senatorial Campaign Committee, and the maximum of $4,600 to the Obama Victory Fund. Though comparatively small sums for a wealthy man, they buy an awful lot of good will. So, too, does anything else that improves one’s odor and influence. Lee, for example, sits on many civic and charitable boards, among them Lincoln Center for the Performing Arts, The Museum of Modern Art, NYU Medical Center, The Rockefeller University and Whitney Museum of American Art, and the Executive Committee for Harvard University’s Committee on University Resources. The Times article mentions the sense of betrayal felt by a longtime Simmons employee who has been laid off after 22 years, with two months’ severance. But how often do we get a detailed look at the folks whose actions cause the pain? Very seldom indeed.

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`Master of Light’ Kao, Imaging Pioneers Boyle, Smith Win Nobel in Physics

October 6, 2009

By Michelle Fay Cortez and Trista Kelley Oct. 6 (Bloomberg) — Three scientists whose work gave birth to fiber-optic networks and digital cameras won this year’s Nobel Prize in Physics. Charles K. Kao , who worked at Standard Telecommunications Laboratories in Harlow, U.K., and taught at the Chinese University in Hong Kong, will share the 10 million-krona ($1.4 million) prize with Willard S. Boyle and George E. Smith , formerly of Bell Laboratories in Murray Hill, New Jersey, the Nobel Assembly said today in Stockholm. Kao will get half of the amount while Boyle and Smith split the remainder. Kao calculated how to transmit light over long distances through optical glass fibers in 1966, a breakthrough that means people today can exchange text, music and images around the world within seconds. Three years later, Boyle and Smith designed the first imaging technology using a digital sensor, paving the way for the digital camera. The research “affects our everyday lives,” Joseph Nordgren, professor of physics at Uppsala University in Sweden and chairman of the Nobel prize committee in the field, said in a telephone interview. The scientists’ work altered “the way we are connected today, the way we can image things that happen in the universe and transmit them easily.” Asked why the three physicists didn’t get rewarded earlier, Nordgren said the Nobel prize “is not really given to lifetime achievements” but rather to a single body of work in which you can “see the impact.” “The way we are connected today, the way communication works, that wasn’t evident 20 years ago.” Purity of Glass The findings “helped to shape the foundation of today’s networked societies,” the Nobel committee said in a statement that called the three scientists “the masters of light.” Kao’s discovery in fiber optics set the stage for the technological revolution that underpins today’s global communication systems, powering broadband Internet connections and carrying data transmissions around the world. In 1966, he figured out how to transmit light for more than 100 kilometers using optical glass fibers , five times the length of the most advanced fibers then available, the Nobel committee said. The key was the purity of the glass, Kao found. The first ultra-pure fibers were made just four years after his discovery, in 1970. Now the glass fibers snake throughout the world in utility and computer cables, and the light that flows through the thin threads instantaneously transmit text, music, pictures and video globally. Everyday Lives “Kao was the first to understand the impurities of glass and how to get rid of them,” said Sir Peter Knight of Imperial College London. “He was a revolutionary and his work is a fine example of how fundamental research can have a massive impact on our everyday lives.” Kao, 75, was born in Shanghai and has British and U.S. citizenship. He worked as an engineer while studying at the University of