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  • The Usual Suspects
    Wall Street bankers who’ve spent any time in the business often find they suffer from “Goldman Sachs envy”—a bitter mix of resentment and begrudging admiration for the firm’s seemingly endless list of triumphs. It thrived while others struggled, and even if competitors were succeeding, Goldman always one-upped them. It sealed bigger deals, showered its executives with more money, and placed its powerful alumni in higher levels of government. Now, with Goldman emerging from the financial crisis battered but still on top, the Street is seeing something more insidiously silly: a bona fide Goldman conspiracy. “A lot of people think that they must have gotten where they are because of some unfair advantage,” hedge fund manager Bill Fleckenstein says. “Nobody likes to think that someone flat out beat ’em.” (See a list of Goldman Sachs alumni and how they figure into the market turmoil of recent months.) Believers point to the one degree of separation between Goldman bankers and recent financial events. Bush’s Treasury secretary, Hank Paulson, is a former Goldman C.E.O., and his replacement at Treasury, Tim Geithner, was mentored by Goldman alumni. Mario Draghi, who is leading the crisis response for the E.U., is a former Goldman vice chairman. Merrill Lynch C.E.O. John Thain was once Goldman’s co-president, and Wachovia chief Robert Steel was a vice chairman. Ed Liddy, the new C.E.O. of A.I.G., was Goldman’s vice chairman. World Bank president Robert Zoellick was a managing director. Even Neel Kashkari, the 35-year-old tapped to oversee the $700 billion Troubled Assets Relief Program, served at Goldman as a vice president. Are they plotting to take over the world? Who knows. They sure are a tight-knit group, and potential conflicts abound. When we asked the participants about their roles in the alleged conspiracy, some didn’t appreciate the joke. Goldman said that such claims are ludicrous. In fact, a spokesman said that the firm is at a disadvantage, since its alums must go out of their way to avoid the appearance of favoritism. Geithner, Paulson, the S.E.C., and others also dismissed the theories. But for those who believe in smoky back rooms and secret handshakes, here’s what your fellow theorists are whispering. Read with the lights on.Related LinksHank Paulson, RevisionistSign of a Bottom?Barney Frank Has Got Your Number
    Wed, 07 Jan 2009 13:00:00 GMT
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  • The Man Who Made Too Much
    Two young men, traders on John ­Paulson’s staff, come into his hedge fund’s office seeking advice on whether to buy a certain debt security. Sitting just a few feet away, I have no idea what Paulson tells them. His slightly high-pitched voice is so soft that on the rare occasions he is forced to speak in public, he’s easily drowned out by the rustling of papers or the clearing of throats. When he appeared before a U.S. House committee in November to try to explain how he had lavishly profited while countless others had suffered, Paulson spoke so gently, even when inches from the microphone, that representatives repeatedly, and with growing irritation, had to ask him to speak up. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "slideshows", "index" : "4"},"mediaType2":{"value" : "graphic", "index" : "6"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/slideshows/2009/01/Bosses-at-Ailing-Hedge-Funds","url2":"/graphics/2009/01/Tracking-Paulsons-Success-in-a-Weak-Market","url3":"/executives/features/2009/01/07/Goldman-Sachs-Alumni-in-Finance","url4":"/culture-lifestyle/culture-inc/arts/2009/01/07/The-Making-of-Money-Never-Sleeps","teaser1":"John Paulson may be thriving, but most of the other hedge fund kings are fading fast.","teaser2":"Even before the market turmoil of 2007, Paulson has been outperforming other indices.","teaser3":"Blankfein. Steel. Thain. Paulson. Kashkari. See a pattern? ","teaser4":"Fox hits up Hollywood A-listers to make a sequel to Oliver Stone's Wall Street.","headline1":"A Dying Breed","headline2":"Paulson's Winnings","headline3":"The Usual Suspects","headline4":"Get Me Rewrite, Rewrite, Rewrite","title":"More From Portfolio.com" }'); Paulson is smart enough to know that at this particular moment in history, the less he’s heard from, the better. The simple reason: He is not suffering. In an era in which losers are universal and making a profit seems somehow shady, Paulson is the most conspicuous of Wall Street’s winners. Paulson & Co.’s funds (with an estimated $36 billion under management and growing by the day) were up a staggering $15 billion as the markets teetered in 2007; one fund gained 590 percent, another 353 percent. All this reportedly garnered him a personal payday of $3.7 billion, among the biggest in history. In 2008, his funds didn’t climb nearly as much but were still successful enough to put him at the very top of his profession. By scoring returns of this magnitude, Paulson has dwarfed the success of George Soros, whose currency trades in the 1990s made him so much money that he has spent much of the rest of his career atoning for them. Paulson makes no apologies. During our conversation in his conference room, he describes in detail how he pulled off the greatest financial coup in recent history—a two-year bet that the calamity we are now experiencing would take place. It was a megatrade involving dozens of financial instruments, along with prescient wagers that banks like Lehman Brothers would eventually go under. (View a graphic showing how much John Paulson has outperformed other indices.) Left unexamined is the uncomfortable moral dimension of Paulson’s achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down? Do traders who figure out a way to profit from our misery deserve our contempt or our admiration, however grudging? The question has long dogged that most hated species of Wall Street trader, the short-seller who profits by trading borrowed stock. Because of his recent success, Paulson is now their designated king. So it’s no surprise that he is finding himself the object of finger-pointing about who caused the mess we’re in. On November 13, Paulson and four other titans of the hedge fund world—Soros, Philip Falcone of Harbinger Capital Partners, Ken Griffin of Citadel Investment Group, and James Simons of Renaissance Technologies—were forced to answer questions in the glare of TV lights before the House Oversight Committee, chaired by Henry Waxman, a Democrat from California, the same man who dog-and-ponied tobacco executives into claiming under oath that cigarettes aren’t addictive. The five were selected because they were the highest-paid fund managers in 2007, as ranked by Alpha magazine, an industry trade publication. (View a slideshow detailing the falling fortunes of other hedge fund managers.) There has never really been a time when short-sellers have been feted. They had a brief moment in the sun following the corporate scandals of the early 2000s, when hedge fund manager Jim Chanos, among others, was credited with uncovering Enron’s fraud. Even though short-sellers red-flagged the dangers of subprime lending years before the crisis—Gradient Analytics, a research firm, issued private warnings as far back as 2002—they have received few brownie points since the housing bust began. “Everybody’s too busy looking out for themselves to come to the defense of people who are perceived as profiting from the misery of others,” Chanos says. In the view of many C.E.O.’s, short-sellers do more than just profit from corporate misfortune; they inflame it. C.E.O. Dick Fuld of Lehman Brothers and Alan Schwartz, former C.E.O. of Bear Stearns, in their own recent appearances before congressional panels, blamed rumormongers and short-­sellers for the demise of their firms. “The shorts and rumormongers succeeded in bringing down Bear Stearns,” Fuld ­asserted. “And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers.” Schwartz gave similar testimony when he appeared before the Senate Banking Committee in April, saying that there was a run on the bank despite a “capital cushion well above what was required to meet regulatory standards.” He testified that “market forces continued to drive and accelerate our precipitous liquidity decline.” Banking Committee chairman Christopher Dodd chimed in that “this goes beyond rumors. This is about collusion.”  But was it? Chanos, for one, is tired of the blame-the-shorts litany, and he recalls a conversation with Bear Stearns’ Schwartz to make his point. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "slideshows", "index" : "4"},"mediaType2":{"value" : "graphic", "index" : "6"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/slideshows/2009/01/Bosses-at-Ailing-Hedge-Funds","url2":"/graphics/2009/01/Tracking-Paulsons-Success-in-a-Weak-Market","url3":"/executives/features/2009/01/07/Goldman-Sachs-Alumni-in-Finance","url4":"/culture-lifestyle/culture-inc/arts/2009/01/07/The-Making-of-Money-Never-Sleeps","teaser1":"John Paulson may be thriving, but most of the other hedge fund kings are fading fast.","teaser2":"Even before the market turmoil of 2007, Paulson has been outperforming other indices.","teaser3":"Blankfein. Steel. Thain. Paulson. Kashkari. See a pattern? ","teaser4":"Fox hits up Hollywood A-listers to make a sequel to Oliver Stone's Wall Street.","headline1":"A Dying Breed","headline2":"Paulson's Winnings","headline3":"The Usual Suspects","headline4":"Get Me Rewrite, Rewrite, Rewrite","title":"More From Portfolio.com" }'); The day before the Fed’s rescue of Bear Stearns, Chanos says he was walking to the Post House restaurant in New York City, when, at 6:15 p.m., his cell phone rang. He saw the Bear Stearns exchange come up on his caller I.D. and took the call. “Jim, hi, it’s Alan Schwartz.” “Hi, Alan.” “Well, Jim, we really appreciate your business and your staying with us. I’d like you to think about going on CNBC tomorrow morning, on Squawk Box, and telling everybody you still are a client, you have money on deposit, and everything’s fine.” “Alan, how do I know everything’s fine? Is everything fine?” “Jim, we’re going to report record earnings on Monday morning.”  “Alan, you just made me an insider. I didn’t ask for that information, and I don’t think that’s going to be relevant anyway. Based on what I understand, people are reducing their margin balances with you, and that’s resulting in a funding squeeze.” “Well, yes, to some extent, but we should be fine.” “This is now 6:15 on Thursday night, the night before the collapse,” Chanos says. “It was after a meeting with Molinaro”—Bear Stearns C.F.O. Sam Molinaro—“who basically told him at that meeting, ‘We’re done. We’re gone. We need money overnight we don’t have.’  