Business posts

From Ken Auletta's profile of Henry Blodget in the April 8, 2013 issue of The New Yorker:

Not long after the 2000 merger of AOL and Time Warner, Blodget predicted that within two years the resulting enterprise would become the world's most valuable company. It turned out to be the most disastrous merger in corporate history. Meanwhile, Blodget's compensation at Merrill Lynch rose from three million dollars, in 1999, to twelve million, in 2001.

Job creators.

We've been hearing that phrase a lot from the usual folks in the Republican party. They use it as a euphemism for the wealthiest people in the country, whom Republicans don't want to tax further, even though their current tax rate is half of what it was when I was growing up: 35% rather than 70%.

The right can't say “Don't tax the rich.” That won't play. So in a time of double-digit unemployment, someone dreamed up the term “Job creators.” The top 1% are wealthy, sure, but they're also the people who create jobs (Bill Gates, etc.), and taxing them at a higher level (at, say, 39%) will create such uncertainty that they won't expand their operations, and this will keep the economy from expanding as well. Taxing “job creators” is thus counterproductive to creating jobs.

It's a lie, of course.

The wealthiest people in this country (Bill Gates, etc.) are not job creators but profit creators. That's their job. If they have to add jobs in order to create profit, they'll do it. If they have to cut jobs in order to create profit, they'll do that, too. And if they can get you, their employee, to do more for less, they'll do that every day and twice on Sunday.

That's why the term “job creators” is such a lie. It ignores what a CEO does, what a corporation is. It ignores what capitalism is.

I've been feeling this all year. I've been waiting for someone in the mainstream media to say this all year. Nothing.

It's not the mainstream media, but recently, on his site, journalist Peter Lewis wrote about former Gannet CEO Craig Dubow, who resigned recently after six years at the helm. During his tenure, Gannett went from employing 52,000 to 32,000. Its stock went from $72 a share to $10 a share. Admittedly the last six years were particularly rough for newspapers, but—and here's the point—they weren't rough for Craig Dubow, whose salary was raised several million in 2010 to $7.9 million. Meanwhile, the pay of Bob Dickey, the head of Gannett’s U.S. newspapers division, was nearly doubled, from $1.9 million to $3.4 million, in 2010. This past summer he laid off 700 people. “While we have sought many ways to reduce costs,“ he told the workers, ”I regret to tell you that we will not be able to avoid layoffs.”

Job creators.

Dubow insists that his top priority as CEO was to serve the consumer: “We have always maintained an unwavering focus on the consumer,“ he wrote in his resignation letter. ”As a result, we have evolved into a digitally led media and marketing solutions company committed to delivering trusted news and information anywhere, anytime.”

Marjorie Magner, non-executive chairman of Gannett’s board of directors, echoed this thought. So did new CEO Gracia Martore.

Here's Peter Lewis:

These people are lying. The corporate goal is not to serve the consumer; it’s to maximize profits and pay packages for top executives. Can anyone argue that Gannett newspapers and journalism are better today, and that news consumers are better served?

How did Mr. Dubow and Gannett serve the consumer? They laid off journalists. They cut the pay of those who remained, while demanding that they work longer hours. They closed news bureaus. They slashed newsroom budgets. As revenue fell, and stock prices tanked, and product quality deteriorated, they rewarded themselves huge pay raises and bonuses.

Job creators.

Next time you hear someone use that term, feel free to punch them in the face.

One of the worst offenders.

Doing some research on The Seattle Times website the other day I came across the following link (right-hand column, third down):

I noticed the headline certainly. The NY Times reporting poorly. Didn't have their facts. According to who? Exxon Mobile Perspectives? You're effin' kidding me. Why is this even on a legitimate news website? Or is The Seattle Times no longer a legitimate news website? Or have we created a culture where legitimate news organizations are so desperate for money they'll do what they need to do to survive. Like linking to Exxon Mobile Perspectives.

I clicked through but didn't even bother to read the article by Ken Cohen, vice president of public and government affairs for Exxon Mobil Corporation. But I did see his latest post: HIGHER TAXES ON OIL COMPANIES WON'T CREATE JOBS. Really? Hard hitting.

How does that guy sleep? How do I?

Last week I happened to be in the Southdale Shopping Center, near Edina, Minn., in the middle of a weekday afternoon, and the place was a ghost town. Seven miles east, on the site of old Met Stadium, you have the Mall of America, which still brings in (and takes away) the crowds. The recession, and the digitalization of business and culture, hasn't helped Southdale, either. Even its movie theater was pretty empty.

In October 1996, 15 months into his run as founder and CEO of amazon.com, I interviewed Jeff Bezos for The Seattle Times. It was all new to me: both the Internet and interviewing people. I was actually singularly wrong for the role. I went in ready to talk about literature, about which, it turns out, Bezos didn’t know much, and we wound up talking about technology and business issues, about which I knew even less. The resulting Q&A still feels valuable from an historical perspective. Part I can be read here.

How do you get your list of books together?
We get the bulk of our data from book wholesalers who have computerized inventory data bases of their own, which they use to manage their warehouse operations. We get data from the Library of Congress. And we get data directly from publishers. Any publisher can come to our website and one of the links at the bottom of the home page—there is one that says “Is there an author in the house?” and there's another one that says “Calling all publishers.” A tiny fraction of the data we actually enter by hand.

