The president pivoted from deficit reduction to increasing demand—with a surprising call for a higher minimum wage.
What does it take for a Democratic president to start talking like a Democrat about economic issues? Two big presidential election wins, apparently. For when it comes to economics, President Obama delivered a center-left speech for a center-left economic country.
Vice President Joe Biden applauds as President Barack Obama gives his State of the Union address during a joint session of Congress on Capitol Hill in Washington, Tuesday Feb. 12, 2013. (Charles Dharapak/AP)
When Obama delivered his State of the Union in previous years, the economy was in deep recession (2009), starting to dig out (2010), and muddling along in very low gear (2011 and 2012). Finally, however, he was able to lead with some justified boasting about the strong run the economy has enjoyed over the past year—in spite of Washington, not because of it.
Housing is back, he declared. The stock markets, energy production, and car sales are all at high levels. “After years of grueling recession, our businesses have created more than six million jobs,” he said. (He might have added that the Treasury Department today reported that the government actually reported a surplus in January.)
The best thing the government can do to help the economy keep growing at this pace is to get out of the way a little bit—to stop with the brinksmanship and threats over the debt ceiling. “The greatest nation on Earth cannot keep conducting its business by drifting from one manufactured crisis to the next,” he said. Obama offered his preferred solution of a balanced replacement to the impending sequester, composed of some budget cuts and new revenue through the closing of tax loopholes.
So far, so centrist. But he then made a slight turn to the left. To promote growth, he ran through his longstanding laundry list of encouraging manufacturing and clean energy. And then he made a sharper turn. Obama has received his share of grief from the left (and increasingly from the center) for focusing too much on the deficit and not enough on promoting demand. Obama seemed to take some cues from Paul Krugman. Departing from the official bipartisan Washington consensus, he proclaimed that “deficit reduction alone is not an economic plan.”
Then he pivoted to a largely neglected subject in the past four years: wages. “Corporate profits have skyrocketed to all time heights, but for more than a decade wages and income have barely budged,” he noted. Then Obama launched into perhaps the most surprising section of the speech—one that was not rolled out to reporters in the pre-speech phone calls. And to me, it was one of the best parts.
Today, he noted, someone working full time at the minimum wage makes just $14,500 a year. Even with extra tax breaks and credit, “a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong.” He continued: “Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full time should have to live in poverty, and raise the federal minimum wage to nine dollars an hour.” Doing so would promote economic justice, to be sure. “It could mean the difference between groceries or the food bank.”
Big banks have copped to heinous crimes that have cost citizens billions of dollars. And it just keeps happening. Daniel Gross on why the madness never ends—and no one goes to jail.
We’re 53 months removed from the Lehman Brothers meltdown. The U.S. bailouts have essentially been wound down at a profit. The Dow Jones Industrial Average is hovering near 14,000, and global bond markets are as calm as the Sargasso Sea. At the World Economic Forum last month, bankers like Jamie Dimon of JPMorgan Chase and Brian Moynihan of Bank of America, strode around proudly, their places and share prices largely restored. To a large degree, we have moved on.
A man stands outside JPMorgan Chase bank on Park Avenue in New York City. (John Moore/Getty)
But as William Faulkner wrote: “The past is never dead. It’s not even past.”
He could have been writing about the banks. Day after day, our largest financial institutions continue to be revealed as unreformed, largely unrepentant bad actors. Regulators, prosecutors, and plaintiffs in lawsuits continue to unearth scandalous behavior from before, during, and after the credit boom. Bankers conspired with their colleagues, with their counterparts at other banks, and at ratings agencies to milk money through plainly illicit and unkosher means. When caught, frequently indicted by their own emails and instant messages, the banks agree to pay big fines, utter pro forma apologies, and move on. A few people may lose their jobs, and a lot of people may lose their bonuses. But nobody goes to jail.
Why? Prosecutors fear that indicting a highly leveraged, highly indebted institution would trigger a cascade of unwanted outcomes—capital flight, bank runs, disruptions in vital markets. “The greatest triumph of the banking industry wasn’t ATMs or even depositing a check via the camera of your mobile phone,” notes Barry Ritholtz, a money manager and author of Bailout Nation. “It was convincing Treasury and Justice Department officials that prosecuting bankers for their crimes would destabilize the global economy.”
The crime without punishment is as predictable as it is infuriating.
The news this week has been concentrated in two big areas: last decade’s U.S. mortgage mania and the London-centered conspiracies among banks to fix benchmark interest rates.