So here he is, calling one of his biggest clients to go on CNBC the next morning to say everything’s fine when clearly it’s not. And he knew it wasn’t.” Chanos refused to go on CNBC. By 6:30 the next morning, word was out that the Fed was engineering the rescue of Bear Stearns. Chanos realized that he could have been on CNBC while that was ­announced. “I thought, That fucker was going to throw me under the bus no matter what.” “So here it is,” Chanos says. “Alan Schwartz takes the position ‘Short-sellers were our problem,’ and who did he try to get to vouch for him on the morning of the collapse? The largest short-seller in the world. You want to talk about ethics and who’s telling the truth on these things? It’s unbelievable.” Schwartz, not surprisingly, has a different version of events. “I did not make the statements attributed to me by Mr. Chanos,” he says through a spokesperson. According to someone who has spoken to Schwartz, the ex-C.E.O.’s side of the story is that the conversation took place on Wednesday, not Thursday, and that it was entirely different from what was related by Chanos. His contentions are that the call was an effort to obtain a public statement from Chanos that “a group of short-sellers out there are trying to take Bear Stearns down” and that no information on Bear’s financial strength was conveyed to Chanos. Paulson is in his mid-fifties, hair thinning at the top just a bit, with a slight paunch that he fights by jogging in Central Park, a half-block from the 28,000-square-foot Upper East Side townhouse that he bought a few years ago. He is of medium height, medium build, medium disposition. He favors old-fashioned tortoiseshell bifocals and dark-gray suits—none of the forced informality that you find in some hedge fund offices. He speaks fluidly and candidly and is unmoved by critics of his chosen profession. This, after all, is a man whose mind has been set on making vast, historic amounts of money since he was a kid, when he bought candy in bulk and sold individual pieces to his buddies at a profit. At the beginning of 2008, he says, the general thinking was, No, we’re not going to have a recession; we’re going to have a slowdown. “Then there would be a pickup in the second half of the year. When the second half started looking as bad as the first, the general feeling became, We’re not going to have a pickup; we’ll have a slowdown.” Paulson is astounded that some optimists continue to expect that somehow the formerly unsinkable economy will remain afloat, at least long enough for the government’s rescue boats to arrive. “Now that we’re in a recession, they’re probably admitting, ‘Okay, we’re in a recession, but it will probably last just two to three quarters.’ So they’re always underestimating the severity of the magnitude,” he says. Paulson’s own view of the current situation is much darker. He predicts that the recession will last well into 2010 and that unemployment will reach 9 percent, a sharp increase from its current perch just below 7 percent. “We have a long way to go before we reach the bottom,” he says. Paulson has become a lightning rod not simply because he made money in an awful market, but because of the way he made it. He wagered against subprime securities while everyone else was piling in. He bet that in addition to Lehman Brothers, other banks like Washington Mutual and ­Wachovia were due for a fall. Long before the financial crisis hit, Paulson, according to one person briefed on the trade, invested $22 million in a credit default swap that eventually paid $1 billion when the federal government opted not to rescue Lehman Brothers. That amounts to a staggering $45.45 for each dollar invested. John Paulson was born in 1955 in Queens, New York, in a pleasant and somewhat obscure middle-class neighborhood called Beechhurst. His father, Alfred, an accountant who came from a Norwegian family that had settled in Ecuador, rose to become C.F.O. of Ruder & Finn, a public relations agency. But John’s investment-­banking genes seemed to have come from his mother’s father, Arthur Boklan, who, during the crash of 1929, was a banker at a long-since-vanished Wall Street firm. In an interesting parallel with his grandson, he apparently prospered even as the Great Depression dragged the country into misery. In 1930, according to census records, he was able to afford a $220-a-month apartment in the Turin, a stately building that still stands at 93rd Street and Central Park West in Manhattan.  Boklan saw to it that his grandson had an early appreciation for the principles of capitalism. When John was a small child, Boklan was the one who encouraged him to buy Charms candy in bulk at the supermarket and then sell the individual candies to kids in the schoolyard at a substantial markup. His profits grew, as did his appreciation for economies of scale and the tendency of certain commodities to become mispriced through ignorance or carelessness. It was also the point at which he would become transfixed by the process of turning pennies into dollars. Paulson would spend much of the rest of his career under the tutelage of older Wall Street role models, seeking to replicate those days with his grandfather. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "slideshows", "index" : "4"},"mediaType2":{"value" : "graphic", "index" : "6"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/slideshows/2009/01/Bosses-at-Ailing-Hedge-Funds","url2":"/graphics/2009/01/Tracking-Paulsons-Success-in-a-Weak-Market","url3":"/executives/features/2009/01/07/Goldman-Sachs-Alumni-in-Finance","url4":"/culture-lifestyle/culture-inc/arts/2009/01/07/The-Making-of-Money-Never-Sleeps","teaser1":"John Paulson may be thriving, but most of the other hedge fund kings are fading fast.","teaser2":"Even before the market turmoil of 2007, Paulson has been outperforming other indices.","teaser3":"Blankfein. Steel. Thain. Paulson. Kashkari. See a pattern? ","teaser4":"Fox hits up Hollywood A-listers to make a sequel to Oliver Stone's Wall Street.","headline1":"A Dying Breed","headline2":"Paulson's Winnings","headline3":"The Usual Suspects","headline4":"Get Me Rewrite, Rewrite, Rewrite","title":"More From Portfolio.com" }'); Following high school in Brooklyn, Paulson moved on to New York University, which in the 1970s offered a popular seminar taught by John Whitehead, then a senior partner at Goldman Sachs. Paulson listened, fascinated, as Robert Rubin, later secretary of the Treasury under Bill Clinton and now an unofficial adviser to Barack Obama—talked about the mysterious and new (to Paulson, anyway) world of risk arbitrage. At the time, the scholarly, soft-spoken Rubin was viewed, at least by Paulson’s professor, as the smartest partner at Goldman Sachs; he was certainly the richest. Paulson graduated first in the class of 1978, with visions of arbitrage in his future. Harvard Business School followed. There, Paulson came under the spell of another established star in finance, the leveraged-buyout titan Jerry Kohlberg. “I had never heard of Jerry Kohlberg,” Paulson recalls, “but one of my friends told me, ‘Forget about investment banking. You’ve got to hear Jerry Kohlberg. These guys make more money than anybody on Wall Street.’ ” According to Paulson, Kohlberg described how he engineered the L.B.O. of a company by putting up just $500,000 in equity and then obtaining a $20 million bank loan secured by the company’s assets. The company was turned around and sold at a profit of $17 million in two years’ time. Paulson received his M.B.A. and then spent his time in pursuit of as much money as he could earn. In 1980, the hottest jobs were not in investment banking but in management consulting. So when Paulson finished at Harvard that year, he joined one of the leading lights in the field, the Boston Consulting Group. Though the starting salaries were far higher than those in investment banking, he realized that even the partners didn’t manage to pull in the kind of money he was hoping for. Thus, following a chance social encounter with Kohlberg, Paulson moved to Wall Street, where he was introduced to Leon Levy of Oppenheimer & Co. Paulson was soon hired by Levy’s new venture, Odyssey Partners. After a couple of years at Odyssey, Paulson realized he was not getting the training he needed to climb the ­investment-banking money tree. So in 1984, just as the bull market was beginning, the 28-year-old joined Bear Stearns as an investment-banking associate. Four years later, he was promoted to managing director but soon opted to strike out on his own. After dabbling in real estate and beer—Paulson was an early investor in what would become the Boston Beer Co.—he joined the great, long march of former investment bankers and traders into the hedge fund business in 1994, going where he thought the money was. Paulson began with about $2 million of his own money, just a blip in the hedge fund world, even then. The firm consisted of just Paulson and an assistant. He shared office space in a Park Avenue building with other small hedge funds. At first, growth was slow. Paulson, who lived in an apartment in Lower Manhattan above what is now a discount shoe outlet, shepherded his money carefully and began to establish a track record. In keeping with the norms of the time, he charged a fee of 20 percent of profits and 1 percent of assets—a comfortable sum when the size of his fund was $20 million but nothing like what he has made recently. Then, in the late 1990s, came the tech bubble, and more important for Paulson, who was shorting stocks and betting big on corporate mergers, its bursting in 2001. When the market crashed after stocks lost steam that year, Paulson’s funds climbed 5 percent and rose the same amount in 2002, demonstrating his uncanny ability to avoid losing his investors’ cash as the rest of the market cratered. (Indeed, Paulson has had only one down year out of the past 15: His funds recorded a 4.9 percent decline in 1998, the year of the debacle in the Asian markets.) Money continued to pour in. By 2003, his funds had $600 million under management; two years later, their value was upwards of $4 billion. Paulson began branching out, moving away from betting on mergers and into the financial instruments of firms in bankruptcy. He was still as obscure as he could be, keeping his name and that of his wife, Jenny, out of the papers, though they did begin to accumulate the usual symbols of hedge fund wealth. He left his apartment on Broadway for the palatial quarters of a mansion on East 86th Street and bought an opulent, though not extravagant, house in the Hamptons, outside of New York City. Paulson got wind of the coming storm in the credit markets through the infallible barometer of prices. By 2005, the amount of money he could make on the riskiest securities was not enough to justify the risk he was taking. Pricing, in his view, made no sense. Paulson concluded that he could do better on the short side—wagering that prices of risky securities would fall. “We felt that housing was in a bubble; housing prices had appreciated too much and were likely to come down,” he says. “We couldn’t short a house, so we focused on mortgages.” He began taking short positions in securities that he believed would collapse along with the housing market.  