Former governor and white-collar crime buster Eliot Spitzer tells Daniel Gross that levying fines for insider trading is easy compared to pinning guilt on a company’s top dogs.
The law-enforcement response to the financial crisis and misdeeds on Wall Street has generally been disappointing. There has been a steady procession of insider-trading cases, in which hedge-fund managers have been nailed for manipulating the market. But the failures of AIG, Lehman Brothers, Bear Stearns, Fannie Mae, and Freddie Mac required massive bailouts and inflicted enormous damage on the economy. While Wall Street firms have entered into a series of expensive settlements, there have been virtually no prosecutions of top executives.
Eliot Spitzer agrees with those criticisms—to a point. “There is some legitimacy to the notion that insider-trading cases do not confront the structural problems that undergird the most significant cancers that metastasized on the Street prior to ’08—the conflicts of interest woven into the business models of the major banks,” he told me. Few regulators and prosecutors understood Wall Street from the inside out the way that Spitzer did. As New York attorney general, he went after the knots of conflicts after the dotcom bust, making Wall Street banks settle and change their research practices, nailing big mutual funds for abusive trading, and pushing the giant insurer AIG to remove its CEO.
But Spitzer doesn’t buy into the popular progressive critique that the insider-trading prosecutions have been a sideshow. “Having said that, [the prosecutors] deserve an awful lot of credit for having pursued insider trading in the very determined way that they have,” said the former New York governor and current Viewpoints host. “It is an area of fraud that has always been there, and probably will always be there, because the temptations are there.” What’s more, he notes, “They haven’t just gotten small fish, they got big players.” For example, the U.S. government has won convictions of a ring involving Raj Rajaratnam, the former billionaire head of the hedge fund Galleon Group, and Rajat Gupta, the former head of McKinsey & Co. and a Goldman Sachs board member. And now it is pursuing hedge-fund giant SAC Capital.
The problem for prosecutors is that the sins of the financial crisis were very difficult to pin on the head honchos as crimes. “The issue of corporate remedies is the most difficult and the most challenging issue we have to deal with in this whole mess,” he said. “Finding and ascribing criminal intent to a CEO is rarely going to happen.” Goldman Sachs Lloyd Blankfein, he notes, wasn’t directly involved in the Abacus transaction—a collateralized-debt obligation (CDO) deal gone bad that led to a $550 million settlement. “You’d never see an email where the CEO talks about doing that deal. This isn’t how business is being done.” And so in many cases, the best that prosecutors can hope for is a settlement, in which companies pay penalties and neither deny nor admit their guilt. In the meantime, the CEOs stay on.
In the 80s, the Securities and Exchange Commission took the lead in prosecuting insider trading. A decade ago, it was Spitzer’s New York attorney general’s office that went after big Wall Street firms. Now the prosecutorial energy is coming from Preet Bharara, the ambitious U.S. attorney for the Southern District of New York.
The case developing against SAC is another sign of Bharara’s ambition. Last week, the government charged (PDF) Mathew Martoma, a junior executive at the huge hedge-fund complex, with trading on insider information gleaned from a doctor who helped oversee drug trials. Having secured the cooperation of the doctor, the government is aggressively pursuing Martoma. And on Wednesday, SAC told investors it has received a Wells notice—a formal notification from the Securities and Exchange Commission that it plans to pursue the company.
To a degree, Steven Cohen may be an irresistible target for prosecutors. It seems he either has remarkably bad judgment choosing employees, or he has set up an environment in which some people feel compelled or welcome to cheat. Even though he has yet to be directly implicated in any wrongdoing, the government has busted several people for insider trading who were either former SAC employees or SAC employees at the time of their alleged wrongdoing. For all intents and purposes, however, Cohen is SAC. He owns most of the capital SAC manages and makes all the key decisions. “He’s like the John Gotti of the hedge-fund world,” Spitzer notes, taking pains not to compare hedge funds with organized crime. In a prior generation, government prosecutors would put charts on the wall to identify the five organized-crime families and signal who they were after. “Today the target is hedge funds, and Steve Cohen is the capo di capo.”
But getting him won’t be so easy. In the other insider trading cases the U.S. attorney’s office has successfully pursued, it was armed with wiretappings, tapes of conversations, and the cooperation of key players. That doesn’t seem to be the case here. The indictment of Martoma didn’t show any sign that the government had tapes of conversations between Martoma and Cohen. And Martoma has thus far said he is going to fight the charges.
Hedge funds are a brutal business, but for years Steven A. Cohen has been a legend. Now he appears to be an indirect target in a massive insider-trading case. Daniel Gross reports.
Steven A. Cohen is a mythic figure in the hedge fund world. With an estimated net worth of $8.8 billion, the secretive 56-year-old investor is 40th on the Forbes 400. His compound in the back country of Greenwich, Ct., is filled with so many recreational amenities it has been referred to as Chelsea Piers (PDF), and he’s a major collector of modern art and a philanthropist. Children’s hospitals on Long Island and New York bear his name.
Steven A. Cohen, founder and chairman of SAC Capital Advisors during an interview at the SkyBridge Alternatives (SALT) Conference in Las Vegas, Nevada on May 11, 2011. (Steve Marcus / Reuters / Landov)
But in recent years, as the Securities and Exchange Commission and Preet Bharara, the U.S. Attorney for the Southern District of New York, have ramped up investigations into insider trading, Cohen’s name has kept popping up. More than half a dozen people have been convicted or accused of insider trading who were former employees of the massive Greenwich hedge fund Cohen runs, SAC Capital Advisors, or who were SAC employees at the time of their wrongdoing. Last year, Sen. Charles Grassley (R-IA) called for an investigation into SAC’s trading. And on Monday, Matthew Martoma, a one-time analyst at SAC, appeared in Federal Court in Manhattan on charges of alleged insider trading and was released on a $5 million bond.
The indictment (PDF) alleges that SAC reaped a huge windfall by trading on confidential, nonpublic information about poor results of an Alzheimer’s drug trial. Martoma allegedly obtained the information from Sidney Gilman, a physician who helped run the trials. (Gilman is now cooperating with the government.) Based on the information, the government says, SAC quickly sold huge positions it had amassed in two companies, Elan and Wyeth, that were developing the drug—and then bet the companies’ stock would go down. The actions allegedly led to “over $276 million in illegal profits of avoided losses in July 2008 by trading ahead of a negative public announcement” on the drug, according to the indictment.