First, mortgages. On Tuesday, the U.S. Department of Justice, joined by several state attorneys general, sued ratings agency Standard & Poor’s, charging that it put its highest stamp of approval—AAA—on packages of mortgage-backed securities that it knew were junky for the sake of collecting fees. Some have suggested that is payback for S&P having downgraded America’s credit rating in 2011. But come on. Several years ago, a congressional probe unearthed a classic instant message exchange between S&P employees. “We rate every deal,” an analyst said. “It could be structured by cows and we would rate it.” The possible damages: $5 billion.
President Obama has nominated a former oil-industry engineer and retail CEO to run the Department of the Interior. So why should tree huggers rejoice?
For years, the “business community” has been complaining that President Obama has been reluctant to include chief executive officers in his inner circle. The Bush administration featured former CEOs of big companies at Defense (Donald Rumsfeld), Treasury (Paul O’Neill, John Snow, and Henry Paulson), Commerce (Carlos Gutierrez of Kellogg) and Energy (Samuel Bodman).
President Obama watches as his Interior Secretary nominee, REI CEO Sally Jewell, center, gets a kiss Wednesday from outgoing Interior Secretary Ken Salazar. (Susan Walsh/AP)
Now, more than four years into his presidency, Obama has finally appointed a chief executive officer of a national name-brand company with experience in the oil business to a cabinet post. Sally Jewell of the outdoor retailer REI has been nominated to be the next secretary of the interior.
But the folks at the Chamber of Commerce and the Business Roundtable, who might have been hoping for one of their own—a relentless advocate for lower taxes, reduced regulation, aggressive oil exploration, high executive pay, and hard-core Darwinian capitalism—to be vaulted into the inner sanctum might be disappointed. REI boasts annual sales of more than $1.8 billion and at the beginning of 2012 had 122 stores in 29 states and 11,000 employees. But it isn’t a typical company. And while Jewell is a veteran of Mobil Oil, she is much closer to a community organizer than a hard-charging boss. Oh, and she first climbed Mount Rainier at the age of 16.
REI is, in fact, a cooperative owned by its members—much like, say, the Park Slope Food Co-Op, or a credit union, or a kibbutz. It was started 75 years ago by a bunch of mountain-climbing enthusiasts in the Pacific Northwest and has grown steadily over the years. Americans have latched on to snowboarding, hiking, and the new trends of showing up to work in fleeces and adventure sandals. And REI has been there to serve them.
The chain’s retail footprint has spread from the northwest and earthy-crunchy precincts into unlikely new areas: Greensville, S.C.; Paramus, N.J.; Yonkers, N.Y.; even a store in the Puck Building in Manhattan’s SoHo neighborhood. (Because people need hiking gear to climb Cobble Hill and hike through Carroll Gardens?)
In 2011, REI reported revenues of $1.8 billion, up 8.4 percent from the year before, and healthy operating income of $116.2 million. It added 842,000 new members in 2011. But the profits didn’t go into the pockets of mutual funds, or of top bosses. Each year, members receive an “annual patronage refund” that is based on purchases. In 2011, REI distributed nearly $100 million to its 4.7 million active members. The company also has a philosophy of sharing profits with employees—at the end of 2011, it paid out $14.9 million in employee performance incentives and $13.2 million in profit-sharing and retirement payments.
REI is a touchy-feely place. It ranked eighth on Fortune’s 100 Best Companies to Work For in America for 15 consecutive years. The company notes: “REI is committed to promoting environmental stewardship and increasing access to outdoor recreation through volunteerism, gear donations and financial contributions.” Jewell closed her most recent letter to shareholders with a phrase that likely has never appeared in a Securities and Exchange Commission filing: “We wish you much joy in sharing the great outdoors with friends and loved ones or enjoying solitude in a beautiful setting, and look forward to serving you on that journey.”
The FBI says it busted an 18-person ring that spanned 8 countries and 28 states. This was no ordinary identity theft, writes Daniel Gross
Make Up. Pump Up. Run Up.
It’s not the latest exercise fad. Rather, according to the Justice Department and the Federal Bureau of Investigation, it’s the three-step process through which an 18-person ring allegedly committed a stunning $200 million credit-card fraud.
The complaint, which can be seen here, describes what an FBI agent involved in the case called an “extensive, sophisticated, organized scheme.” A ring of people, ranging from a 31-year-old credit counselor in Philadelphia to a 74-year-old jeweler in northern New Jersey, allegedly conspired to make up fake identities, pump up credit profiles with more false information, and then run up huge unpaid credit-card bills.
All 18 people named in the indictment were charged with the same count of conspiracy to commit fraud, which carries a maximum penalty of 30 years in prison and a $1 million fine. Only 13 have been arrested. One is out of the country, and authorities are looking for the other four, according to a spokesman for the U.S. attorney for New Jersey.