The best opportunities were in the junkiest portion of the housing market: subprime. Pricing of subprime securities “was absurd,” Paulson says. “It didn’t make sense.” Subprime securities graded triple-B—in other words, those that the credit-rating agencies thought were just a tad better than junk—were trading for only one percentage point over risk-free Treasury bills. This absurdity appealed to Paulson as easy money. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "slideshows", "index" : "4"},"mediaType2":{"value" : "graphic", "index" : "6"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/slideshows/2009/01/Bosses-at-Ailing-Hedge-Funds","url2":"/graphics/2009/01/Tracking-Paulsons-Success-in-a-Weak-Market","url3":"/executives/features/2009/01/07/Goldman-Sachs-Alumni-in-Finance","url4":"/culture-lifestyle/culture-inc/arts/2009/01/07/The-Making-of-Money-Never-Sleeps","teaser1":"John Paulson may be thriving, but most of the other hedge fund kings are fading fast.","teaser2":"Even before the market turmoil of 2007, Paulson has been outperforming other indices.","teaser3":"Blankfein. Steel. Thain. Paulson. Kashkari. See a pattern? ","teaser4":"Fox hits up Hollywood A-listers to make a sequel to Oliver Stone's Wall Street.","headline1":"A Dying Breed","headline2":"Paulson's Winnings","headline3":"The Usual Suspects","headline4":"Get Me Rewrite, Rewrite, Rewrite","title":"More From Portfolio.com" }'); While Paulson was hardly the only fund manager to bet against subprime, he seems to have made the most money, most consistently, from the banking industry’s troubles. One reason for this is that Paulson was able to recognize and act on the unimaginable—that the banks, which took on most of the subprime risk, had no clue what they were holding or how much it was worth. Big banks like Merrill Lynch, UBS, and Citigroup held triple-A-rated securities, but these were backed by collateral that was subprime at best, making the rating of the securities almost irrelevant. “They felt,” Paulson explains, “that by having 100 different tranches of triple-B bonds, they had diversification to minimize the risk of any particular bond. But all these bonds were homogeneous.” It was like having 100 different pieces of the same poisoned apple pie. “They all moved down together.” What separated Paulson from the rest of the hedge fund crowd was his realization that nobody was able to value these complex securities. His advantage came when he was willing to admit that. Other traders refused to short the big banks because they couldn’t believe that such huge institutions would be so unaware of their own risks. Once that fact dawned on Paulson, he bet, fast and big, that the banks would fail. “We thought that many banks and brokerages were massively overleveraged, with very risky assets, and that a small decline in the assets would wipe out the equity and impair the debt,” Paulson says. He and his analysts knew that the banks were deep into subprime, and yet the prices of their debt securities hadn’t fallen, indicating that the rest of the market hadn’t caught on. By the end of 2007, he started to beef up his short positions, focusing on overleveraged financial institutions—Wachovia and Washington Mutual among them. And then there were derivatives. Since all that toxic waste on the balance sheet imperiled the survival of the banks, Paulson wanted to be sure he was prepared. So he bought credit default swaps, like the $22 million he bet against Lehman—essentially an insurance policy that paid off when Lehman’s bonds defaulted. Even though Paulson didn’t actually own any Lehman bonds, he made more than $1 billion on that bet. It’s as though he’d bought insurance policies on houses he didn’t own along the Indian Ocean just moments before the tsunami hit. Though the financial crisis has rewarded Paulson handsomely, he continues to search for investment opportunities. On October 2, he walked into a breakfast meeting at the J.P. Morgan Chase Tower, right across the street from his hedge fund’s old office on Park Avenue, to make a presentation to potential investors about a new fund he had started to trade distressed debt. Its name: the Paulson Recovery Fund. As usual, Paulson was calm and quiet. His associates described how Paulson & Co.’s funds had thrived during even the very worst declines in the market, with an annual growth rate of 17 percent since inception. Slides in Paulson’s presentation declared that the U.S. had slipped into its deepest recession since World War II. His charts displayed the usual parade of bad tidings: a steep decline in home prices, soaring mortgage delinquencies, credit contracting, and hemorrhaging in the financial sector. The 14th chart showed his strategy. It read, “How do we benefit near-term?” Paulson’s answer came in four bullet points: Cut leverage and build cash, eliminate exposure to the equity markets, maintain only short-term securities, and prepare for bargains in debt securities of distressed companies—a “$10 trillion opportunity,” another chart pointed out. Paulson has also taken steps that may help him avoid being tagged as a robber baron, donating $15 million to the Center for Responsible Lending to support a program designed to help homeowners avoid foreclosure. His congressional testimony on November 13 included his thoughts on how the government could help the banks get back on their feet—something that will of course benefit everyone, not just the holders of those distressed securities that Paulson is eager to buy. But it’s hard to see how any financier who made a fortune from market turbulence can improve his public image when the economy is in such serious trouble. George Soros, even with his massive philanthropic efforts to promote democracy in Eastern Europe, will probably go down in history as the man who broke the Bank of England. Traders like Paulson will probably never be popular. They might as well get used to it. Paulson himself remains unrepentant. At a recent lunch for investors at the Metropolitan Club in Manhattan, his clients dined on Colorado rack of lamb and sipped champagne, the recession be damned. Paulson, his wife, and their children still live in their home on East 86th Street, in a mansion that at one time was a men’s club. They also have a seven-bedroom, seven-and-a-half-bath estate with an indoor pool on Ox Pasture Road in Southampton, New York; he bought the house in 2006 for $12.75 million. This past April, Paulson apparently wanted a place that was larger than a mere bungalow for his growing family, so he listed the property for $19.5 million. At last look, it was still for sale; its asking price, which had been lowered at least twice, was down to $13.9 million. Evidently, John Paulson had bought at the top of the market. Related LinksLehman Europe and Prime Brokerage Counterparty RiskCDS Didn't Bring Down Bear and LehmanThe Shears are Out
    Wed, 07 Jan 2009 13:00:00 GMT
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  • The Case for Optimism
    When it comes to issuing gloomy warnings about the U.S. economy, I’ve established myself as something of an authority (or bore). Ten years ago, I was much exercised about the threat of a stock market bubble; in 2002, I wrote a piece saying that the next crash would come in real estate. Since then, I’ve produced numerous jeremiads, including ones for this column. But for the first time in my memory, I am less pessimistic than the conventional wisdom. I wouldn’t say that I’m a heady optimist, but I think there is a danger of repeating the mistake that many of us made during the boom: extrapolating current trends to make decisions about the future, failing to take into account how rapidly economic circumstances can change. There’s a risk that we may again overshoot the mark: As the economy goes down, we could be overemphasizing the negative just as we exaggerated the positive on the way up. (View a graphic showing analysts' predictions for 2009 quarterly G.D.P. growth.) Yes, the short-term outlook is dismal and will remain that way for months. On top of a slumping housing market and credit crunch, we have soaring unemployment, an unprecedented fall in consumer confidence, daily corporate retrenchments, and a dramatic slowdown in the world economy, which is affecting even India and China. The U.S. recession, according to the National Bureau of Economic Research, began in December 2007, which means it’s already the third-longest downturn since 1945. Come May, barring something completely unexpected, this recession will become the longest in postwar history. So where’s the good news? In any serious downturn, a number of self-reinforcing processes—economists call them adverse feedback loops—start to take hold. To prevent a recession from turning into a depression that lasts for years and years, these feedback loops have to be thwarted on as many fronts as possible, with a variety of policies. Fortunately, these are now being put in place. In the U.S., we have an energetic new president with a mandate to expand government spending and cut taxes. Equally important, we have the Federal Reserve, chastened by earlier errors, injecting money into the financial system at a rate never seen before. Overseas governments also are busy introducing stimulus packages, slashing interest rates, and propping up their banks. It’s possible the pessimists are right, and all of these initiatives will fail to halt the downward spiral. But that would go against historical precedent. And during the most catastrophic slumps of the past—the Long Depression of 1873 to 1879, the Great Depression of 1929 to 1933, Japan’s “lost decade” of the 1990s—policymakers failed to act decisively until it was too late. The most visible adverse feedback loop is in the financial industry. Faced with mounting losses on housing-related securities and loans, banks and other institutions are curtailing their lending to preserve capital. Initially, the Fed responded to this problem by cutting interest rates and expanding its role as the lender of last resort to encourage banks not to sit on their capital. This strategy, which amounts to a finger in the dike, prevented a rash of collapses but did nothing to repair the financial industry’s capital base, which has been massively impaired. By injecting taxpayers’ money into big banks on generous terms and agreeing to have the government take the hit on many of Citigroup’s junky securities, Ben Bernanke and Hank Paulson are well on their way to addressing the problem; in essence, they’re socializing the private sector’s losses. From a political and philosophical perspective, this is an ugly process to behold—who likes bailing out Vikram Pandit and Robert Rubin? Nevertheless, it is probably the only way for the financial industry to move beyond the credit crunch and start over. The Obama administration is likely to expand assistance to the banks, possibly through the creation