Which books are the big sellers?
We sell everything, but we are probably disproportionately strong in literary fiction, science fiction, and computer books, Internet books, things you would expect. But we also sell a huge amount of romance novels. We sell a disproportionately small number of romance novels, but romance is such a huge category. It's a small piece of a huge pie.

Do you have a favorite book?
It used to be Dune. I'm sort of a techno-geek, propeller-head, science-fiction type, but my wife got me to read Remains of the Day and I liked that a lot. I also like the Penguin edition of Sir Richard Francis Burton's biography

Bugs in the system?
There aren't any bugs per se but there are things we want to do better; and there are whole new things that we want to do.

Such as?
We want to increase the amount of customer-to-customer interaction that we have, and increase the amount of customer-to-author interaction. We want to set the store up so we can redecorate the store for each individual who walks in; so you can set up a series of preferences and say, “I never read romance; don't ever show me any romances.”

What do you mean?
The whole page would be personally designed for you. So if you said, “I really love literary fiction”...etc., well, here's a great science ficton novel that we actually think you'd like based on your preferences in literary fiction. Stuff like that. In case you want to broaden out.

It would all be done automatically. It would have to be. The way it might work is you might come in and we present you with a list of 100 books that are in a particular genre, like literary fiction, let's say, and you would rate the ones you liked the most and disliked the most, and based on what you liked and disliked the computer would be able to form a profile of your particular tastes, and it might try to match you up with people of similar tastes. You call that your affinity group. What are things you haven't read that people in your affinity group love? And then it would recommend those things to you.

Are there other on-line booksellers?
There are more than a thousand on-line booksellers. We are by far the largest and best-known and the one doing the best job of customer service. There’s Book Stacks Unlimited in Ohio--they only offer about 400,000 titles. We discount our prices and they don't. We discount the top 300,000 bestsellers from 10 percent to 30 percent. Again, that's almost twice as many titles as the largest physical bookstores even carry.

We can afford to do that because we have such a lower cost structure. Our desks are made of doors. We spend money on things that matter to customers. We have the world's best servers—we use digital alpha servers—64-byte machines with a gigabyte of RAM and all this stuff. We hire only the most talented computer programmers.

How will all of this affect physical bookstores?
I think you'll see a continuation of the trend that's already in place, which is that physical bookstores are going to compete by becoming better places to be. They'll have better lattes, better sofas, all this stuff. More comfortable environments. I still buy about half of my books from physical bookstores and one of the big reasons is I like being in bookstores. It's just like TV didn't put the movies out of business—people still like to go to the movie theater, they like to mingle with their fellow humans—and that's going to continue to be the case. Good physical bookstores are like the community centers of the late 20th century. Good physical bookstores have great authors come in and you can meet them and shake their hands, and that's a different thing. You can't duplicate that on-line.

Now there's a whole series of stuff that we're going to do on-line that you could never do in a physical bookstore; and we're doing some of that now. Any customer, any browser, anyone in the world, can come to amazon.com and review any book on our bookshelves; you can't do that in a physical bookstore. What are you going to do--put yellow 3M post-its on the spine?

How do you police that?
On a daily basis we have people who read through all the submissions and weed out the ones that are frivilous; but it's an incredibly small number of people who actually do that. We had God review the Bible. We had J.D. Salinger review Catcher in the Rye. It was very funny. The person who did that one actually had a terrific sense of humor. But we just get rid of it.

But if you want to trash a book, that's fine with us. If you want to come in and say “I thought this was John Grisham's worst book ever; he should be embarrassed by foisting this on us. It's not as good as Time to a Kill, blah blah blah,” that helps people make purchasing decisions; and that's fine with us.

Our whole editorial department gets together the third Tuesday of every month--or something like that--at one of their houses, and they sit and read through all of these and make the decisions. [There are] eight people in the department.

Why call it “amazon”?
The amazon is the earth's biggest river and we’re the earth's biggest bookstore.

How many employees do you have now?
Just over 100. We opened the store almost fifteen months ago, July 16th, 1995, and we've been growing at 34 percent a month, which is basically unheard of. That annualizes to more than 3000 percent a year. We've been in four different offices in the last fourteen months, always moving because we don't have enough space—both in terms of our staff and our warehouse space. We're about to move our warehouse again. We've shipped books now to over 95 different countries.

Anything new on the horizon?
We've made it possible for any website on the entire Internet to have their own bookstore in association with amazon.com. No matter how small or big your website, you can add a bookstore to it. And we pay you 8 percent of revenues for any order you send us through your bookstore. It costs nothing up front. All you have to do is come to our homepage and fill out an on-line application form; we give you a special ID number and you encode in the URL that you use to point to the books in our catalogue. That special ID number allows us to track where the books came from.

We've had this open now for just over two months. It’s called the Associates Program, and we already have over a thousand websites. There's one Associate who has a website that sells meteorites. This guy knows everything about meteorites but you could never set up in the physical world a store that just sold books on meteorites. It would never make any money.

I came up with the idea by trying to figure out "How can amazon.com become experts on all 300,000 Library of Congress narrow niche subject categories?” There's just no way. But there are such experts out there. And they already have websites. Let them do it.

--October 1996

In October 1996, 15 months into his run as founder and CEO of amazon.com, I interviewed Jeff Bezos for The Seattle Times. It was all new to me: both the Internet and interviewing people. I was actually singularly wrong for the role. I went in ready to talk about literature, about which, it turns out, Bezos didn’t know much, and we wound up talking about technology and business issues, about which I knew even less. The resulting Q&A still feels valuable from an historical perspective ...