The episode is noteworthy not just for its size, but for the alleged involvement of Cohen, who appears to be an indirect target of the indictment.
Hedge funds are a brutal business. Finish the year up, and you get a big bonus. Lose money for a year or two, and you’re out. Investors don’t hesitate to pull out their funds after a lean year, even if it has been preceded by several fat years. Every hedge-fund portfolio manager has to have an edge—some secret sauce, experience, or domain knowledge that helps him profit in highly volatile markets.
But in an industry with a high degree of mortality, SAC has thrived and evolved into an institution. It is one of the largest hedge funds in the world. Thanks to its superior performance, SAC charges higher management fees than most of its peers.
Many observers and industry participants believe that Cohen’s edge is simply trading skill. Several hedge-fund professionals tell me they believe Cohen is simply the most talented trader out there, one who can process information more intelligently and effectively with his peers. After all, the markets are highly unpredictable. Stocks can go down on goods news and rise on bad news. Cohen is an excellent sailor in choppy waters.
Black Friday sales slumped, but who cares? Americans are confident—and willing to shell out big bucks online for the holidays, writes Daniel Gross.
Black Friday, the official opening to the frenzied Christmas shopping season, has never been more heavily covered than it was this year. Paradoxically, it may have never mattered less.
Paul Sakuma / AP Photo
For years, the day after Thanksgiving was a great retail harbinger, a leading indicator of how the vital Christmas shopping season will turn out. In an economy driven by consumer spending, Black Friday assumed totemic importance. Analysts sift through the traffic and sales rung up by mall retailers the way Roman priests used to inspect chicken entrails for omens. But thanks to shifts in technology and consumer habits, Black Friday has lost a great deal of its real and symbolic importance. Sure, millions of Americans queue up, as if at a party. And, yes, Black Friday provides the spectacle of gunplay, arrests, and casual violence. But in the future, we may not have Black Friday to kick around.
Why? Consistent encroachment is pulling sales that would have taken place on Black Friday earlier in the week. Shoppers who wish to get a jump on their lists without wading into occasionally violent crowds start shopping the Wednesday before Thanksgiving, as my family did. Retailers have also decided to get a jump on the competition by opening Thursday and offering enticing discounts. That means a bigger portion of the retail-sales pie is being consumed on the day pumpkin pie is consumed. Walmart reported that on Thursday night, “during the high traffic period from 8 p.m. through midnight, Walmart processed nearly 10 million register transactions and almost 5,000 items per second.” The logic is inescapable: the merchandise is there and paid for. So why not try to move it?
As a result, a lot of retail business that was not conducted on Thanksgiving Day 2011 was conducted on Thanksgiving Day 2012. It’s likely the same will be the case next year. This trend reduces the utility of Black Friday sales as an indicator. As ShopperTrak reported, while more Americans hit the malls on Black Friday 2012 than on Black Friday 2011 (foot traffic was up 3.5 percent), actual sales fell by 1.8 percent. Said ShopperTrak founder Bill Martin: “While foot traffic did increase on Friday, those Thursday deals attracted some of the spending that’s usually meant for Friday.”
What’s more, the mall may be the wrong place to be looking for shoppers. With every passing day, every passing week, and every passing month, a larger chunk of retail sales are conducted in front of computers, on mobile phones, or on tablet devices. People have never had a greater ability to shop from the comfort and privacy of their own homes. Plenty of people who were horrified at the prospects of stores being open on Thanksgiving pushed back from the table to make an order on Amazon.com or on Rue La La. As the National Retail Federation noted on Thanksgiving Day, NRF estimated “more than 35 million Americans visited retailers’ stores and websites Thursday—up from 29 million last year.” That’s an increase of 20.6 percent.
Simply put, online shopping is taking market share from physical retail sales—on Black Friday and every day of the year. Online shopping is not yet 20 years old, so overall it has a small chunk of retail sales. But increasingly, every day is Cyber Monday. According to the Census Bureau, in the first 10 months of 2012, sales at “nonstore retailers” were up 11.8 percent from the first 10 months of 2011, while overall sales were up just 5.5 percent. So far this year, nonstore retailers have accounted for about 8.6 percent of total retail sales. That means that overall holiday shopping sales can rise by a decent margin even as bricks-and-mortar sales barely budge. That’s what NRF said happened over the weekend. As The New York Times reported online, “sales increased 17.4 percent on Thanksgiving, and 20.7 percent the next day, according to I.B.M., which tracks e-commerce transactions from 500 retailers.” In its survey, the National Retail Federation found that “the average person spent $172.42 online over the weekend, or approximately 40.7 of their total weekend spending, up from 37.8 percent last year.”
Because the geography of shopping, and working in retail, is shifting, analysts who look only at Black Friday sales at stores aren’t seeing the whole picture. Rapidly changing consumer behavior makes it difficult to compare results from year to year. Instead, we have to look at online and physical sales on the period from Thanksgiving Day to Sunday to get a true view of how the holiday shopping season started.
Up for a cliff dive? The outliers in the Thelma & Louise Caucus are—they believe careening over the fiscal cliff is a necessary step to rationalize our tax code. Dan Gross explains why he’s one of them.
Tuesday was Day 14 of the Fiscal Cliff Hostage Situation. With Congress out of session and most representatives heading home for Thanksgiving, there weren’t any formal talks. The presumption seems to be, however, that Congress and the White House will come together to make a deal before Jan. 1, thus preventing tax rates from soaring and feared automatic spending cuts from kicking in.
President Barack Obama speaks before Speaker John Boehner, Secretary of the Treasury Timothy Geithner and other cabinet members during a meeting on November 16, 2012 in Washington, DC. (Toby Jorrin / AFP / Getty Images)
Most voices in official Washington earnestly assure Wall Street, the wealthy, and companies that they want nothing so much as to make a deal in the next several weeks. And we should take them at their word. But here and there, it’s possible to detect voices who are urging inaction. Some people, left, center, and right, believe careening over the cliff would be an affirmative good, a willful act of liberation, a step that is necessary to rationalize our tax code. I’ve dubbed these folks the Thelma & Louise Caucus. And I count myself a member.