London, where he received his doctorate degree in 1965. He married May Wan Wong in 1959 and has two children. “I am absolutely honored,” Kao said in an e-mailed statement today. “The Nobel has never been given out for applied sciences before. Fiber optics has changed the world of information so much in these last 40 years. It certainly is due to the fiber optical networks that the news has traveled so fast.” The other half of the prize was awarded to Boyle and Smith for an invention that still dominates sophisticated digital photography. Hubble Telescope Their imaging technology used a digital sensor, known as a charge-coupled device , to transform light into electric signals. Building on the theories of Albert Einstein , who won the same award in 1921, they designed a sensor that could quickly capture and display tiny dots of composition called pixels, which form a picture when joined. With the invention of their electronic eye for a digital camera, light could be captured and distributed electronically. It is still used in sophisticated devices including the Hubble Telescope , and in medical tools to peer inside the human body to diagnose disease and perform microsurgery, the Nobel committee said. “Digital photography has become an irreplaceable tool in many fields of research,” the committee said. “The CCD has provided new possibilities to visualize the previously unseen. It has given us crystal-clear images of distant places in our universe, as well as the depths of the oceans,” they said. ‘Out Sailing’ Boyle, 85, was born in a log cabin in Canada’s Nova Scotia province and home-schooled by his mother until his early teens. A Canadian and U.S. citizen, he trained as a pilot in the Royal Canadian Navy, according to an interview posted on science Web site science.ca . He received his undergraduate and doctoral degrees at McGill University in Montreal, and has four children. Smith, 79, was born in White Plains, New York. He studied at the University of Pennsylvania in Philadelphia and received his doctorate at the University of Chicago in 1959. He has two daughters and a son. “This is really quite exciting, but is it real?” Boyle said when reached via telephone by the prize press conference today. “I haven’t had my morning cup of coffee yet.” Smith, who completed a round-the-world trip in a sail boat called the Apogee in 2005, did not answer a phone call or e-mail seeking comment. Nordgren also said the committee hadn’t been able to reach him to let him know about the prize. “Maybe he’s out sailing,” Nordgren said. Universe and X-Rays Last year’s physics prize went to Yoichiro Nambu of the U.S., and Makoto Kobayashi and Toshihide Maskawa of Japan for showing how subatomic particles that are supposed to act similarly sometimes don’t, leading to a better explanation of how the universe was formed. Annual prizes for achievements in physics, chemistry, medicine, peace and literature were established in the will of Alfred Nobel , the Swedish inventor of dynamite, who died in 1896. The Nobel Foundation was established in 1900 and the prizes were first handed out the following year. In 1901 the first Nobel Prize in Physics was awarded to Wilhelm Roentgen for his discovery of X-rays. The physics prize has since been awarded for discoveries and inventions, according to the Nobel Prize Web site. Yesterday, Elizabeth Blackburn , 60, a professor at the University of California in San Francisco; Carol Greider , 48, a professor at Johns Hopkins University School of Medicine in Baltimore; and Jack Szostak , 56, a professor at Harvard Medical School in Boston, won the Nobel Prize in medicine for research on cell division and the “immortality enzyme” that can help them multiply without damage. To contact the reporter on this story: Trista Kelley in London at tkelley2@bloomberg.net Michelle Fay Cortez in London at mcortez@bloomberg.net