So how did you come up with the idea for this company?

In the spring of '94 I came across this guy named Quartermain. At that time he was collecting statistics on Internet growth. He had a web page where he did this.

Nobody knew, nobody had a clue, how many people were on-line. What you could measure, and what Quartermain was measuring, was the rate of Internet growth. He set up ... sniffers so he could measure, at certain key points going past on the Internet, these packets of data and see what protocol they were in; and if they were in http protocol he knew they were web packets. So because he wasn't measuring the whole Internet, just these choke points, he didn't even know what the base usage of the Web was. But he could measure very accurately the rate of growth; and the rate of growth was 2300 percent a year. I had never seen anything grow at 2300 percent a year.

At the time I was working for a very specialized investment bank in New York City called D.E. Shaw and Co. It is, unarguably, the largest quantative hedgefund in the world. What they did was they made lots and lots of tiny little trades—computers decided all the trades—and all the trades were made based on inefficiencies in the equity and bond markets. Totally technologycentric. Very similar to amazon.com in that sense. In other words, amazon.com is not a technology company per se but we're a completely technologycentric company—we live and die by the computer programs we write—and D.E. Shaw was the same way but in the realm of finance.

I was one of four senior people [at D.E. Shaw] who helped to run that company, ran a couple of the firm's profit centers; but this startling growth statistic of 2300 percent a year sort of pried me out of there. I said “This is interesting. What kind of businesses can you do on the Web that would actually make sense?” It had to be a business where the value proposition to the customer was incredibly high, because this Web technology was completely in its infancy. It's immature. There are lots of inconveniences associated with using it: your modem line hangs up on you, your call-waiting clicks in and everything goes crazy, there are so many points on the Internet where things don't work right. Images take a long time to download. So if you're going to get people to use your service on-line, whatever it is, you have to be offering something with an incredibly strong value-proposition to make them willing to put up with that large level of inconvenience.

I looked at several different areas and finally decided that one of the most promising ones is interactive retailing. Then I made a list of 20 products, and force-ranked them, looking for the first-best product to sell on-line.

In the top five were things like magazine subscriptions, computer hardware, computer software, and music. The reason books really stood out is because there are so many books. Books are totally unusual in that respect—to have so many items in a particular category. There are one and a half million English-language books, different titles, active and in-print at any given time. There are three million titles active and in-print worldwide in all languages. If you look at the number two category in that respect, it's music, and there are only about 200 thousand active music CDs. Now when you have a huge number of items that's where computers start to shine because of their sorting and searching and organizing capabilities. Also, it's back to this idea that you have to have an incredibly strong value proposition. With that many items, you can build a store on-line that literally could not exist in any other way. It would be impossible to have a physical bookstore with 1.5 million titles. The largest physical bookstores in the world only have about 175,000 titles. It would also be impossible to print the amazon.com catalogue and make it into a paper catalogue. If you were to print the amazon.com catalogue it would be the size of seven New York City phone books.

So here we're offering a service that literally can't be done in any other way, and, because of that, people are willing to put up with this infant technology.

That's actually one of the huge cost advantages we have over physical bookstores: We don't have to inventory all the books. Even the ones we do inventory we don't have to inventory in expensive retail real estate; we inventory in very inexpensive warehouse space.

If you look on our website, every book has its own web page, and one of the things that's on each book's web page, is what we call the availability status. So we're telling our customers what the availability is on each individual title. There are five different availability categories: There are things that are usually shipped within 24 hours; things that are usually shipped within 2-3 days; thngs that are usually shipped within one to two weeks; things that are usually shipped within four to six weeks; and there's a fifth category, not yet published, shipped when available.

So the books that we actually inventory in our warehouse are the ones that are marked “shipped within 24 hours.” Those are the best-selling books.

Then there are about 400,000 titles—keep in mind that's more than twice as many titles as you'd find in the largest of the superstores—that we can ship within 2-3 days. Those we get from wholesalers, like Pacific Pipeline, or Ingram, the world's largest book warehouse is in Roseberg, Oregon, another reason why we're located in Seattle. They have more titles than in any single warehouse in the country. We use a network of about a dozen different wholesalers to provide us with rapid access to the 400,000 best-selling titles.

Then the next 500,000 titles are either one to two week titles or four to six week titles. Those we get directly from 20,000 different publishers, and, depending upon the publisher, either one-to-two weeks or four-to-six weeks. Then there are these books that are not yet published.

Tomorrow, part II: Bezos' favorite books, why choose “amazon,” the two-month-old Associates Program, and that futuristic concept of “redecorating the store for each customer”...

I read the following three paragraphs, from the article “Distilling the Wisdom of CEOs” by Adam Bryant, in yesterday's New York Times. Three grafs was as far as I got before I began railing in frustration:

IMAGINE 100 people working at a large company. They’re all middle managers, around 35 years old. They’re all smart. All collegial. All hard-working. They all have positive attitudes. They’re all good communicators.

So what will determine who gets the next promotion, and the one after that? Which of them, when the time comes, will get that corner office?

In other words, what does it take to lead an organization — whether it’s a sports team, a nonprofit, a start-up or a multinational corporation?

In other words?