Comparatively few members of Congress can be seen actively advocating for a lack of resolution. It’s frowned upon. But Sen. Patty Murray, the high-ranking liberal Democrat from Washington, isn’t afraid of the cliff. As Matt Yglesias of Slate points out, Murray in July spoke of the utility of going over the cliff in purely practical terms. In her view, the expiration of the Bush tax cuts establishes a new baseline of significantly higher rates, which would then make it much easier for Republicans to sign off on a tax cut deal. “We will have a new fiscal and political reality,” Murray said. “If the Bush tax cuts expire, every proposal will be a tax-cut proposal, and the pledge will no longer keep Republicans boxed in and unable to compromise.” And, in Murray’s view, this gives Democrats the upper hand. “If middle-class families start seeing some money coming out of their paychecks next year, are Republicans really going to stand up and fight for new tax cuts for the rich?” Without the cliff, there’s no prospect of a deal.
Other members of the Thelma & Louise Caucus believe the cliff is desirable for reasons of justice, not of tactics. Jonathan Cohn, the longtime reporter and Ann Arbor–based health-care maven at The New Republic, is the president of the Michigan chapter of the caucus. For Cohn, the cliff solves all sorts of problems. He never liked the Bush tax cuts to begin with and says we need the money. “I always thought that we should get rid of all the Bush tax cuts,” he said. “It seems to me the Clinton-era tax rates were just fine.”
Jonathan Chait of New York magazine, who is a native of Michigan and formerly worked at The New Republic, represents the realpolitik wing of the caucus. Even before the election, he was gaming out the smart politics behind a cliff dive:
“On the morning of November 7, a reelected President Obama will do … nothing. For the next 53 days, nothing. And then, on January 1, 2013, we will all awake to a different, substantially more liberal country. The Bush tax cuts will have disappeared, restoring Clinton-era tax rates and flooding government coffers with revenue to fund its current operations for years to come. The military will be facing dire budget cuts that shake the military-industrial complex to its core.”
Going over the cliff, Chait argues, will finally allow Obama to turn the tables on the obstructionist Republicans who have made his life hell for the past four years. And he will be able to give up trying to compromise with House Speaker John Boehner because the nature of the game changes. Obama and his crew, Chait writes, “understand something important, something that has not quite sunk in with wary liberals, obstinate conservatives, or split-the-difference deficit scolds: They no longer have to.”
People will pay more for products born in the United States—and Chinese consumers agree. Daniel Gross on whether the stamp of approval means more money.
For a long time, U.S.-based manufacturers have felt like the deck was stacked against them. Labor costs are lower almost everywhere, especially in China. Taxes on profits are comparatively high. The most rapidly growing end markets are also overseas, and it frequently makes sense to manufacture heavy items like cars or appliances near the consumers who will buy them.
Chris Rank, Bloomberg / Getty Images
But trends have a way of reversing. Rising labor costs in Asia and the continuing hard work American firms have done on efficiency and productivity have helped reduce the cost advantage of offshore locations. In an influential report, Made in America, Again (PDF), the Boston Consulting Group (BCG) suggested that up to 3 million manufacturing jobs could return to the U.S. over the next several years.
Now, BCG says there is more reason for people who make stuff in the U.S. to take heart. According to a new survey, consumers at home and abroad say they are willing to pay more for certain products bearing a “Made in the U.S.A.” stamp. Driven by a combination of patriotism, fear of the potential danger lurking in some China-made goods, and a concern over quality, 80 percent of American consumers say they are willing to pay a premium for products made in the U.S. instead of Chinese products. Nearly 60 percent of U.S. consumers said they had consciously chosen more expensive American-made products over cheaper Chinese ones in the previous month. Perhaps more surprising, some 60 percent of Chinese consumers said they would do the same. “We were really surprised at how much the Chinese consumer values the Made in America brand,” said Hal Sirkin, senior partner at BCG. (You can read more about the survey here.)
The preference for U.S.-made goods was particularly pronounced in product categories, such as hand tools. “For things people expect to be durable and pass on to your children, they are willing to spend the extra money if they can afford it,” said Sirkin. “And Chinese products just aren’t designed for the durability that we expect.” He also noted that anything that deals with children—toys, baby clothes, children’s furniture—found a similar response. Media reports on problems with Chinese-made drywall, or on lead paint in Chinese-made toys, have made parents think beyond price. Sirkin noted that 37 percent of U.S. consumers said they would be willing to pay 10 percent more for baby food if it were made in the U.S.
Of course, it is easier to purchase patriotically when doing so is less costly. And Sirkin says that the shrinking cost difference between manufacturing in China and the U.S. is affecting consumer preferences. “Wages in China have been rising about 15 to 20 percent per year,” Sirkin noted. “And so the value equation has changed. Instead of having to pay double for a U.S.-made product is in many instances, the consumer is only going to have to pay 20 percent more.”
Sirkin and his colleagues were surprised by the changing attitudes of Chinese consumers, who are now much more keenly attuned to issues of quality in everything from dairy products to toys and furniture. “Chinese consumers are quietly recognizing the value of 'made in the U.S.A.,'” Sirkin said. In the survey, 50 percent of Chinese consumers said they had deliberately chosen American-made products over Chinese ones—even if it costs the same or more. This preference is largely due to rising concerns over quality and environmental issues among middle-class Chinese consumers.
Now, there’s some reason to be skeptical of these numbers. Surveys tend to measure sentiment and attitudes, rather than behavior. People do not always do what they say. And the playing field between U.S. and Chinese manufacturers isn’t quite level. But Sirkin says there is an important message embedded in this study. “People tend to discount U.S. manufacturing,” he said. “And they shouldn’t. The message for U.S. manufacturers and retailers is that they are undervaluing the Made in America brand by not making it prevalent.”
Will we have a deal in 2012? Market watchers say yes, but the GOP remains solidly anti-tax, and big businesses like Walmart aren’t taking any chances. Daniel Gross reports.
On Day 13 of the Fiscal Cliff Hostage Situation, the prevailing mood about a deal to head off tax increases and spending cuts was optimism—even complacency … at least in New York.
Last Friday, President Obama held meetings with congressional leaders. When the protagonists emerged and declared them to have been productive, the stock market began to rally. The optimism continued.