The complaint describes something that resembles a multinational corporation—the enterprise “spanned at least 8 countries” (including Pakistan, India, China, Romania, and Japan), and at least 28 states. It involved the creation of 80 fake companies, more than 1,800 mailing addresses, 7,000 false identities, and 25,000 credit cards. It was as if the alleged fraudsters manufactured a small suburb, in which everyone had good credit at the beginning—only to walk away from big credit-card bills once they maxed out the plastic. The total cost is still being counted. But the U.S. says “final confirmed losses may grow substantially above the present confirmed losses of more than $200 million.”
Credit-card fraud is generally done with existing cards—crooks may hack the number, or get a new card sent to a different address, and then run up a bill until they get cut off. New account fraud is more difficult, time-consuming, but potentially more lucrative. The alleged fraudsters apparently read the personal finance literature on how to build and rebuild credit scores. They would apply for and receive low-spending-limit cards, make a few small purchases and pay down the balance. “This slowly increased the credit score of the false identities,” the complaint notes. Then, after the credit-card companies responded to the good behavior and improved scores by raising the spending limits, they would go on spending rampages and stop paying. This is also known as a bust-out scheme. “It’s not unique,” said Al Pascual, senior analyst at Javelin Strategy & Research. “It’s just that $200 million is huge. A bust out scheme of this scale is unprecedented.”
The alleged conspirators also used more devious means to bolster credit scores. They would build up a virtual credit history by purchasing or adding “tradelines,” meaning the lines of credit that appear in a credit history. So, for example, that might show a particular person opening an account with a certain bank on a set date. One of the alleged conspirators, Vernina Adams, who ran a business called One Stop Credit Shop, allegedly enabled the members of the ring to post tradelines on the credit histories of false identities. In January, Adams pleaded guilty to an apparently unrelated federal charge of identity theft in California.
It wasn’t enough to lay off staff and scale back printing. Now, media companies are unloading their actual offices—or renting them out to strangers. Daniel Gross on the latest desperate act of a beleaguered industry.
Three makes a trend. The Washington Post Co. Friday announced that it would look to sell its iconic headquarters building in downtown Washington, D.C. In January, the Detroit Free Press and The Detroit News announced they would put up for sale their headquarters, a 1917 arched pile of concrete and stone designed by the architect Albert Kahn. The same month, Gannett said it will sell the building that houses the Rochester, N.Y., Democrat & Chronicle. The building was the place where Frank Gannett started and built his vast newspaper empire.
Washington Post building. (Gerald Herbert/AP)
It’s no secret that newspapers are in crisis. Advertising revenues have fallen by half in the past decade and are back to where they were in 1983; circulation revenues are back to where they were in 1996. The digital numbers are rising, but not nearly fast enough. Print media is hampered by high fixed costs incurred in the pre-digital era—pensions and union contracts, equipment like printing presses, large numbers of employees, and big office buildings.
Virtually every newspaper company has engaged in drastic measures—laying off experienced employees, eliminating sections, cutting back printing from daily to a few days per week. Those efforts are all meant to lower day-to-day operating costs. But we’ve also seen newspaper companies seek onetime injections of cash by selling off non-core assets. The New York Times, for example, recently sold About.com to IAC (the parent of Newsweek/DailyBeast), as well as pieces of its sports business, and unloaded its regional newspaper business.
Increasingly, the large, statement-making headquarters building—typically located smack in the middle of town—is falling into the non-core asset category. The physical plants frequently included printing plants, which are no longer needed. They were built to house much larger staffs than are viable today. Meanwhile, many big-city downtowns are experiencing a renaissance that is bringing new capital. And newspaper buildings have what forward-thinking developers want: central locations, big floor plates, fine bones, and a recognizable address. Supply, meet demand.
Generally speaking, newspaper companies are motivated sellers—the market knows they are eager to raise cash, and quickly. As a result, they don’t always get the best price. In 2004, the New York Times Co. sold its fortresslike headquarters on 43rd Street, to Tishman-Speyer, a huge New York real-estate company, for $175 million. (The Times used some of the cash to build its new glass tower nearby.) But three years later, Tishman-Speyer flipped the building to an Israeli investor at the height of the commercial real-estate bubble for $525 million.
The Detroit Free Press and Detroit News announced in January that they are selling their headquarters building in Detroit. (Bill Pugliano/Getty)
While many purchasers seek to convert the property into a different use, other buyers are looking for a teardown. In May 2011, McClatchy, which owns The Miami Herald, agreed to sell the newspaper’s headquarters, which occupies 14 prime acres overlooking Biscayne Bay, to a Malaysian developer for $236 million. The acquirer plans to raze the building and erect a casino and resort on the space.