What is Bryant assuming here? He's assuming that the employee who demonstrates the greatest leadership skills will get promoted. He's assuming that promotions are based upon positive skills. He's assuming nothing pejorative—ruthlessness, ass-kissing, bad-mouthing competition—goes into success or promotion in a modern corporate office.

I mean, c'mon.

In distilling that CEO wisdom, Bryant comes up with the following traits that will help those 100 hard-working 35-year-olds (and presumably you and me):

• passionate curiosity
• battle-hardened confidence
• team smarts
• a simple mind-set
• fearlessness

All positive, of course. No CEO got where they got because of anything untoward. Maybe we should add “self-promotion” to the list. “Selective memory.” “Bullshit.”

Interesting, too, how these five traits may help the CEO but not necessarily the company. Or us. You'll probably find the last four traits, for example, in every CEO that led us straight into the global financial meltdown. When it comes to investing in derivatives based upon subprime mortage loans, fearfulness has its place.

Going through security at SeaTac, and grabbing one of those gray plastic bins for my shoes, which were off, and my watch, which was off, and my computer bag, which still had the computer in it, I saw an ad on the bottom of the plastic bin:

Microsoft
The NEW BUSY would have their BELTS OFF by NOW
@hotmail.com

First thought: Is it a good ad when the response of almost everyone who reads your ad is: “Fuck you”?

“Privatization does not mean you take a public institution and give it to some nice person. It means you take a public institution and give it to an unaccountable tyranny.

"Public institutions have many side benefits. For one thing they may purposely run at a loss. They're not out for profit. They may purposely run at a loss because of the side benefits. So, for example, if a public steel industry runs at a loss it's providing cheap steel to other industries. Maybe that's a good thing. Public institutions can have a counter-cyclic property. That means they can maintain employment in periods of recession, which increases demand, which helps you to get out of recession. A private company can't do that. In a recession, you throw out the work force. That's the way you make money.”

—Noam Chomsky
“The Corporation” (2002)

Here are four names to remember. There are more but these are the ones I know:

Michael Burry
Greg Lippmann
Steve Eisman
John Paulson

They're the names to trot out whenever someone—particularly a higher up at an investment bank—says, vis a vis the subprime mortgage disaster, that no one saw it coming.

No, people saw it coming. These guys saw it coming. They bet against it and made hundreds of milions. Or billions.

I certainly didn't see it coming. I'm an idiot when it comes to finance. I'm even more of an idiot when you get into esoteric matters like banks selling mortgages and bundling them into bonds, which are rated by agencies that aren't rating them properly, and some of these bonds, the worst of the bonds, are sometimes rebundled into new packages called collateralized debt obligations, or CDOs, that are also rated by agencies that aren't rating them properly, and then side-bets are placed on those... I mean, you lost me back at the pass. It's partly why I read Michael Lewis. He writes well enough that even I can fathom some of this stuff. Right now I'm reading "The Big Short: Inside the Doomsday Machine," about the subprime mortgage disaster.

Man, is it depressing.

There was an article in The New York Times yesterday, Andew Ross Sorkin's column, about uber-investor Warren Buffett coming to the defense of Goldman Sachs. He said: "I don't have a problem with the Abacus transaction, and I think I understand it better than most." He probably does. I didn't even know it was called the Abacus transaction. All I know is that John Paulson helped put together...what? A bond? Securities? An instrument? Then he shorted that instrument, the Abacus instrument, and Goldman Sachs didn't tell the people who bet long that the instrument was put together in part by the guy who was shorting it; the guy on the other side of their bet.

Buffett says:

“I don’t care if John Paulson is shorting these bonds. I’m going to have no worries that he has superior knowledge. ... It’s our job to assess the credit.”

To which Sorkin chimes in: "The assets are the assets. The math either works or it doesn’t."

All of that makes sense. But it still sounds wrong. It's like finding out that the lineup of the baseball team I'm betting on was put together, not by the manager, whom I trust, but by the guy in the stands who's betting against my team, whom I don't. This behavior may not be illegal but it should be.

There's also the matter of being able to see the line-up. That lineup may not be online. It may not be posted in the dugout. The manager might not exchange it with the other manager's lineup before the game begins. Buffett calls it "assessing the credit," but according to Lewis, the bond market is opaque in a way that the stock market, which is more heavily regulated, is not. It's often hard to assess the credit. Was this particular instrument that John Paulson created for Goldman Sachs one of those that was hard to assess? I don't know. Does Warren Buffett, who understands these things better than most, have greater access to Wall Street firms and can thus assess the credit more easily than, say, a Michael Lewis, or you, or I? I don't know. These are merely my follow-up questions. The follow-up questions that Andrew Ross Sorkin didn't ask.

Let's pull back further. Are roles being blurred here? Why are investors on either end of a deal creating that deal? Why are investment banks placing bets on their own creations? Why is this allowed? Why is this still going on?

Back to Lewis' book. Page 158:

It was in Las Vegas [in Jan. 2007] that [Steve] Eisman and his associates' attitude toward the U.S. bond market hardened into something like its final shape. As Vinny put it, "That was the moment when we said, 'Holy shit, this isn't just credit. This is a fictitious Ponzi scheme.'" In Vegas the question lingering at the back of their minds ceased to be, Do these bond market people know something that we do not? It was replaced by, Do they deserve merely to be fired, or should they be put in jail? Are they delusional, or do they know what they're doing? Danny thought that the vast majority of the people in the industry were blinded by their interests and failed to see the risks they had created. Vinny, always darker, said, "There were morons and crooks, but the crooks were higher up."