President Barack Obama speaks before Speaker John Boehner, Secretary of the Treasury Timothy Geithner, and other cabinet members during a meeting on Nov. 16, 2012, in Washington, D.C. (Toby Jorrin / AFP / Getty Images)
Monday morning. As the CNBC.com headline put it, “Dow Soars 150 on Cliff Hopes.”
In fact, there seems to be a growing consensus among those who follow markets with the same ardor as they do on MSNBC that something is happening. A deal will get done, simply because it has to be done. Time is running out, and if no grand bargain is reached, bad things will happen. Wall Street, whose denizens have the most to lose from a vault over the fiscal cliff, craves a resolution. Which is one of the reasons CNBC is running its “Rise Above” campaign, which calls for Washington to eschew partisanship and make a deal to avoid the cliff.
On Sunday night, Goldman Sachs—the firm believed by many to control Washington, D.C.—sent out an optimistic note, suggesting that the hostage would be released in a few weeks: “We believe the ‘fiscal cliff’ ultimately will be avoided, but precedent suggests any resolution will not happen until mid- to late-December.”
Monday morning, Ben White, Politico’s sharp New York–based watcher of the calamitous intersection of Wall Street and Pennsylvania Avenue, declared it all over except from the shouting. “There seems little chance the cliff battle will go near or past the Dec. 31 deadline,” White wrote. “Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans” and are figuring out how to cut their losses. “So while talks will continue and the public kabuki will play out for a few more weeks, we are really just waiting on a final score.”
That’s possible. But let’s take a step back. Just because the White House and congressional Republicans told us their meetings Friday were fruitful, it doesn’t mean they were. Hell, Neville Chamberlain thought his September 1938 meeting in Munich with the Germans was fruitful. To admit that a meeting was not fruitful is to admit that you wasted your own time, and, worse, the time of the media that staked out the meeting to get the anodyne post-meeting quote.
In his latest dispatch from the precipice of tax hikes and spending cuts, Daniel Gross on the hostage no one wants to save: the payroll tax cut.
We’re now in Day Nine of the 2012 Fiscal Cliff Hostage Situation.
Bradley C Bower / AP Photo
On Wednesday, the CEOs came and went from the White House. Talks between Congressional leaders and President Obama are slated to kick off tomorrow. As Thanksgiving approaches, the White House is still holding the Bush-era tax cuts hostage. What’s more, automatic budget cuts that will affect major contractors are slated to kick in on Jan. 1—the same cruel day that tax rates on capital gains, income, dividends, and states rise.
In theory, it’s all open to negotiation. The tax cuts could be warded off through simple legislation. A deal could forestall some of the tax increases, or a package of tax reforms could provide higher revenue, thus obviating the need for marginal tax increases. And so while the Bush tax cuts are in jeopardy, they’re still very much alive. But the standoff may have already claimed one victim. One of the hostages is clinging to life, and will not likely emerge alive from the standoff: the temporary payroll tax cut.
The payroll tax cut—or tax holiday—was not part of the Bush-era tax cuts. Rather, it was a post-stimulus effort to goose the economy in 2011 and 2012. As Mitt Romney and his allies have famously pointed out, 47 percent of Americans don’t pay any income tax. But pretty much everybody with a job pays payroll taxes—the regressive 6.2 percent tax levied on the first $100,000 or so of income that funds Social Security and Medicare.
In late 2010, as President Obama suggested, Congress approved a temporary one-year payroll tax cut that reduced the rate from 6.2 percent to 4.2 percent. This was part of a larger package in which Congress extended the Bush tax cuts for two more years and threw in extended unemployment insurance. Since many people pay more in payroll taxes than they do in income taxes, the cut was quite meaningful. Somebody with a salary of $50,000 would see an extra $1,000 in her paychecks over the course of the year. And since such middle-income earners are likely to spend—rather than save—these tax cuts, it was a pretty effective form of stimulus. The estimated cost for 2011 was $112 billion.
Now, the beauty of a temporary tax cut is that you can always accuse the other side of wanting to increase taxes if they simply want to let the temporary measure expire as it was designed to do. That’s the tactic Republicans have been using against Democrats and Obama with the Bush tax cuts for the past several years. Obama briefly turned the tables on the Republicans over the payroll tax in late 2011. And so, at the end of 2011 with the economy growing slowly and concerns about the ability of consumers to sustain the recovery, Congress and the White House struck another deal to extend the 4.2 percent payroll tax rate through 2012. Another 12 months, another $100-billion-plus into the consumer economy.
For the past several months, both sides have pretty much assumed that the payroll tax cut would fade away at the end of the year—regardless of who won the election. Why? Republicans never really liked it; in theory, the tax cuts undermined Social Security and Medicare, which is vital to their geezer constituents. What’s more, it’s a tax cut on wages of typical workers. And for ideological and personal reasons, Republicans much prefer cutting taxes on high earners, and on investment and estates. That’s where the real money is.
Corporate America went all in on a Romney victory. But as pragmatists, they’ve come around quickly. By Daniel Gross.
It’s day eight of the fiscal cliff hostage crisis situation. And while a resolution still seems far off, there have been some significant changes. For the first time, President Obama, the holder of the hostage, has issued his demands. And a new set of external players is entering the scene: America’s chief executive officers.
Here’s the state of play. Come Jan. 1, the U.S. will go over the fiscal cliff. The Bush-era low tax rates on income, capital gains, dividends, and estates will expire. At the same time, automatic cuts that will affect defense contractors and other industries dependent on government will kick in. In the wake of last week’s election, President Obama came into control of items that Republicans in Congress desperately want. If Obama simply sits back and does nothing, the wealthy will have to start paying more taxes and the greatest Republican legislative achievement of this young century will disappear in a matter of weeks.
In previous installments, we’ve documented how Republicans have already made significant concessions—first acknowledging the need for more revenues in any deal, and then saying those revenues should come primarily from eliminating tax breaks for the wealthy. Meanwhile, Democrats have generally stood fast and have increased their demands.