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Honda Holds Out for Hydrogen as U.S. Favors Nissan’s Battery-Powered Cars

August 12, 2009

By Alan Ohnsman and Makiko Kitamura Aug. 12 (Bloomberg) — Honda Motor Co. is backing hydrogen power for the cars of the future, waving aside a decision by the Obama administration to drop the so-called fuel-cell technology in favor of battery-run vehicles. “Fuel-cell cars will become necessary,” said Takashi Moriya , head of Honda’s group developing the technology. “We’re positioning it as the ultimate zero-emission car.” Honda, the only carmaker to lease hydrogen-powered autos to individuals, opened a production line last year in Tochigi prefecture to make 200 fuel-cell FCX Clarity sedans, the model being leased in a trial in Los Angeles. The Obama administration sought to eliminate hydrogen-station funding and instead lend $1.6 billion to Nissan Motor Co. and $465 million to Tesla Motors Inc. to make electric cars, and give $2.4 billion in grants to lithium-ion battery makers. “Honda has a propensity to think very long term,” said Ed Kim , an analyst at AutoPacific Inc. in Tustin, California. “It’s also part of the company culture that if they’ve made a decision they think is correct, they’ll really stick with it.” Honda is not alone. Toyota Motor Corp. , Daimler AG, General Motors Corp. and Hyundai Motor Co. say hydrogen, the universe’s most abundant element, is among the few options to replace oil as a low-carbon transportation fuel. U.S. Energy Secretary Steven Chu said in May his department would “be moving away” from hydrogen as it’s unlikely the U.S. can convert to the fuel even after 20 years. Nissan Chief Executive Carlos Ghosn predicts electric vehicles may grab 10 percent of global auto sales by 2020. Honda hasn’t announced plans for a battery-powered car. Honda shares fell 1.6 percent to 3,070 yen as of 10:25 a.m. on the Tokyo Stock Exchange. Fuel Costs Hydrogen, made mainly for industrial use from natural gas, costs about $5 to $10 per kilogram for vehicles in California, more than double an equivalent amount of gasoline. The Energy Department estimates future prices for hydrogen will fall to $2 to $3 a kilogram, Toyota said on Aug. 6. Toyota President Akio Toyoda said Aug. 5 his company plans consumer sales of fuel-cell cars within six years. Toyota, like Honda, is making “exponential progress” with fuel cell technology, Justin Ward , manager of Toyota’s U.S. advanced powertrain program, said in an interview. Battery-powered electric cars are further along in the market. Mitsubishi Motors Corp. started selling the i-MiEV last month. Tesla sells a $109,000 Roadster and Nissan unveiled its first electric car, the Leaf, this month. It plans limited sales of the model in Japan and the U.S. next year. Fueling Time Honda says hydrogen vehicles match the refueling style drivers are used to: filling up in minutes at a service station. Nissan’s Leaf recharges fully in 30 minutes with a fast-charger, or up to 16 hours on a household outlet, said Tetsuro Sasaki, senior manager of Nissan’s battery test group. A budget crisis slowed plans for more hydrogen stations in California, home to the biggest fleet of cars using the fuel. At the federal level, Chu sought $333.3 million in May for battery and advanced gasoline autos in the 2010 budget, up 22 percent. Hydrogen funds were cut 60 percent to $68 million, slashing money that would have gone to transportation projects. The Clarity is available in the U.S. only in Los Angeles, where drivers can use about 16 hydrogen stations . The 5- passenger car has a top speed of 100 miles an hour and goes 240 miles (386 kilometers), more than double the 100-mile range of Nissan’s compact electric car. Through July, Honda leased cars to 10 drivers for $600 a month. Filling Stations One problem for Honda is the need for a network of hydrogen filling stations. “We cannot do infrastructure alone,” said Moriya. “We’ve been developing the cars on our own without government support.” The Senate and House voted in July to restore the funds. President Barack Obama must approve the final budget. Honda and Toyota will have to reduce production costs to win over consumers. Fuel cells need more platinum — a precious metal that costs more than $1,200 an ounce — and current durability is half that of gasoline engines, according to Moriya. Honda plans to offer hydrogen-powered cars at costs comparable to midsize gasoline autos by 2020. Honda said its 2005 hand-built predecessor to the Clarity cost about $1 million. Moriya wouldn’t discuss the Clarity’s price. Expensive Platinum Honda engineers in Tochigi are trying to trim costs. For 13 months, technicians have worked in a semiconductor-style clean-room, coating rolls of plastic film for fuel-cell membranes. Nearby, a press stamps stainless-steel plates that will grip the material. Hundreds of the cells are then sealed in a metal case, forming the fuel-cell stack. Honda’s hydrogen push has been undermined by plunging sales in the U.S., its main market. Last quarter, profit at Japan’s second-largest carmaker fell 96 percent to 7.5 billion yen ($79 million). Its research budget is 515 billion yen this fiscal year, down 8.5 percent. Funds for fuel cells were cut and some spending shifted to other “priorities,” Moriya said, without elaborating. Honda probably spends “a few tens of billions of yen” a year on fuel cells, said analyst Mamoru Kato at Tokai Tokyo Research Center in Nagoya. “Maybe, just maybe, fuel cells will be the future,” said Edwin Merner , who helps manage about $3 billion at Atlantis Investment Research in Tokyo. “And if you’re not in there, then you have a big disadvantage.” To contact the reporter on this story: Alan Ohnsman in Tokyo at aohnsman@bloomberg.net ; Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net .

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