That's Eisman and associates in Jan. 2007. They saw it coming. And Michael Burry? He saw it coming in 2003.

You should read Lewis' book. Burry is the most interesting character in it but Eisman is the big quote. I leave with him:

I think Alan Greenspan will go down as the worst chairman of the Federal Reserve in history. That he kept interest rates too low for too long is the least of it. I'm convinced that he knew what was happening in subprime, and he ignored it, because the consumer getting screwed was not his problem. I sort of feel sorry for him because he's a guy who is really smart who was basically wrong about everything.

This is a story that's both personal and political. It's personal because it's about Patricia, my Patricia. It's political because... Well, keep reading.

It's a post from illustrator Robert Neubecker on the creation of Slate, and how the look of Slate came about.

In 1995, Patricia moved from New York, where she'd lived for 20 years, and where she'd been, among other things, art director at Newsweek magazine, to Seattle, where she grew up, and where she'd just gotten a gig with MSN. Bill Gates also wanted to start an online-only magazine as well, to show that it could be done, and he'd hired Michael Kinsley to get it rolling. Kinsley moved in across the hall from Patricia, Patricia introduced herself and suggested she help on the art side. She pitched a couple of primary illustrators: Mark Stamaty, Philip Burke and Robert Neubecker. Here's Neubecker:

Patricia bought a few of these drawings and, when they were developing a look for Slate, showed them to Mike and the Slate editors. The idea was to use simple black and white drawings that could download quickly on the old, slow, dial up modems. I had newspaper experience, and had worked extensively with Patricia when she was design director at Newsweek, so she knew that I could produce on short deadlines. So far so good. But, then the Microsoft people suggested, why couldn’t we just hire a high school kid who could draw, pay him peanuts, and come up with our own cartoons?

They hired the high school kids. Of course they didn't work out and Patricia kept pushing toward the professionals. Eventually they decided on Neubecker and Stamaty, but the contracts, as Microsoft contracts are, sucked. Patricia kept pushing in this area, too. Neubecker again:

I worked all summer without a contract or a paycheck while Patricia patiently, persistently moved the contract from WFH to the normal one time usage, artist copyright, that is the ethical norm.

Eventually it worked out. Because there was a Patricia. If there wasn't a Paticia, Slate's design would've been as screwed-up as any Microsoft design. Patricia's sister-in-law, Jayne, has a phrase for when she buys something cheap and it doesn't work: “I hate getting what I paid for.” That's Microsoft. It often gets what it pays for. 

(Sidenote: I'm in the midst of something similar with Microsoft. Well, “midst.” Almost two years ago, I wrote a piece for MSN on “The Dark Knight” and I haven't been paid for it yet. The contract with MSN was different than the contract for MSNBC, for which I wrote for many years. At MSN, they'd broadened the NDA, the Non-Disclosure Agreement, to such an extent that the signer couldn't write about Microsoft. Ever. So I didn't sign it, and I told them I wouldn't sign it, and there was a flurry of activity for a few days afterwards and then silence. Apparently if you don't sign their contract they have no mechanism in place for a one-time fee. So I haven't been paid. I'm sure there are others in the same boat. I'm sure there's a good class-action lawsuit waiting to happen. Maybe it's already happening. Here's hoping.)

Neubecker, a talented man, is more optimistic than I am about the way things are going for people like him: people whose value lies in the quality of the work they do; whose work can't be quantified:

There was an explosion of illustration being used online in ’99 and ’00 before the tech bubble burst. This is gradually coming back and with the advent of the I-Pad and similar devices I expect this to open up more. Long columns of grey type is always boring—even in the New Yorker, bless them. Photos all look alike after a while. I have two web illustration jobs on now, series of drawings.  One of the nicest jobs I did last year was a web animation I did for a pharma company. I teamed up with Rob Donnally from Slate who made the drawings move. I expect to see much more of that as time goes on. And print, like radio, I don’t think will ever go away. They say video killed the radio star. Tell that to Howard Stern.

Except the radio star in mind was a musician, a singer, someone who raised the spirit. It wasn't what Howard Stern is. Or what Rush Limbaugh is. You can't look at what radio has become and not be saddened.

Neubecker's story is a nice story with a happy ending, but it reminds me of Michael Mann's “The Insider”: it's about a battle being won in a war that everywhere else is being lost. And there are fewer insiders like Patricia fighting for us.

"Senior management's job is to pay people. If they fuck a hundred guys out of a hundred grand each, that's ten miliion more for them. They have four categories: happy, satisfied, dissatisfied, disgusted. If they hit happy, they've screwed up; They never want you to be happy. On the other hand, they don't want you so disgusted you quit. The sweet spot is somewhere between dissatisfied and disgusted."

—Greg Lippmann of Deutsche Bank, in Michael Lewis' "The Big Short," pg. 63. Last week, Lippmann, who not only bet against the subprime housing market but spread word that others should bet against the subprime housing market, too (he was, Lewis, writes, the "Patient Zero" of those bets), left Deutsche Bank for a hedge fund founded by Fred Brettschneider.

"Really, it was a federal issue. Household [Finance Corporation] was peddling these deceptive mortgages all over the country. Yet the federal government failed to act. Instead, at the end of 2002, Household settled a class action suit out of court and agreed to pay a $484 million fine distributed to twelve states. The following year it sold itself, and its giant portfolio of subprime loans, for $15.5 billion to the British financial conglomerate the HSBC Group.