The last 24 hours have brought new developments. First, President Obama has laid out a marker for a grand bargain—and it’s a much more aggressive one than he has put out there previously. The Wall Street Journal reported, in advance of a meeting Friday with congressional leaders, Obama is calling for “$1.6 trillion in additional tax revenue over the next decade, far more than Republicans are likely to accept and double the $800 billion discussed in talks with GOP leaders during the summer of 2011.” Ouch. For those counting at home, that’s twice as much as was on the table just 13 months ago. As for the Republican suggestion that all the revenues come from tightening tax deductions and loopholes? Forget about it. Treasury Secretary Tim Geithner, appearing at a Wall Street Journal event, said Obama is “not prepared to extend the upper-income tax cuts.” So as Republicans edge closer to the Democrats’ position, the Democrats are moving away from the Republicans.
Now, America’s CEOs are getting involved. This evening, President Obama will meet with a group of top bosses at the White House to discuss the fiscal cliff and other economic issues. Among those attending: Pepsi CEO Indra Nooyi and GE CEO Jeff Immelt. To the extent corporate America got involved in the 2012 election, it was generally on the side of Mitt Romney. Lobbying organizations like the Chamber of Commerce funded huge anti-Obama advertising campaigns, while lots of CEOs contributed to anti-Obama Super PACs.
In effect, CEOs, especially Wall Street CEOs, went all in on a Romney victory. But as pragmatists, they have come around rather quickly. Many CEOs are genuinely freaked out at the prospect of the fiscal cliff. “At a Wall Street Journal CEO conference in Washington, 73 percent of participants said their primary concern was the so-called fiscal cliff,” the Journal reported Wednesday. But the bosses seem to be more worried about the impact of a slowdown on their companies’ bottom lines than on their own. An informal show of hands at the conference showed many of the CEOs were personally willing to pay higher taxes to reduce the deficit. In the precincts of the rich, there is rising acceptance that their personal tax rates will be higher next year.
Goldman Sachs CEO Lloyd Blankfein took to the op-ed page of The Wall Street Journal to offer an olive branch of sorts. Expressing concern that the fiscal cliff would “derail the fragile recovery,” he urged Congress to act. He accepted the premise that revenues must be part of the deal. “A number of CEOs and companies agree and support principles that call for a comprehensive and balanced solution to the debt problem—increased tax revenues and decreased spending,” he wrote. Blankfein also seemed to accept that tax rates on personal income would have to go up. “Broadening the personal income-tax base by closing loopholes will generate substantial additional revenue while minimizing increases in marginal tax rates [my italics] that could stifle risk-taking and robust growth.” Notice the small but important change here: increases in tax rates on personal income should be minimized, not ruled out. In other words, Blankfein’s position is quite closely aligned with Geithner’s.
Now, Blankfein doesn’t speak for the Republican Party any more than Robert Rubin speaks for the Democrats. But to have the CEO of one of America’s most powerful investment banks publicly make the case that it is OK for marginal tax rates to rise is significant. It’s amazing the difference a week makes.
Most savvy pundits thought Ohio would be President Obama’s firewall. But it was really the uemployment data that turned out to be his impregnable fortress. Daniel Gross reports.
In a campaign full of many twists and turns, it’s clear to me precisely when Mitt Romney lost the election: Friday, Oct. 6, 2012.
Mitt Romney speaks to reporters on his campaign plane en route from Pittsburgh to Boston, on Nov. 6. (Charles Dharapak / AP Photo)
It may seem counterintuitive, because it was just three days after Obama’s disastrous debate performance in Denver. It was a time when the polls and prediction models were all showing substantial movement toward Romney. And a look back at the graphs will show that Obama began to stabilize and pull away much later in the month.
So what happened on Oct. 6?
At 8:30 a.m., the Bureau of Labor Statistics released what was likely the single most consequential economic data point in recent political history: the September employment report. BLS reported that the companies added 114,000 payroll jobs in the month. The unemployment rate, calculated from a separate survey in which BLS asks individuals about their employment situation, ticked down from 8.1 percent in August to 7.8 percent in September.
The report was important: psychologically, economically, and politically. Most savvy pundits thought Ohio would be President Obama’s firewall. But it was really the uemployment data that turned out to be his impregnable fortress.
It was the first time the unemployment rate had fallen below 8 percent since January 2009. But flows are more important than levels, and more easily understood. Or to put it another way, it’s not so much where things are that matter, but the direction they’re going. Since hitting its lows in 2009, the economy had been fitfully—and then steadily—improving. Between March 2009 and the fall of 2012, the stock markets had essentially doubled. In October, the economy was in its 39th straight month of growth. Even the housing market was coming around. And incumbents tend to get rewarded for improvement.
The labor market, however, remained a big question mark. The economy continued to shed jobs into early 2010. And in many months, job growth was painfully slow. That was electoral poison for Barack Obama.
The Republican candidate's chances of winning the Hawkeye State may be blowing away. Dan Gross explains why.
President Obama ended his second presidential campaign in the state where his first presidential campaign gained its first crucial breath of wind. Four years later, it seems wind may be giving Obama a boost in Iowa.
Mitt Romney speaks to supporters in Dubuque, Iowa on Nov. 3, 2012. (Charles Dharapak / AP Photo)
Iowa is a swing state that Mitt Romney has contested but doesn't look to be winning. The RealClearPolitics poll aggregation gives Obama a 48.7 - 46.3 lead over Romney. Nate Silver's 538 projection gives President Obama an 84.3 percent chance of winning the Hawkeye State. And wind may have something to do with it. Why? Romney, along with many Congressional Republicans, has opposed the renewal of the longstanding wind energy production tax credit, which makes wind energy projects viable. And no state gets more economically from wind than Iowa does.
In August, I spoke with Rob Hach, founder and president of Anemometry Specialists, based in Alta, Iowa; he's a registered Republican and 2008 McCain voter who was attending the Democratic National Convention as an Obama supporter. His firm, which has 27 employees, conducts assessments on wind projects and wind resources to see where they are economically feasible. "In Iowa, there are thousands of people employed making wind turbines, blades. There are a lot of farmers who have been able to enjoy the royalties. There are a lot of students going to school at community college to go to work on wind turbines," he said. "They are quite disappointed with Governor Romney's position on renewable."
Wind is a big business in Iowa. According to the Iowa Wind Energy Association, the state is the third largest for wind production, with 4,536 megawatts of capacity. Texas and California are first and second. When it comes to the percentage of electricity generated by wind, Iowa is far and away the leader in the U.S., with 20 percent. "As more of our new wind farms come online, I wouldn't be surprised to see it reach 25 percent in the next 6 months," said Harold Prior, executive director of the Iowa Wind Energy Association.