of a new Resolution Trust Corp., which would take on distressed assets from many financial institutions, perhaps in return for stricter limits on executive compensation and bigger equity stakes than the Bush administration demanded from Citigroup. In addition, the Fed has agreed to purchase hundreds of billions of dollars’ worth of such dubious securities as “triple-A”-rated mortgage bonds and credit-card receivables and allow financial institutions to swap even trashier paper for cash or Treasurys. The financial crisis is far from over, but with the federal government guaranteeing bank debts, dispensing practically unlimited amounts of credit at close to zero percent interest, and acting as the junk purchaser of last resort, it may well have seized the initiative. Similarly aggressive moves may soon be under way in the housing market, where the self-reinforcing cycle is continuing into its third year. As prices keep falling, the number of foreclosures increases and abandoned homes flood the market. At the same time, home loans become more difficult and costly to obtain for almost all kinds of borrowers, so potential buyers decide to stay put, and prices fall further. The good news is that Obama appears to be serious about preventing more foreclosures. One option is to follow the advice of Sheila Bair, the departing head of the F.D.I.C., and restructure millions of delinquent home loans, reducing the principal and lowering the interest charges. For this to happen, changes will need to be made to the bankruptcy code and laws regarding the disposition of securitized mortgages. A more radical approach would be to have Fannie Mae and Freddie Mac, the two government-sponsored mortgage companies—now effectively government agencies—offer refinancing to any homeowner with negative equity, that is, anybody with a home loan bigger than the value of his or her property. And to encourage home buying, Allan Meltzer, an economist at Carnegie Mellon University, has proposed making some down payments tax-deductible.  Unfortunately, even if Obama could wave a magic wand to mend the financial industry and stabilize the real estate market, the recession wouldn’t end overnight. Thanks to another adverse feedback loop—dubbed the Keynesian multiplier, after the dead British economist who is all the rage these days—the trouble has already spread to the rest of the economy. Take Charlotte, North Carolina, a big regional financial center. As locally based companies like Bank of America, LendingTree, and Wachovia lay off thousands of employees, the area’s restaurants, messenger services, and limo companies see their revenues plummet. These businesses, in turn, trim their operations and jettison staff, which reduces the need for produce, bicycles, and town cars. The original fall in demand generates a second-round effect, which generates a third-round effect, and so on. Imagine this happening in towns and cities all across America and you can begin to understand how a recession takes hold. The usual way to counter a fall in demand in one part of the economy is to boost it in another. This is the principle behind stimulus programs like the one Obama has proposed, which could involve up to a trillion dollars in new expenditures and tax cuts. The ­arithmetic behind this enormous figure is strikingly straightforward. Since the start of 2007, about $10 trillion in real estate and stock market wealth has been wiped out. If, for every dollar American households have lost, they cut back their expenditures by, say, 5 cents—an assumption that jibes with historical ­evidence—the total spending shortfall in the economy will be $500 billion a year, or $1 trillion over two years, the likely duration of the stimulus package. This emergency measure will eventually have to be paid for—as will all the recent bailouts—but the middle of a recession isn’t the time to obsess about budget deficits. A more pressing concern is making sure that additional government outlays are spent rather than saved. It turns out that much of the $150 billion worth of tax rebates authorized by the Economic Stimulus Act of 2008 wasn’t spent. So the 2009 stimulus will be targeted at cash-strapped states, the unemployed, and other recipients who won’t let the money collect dust in their savings ­accounts. It may be too much to hope for that the package by itself will revive overall spending. However, combined with the $250 billion in consumer savings that the recent drop in gasoline prices will deliver this year, it could well prevent another downward lurch. As in any deep recession, the ultimate key to recovery will be restoring the confidence of business executives, investors, and consumers. When times are good, most people you meet are upbeat, and it’s easy to dismiss the warnings of worrywarts and cranks like yours truly. As unemployment increases, the odds of running into somebody who was just fired, or whose best friend was just fired, rise exponentially. Gloom spreads like a virus. Eventually, the few remaining optimists are the ones who start to seem crazy. Breaking this psychological feedback loop is Obama’s toughest task. Luckily, he comes equipped with impressive oratorical skills, a calm and reassuring demeanor, and the rare ability to make Americans feel good about themselves and their country. If, after leveling with the public about what has gone wrong, he can outline a credible and fair strategy for recovery, including the establishment of a tougher and more scrupulous regulatory structure, he could buck up what Keynes referred to as the economy’s “animal spirits”—the optimism that goads entrepreneurs into action. The model for Obama, inevitably, is Franklin D. Roosevelt, who took office in March 1933, a time when one in four people was out of work and the banking system was in a state of panic. By no means did all the policies that Roosevelt introduced in his famous “hundred days” work out perfectly. But he stabilized the financial system; convinced Americans that, at last, something serious was being done; and conveyed a sense of confidence. Bernanke, a Republican fan of Roosevelt’s, likes to remind people that one of the stock market’s best years of the 20th century was 1933. During Roosevelt’s first term, the inflation-adjusted gross national product expanded more than 25 percent. It would be wishful thinking to expect such a vigorous upturn between now and 2012. Before we can hope for a sustainable recovery, we have to deal with yet another adverse feedback loop—deflation—which is a recipe for Japanese-style stagnation. As prices start to fall throughout the economy, borrowing money and servicing debt costs more in real terms, putting even more strain on borrowers and financial institutions. Bernanke is determined not to let deflation gain a foothold. Between September and December, the monetary base—notes and coins in circulation, plus bank reserves at the Fed—jumped by about a third. Without announcing it publicly, the Fed has adopted a policy known as “quantitative easing,” which basically means that it’s flooding the economy with cash. With central banks around the world adopting similar policies, it’s hard to see a global fall in prices persisting for very long. By the end of this year, if all goes well, there could be tentative signs of an upturn. How seriously do I take this rosy scenario? Recently, I moved some of my savings from cash into stocks. If the past two years have taught us anything, it’s that popular economic wisdom is often mistaken. In venturing into the stock market, I am taking out a long-term call option on the possibility that the doomsayers, my normal self included, are mistaken. I hate to sound like a shill for Wall Street, but in my mind, this is simply sensible diversification.Related LinksWorst of TimesThe I-WordBound for Zero
    Wed, 07 Jan 2009 13:00:00 GMT
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  • The Big Fix
    In the aftermath of the stock market crash of 1987, reformers moved to remake America’s regulatory structure. Some experts proposed tinkering with the oversight agencies, merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, for instance. Others recommended regulating derivatives, which were in their infancy. George Soros, not yet the bête noire of right-wingers, took to the editorial page of the Wall Street Journal to warn that nobody was thinking big enough: “The longer markets function without supervision explicitly aimed at maintaining stability, the greater the danger of an accident like October 19, 1987.” Anyone remember the landmark 1987 Securities Act? It never materialized. And did anything happen in 1998, after Long-Term Capital Management nearly went under and a similar dance took place? Many of the same players strutted on the same stage, and Soros again predicted that without sweeping international regulatory reform, we risked “the breakdown of the gigantic circulatory system which goes under the name of global capitalism.” Again, no ’98 Securities Act—perhaps not surprising, given that what followed was a market recovery that we now know was a massive equity bubble. (View a graphic showing how investment vehicles escaped current regulatory measures.) In our current financial mess, hardly a day goes by without another hearing on the failures of the U.S. regulatory ­system or speech on regulatory affairs. In November, Henry Waxman, chairman of the House Committee on Oversight and Government Reform, hauled five of the most influential hedge fund managers before the committee and extracted pronouncements from each of them—some less full-throated than others—that the markets, including hedge funds, needed more regulation. Once again, there was George Soros, as right as ever, leading the Regulatory Light Brigade. This time, the calamity in the markets is more devastating than any of the previous crises since the Great Depression. Luckily, it’s looking like history won’t repeat itself. One of the enduring legacies of this economic collapse will be that the government finally had to embark on a wholesale financial rethinking. Right now, finding a way to end the crisis and reinvigorate the economy is the most pressing issue. But in a few months, after the Obama administration settles in—assuming we aren’t all eating cat food under a bridge—we are going to have the debate we need about how to rebuild the regulatory system. The pressure to put off this debate will be enormous. The financial industry is bound to resist. But Wall Street is at its weakest point in decades; the new administration has to strike while the public temper is at its hottest. “Investors have lost confidence in everything: the regulators, the system, the oversight of Congress, the fairness of our markets,” says Arthur Levitt, a former S.E.C. chairman. “How do you restore that?” One hopeful sign is that President Obama has given the matter significant thought. In a campaign speech in March, he talked about regulating the derivatives markets and raising the capital standards for banks. If that speech becomes the template for reform, it’s a promising start. It’s also promising that Gary Gensler was named co-head of Obama’s search team for a new S.E.C. leader. Gensler has been a prescient critic of excesses at Fannie Mae and Freddie Mac (which were not remotely the cause of the crisis but were inarguably pockets of systemic risk).  