"Eisman was genuinely shocked. 'It never entered my mind that this could possibly happen,' he said. 'This wasn't just another company—this was the biggest company by far making subprime loans. And it was engaged in just blatant fraud. They should have taken the CEO out and hung him up by his fucking testicles. Instead they sold the company and the CEO made a hundred million dollars. And I thought, Whoa! That one didn't end the way it should have.'"

—from Michael Lewis' "The Big Short: Inside the Doomsday Machine," pg. 18

So our search for a culprit in the global financial meltdown has taken us from Nick Paumgarten's "The Death of Kings" in the May New Yorker (where many were called but no one chosen), to Michael Lewis' "The Man Who Crashed the World" in the July Vanity Fair (which chose Joe Cassano, head of the financial products group at A.I.G.).

John Cassidy, in a New Yorker piece last month called "Rational Irrationality," suggests a culprit closer to home: You. OK, me. OK, all of us. Not in a "we're all guilty" way but in a "human nature" way. Cassidy suggests that those involved didn't act particularly greedy or irrationally; they acted normally greedy and rationally. They acted the way most of us do. And they will keep doing so. And that's the problem.

He starts with a factual metaphor: the opening of the Millennium Bridge in June 2000, and how, apparently because the bridge's architects hadn't anticipate so much foot traffic, the bridge, with people on it, began to sway a bit; but the more pedestrians adjusted to the swaying the worse the swaying got. Engineers call this phenomenon "synchronous lateral excitation," and Cassidy says, in a non-metaphoric way, it's responsible for our booms and busts. We all do what we all do. Or to quote Catch 22:

Dobbs: Look, Yossarian, suppose, just suppose, everyone thought the same way you do.
Yossarian: Then I'd be a damn fool to think any different.

When the subprime mortgage was going gangbusters, why wouldn't you get involved? When it faltered, why wouldn't you get out? Cassidy writes:

The trigger [for the Global Financial Meltdown] was, of course, the market for subprime-mortgage bonds—bonds backed by the monthly payments from pools of loans that had been made to poor and middle-income home buyers. In August, 2007, with house prices falling and mortgage delinquencies rising, the market for subprime securities froze. By itself, this shouldn’t have caused too many problems: the entire stock of outstanding subprime mortgages was about a trillion dollars, a figure dwarfed by nearly twelve trillion dollars in total outstanding mortgages, not to mention the eighteen-trillion-dollar value of the stock market. But then banks, which couldn’t estimate how much exposure other firms had to losses, started to pull back credit lines and hoard their capital—and they did so en masse, confirming Shin’s point about the market imposing uniformity. An immediate collapse was averted when the European Central Bank and the Fed announced that they would pump more money into the financial system. Still, the global economic crisis didn’t ease up until early this year, and by then governments had committed an estimated nine trillion dollars to propping up the system.

Whatever the asset class may be—stocks, bonds, real estate, or commodities—the market will seize up if everybody tries to sell at the same time. Financiers were accordingly obliged to keep a close eye on the “mass psychology of the market,” which could change at any moment. Keynes wrote, “It is, so to speak, a game of Snap, of Old Maid, of Musical Chairs—a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops.”

For the second time this year, The New Yorker has given us a must-read article that's only available online by subscription. Haven't read it? You should subscribe. You also might still find it on shelves. Hell, you can borrow my copy. It's from the Sept. 21st issue, and it's called "Eight Days" by James B. Stewart. All about those eight days last September when the world financial system teetered, creaked, raised dust, but didn't...quite...fall. A lot of good inside information. A lot of good reporting. Key sum-up graph for me, about halfway through (italics mine):

The Treasury official described the situation: "Lehman Brothers begat the Reserve collapse, which begat the money-market run, so the money-market funds wouldn't buy commercial paper. The commercial-paper market was on the brink of destruction. At this point, the banking system stops functioning. You're pulling four trillion out of the private sector"—money-market funds—"and giving it to the government in the form of T-bills. That was commercial paper funding GE, Citigroup, FedEx, all the commercial-paper issuers. This was system risk. Suddenly, you have a global bank holiday."

I'd recommend laissez-faire folks in particular read the piece. You still hear them from time to time—maybe more insisently now that last September is a memory and folks have pitchforks out for bankers and brokers. They should've let Bear collapse. They should've let A.I.G. collapse. Let the market be the market. But letting Lehman Bros. collapse was bad enough. If A.I.G. had collapsed, everything would have collapsed. Is this "bailing out Wall Street"? To an extent. Trouble is we're all connected to Wall Street. We're all connected to institutions we don't know about until they fail. Tim Geithner: "It's not Wall Street that suffers when you 'teach people a lesson.'"

We're definitely at an impasse. The momentum my entire life has been toward merging big companies into bigger companies into behemoths that can compete on a global scale. But then you wind up with a company too big to fail. Last September showed why we can't have that. So something's gotta give.

Last May, in his essay “The Death of Kings” in The New Yorker, Nick Paumgarten, among other tasks, looked for the worst offender in the Global Financial Meltdown, a “sin eater,” he says, then writes:

So far, Bernie Madoff, John Thain, Dick Fuld, Joseph Cassano, and even Jim Cramer, to name a few who have been cast in the role, have proved insufficient.