Putting up wind turbines creates a lot of good collateral economic activity. Wind turbines are very large and heavy, and hence difficult to ship over long distances. So areas that erect a lot of wind turbines tend to attract manufacturers and suppliers. The state's 2,800 turbines have brought hundreds of manufacturers and suppliers to Iowa, from which they export to other states and countries. The construction of wind farms is leading other investors to plow cash into constructing electricity distribution and transmission lines. Several thousand Iowa jobs rely on wind power. And each year, landowners collect more than $14 million in payments in exchange for allowing turbines to stand on their property.
Of course, the industry is only viable thanks to the 20-year-old production tax credit, which gives the owners of turbines a tax refund for every electron of electricity they generate in the turbines' first ten years of operation. But the Federal Renewable Electricity Production Tax Credit is in danger of sunsetting at the end of this year. As such, it is another one of the victims of the bizarre politicization of alternative energy.
George H.W. Bush signed the first production tax credit into law in 1992. In 2008, George W. Bush rhapsodized about the possibilities of solar. "I really see a day in which each house can be a little electric generator of their own and feeding back excess power into the gird through the use of solar power," he said. But since the election of President Obama, Congressional Republicans have generally opposed efforts to back alternative energy. In part it's because there was a lot of green energy stuff in the stimulus, which virtually every Republican opposed. In part it's because a lot of big GOP donors are in the oil and coal industry, which rightly view renewable energy as a threat. And in part it's because some alternative energy programs involved making large loan and investments in individual companies like Solyndra. To nobody's surprise, despite intense lobbying from the large companies involved, the Senate and the House have not agreed to extend the production tax credit.
The hurricane exposed the vulnerabilities of our new just-in-time economy. Daniel Gross on the economic mentality that makes us susceptible to natural disasters—and massive inefficiencies.
Hurricane Sandy upended the plans of thousands of marathoners, and the lives of hundreds of thousands of people who are still without power or access to their homes. It also upended one of the most important concepts in modern business: just-in-time management.
Workers remove the remaining protective plywood from store windows in Times Square following Hurricane Sandy in New York City, Oct. 31, 2012. (John Lamparski / Getty Images)
The discipline of just-in-time started with manufacturing. Companies began to realize that it made sense to keep on hand only the parts that were needed to assemble products on any given day. Keeping excess inventory around tied up cash, cluttered up factory floors, and imposed storage and management costs. Retailers were the next to catch on. Information technology and an understanding of consumer habits spurred stores to have only the amount of stock necessary to meet demand. There was no point in bringing in Christmas goods to stores in July and August; just wait until November. The mentality applied to people and services as well as goods. How many times have you waited on a plane for the pilot and flight crew to arrive from another plane?
Next the just-in-time mentality was married to long supply chains. In a world of rising interconnections, it made sense to source materials and services from locations where they can be produced cheaply. Our clothing and electronics no longer arrive from South Carolina and California; they come from China. Oil arrives on ships from Angola and Russia rather than on trucks and trains from Pennsylvania. Tech support comes from India, not from the guy working on the fifth floor.
We’ve learned, however, that the just-in-time economy is subject to disruptions by forces of nature. Last year, Japan’s tsunami quickly led to shortages at Honda and Toyota dealerships in the U.S. And we’re seeing it with Sandy today. Because of its size and location, Sandy inflicted maximum damage on the just-in-time economy. It took out 19th-century infrastructure (ports, rail), 20th-century infrastructure (tunnels, highways, airports), and 21st-century infrastructure (cellphone and Internet service). “The New York area’s port system is the largest on the East Coast, and the third largest in the nation. Last year, it handled $208 billion in cargo,” as Stephanie Clifford and Nelson Schwartz reported in The New York Times on Monday. And that is causing significant disruptions. “The supply chain is backing up at a crucial time, just as retailers normally bring their final shipments into stores for the holiday shopping season, which retailers depend on for annual profitability.”
The just-in-time mentality has spread from manufacturing and retailing into other businesses, and into our personal lives. And the logic is both compelling and unavoidable. We don’t power our homes by running coal-burning stoves and storing electricity in immense batteries; we bring in power produced by distant coal-burning plants over wires. Gas-station owners take delivery of gasoline every other day. Why? Doing so lets them conserve cash and maintain flexibility in pricing. What’s more, maintaining bigger supplies would require the construction of expensive, unsightly, and environmentally problematic storage tanks. We don’t arrive at a train station an hour before the train leaves; we arrive just before it does. We don’t can and pickle vegetables, or store meat in the chest freezer we had when I was a kid; we have it delivered just-in-time from Freshdirect.com or Peapod. We don’t walk down to the boutique; we order from Rue La La.
In fact, e-commerce is a massive and growing just-in-time industry. See something you want, click and buy it, and wait for the UPS truck. According to the Census Bureau (PDF), electronic and online sales are up 11.5 percent this year, more than twice the rate at which the overall retail market is growing. Such just-in-time commerce accounts for about 9 percent of retail sales. And it’s growing. Just wait until Amazon.com rolls out same-day delivery. Meanwhile, we’re now turning data into a just-in-time business. Why go to the expense and inconvenience of storing and managing your own information, when it can reside in the cloud—and be served to you where you want it at any time.
It’s all to the good. But once a link in the chain is broken—or when several links are broken at once—outages, delays, and shortages ensue. And that causes massive economic inefficiency.
Mayor Bloomberg says Sunday’s marathon will bring New Yorkers together—but how exactly will they get together with the subways crippled and traffic a horror show? Marathon veteran Dan Gross wonders.
New York City without the marathon would be like New Year’s Eve without Times Square or July 4th without fireworks. So to argue that Sunday’s race should be canceled or suspended this year in the wake of Hurricane Sandy may seem spiteful. And yet the marathon backlash is not surprising. The logistics of staging the event just six days after Sandy hit make it a tough sell.