First, regulators need to change their ninnyish attitudes. They have gone about their jobs in the past decade like hall monitors at the prom, deeply afraid of being ostracized. They need to bring some mettle to their roles. The challenge is to remake the system so that it’s up to the task of preventing, or at least minimizing, the next global meltdown. Alter the structure all you want, but unless you have the right regulatory attitude, it’ll be for naught. This is not a moment to think small. First, we raze the S.E.C. and the C.F.T.C., along with most, if not all, of the federal banking and state insurance regulatory structure. We should strip the Federal Reserve of its responsibility for regulating banks; it’s enough to oversee the economy. And just as everyone was trying to express how bumbling and irrelevant the S.E.C.’s enforcement approach has been, the agency provided perfect examples. In mid-November, headlines blared that the S.E.C. had charged Mark Cuban, the billionaire owner of the Dallas Mavericks and a frequent blogger, with insider trading. Did he gain secret knowledge of the failure of A.I.G. and sell his stake? Had he done something untoward with regard to Lehman Brothers? No. Four and a half years ago, Cuban sold stock in a company called Mamma​.com based on inside information, according to the S.E.C., and thereby avoided $750,000 in losses. Today, Copernic, Mamma​.com’s successor, sports a market value of less than $3 million. Cuban may well be guilty. But who cares? It’s as if Homeland Security had a ceremony in 2008 to announce that it had erected a gold-plated bollard at ground zero. And come December, it became clear that the S.E.C. had shockingly botched multiple chances to upend confessed Ponzi schemer Bernie Madoff. Before the economic crisis became acute, Treasury Secretary Hank Paulson put forward his plan to remake the regulatory system. Like most of Paulson’s initiatives, it was inadequately explained and poorly sold. And the motivation was exactly wrong, born of a fear of regulation that looks ridiculous today. It died on arrival, as it should have. But surprisingly enough, given the dubious way it began, a Paulson-like framework is a good place to start. It was influenced by what is known in regulatory circles as the Twin Peaks approach, used in Australia and the Netherlands. The idea is to create two financial regulators that are given separate responsibilities not based on financial firms’ lines of business. Currently, we have separate regulators for securities, futures, banks, and insurance. That antediluvian division of labor needs to be scrapped. Under a Twin Peaks structure, one agency would focus on the safety and soundness of financial institutions: the strength of their balance sheets, whom they trade with, and how strong their risk controls are. An agency with this structure would remedy one of the glaring limitations of the S.E.C.—that it has too many lawyers and too few market experts. The second peak will be more familiar. It would focus on business conduct and investor protection, otherwise known as lying, cheating, inadequate disclosure, and manipulation. This would encompass much of what the S.E.C. is currently supposed to be doing. It would go after big targets and not monkey around with dinky companies and small-time ­insider-trading issues. The Twin Peaks model has good-cop, bad-cop appeal. The safety-and-soundness regulator can work with firms to make sure they are solid or else the enforcer will come in. And we should consider a third peak as well: one with responsibility for surveying systemic risk. It would monitor the safety and soundness of the entire financial system, rather than assess it on a company-by-company basis. One debate—sometimes drawn as a Europe-vs.-U.S. argument—is about whether we should reorder regulation based on broad “principles” rather than strict “rules.” This is a red herring, despite the energy expended on it. Rules come from principles, after all. Whatever we have, it needs to be enforced.  In remaking the regulatory architecture, we will need to update the regulatory mandate to deal with 21st-century financial products. Accounting rules should be tightened to prevent anything from being moved off the balance sheet unless there is a true sale of the assets. No entity or instrument should be untouched by some form of regulation. Regulators need to monitor positions taken by banks, other financial institutions, and major investors, including hedge funds. To its credit, the S.E.C. did attempt in recent years a modest hedge fund registration requirement. The courts struck it down. Congress will have to expand the regulatory mandate to include private investment partnerships, or at least those of a certain size. Clearly, the regulators will need new powers. We must install higher capital requirements for all financial institutions. Given the disastrous incompetence of the rating agencies, Congress will have to undertake the enormous task of decoupling our regulatory framework from its dependence on ratings. Right now, ratings are written into the fabric of thousands of laws and regulations. Instead, market prices should be used. There is wide consensus, as there should be, that derivatives will be brought under the umbrella. In the 1990s, the definitive fight was over the regulation of derivatives. Brooksley Born, then the head of the C.F.T.C., pushed to regulate them. Alan Greenspan, Robert Rubin, and Lawrence Summers fought her. She was right. It’s encouraging that people like former S.E.C. commissioner Levitt, who sided with the crowd that argued that regulation would plunge the market into legal chaos, are now having second thoughts. Let’s hope the same is true for Summers, who is now in Obama’s inner circle. “I have regrets that I didn’t use that as an opportunity to say, ‘Wait a second, maybe it will create uncertainty, but what about going forward? And what about mandating a clearinghouse?’ ” Levitt says. “I could have and should have, and I regret not doing it.” Other problems are thornier. Can we do something about outrageous compensation for executives and Wall Street? Can we prevent institutions from becoming too big to fail or, worse, too interconnected to fail? Right now, unfortunately, regulators are encouraging mergers, giving us a land of one-eyed institutions buying blind ones. They have to be followed by a complete re-thinking of our capital requirements. Stronger capital requirements might help with excessive bonuses too. They will make financial firms more stable, less profitable, and therefore more parsimonious with their own employees in order to leave more for shareholders. But a revitalized regulatory sector won’t be enough. We need more dissidents. We need to make the world a safer place for short-sellers to criticize companies. Regulators should publicly praise short-sellers, rather than periodically ban their activities. Critics and whistle­blowers, no matter how self-motivated, should be regularly consulted about suspicious companies, not dismissed as cranks once they expose wrongdoing. And then we need to bring back plaintiffs’ lawyers. In the past decade and a half, Republicans not only weakened regulation but also led an attack on these lawyers. Corporate America hated them—and why not? They seem like parasites, ready to pounce on every corporate mistake. But they are vital to keeping capital markets functioning because they keep boardrooms scared. Frank Partnoy, a University of San Diego law professor and prescient critic of the fragile financial markets, says that “it’s crucial that standards not stand alone and they be enforced with real teeth. We need public enforcement and private litigation.” The current catastrophe presents us with an opportunity. But the Obama administration and a Barney Frank-led congressional effort have to be aggressive and ambitious. Reforms can always be scaled back if they overshoot the mark. But the reform-minded cannot enter the debate in a defensive crouch. As new chief of staff Rahm Emanuel says, Don’t let a crisis go to waste. Related LinksSign of a Bottom?The Man Who Made Too MuchThe Shears are Out
    Wed, 07 Jan 2009 13:00:00 GMT
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  • Labor Pains
    With the inauguration of President Barack Obama, you might be forgiven for thinking that the campaign is over. But in Washington, a barrage of political ads still crowd the airwaves. One, sponsored by a conservative outfit named Americans for Job Security, features grainy and menacing footage of leading Democrats like Nancy Pelosi and Chuck Schumer. A narrator intones, “Democratic leaders want to deny workers the right to a secret ballot in union-organizing elections. Maybe it’s a payoff to the union bosses.” Another, sponsored by American Rights at Work, a pro-labor group, shows a surprised office worker meeting with his supervisor, who gleefully informs him, “We’re giving you health benefits, a pension, and a nice big raise.” Alas, the worker wakes up. “If you think this is going to happen by itself, you’re dreaming,” the narrator says. The ads set the stage for what will most likely be the first major confrontation between the Obama administration and business—and it could get ugly. At stake is the Employee Free Choice Act, which would make it much easier for unions to organize. The bill is a top priority of the labor movement, and since labor helped get Obama elected, it expects the bill to become a top priority for him too. Obama has been cheered by many in the business community for appointing moderates like Tim Geithner to Treasury and Larry Summers to the National Economic Council. The new president, notably, hasn’t brought many labor-affiliated economists and activists onto his economic team. But what is about to play out in Washington will no doubt be an early reminder that despite Obama’s good intentions and promises of a kumbaya era of coming together, he won’t be able to sidestep the classic conflict between business and labor. The U.S. Chamber of Commerce is calling the coming war over the bill “Armageddon.” Such corporate titans as former General Electric head Jack Welch, outgoing Wal-Mart C.E.O. Lee Scott, and Home Depot co-founder Bernie Marcus are denouncing it. At the World Business Forum, Welch was apoplectic: “If business leaders are not aware of this terrible piece of legislation, they should be. It would hurt us dramatically in our ability to be competitive globally.” Political veteran Mark McKinnon, a former media adviser to George W. Bush, says he’s “never seen business this fired up.”On the other