Michael Lewis, author of “Liar’s Poker” back in the day, and “Moneyball in a more recent day, says not so fast. His piece on A.I.G. in the July Vanity Fair, “The Man Who Crashed the World,” not only offers one of the clearest pictures of this huge, vague mess, it offers up that worst offender: the aforementioned Joe Cassano, head of A.I.G. F.P. (Financial Products.)

Because of Lewis’ connection with Wall Street—as a trader for Solomon Brothers in the 1980s—he became (initially, an unwilling) confidante first to A.I.G’s Jake DeSantis, for whom Lewis opened the doors to the New York Times Op-Ed page, and then to a host of mostly anonymous A.I.G. F.P. employees. who gave him the inside story of A.I.G. F.P. in the 2000s. It’s a familiar story to almost anyone who’s had an idiot, micromanaging boss. The difference is in the damage this particular boss did.

Read the entire article. Lewis gives us a quick background on how A.I.G. became Wall Street’s designated insurer for what were still perceived to be fairly risk-free mortgage securities. He writes:

The risks it ran were probably trivial in relation to its capital, because the risks that the financial system wanted to lay off on it were, in fact, not terribly risky.

Then the clouds darken:

At the end of 2001 its second C.E.O., Tom Savage, retired, and his former deputy, Joe Cassano, was elevated. Savage is a trained mathematician who understood the models used by A.I.G. traders to price the risk they were running—and thus ensure that they were fairly paid for it. He enjoyed debates about both the models and the merits of A.I.G. F.P.’s various trades. Cassano knew a lot less math and had much less interest in debate...

But A.I.G. F.P. was a subdivision of A.I.G. How did the parent company allow someone who knew little about the product, wasn’t interested in debate, and punished those who didn’t agree with him come to power? The long answer is that they always do. The short answer is here:

A.I.G. F.P.’s employees for their part suspect that the only reason [A.I.G. Hank] Greenberg promoted Cassano was that he saw in him a pale imitation of his own tyrannical self and felt he could control him. “So long as Greenberg was there, it worked,” says one trader, “because he watched everything Joe did. After the Nikkei collapsed [in the 1990s], a trader in Japan lost 20 million. Greenberg personally flew to Tokyo and took him into a room and grilled him until he was satisfied.” In March 2005, however, Eliot Spitzer forced Greenberg to resign. And, as one trader puts it, “the new guys running A.I.G. had no idea.” They thought the money machine ran on its own, and Cassano did nothing to discourage the view. By 2005, A.I.G. F.P. was indeed, in effect, his company.

But almost every company has guys like this. You’ve probably worked for guys like this. And they’re not bringing down the entire financial system. Something else had to be going on:

The more subtle change inside A.I.G. F.P. occurred not long after Cassano assumed control. ... The banks that used A.I.G. F.P. to insure piles of loans to IBM and G.E. now came to it to insure much messier piles that included credit-card debt, student loans, auto loans, prime mortgages, and just about anything else that generated a cash flow. ... Because there were many different sorts of loans, to different sorts of people, the logic applied to corporate credit seemed to apply to this new pile of debt: it was sufficiently diverse that it was unlikely to all go bad at once. But then, these piles, at least at first, contained almost no subprime-mortgage loans.

Here’s the telling stat:

The combination of the dot-com bust and the 9/11 attacks had led Alan Greenspan to pump money into the system, and to lower interest rates. In June 2004 the Fed began to contract the money supply, and interest rates rose. In a normal economy, when interest rates rise, consumer borrowing falls—and in the normal end of the U.S. economy that happened: from June 2004 to June 2005 prime-mortgage lending fell by half. But in that same period subprime lending doubled—and then doubled again. In 2003 there had been a few tens of billions of dollars of subprime-mortgage loans. From June 2004 until June 2007, Wall Street underwrote $1.6 trillion of new subprime-mortgage loans and another $1.2 trillion of so-called Alt-A loans...

And here, to a certain extent, is why this was happening:

Perhaps the biggest reason for this [booming demand for housing and a continued rise in house prices] was that the Wall Street firms packaging the loans into bonds had found someone to insure against what turned out to be the rather high risk that they’d go bad: Joe Cassano.

A.I.G. F.P. ... went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. And yet no one at A.I.G. said anything about it...

I like stories of the guys who figure it out early and who complain to deaf ears. Gene Park was one such guy:

He suspected Joe Cassano didn’t understand what he had done, but even so Park was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost, who had no clue, but then, his job was to sell, not to trade. “None of them knew,” says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing—and paying them for their talent!

Eventually, thanks to Gene Park, Joe Cassano figured it out before most others and A.I.G. F.P. stopped insuring the risky sub-prime mortgage bonds. But it was already too late. Worse, in 2006 and 2007, Wall Street took on the risk themselves, resulting in hundreds of billions of dollars in losses there. Then the earlier, A.I.G.-insured subprime mortgages began to default, too.

The system was built on the premise that everyone wouldn’t, couldn’t default at the same time; then, to continue making easy money in down times, everyone went about making sure that this unlikeliest of scenarios became more and more likely.

“Until the spring of 1978, when Salomon Brothers formed Wall Street’s first mortgage security department, the term borrower referred to large corporations and to federal, state, and local governments. It did not include homeowners. A Salomon Brothers partner named Robert Dall thought this strange...