The legendary trader has some strict words about the European bailout—and he cautioned there are “turbulent” times ahead for the continent. Daniel Gross reports from Davos.
George Soros, slightly frail, at 82, is no longer active in the money-management business. But the legendary hedge-fund manager still has pointed views on the global economy, the markets, and politics. On Thursday night, at the Hotel Seehof in Davos, he held a group of financial journalists rapt for nearly two hours as they dined on mango salad and beef. At the heart of Europe, as the European financial establishment celebrated its success at beating back the crisis, Soros issued a stark warning. The agreement by the European Central Bank to intervene in government bond markets, supporting the sovereign debt of Italy and Spain with purchases, has worked, to a degree. “The euro is now here to stay, and the markets are reassured the immediate crisis is over,” he said. But in saving the euro, the continent’s financial powers have damaged the economy of the euro zone and created dangerous new political imbalances. As a result, “we have quite a turbulent time ahead for 2013.”
George Soros spoke at the World Economic Forum in Davos, Switzerland, on Jan. 23. (Bloomberg, via Getty)
Soros, of course, has a complicated relationship with Europe. Born in Hungary, he survived the Nazi occupation, and later made his name betting against the British pound and the Bank of England in the 1980s. Now retired from active money management, Soros said that he is “spending my time developing my philosophy of ‘imperfect understanding’ and reorganizing my foundation so that it can actually survive me.”
At the World Economic Forum, you can sit in on dozens of panel discussions and hear different varieties of the same economic conventional wisdom, rendered in generally bland rhetoric. But Soros has a few contrary views, and a willingness to air them forthrightly.
That’s not surprising, given his personal history, but Soros also has a few positive things to say about Germany and its performance in the rolling European crisis. By intervening in government debt markets—only after German Chancellor Angela Merkel agreed—the European Central Bank may have saved the currency, but damaged the continent that uses it. “Germany did the minimum that was necessary to save the euro,” he said.
The result now is that the euro zone is effectively divided into creditors (countries like Germany, Holland, and the Scandinavian countries) and debtors (Greece, Spain, Italy, Portugal, Ireland). “The creditors are in charge, and are unfortunately arguing for a policy of austerity, which is counterproductive,” he said. While the ECB and IMF have made budget cuts and tax increases a condition of receiving aid, he notes, “You can’t reduce excessive debt by reducing the GNP.” He said austerity is pushing the euro zone into recession, which will further aggravate political tensions.
The danger now is that the European Union, a voluntary association of equal states, is in danger of devolving into a system “where Europe is divided into the center and the periphery, with the center controlling policy and the periphery used to a permanently inferior and subordinate situation."
Soros equated this to the post–World War II era, when the U.S. and the developed world controlled the flow of capital and subjected the developing world to very sharp financial discipline. “The political problem [in Europe today] is that the creditors, particularly Germany, are in charge,” he said. “And effectively nothing can be proposed on the European level without first checking with Germany if it is acceptable.” The upshot: the financial solution to the continent’s problems “is politically unacceptable, and, in the long run, intolerable,” Soros said. “So the euro is in danger of destroying the European Union.”
Just because nations aren’t threatening to leave the Euro, doesn’t mean that financial leaders should get complacent. Daniel Gross reports from Davos.
This is the first World Economic Forum in at least six years that hasn’t been gripped by a financial crisis. The giant banks are shrinking their footprints and workforces, but they’re not falling. To those without a Bloomberg or Reuters terminal, government bond markets have become boring again, as interest rates on Italian, Spanish, and Irish bonds have fallen to acceptable levels. The hedge-fund managers are schmoozing, back slapping, and scheming about deals, not fingering blackberries and iPhones like worry beads. “There’s no doubt the tone is generally more positive,” said the guy in the parka strolling down Promenade, the main drag of Davos. It was Michael Dell, the founder and CEO of Dell, Inc.
From left, British Prime Minister David Cameron and Italian Prime Minister Mario Monti. (AP (2))
Europe’s financial system is still battered. But the bailouts of Portugal, Ireland and Spain, the agony of Greece, the prospects of economic shrinkage in Germany and the U.K. don’t seem to be high on the agenda. To a large degree, the bailouts—the funds provided to Spain, Greece, Ireland, and Portugal by the International Monetary Fund and European Central Bank, and the ECB’s promises to purchase Italian bonds—seem to have stopped the panic. The expectation now, as IMF Managing Director Christian Lagarde said at a Newsweek and The Daily Beast event on Wednesday, is that “the policy decisions that stabilized the financial markets are going to translate into the real economy.”