side, Andy Stern, president of the Service Employees International Union, tells me the legislation “is essential for workers to be able to share in the wealth of their employers.” Stern matters, and he will continue to matter during the Obama administration. With 2 million members, the S.E.I.U. is the largest and fastest-growing union in North America, and its endorsement of Obama gave the first-term senator’s campaign a big lift during the Democratic primaries in 2008. There is no question that Obama favors the bill; he was one of its many co-sponsors in the Senate. But now he has to make a choice. If Obama wants the law, he can get it passed, but he’ll have to fight for it—and spend valuable political capital early in his term—when he has other priorities, like pushing health-care reform, clean-energy efforts, and an economic-stimulus measure. In 2007, the E.F.C.A. was passed by the House but was filibustered in the Senate and did not pass. This time, though Democrats enjoy a larger majority in the Senate, some in the caucus—especially new senators from conservative states, like Mark Begich of Alaska—might not stand up against a Republican filibuster. Transition officials were divided on how aggressively and quickly Obama should move on the bill, but sources close to the campaign tell me he will push ahead. I’ve often been a critic of unions, but on this issue, I support them and think Obama is right to move forward. The central argument in favor of the bill is that it puts workers on a more level playing field when it comes to organizing unions. Right now, under federal law, a union can be certified to represent workers in two ways. The first is if a majority of workers sign cards saying they favor joining a union. The second is if, in a secret-ballot election, a majority of workers vote to organize. Under current law, an employer can demand a secret-ballot election even if a majority of workers sign cards. Under the E.F.C.A.—also known as “card-check” legislation—employers wouldn’t be able to demand an election. They would have to recognize the union after the cards were signed. Thus, the bill would take the choice out of management’s hands and give it to the workers. If workers wanted a secret-ballot election, they could have one. If they wanted to just go with card check, they could do that. Passing the card-check bill will surely help unions be certified more easily. But boosting union membership won’t be a slam dunk. Corporations, which have had the upper hand in keeping unions out of their shops, will still have many tools at their disposal to thwart them. They can hold meetings on company time advising against union membership and launch full-scale campaigns to prevent workers from joining.If card check becomes law, it won’t restore unions to their glory days—today only 7.5 percent of workers in the private sector belong to unions, less than half the number 25 years ago—but it might arrest the decline, which isn’t bad for business in the long run. No less of an authority than Ben Bernanke has said that the drop in union membership explains a good 10 to 20 percent of the increase in income inequality in the United States. If businesses want people to be able to afford their products, union membership itself serves as an economic-stimulus package—a surefire way to put more money into workers’ pockets.In the end, no one knows what the exact effects of card check would be. Union membership would surely rise, but the economic dislocation could be minimal. Most of the job losses in the United States fall disproportionately in industries with unions. If the bill becomes law, it will certainly lead to a flurry of organizing, but it won’t be easy for labor to hold on to even its meager 7.5 percent of jobs.God knows it’s easy to bash unions. The American auto industry is on its knees in no small part because of legacy costs brought on by the demands of the United Auto Workers, which agreed in December to a package of givebacks. But being anti-union is as boneheaded as being anti-corporation—a knee-jerk reaction when nuance is required. After all, unions are found not only in dying industries but in growth industries like aerospace, energy, and entertainment. Private equity giants, already struggling during the economic crisis, will face further challenges should the E.F.C.A. pass. When private equity firms bought such businesses as Toys R Us, Hilton Hotels, Dunkin’ Donuts, and Hertz, they surely didn’t plan on having to face substantial unionization drives, but shortsightedness has been in no short supply in boardrooms around the country. While the Private Equity Council, the Washington lobby for the big private equity firms, hasn’t taken a position on the E.F.C.A., individual members have. The Carlyle Group has been in a big fight with the S.E.I.U., which is trying to organize workers at HCR ManorCare, a company with nearly 60,000 employees in 32 states running more than 500 long-term-care facilities. Carlyle closed its $6.3 billion purchase of the company in December after overcoming concerns from regulators and efforts by the S.E.I.U. to delay the sale. There’s no reason workers should have to get the short end of the stick just to save the private equity guys from being inconvenienced.The legislation doesn’t apply to small businesses, so the corner grocery probably won’t face an organizing drive. And as for larger companies, it’s worth noting that many corporations have chosen not to fight card check and have honored union expansion without calling for elections, which are often bitterly fought. These include Harley-Davidson, Aetna, and AT&T. Some Republicans have recognized this. Indeed, a Republican, George Pataki of New York, became the first governor of either party to sign a card-check bill, hailing it later as “an important step toward eliminating unnecessary hurdles while also ensuring fairness.’’ Sounds right to me. Related LinksFinally, Drama! A Geithner vs. Bair Clash?Ben Stein Watch: November 30, 2008Obama's Economic Team
    Wed, 07 Jan 2009 13:00:00 GMT
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  • It Flexes! It Curls!
    Sales of Amazon’s Kindle shot up during the holidays, encouraging the makers of other e-readers to believe that the market will grow if they keep pushing the right technology. One firm that’s trying is Plastic Logic, an upstart with $200 million in funding from Intel, Siemens, and others. Betting that lightweight plastic is the answer, the Mountain View, California, company is developing a reader that will curl like a piece of paper and to which books, periodicals, and office documents can be downloaded via WiFi. A prototype of the fully flexible reader is still a few years away. In the meantime, Plastic Logic’s first model—a rigid one—will be out this spring. (View an interactive feature about gadgets that have failed to to sell well). Related LinksLast Bytes: Next Up, CESFirst Bytes: Intel, Accel Partners, CBS, Tumblr, YouTubeReally Late Breaks: A Bad Day for Media
    Wed, 07 Jan 2009 13:00:00 GMT
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  • Green Crude
    In one of the most memorable moments in cinema, a middle-aged businessman whispers to a young and perplexed Dustin Hoffman one word of advice: “Plastics.” In a 21st-century remake, the word might one day be algae. Plastic was the new gold when The Graduate was filmed in the 1960s. In the summer of 2008, as oil prices soared to frightening levels, dozens of little companies managed to bring in a sudden gusher of funding for a technology that has long been relegated to the fringe of alternative energy: turning the green scum that grows in ponds and waterways into fuel. In just six months, investors pledged more than $1 billion to 30 or 40 algae-fuel companies, many of them new. Now with oil prices less than half of what they were in the summer, the fledgling algae industry isn’t likely to see more big investments anytime soon, and the credit squeeze will also hamper development. But the companies hope they’ve raised enough cash to move the technology to the next step and prove that the watery weed can be a viable alternative to petroleum. The fact is, algae contains an abundance of natural fatty oils that don’t need much refining to power cars and jets. Nevertheless, making algae into a cost-effective fuel source remains a highly speculative venture. The process has been tried only on a small scale; so far, just a few thousand barrels of fuel have been made from algae. Large-scale cultivation takes place in huge metal tanks or open ponds. According to a 2004 University of New Hampshire study, the pond method would require 30 million square acres—an area equal to the size of South Carolina—to grow enough algae to satisfy the U.S.’s transportation needs. Whatever process is used will require the building of massive new infrastructure for water management, feedstock supplies, nutrients, and transportation, even if algae oil can be refined at existing facilities. If algae companies can’t increase production while maintaining prices that can compete with petroleum’s, they will fail. Still, the prospect of replacing petroleum with a plant-based fuel that has a high energy yield compared with other plants has led some major investors to take the algae plunge—including Bill Gates, whose venture fund Cascade Investment pledged a reported $50 million to Sapphire Energy, a San Diego startup, in a financing round completed in September 2008. The Rockefeller family’s Venrock Associates fund has also made a substantial investment in Sapphire, and the company has attracted other blue-chip venture funds, including Arch Venture Partners and the V.C. arm of Britain’s huge life-science nonprofit the Wellcome Trust. “We are investing in this because algae is basically the most efficient photosynthetic process on the planet,” says Arch’s Kristina Burow. In the fall, the U.S. Department of Energy’s National Renewable Energy Laboratory in Golden, Colorado, launched a $200 million effort to fund innovative biofuel technologies and projects, including some using algae. Barack Obama mentioned algae several times on the campaign trail, and his advisers expect algae will play a role in his administration’s plans for a massive infusion of federal money into alternative fuels. If it does, the money might come just in time to offset the recent fall in oil prices and credit crunch, which could otherwise imperil algae’s prospects. Meanwhile, GreenFuel Technologies of Cambridge, Massachusetts, is developing a system that would use a coal plant’s carbon dioxide emissions as a carbon source to feed algae that would be converted into fuel. Near South Padre Island, Texas, PetroSun is converting a shrimp-research facility into an algae pond. Big oil companies like Chevron are also committing resources to pond scum. “Algae still needs to be proven at scale,” says Chevron spokesman Alex Yelland, “but we have a real sense that this will seriously augment the world’s biofuel supply in the future.” One sunny afternoon in South San Francisco, I find myself investigating the nascent algae revolution from behind the wheel of a Jeep running on biodiesel made by Solazyme, an algae-fuel company founded in 2003. The ride and feel are no different from those of a gas-powered car—no green smoke from the exhaust pipe. In the passenger seat is Harrison Dillon, Solazyme’s co-founder and chief technology officer. Before we start the engine, the other co-founder, C.E.O. Jonathan Wolfson, shows me a liter of algae fuel—a clear, slightly viscous liquid that he says is the first algae diesel to meet the highest standards of ASTM International (formerly the American Society for Testing and Materials) for use in engines. The company also recently had its algae jet fuel ASTM-certified.   