”The problem [with the inability to see big business in home mortgages] was more fundamental than a disdain for Middle America. Mortgages were not tradable pieces of paper; they were not bonds. They were loans made by savings banks that were never supposed to leave the saving banks. A single home mortgage was a messy investment for Wall Street, which was used to dealing in bigger numbers. No trader or investor wanted to poke around suburbs to find out whether the homeowner to whom he had just lent money was creditworthy. For the home mortgage to become a bond, it had to be depersonalized.

“At the very least, a mortgage had to be pooled with other mortgages of other homeowners. Traders and investors would trust statistics and buy into a pool of several thousand mortgage loans made by a savings and loan, of which, by the laws of probability, only a small fraction should default...”

— from Michael Lewis’ “Liar’s Poker,” pp. 83-85

As I was reading Nick Paumgarten’s New Yorker article “The Death of Kings” last week (late to the party again: it’s from the May 18th issue), I kept wondering why it wasn’t a topic of conversation everywhere. Besides the obvious reasons: It’s long, about finance, in the New Yorker. On the other hand: It’s well-written, deep, scary. Maybe those are the same hand. A Google search on the terms “The Death of Kings” and “Nick Paumgarten” brought up less than a thousand hits. I don’t expect viral, I don’t expect Adam Lambert saying he’s gay or what’s painted on Sarah Palin’s toes, but can’t it at least be a little communicable?

Compounding the problem: It’s only online as a small excerpt on the New Yorker’s site. For subscribers like myself, yes, you can read the whole thing, but in .pdf form, making it difficult to copy and share. I understand the rationale—buy the magazine already—but it does limit its impact in our lazy, online world.

Shame. It’s an article that should be read. It’s about Paumgarten’s search for a wise man in the global financial meltdown. Someone who knew early and who might know early again where we’re heading. It’s a gloomy ride. It begins with unnamed insiders recounting when they knew the jig was up (watching a commercial for a subprime lender, studying debt vs. GNP graphs, learning that their cleaning woman in New York bought a house in Virginia to flip), and then wonders, from the center of the storm, how big the storm is and how much damage it will cause:

This doesn’t look like anything yet. The cities aren’t crumbling; the Plains aren’t turning to dust; your four grandparents are not sharing a bed...

What’s our original sin? How many years are we paying for? Since W.? Since Reagan? Since FDR? Since McKinley? Reading, you almost get a sense that our entire economic system has been funded on an illusion that kept us afloat, as surely as Wile E. Coyote’s illusion that he’s on land keeps him running on air. When realization sinks in, hold up a sign: Bye-bye.

One of his wise men is Colin Negrych, a private market philosopher/trader, who was in that 1985 Salomon Brothers’ training session portrayed in Michael Lewis’ “Liar’s Poker,” and who, among his aphorisms, quotes singer Robbie Fulks: “It’s a full-blown chore overlookin’ what’s plain to see.” What have we been overlooking? Debt. “Debt is the story,” he says. Later he adds: “What constituency is there for pessimism? People believe optimism is necessary, an American right. The presumption of optimism is the problem. That’s what creates the debt we have now.”

He’s full of pithy advice. “This whole culture has been set up to see stocks and homes as annual riskless investments. They most assuredly are not.” So that “whole culture” is, what, 10 years old? More? But not pre-1970s. Homes used to be places to live, jobs places to work. Both were stable.

“What has also run aground,” Paumgarten writes, “is a revolution in financing dating back to the nineteen-seventies.” He’s talking about all the stuff I don’t get, or am only beginning to vaguely get: the end of Glass-Steagall, which separated commercial from investment banks; the creation of interest-rate swaps; new ways to securitize debt:

They pooled assets that yielded a regular flow of payments (mortgages, car loans, credit-card receivables, etc.) and then divided the pool into tranches, ranked according to the order of repayment. Pieces of each tranche are sold to investors as securities—a claim on a portion of the payments. The senior tranches get paid back first but yield less. The equity branches, last in line, get paid more to take on the higher risk of not being paid at all. The idea is to spread and therefore mitigate the risk of lending, and in turn lower the cost of borrowing.

OK, I still don’t get it. Once money goes abstract I’m lost. But I remember the horror I felt watching that “60 Minutes” episode last fall in which Steve Kroft described how there were basically bets on all those failing subprime mortgages and no money to cover the bets. I imagined bankers rolling dice in a backroom. I still do. I kept thinking: Is this legal? Should it be?

Paumgarten writes the piece with short, terse sentences,  as if he’s holding his breath, as if he’s waiting for something else to collapse. How fragile is the entire system now? How much are we overleveraged? Wasn’t it 20-1? Is it still?

We get stories from the front lines about unnamed bankers and traders. The jobs lost. The lessons learned. The walls closing in. There’s a search for a villain, too, a face to embody the whole horrible mess. Even as Paumgarten fails in this task—dismissing Madoff as too small, Lehman and Bear as mere portions, and Greenspan as not pernicious enough—I wonder over its efficacy. Paumgarten feels a villain is necessary but I don’t. The very point of the system was its abstractness. What’s happened to my loan? Who’s playing craps with it where? It deserves an abstract villain.

Now It’s our very culture that’s abstract, diffuse, difficult to pinpoint. We’re all over the place. Which is why “The Death of Kings” isn’t a topic of conversation everywhere. But it should be. Libraries probably have the piece if you want to check it out. If they're still open.

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