Workers assemble the finish line for the New York City Marathon in Central Park, Thursday, Nov. 1, 2012. (Richard Drew / AP Photo)
Running in the New York City Marathon is one of the most life-affirming things you can do. You set off on the Verrazano-Narrows Bridge as fireboats spray water and Sinatra’s “New York, New York” blares over loudspeakers. After the long, endless haul up through a packed Fourth Avenue in Brooklyn, the crowd thins out to a few curious Chasids in Williamsburg. After slogging through an industrial patch of Queens, runners accelerate over the long rise of the 59th Street Bridge, eager to reach Manhattan and First Avenue’s wall of sound. A few miles north, a brief, cold turn into the Bronx, a trot down Fifth Avenue, and you start running downhill into Central Park. When I ran New York in 2006 (3:25, thanks for asking!), I never felt more alive.
Plenty of other cities stage marathons. But none quite like this one. The New York City Marathon is fueled by thousands of professionals, volunteers, medical staff, and emergency crews. New York Road Runners CEO Mary Wittenberg presides over an operation that Wal-Mart would envy: goods, people, services, and stuff flow through a crowded city with great ease.
And of course, after disruptive episodes, events like the marathon can provide a much-needed return to normalcy. Thousands of people around the world have spent a lot of time and money to train and travel for the race. Many are running for reasons that have nothing to do with personal bests and everything to do with survival—celebrating a triumph over cancer, or running in memory of loved one, or raising money for charity. For the bars and restaurants that line the route, the marathon means big business, adding up to $350 million of economic activity.
But the marathon involves a certain amount of conspicuous consumption of basics—fresh fruit, water, gasoline, and electricity—all of which are in short supply in New York and the surrounding region. Staten Island is a remarkably inauspicious place to start. In the hours before the race, thousands of people arrive in New York’s least populous borough and shed disposable clothes, jam themselves full to bursting with Gatorade and water, and then leave behind a huge mess. This year, it will all take place with people on Staten Island lacking water and electricity, with many residents suddenly homeless, and with volunteers and professionals retrieving drowned bodies.
It takes a lot of human power and energy to run those 26.2 miles. But it also requires a lot of power and energy to run the race: to fuel the cars and rescue vehicles, to power the sound systems and run the communications networks. In ordinary times, nobody would begrudge the use of fuel and mobile-generating capacity for the marathon. But these aren’t ordinary times. Hundreds of thousands of people within a stone’s throw of the race route lack power. The New York Post noted that the mobile generators used for the marathon could power 400 homes on Staten Island. Meanwhile, the U.S. military is airlifting generating equipment to the East Coast. The disparity between the spare-no-resource attitude of the marathon and the slow-motion restoration of electricity in the New York region is noticeable.
A young boy rides his bicycle on a flooded street in the New Dorp Beach neighborhood of the Staten Island borough of New York, November 1, 2012. (Lucas Jackson / Reuters / Landov)
In case anyone’s wondering how the economy is doing, it’s looking relatively awesome, based on today’s numbers. That’s good for Obama—and good for America. Dan Gross reports.
This is what Morning in America looks like. As the floodwater receded Wednesday and Thursday, government and industry groups this week released a slew of economic data points. All of them generally pointed in the right direction, and confirmed a thesis some wise analysts (OK, me) have been propounding for months. Yes, global growth is slowing and businesses are nervous over faltering exports and political uncertainty. But the innards of the economy—consumer spending, the housing market, the manufacturing sector, and the auto sector (which is the largest single manufacturing and retail sector), are all doing quite well.
Consumers return to Times Square in New York City on October 31, 2012. (John Lamparski / Getty Images)
Far from being in decline, the U.S. economy is expanding and recovering. The virtuous circle of confident consumers, rising domestic activity and more jobs, all help explain why President Obama is poised to win reelection next week— not in spite of the economy’s performance in the past four years, but because of the economy’s performance in the past three years.
Let’s review. People are feeling better about the status quo. Thursday, the Conference Board reported that its measure of consumer confidence rose to 72.2 in October—the highest level for the year. Last week, the University of Michigan/Thomson Reuters consumer-sentiment index came in at its highest level since 2008. And Gallup’s economic optimism index, while still in negative territory, showed its best reading since 2008. Consumer confidence is bolstered by two important measures: the jobs market and the housing market. Most people don’t own stocks or collect capital gains. But they do have jobs, which account for the lion’s share of their income. And most Americans do own homes, which account for the lion’s share of people’s net worth. Both sectors have been depressed for much of the past several years, but are showing signs of life. Lynn Franco, director of economic indicators at the Conference Board, cited “improvements in the job market as the major driver” of rising confidence.
On employment, Friday’s jobs report will be the big tell. But the preliminary data released Thursday points in the right direction. ADP, the payroll-processing company that reports its own monthly jobs figure, said the private sector added 158,000 jobs in October. Not spectacular, but pretty good. Also on Thursday, the Labor Department said first-time unemployment claims fell to 363,000 last week, down from 372,000 the previous week. Yes, there’s still an unemployment crisis. But here’s the reality: the labor market is probably in better shape today than at any time since late 2007.
The same might be said for housing. As we’ve been noting for months, housing is back. This past year has brought persistently higher levels of new and existing home sales, and, finally, of home values. On Tuesday, Case-Shiller reported that home values rose in August, and are up 2.0 percent from August 2011. On Thursday, the Census Bureau reported that construction spending(PDF) turned in a healthy showing in September—rising 0.6 percent from August and up 7.8 percent from September 2011. The gains were driven entirely by housing. Spending on private residential construction in September 2012 was up an impressive 20.9 percent from September 2011, and total private construction spending was up 14.4 percent from September 2011. And what I’ve dubbed the “conservative recovery” persists. Thanks to continuing austerity measures, public spending on construction fell 0.8 percent in September from August, and was off 4.2 percent from September 2011.
Good news in housing tends to be good news for other parts of the economy: for the labor market, since housing is a labor-intensive business; for manufacturing, since a lot of materials used in housing are made domestically; and even for the car companies, which tend to sell a lot of high-margin pickup trucks when the housing market expands. And here, again, Thursday brought positive news on these sectors. The ISM reported that its purchasing managers index for manufacturing in October was 51.7, a bit higher than September. Any reading above 50 indicates the sector is expanding. This is the 31st straight month of expansion.
The auto industry is both the largest manufacturing sector of the U.S. and the largest retail sector. As go cars, so goes the economy. And so far this year, the auto industry has been gaining speed. On Thursday morning, the car companies began to report U.S. sales for October.