Wolfson and Dillon won’t say how much their green crude costs to make or how the company—which recently closed on a $50 million funding round and cut a major deal with Chevron for an undisclosed amount in January 2008—plans to go from the few thousand gallons in its warehouse to the millions needed to satisfy even a tiny fraction of the U.S.’s yearly oil habit of 7 billion barrels. “The problem with algae isn’t so much the science,” says David Kurzman, an independent biofuels analyst, citing the challenge confronting most alternative fuels. “It’s developing what has to be a major industrial process and whether this is cost-effective.” When Wolfson and Dillon co-founded Solazyme, oil was selling for $25 a barrel, and the company struggled to find investors. A few years earlier, the Department of Energy had abandoned an algae-fuel program because it expected the fuel to cost consumers more than $4 a gallon. “We were sure we could make oil more cheaply than this and that algae would be big one day,” Wolfson says. The impact of plunging oil prices on the viability of algae fuel is unknown. Wolfson believes that his company will hit its goal of producing a barrel of algae oil for between $40 and $80 in the next two to three years. (At press time in mid-December, petroleum crude was at $44 a barrel after rising to more than $147 in the summer.) “Unless oil falls to under $40 a barrel, we think we will be competitive,” he says. Jason Pyle, C.E.O. of rival Sapphire, says he’s aiming to make a barrel of algae oil that could be priced at about $60. The truth is, no one really knows what’s possible. Algae is only one of many crops that entrepreneurs hope will challenge petroleum, which remains subject to fluctuations in both price and supply as cartels talk of cutbacks and oil-producing regions remain politically volatile. Money has also poured into ethanol and biodiesel made from so-called first-gen biofuels such as corn, soy, and sugarcane. In fact, $1 billion in private investment for algae is small change compared with the billions of dollars in investments and congressional subsidies that have been aimed at these terrestrial biofuel sources, from which more than 9 billion gallons of ethanol were produced in 2008, an increase of 28 percent from 2007. But most scientists contend that algae fuel—from cultivation to consumption—has a smaller carbon footprint than other biofuels, though no one will know for sure until algae-fuel production is ramped up. By the barrel, algae fuel provides three to four units of energy for every one unit used to make it, a ratio that approaches petroleum’s golden 5-to-1 level of efficiency. Corn’s ratio is a mere 1.2 to 1, according to some studies. That’s a paltry net output for a crop that, given the spike in global food prices this past summer, is already a controversial energy source. Cellulosic plants like switchgrass also score better than corn, having a 2.5 to 1 ratio. In the wake of the energy crisis in the 1970s, the Department of Energy spent hundreds of millions of dollars investigating the fuel potential of algae and other plants, but it dismantled the program in 1996. Since then, scientists have continued to work with algae to better understand its genetics and how it produces oils. “It’s hard not to get excited about algae’s potential,” Paul Dickerson, chief operating officer of the Department of Energy’s Office of Energy Efficiency and Renewable Energy, told the first Algae Biomass Summit, which was held in San Francisco in 2007 and attracted 350 scientists, technologists, entrepreneurs, investors, oil company representatives, and policymakers. In Solazyme’s headquarters, Wolfson shows me labs filled with flasks of goo ranging in color from lime to forest green. The company’s scientists are testing different species of algae in search of optimal ones, both natural and bioengineered, for extracting oil. More than 30,000 algae species exist, but only a few hundred have been studied. Solazyme produces its raw algal material in huge metal fermentation tanks through a process that Wolfson says can rapidly generate large amounts of biomass. Inside the vats, algae is bathed in sugars in a pressure- and heat-controlled environment. It’s a little bit like making beer, Dillon says. To produce millions of barrels of algae crude, however, this method would require heaps of sugar and cellulosic material as well as a vast area to house the vats, which themselves could be challenging to build and maintain. About 500 miles south of Solazyme’s headquarters, San Diego-area startup Sapphire Energy—the algae firm that won Bill Gates’ backing—is betting on the open-pond method, taking advantage of sunlight, which is directly converted into lipids, algae’s oily store of energy. The company claims that it can refine its open-pond algae into not only diesel but also high-grade gasoline—an industry breakthrough. Sapphire executives are staying mum about this method. Pyle says only that it makes use of sunlight, algae, and bioengineering. Sapphire is building a 20-acre pilot farm in New Mexico to experiment with scaling up, he adds. The open-pond system is currently more expensive than one using fermentation tanks, says Department of Energy biofuels expert Fred Gerdeman. And expanding production from a few greenhouses and pilot ponds to the millions of acres of ponds required to make even a modest dent in the world’s consumption of fossil fuels would pose a considerable challenge for Sapphire and other open-pond advocates. Gerdeman believes that both enclosed-tank systems and open ponds will be part of the mix in a future algae-fuel industry. Within five years, Sapphire aims to be producing 10,000 barrels of algae oil a day. By 2022, it hopes to reach 200,000 barrels a day—about what an offshore oil platform produces. By comparison, Chevron’s worldwide operations produce about 2.5 million barrels a day. Sapphire aims to raise $1 billion to fund the expansion. “We want to build an oil company,” says Sapphire backer Burow. “This is not just a short-term play.” Related LinksFuels of the FutureChevron Responds Running on Empty
    Wed, 07 Jan 2009 13:00:00 GMT
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  • Decline of the Empire
    National Amusements The cornerstone of the empire, the family’s holding company comprises a 1,500-movie-theater chain and controlling voting shares in Viacom and CBS. Sumner owns 80 percent of National Amusements; his daughter, Shari, 20 percent. Redstone sold $233 million worth of stock in Viacom and CBS to help pay off National Amusements’ $1.6 billion in debt. CBS The network has buoyed itself with the success of the CSI franchise and has broadcast rights to the Grammy Awards show for 2009. CBS, a National Amusements holding, has been vying for the No. 1 network spot. As of mid-November, CBS’s stock was down more than 70 percent for the year. Midway Games Redstone sold his controlling stake in this videogame maker for $100,000 to a private investor in December. Redstone’s 87 percent stake in the company was an estimated $800 million investment whose market value had fallen 97 percent in the past three years. Midway was famous for creating the Mortal Kombat franchise. WMS Industries Formerly the world’s largest manufacturer of pinball machines, WMS retooled 10 years ago and has become a leading seller of casino gaming machines. Some suspect that Redstone might sell his stake in the company for some quick cash, but in 2008, WMS saw a 38 percent jump in profit over 2007. Viacom As of December, shares were down about 65 percent from the previous year, compared with a 46 percent decrease in the Standard & Poor’s media index during the same period. Viacom, controlled by ­National Amusements, includes MTV, Comedy Central, and Nickelodeon, as well as Paramount Pictures. Related LinksCrunch Time for SumnerSumner's DiscontentDivorce, Media-Mogul-Style
    Wed, 07 Jan 2009 13:00:00 GMT
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  • Cruise Vacation
    You didn’t have much shelf life as a studio executive. You’ve been criticized for putting only two movies (Lions for Lambs and Valkyrie) into production at U.A. How do you respond? Look, I don’t pay any attention to critics. I know who I am. I know what I did. Those 18 months at U.A. were about putting together a management team, building an infrastructure, securing financing, creating a label, and creating a development slate with top talent. I’m really proud of that. You still own a piece of U.A. Will you and Tom Cruise collaborate in the future? Absolutely. We are talking about four or five pictures together. How are Wall Street’s troubles affecting Hollywood? Fewer movies will be made. And I think that’s good. Every single ­weekend, movies are cannibalizing themselves. We’re in an era now where less is more. Make fewer movies. Make them better. If fewer movies are going to be made, you’ll be affected too. Will you be forced to change course? I have been strictly in the movie business, but now I’m looking at crossover. The industry needs brands. I’m looking at theater. I have things I’m not ready to announce. You were the third female talent agent at Creative Artists Agency and the second to have a child. What pressures did you face? A woman had to be far better. When I got pregnant, I didn’t tell anyone until five months in. I worked until 7 p.m. on a Friday, went into labor on Saturday, and had a C-section on Sunday. On Monday morning, I was making a deal from the hospital bed. What else have you been up to since you left U.A.? I read medical books as a hobby. I love the New ­England Journal of Medicine. If I start to get stressed, I pick up a ­medical book and I feel a lot better. Really? Why? I’m always analyzing cause and effect. And I’m fascinated by lon­gevity. Somebody said to me, if you can make it through the next 20 years, you can live to 120. Looking back, were you surprised when you heard that Viacom’s Sumner Redstone fired Cruise in 2006? I don’t look in the rearview mirror, except to adjust my makeup. That’s a joke!  Related LinksSuddenly, Death Race Must Outrun A LawsuitTom Cruise/UA Secures Its $500 Million In FundsSalaam, Hollywood!
    Wed, 07 Jan 2009 13:00:00 GMT
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  • "I'm not an idiot, you know?"
    Katie Couric is sitting in her all-white office, deep in the CBS News building in midtown Manhattan. The evening-news show she anchors has scored third place in the ratings almost continuously since she took over the top spot in 2006. But she has experienced something of a bounce since her series of interviews with Sarah Palin, which left the candidate squirming like an Alaskan sockeye caught in a net. Condé Nast Portfolio talked with Couric about feminism, Hillary, and the future of TV news. A lot of people complained about sexism in the coverage of this election. Did you see it? I do think there is still sexism in the coverage. We’re still in a place in our society where sexism is more palatable than racism. It’s not as repugnant to people. There is still a mentality that you can make jokes about how someone’s hot or a babe, and about gender roles, in a way that is completely taboo vis-à-vis race. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "article", "index" : "0"},"mediaType2":{"value" : "article", "index" : "0"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/views/blogs/mixed-media/2008/11/23/duly-quoted-no-one-wants-to-hang-with-katie","url2":"/views/blogs/mixed-media/2008/09/26/critic-palin-not-reassuring-in-cbs-sit-down","url3":"/executives/features/2008/11/24/Sam-Zell-Talks-with-Joanne-Lipman","url4":"","teaser1":""People need to accept the brand of Katie Couric into their lives ..."","teaser2":"Alessandra Stanley seems to approve of Katie Couric's interviewing skills.","teaser3":"The former real estate mogul discusses his approach to newspapers.","teaser4":"","headline1":"No One Wants to Hang with Katie","headline2":"Palin 'Not Reassuring' in CBS Sit-Down","headline3":"Zell's Sell","headline4":"","title":"More From Portfolio.com" }'); Why do you think so many people had a negative reaction to Hillary Clinton? She’s ambitious. And I think there are still qualities that when women exhibit them are less acceptable than when men naturally exhibit them—like ambition. Have you suffered from similar problems with your press coverage? I think there might be some of that. It might be because of my background—that I did a morning show and that people didn’t necessarily think I was a serious person. You know, I am sort of outgoing and friendly, and I think some people think that is incongruous with being serious and intelligent. So I think there may be all sorts of reasons, and that a lot of it is conditioned and behavioral. You asked Sarah Palin if she thought of herself as a feminist. Do you consider yourself one? Oh yeah. I am. I am. I feel very strongly that women should have equal opportunity. I believe strongly in civil rights. I don’t want to get into too much else. You have said in the past that perhaps the viewing public wasn’t ready to get its nightly news from a woman. Is that changing? Sometimes I think maybe it was because I had come from the ­Today show, too, you know? Maybe Andrea Mitchell wouldn’t have as much of a challenging transition. Because I came from a show where I kind of did everything. I mean, I flew across Rockefeller Plaza as Peter Pan one year. And suddenly I’m in an evening newscast. I think people were a little bit like, “Well, what happened to her? She used to be full of life, and now she’s very stern and serious.” Because I’m a very spontaneous person, and I do have a lot of personality. Does that sound conceited? No, it’s true. Has CBS supported all of the work you’ve been doing on the Web? I always wanted to have a strong inter­net presence, and I really pushed to have a webcast. I think CBS needs to be more aggressive, quite frankly, in putting its product on the Web and having a greater Web presence. Plus I thought the sensibility on the inter­net and the whole vibe—which makes me sound like I’m about 80—of the internet is so different, and is so much more authentic and natural and real and raw, that it would give me an opportunity to not feel as if I had to be so buttoned up.  Your YouTube channel is a little out there. Well, sometimes I think I get a little too weird. ’Cause, I mean, we would wing it 100 percent, pretty much. And so obviously it’s just loopier and more relaxed. We can make jokes. I can say to Hillary, “Why do you have a nutcracker and Sarah Palin has an action figure?” Which is probably not something I would ask her if I were doing a network-news special. Why? Because my bosses would probably choke. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "article", "index" : "0"},"mediaType2":{"value" : "article", "index" : "0"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/views/blogs/mixed-media/2008/11/23/duly-quoted-no-one-wants-to-hang-with-katie","url2":"/views/blogs/mixed-media/2008/09/26/critic-palin-not-reassuring-in-cbs-sit-down","url3":"/executives/features/2008/11/24/Sam-Zell-Talks-with-Joanne-Lipman","url4":"","teaser1":""People need to accept the brand of Katie Couric into their lives ..."","teaser2":"Alessandra Stanley seems to approve of Katie Couric's interviewing skills.","teaser3":"The former real estate mogul discusses his approach to newspapers.","teaser4":"","headline1":"No One Wants to Hang with Katie","headline2":"Palin 'Not Reassuring' in CBS Sit-Down","headline3":"Zell's Sell","headline4":"","title":"More From Portfolio.com" }'); Network-news shows are seeing their ratings wither away. Are you disappointed about the ­format’s decreasing influence? Clearly I knew this was a declining genre when I came here, because I’m not an idiot, you know? I knew that network news was declining, and evening newscasts in particular. But they really play an important role, and I thought that if I could have the opportunity to somehow revitalize it in some small way, it would be a noble endeavor. I have to believe that there is a place for quality and experience. Because many of these outlets are not necessarily legitimate news sources, whether it’s blogs or people who are spouting their opinions about this, that, and the other thing. And there should be, I think, outlets for accuracy and credibility and experience and evenhandedness. But I don’t know. What will ultimately be considered legitimate news may change in the future. There was talk a while back that suggested you were going to leave the CBS Evening News before your contract was up. All those stories were really blown out of proportion.  Meaning they were not accurate? No, they weren’t. You’re really smiling, though. Because it was a bit of a nightmare. I need a straight answer. Like any person, I want to make sure people are happy with the job I’m doing, and there are ongoing con­versations about whether we are doing the right kind of show. There was a feel­ing a while ago that it was a fairly confining format for me, so we’ve had discussions about that. But I think during the election cycle we really broke out in an important way, and our coverage was certainly praised, so I think we—“we” meaning the ­Evening News folks—are feeling very great about the product. Those stories were so twisted and taken out of context. That’s all I want to say about it. What if Larry King left CNN and they begged you to take his seat? You know what? I’ve always had this philosophy in my life that I don’t try to think about what’s around the corner. What is it like being a single mom? I have to say, sometimes it’s hard. I have a great live-in nanny, who is getting married in September and moving to England. And she’s been a huge force in our lives. Listen, it’s not easy—as any single parent will tell you—but when you have means, it’s a lot easier. But it’s challenging, and I’m as guilt-ridden as any working mom is. I just try to do the best I can, you know? I’ve run up to many a volleyball game at my daughter’s high school at 4 in the afternoon, stayed for half an hour, cheered, and run back and done the newscast. And it’s really hard when I can’t. So sometimes I wonder if my kids are going to put my face on a milk carton. But then we become reacquainted again. As you can see, my guilt is oozing out of every pore. Last question: Which newspapers and magazines do you read? Anything and everything. I’m kidding, don’t use that. That’s what Sarah Palin said.  Related LinksElection Media Champs and ChumpsIdle Chatter: Katie 'n' Sarah, New Hope for the 'S-L'Rather: Mark Cuban Is a Modern-Day Paley
    Wed, 07 Jan 2009 13:00:00 GMT
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