The former BBC director general faces a battle with the Times’ unionized employees over a new contract, and a simmering controversy back home over what he knew about the case of Jimmy Savile, the late Beeb star accused of sexually abusing numerous women and girls.
There have been some rocky crossings of the Atlantic from the U.K. to the East Coast of the U.S. The Mayflower had a tough time of it in 1620. The Titanic didn’t make it in 1912. Now, Mark Thompson is the one encountering choppy water.
BBC director general Mark Thompson speaks to the media outside the BBC's Television Centre in White City, west London, on March 2, 2010. (Ben Stansall / Getty Images)
The former BBC director general was tapped in August to be the next chief executive officer of The New York Times Company. At first blush, it seemed like a strange choice. Hiring a Brit who ran a government-owned, not-for-profit global television business to run a company dominated by its U.S.-based newspaper?
But Thompson had helped a venerable, powerful organization extend its global brand, and clearly had the chops to run a sprawling, high-brow news organization. Britain’s media culture may have been soaked in scandal, but the BBC enjoyed a reputation for journalistic probity and high standards in the U.K., much as The New York Times does in the U.S.
The timing seemed propitious for Thompson, too. Yes, the Times Company’s stock has been in decline for a long time. And, like every other print entity, the paper has had difficulty making a profitable transition to a digital world. But the business seems to be stabilizing, thanks in part to a lot of tough decisions made by the company’s much-maligned executive leadership.
To cope with declining advertising revenue, the Times installed a controversial paywall. In Thursday’s earnings report, the company reported that total revenue fell marginally—ad dollars were down nearly 9 percent from the year-ago quarter—but circulation revenues rose 7.4 percent. Why? “Paid subscribers to The New York Times and the International Herald Tribune digital subscription packages, e-readers, and replica editions totaled approximately 566,000 as of the end of the third quarter, an increase of approximately 57,000 or 11 percent since the end of the second quarter of 2012.”
In January 2009, the company, desperate for cash, borrowed $250 million from Mexican industrialist Carlos Slim Helu at a sky-high 14 percent interest rate. But after years of heavy cost cuts and cash-preserving measures like cutting the dividend, it managed to retire the debt it owed to Slim in July 2011. Meanwhile, the Times has been holding a garage sale of sorts: in late 2011, it sold off its collection of regional newspapers for $150 million. Last month, it sold About Group for $300 million to IAC, parent company of The Daily Beast. Earlier this month, it received $167 million for its share of Indeed.com, a jobs search engine, which was sold.
But here’s the irony. As Thompson prepares to assume the position of CEO—his first day is supposed to be Nov. 12—he’s facing two significant issues that will bear directly on his ability to lead the organization: a scandal over journalistic ethics in London, and a long-running, increasingly bitter labor dispute in New York.
IAC, The Daily Beast’s parent company, got a lesson in how auto-generated data can wreak havoc on a corporation’s best-laid plans.
Stock markets are supposed to be efficient. Rational actors continually process data in a methodical way and spit out the appropriate price. But today, the market is increasingly peopled by machines–algorithms, programs, trading bots, and high-frequency traders swapping large and small bits of stock at an insanely rapid pace. High-frequency trading accounts for about half the volume on U.S. stock exchanges. And in recent years, we’ve learned that dispassionate machines and software can act in ways that seem highly irrational.
A trader works on the floor of the New York Stock Exchange. (Mario Tama / Getty Images)
One move in the market triggers a reaction, which pushes a machine to issue a trade, which triggers a host of other trades, and so on. That’s how the Flash Crash came to pass. On May 6, 2010, the Dow Jones industrial average lost about 1,000 points in 20 minutes as computers ran amok. All it takes is one misplaced or mistimed trade, one small bit of misinformation or incorrect data, to set off a chain reaction.
We got a view of that on Wednesday, when the stock of IAC/Interactive Corp., The Daily Beast’s parent company, gyrated wildly in the mid-morning. The culprit was a single piece of information that turned out to be incorrect. The mistake was corrected, but not before several hundred millions dollars of shareholder value had disappeared.
Here’s what happened. On Tuesday, IAC’s stock closed at $52.46. In the morning, IAC released its third-quarter earnings, which were generally better than analysts had expected. In trading before the stock market formally opened, shares rose. At 10:30 a.m., IAC submitted the required filing to the Securities and Exchange Commission. This filing contained additional information about expected 2013 results for specific units, including the “Media” unit and a unit labeled “Other.” The filing included some complicated accounting language but basically said those two units were expected to report a loss for 2013. After opening higher than its Tuesday close, the stock began to drift downward. Again, nothing abnormal.
At 11 a.m. IAC started a conference call during which executives discussed the results with analysts and investors. (You can check out the call here. Then, at 11:28, StreetAccount, a unit of financial-data provider FactSet, incorrectly entered data suggesting that IAC had reported that it expected the whole company would report an operating loss in 2013—not just the “Media” and “Other” units.
Within seconds, as the chart shows, the stock began to plunge. Of course, markets are supposed to process new information that might affect a stock price. And some investors may have dumped the shares based on FactSet’s new piece of information, which turned out to be incorrect. But it’s also highly likely that electronic traders picked up on the action in the stock, thus triggering their own sales—which in turn triggered more trading systems to hit sell. And so a decline quickly became a rout. The stock, which stood at about $50.50 at about 11 a.m., plunged to $45.57 by 11:34—a decline of nearly 10 percent. At 11:34, NASDAQ, the exchange on which IAC is traded, halted trading in IAC’s stock—that’s what it does every time a particular stock falls rapidly in such a short period of time.
Informed of the activity, IAC’s management told investors on the conference call, which was still happening, that incorrect information had been disseminated. Trading resumed at 11:39 a.m., and by noon, the stock had regained much of the ground it gained in its mini-crash. The stock closed the day at about $48. By the middle of the day on Thursday, IAC’s stock had rallied back to almost precisely where it was before the mini-crash.
With an Ohio Walmart hosting a holiday food drive for its own workers, The Daily Beast's Michael Tomasky criticizes the notoriously stingy company for not paying them more.
Milk could hit $8 a gallon if there’s no breakthrough in Farm Bill negotiations, and it won’t just be dairy products spiking in price -- cookies and most other food would also be hit.