“Just because there is no talk of the euro failing and countries leaving the Euro doesn’t mean there should be complacency,” said Enda Kenny, the taoiseach of Ireland, at a panel on Thursday.
But there was plenty of complacency and self-congratulation on display. Mario Monti, the banker who helped lead Italy through last year’s financial crisis as a technocratic prime minister, took a victory lap. On Wednesday, he told the Davos crowd—his crowd—that Italy had regained the confidence of the world’s investors, thanks in large measure to the hard work of his country’s stoic citizens.
The U.K. may be teetering on the edge of yet another recession. But you wouldn’t have guessed it from Prime Minister David Cameron’s muscular, direct speech on Thursday. He boasted about cutting his country’s deficit, keeping business taxes low, and recommended other developed countries do the same. He didn’t say much about the urgency for growth, or the failure of his country to regain its pre-crisis economic peak.
Clearly, success has been redefined somewhat for European financial leaders. Flat is the new up, and not falling on your face is the new definition of success. A “C” is the new “A.” As Klaus Schwab, the maestro of Davos, put it: “We passed the exams last year without failing, but we still have a lot of homework to do.”
So, what are self-satisfied European leaders and the forgiving bond markets overlooking? Plenty, says Barry Eichengreen, professor of economics at the University of California at Berkeley and a prescient observer about the frailties of the Euro. “It’s a total no-brainer that the crisis will be back in 2013,” Eichengreen told me in the buzzing Congress Center. “The underlying issues haven’t been solved.” The much-discussed moves towards a European banking union (a common regulator for all the continent’s banks) aren’t really happening. There isn’t much growth to speak of.
Europe may have avoided total collapse in 2012, but the threat isn’t over, IMF chief Christine Lagarde told a dinner Wednesday hosted by Newsweek & The Daily Beast in partnership with Credit Suisse in Davos.
2013 will be a “make-or-break year for the global economy,” said Christine Lagarde, the managing director of the International Monetary Fund. “We had a really tough 2012, and yet a lot has happened,” from new policy efforts in Europe to a change of leadership in China. In the coming months, the efforts to calm the financial markets should bear fruit in the real economy, she said: “The question is whether policymakers and governments will continue to implement the policies that they have announced.”
Newsweek and The Daily Beast editor in chief Tina Brown shares a light moment with IMF chief Christine Lagarde at the Davos dinner on January 23, 2013. (David Biedert for Newsweek & The Daily Beast)
Minutes after delivering a well-received keynote speech at the World Economic Forum in Davos, Switzerland, Lagarde spoke with Newsweek and The Daily Beast editor in chief Tina Brown at a dinner presented in partnership with Credit Suisse. The event, which highlighted women’s leadership, also featured Egyptian democracy activist Dalia Ziada and was cohosted by Yahoo CEO Marissa Mayer, DuPont CEO Ellen Kullman, and Pamela Thomas-Graham, chief talent, branding, and communications officer at Credit Suisse.
Echoing Davos’s stated theme of “resilient dynamism,” Lagarde, the first woman to lead the IMF, struck a note of guarded optimism. She emphasized the need for vigilance and for policymakers to continue to do better. In her speech, she noted that the IMF expects global growth of just 3.5 percent this year. “The short-term pressures might have alleviated, but the longer-term pressures are still with us,” she said. On Wednesday, she noted, the U.S. Congress announced a deferral of the debt ceiling until May 18. That’s a positive sign, but not nearly good enough. Both the United States and Japan have to focus on a medium-term plan to reduce deficits, Lagarde said. In Europe, she added, “a lot has taken place—too slowly, granted—but a lot has taken place,” She cited the creation of the European stability fund and aggressive monetary policy. While a collapse in 2012 was avoided, “we should make sure we guard against the relapse in 2013,” she said. “Don’t relax.”
It’s rare for the head of an global institution like the IMF to be introduced as a “subversive.” But that’s precisely how Brown described the 56-year-old lawyer. “Christine is a subversive in the very best sense of the word,” Brown said, citing Lagarde’s plain-spokenness and “eagerness to punch at complacency.”
Lagarde has gone against the grain of the European financial establishment by speaking out against austerity. In her speech at the World Economic Forum, Lagarde said Europe should continue the “necessary fiscal adjustment at the country level, and supporting demand, especially with further monetary easing.” The IMF’s in-house economists recently took another look at the impact of stimulus efforts and concluded that such efforts offered more bang for the buck than previously thought. “I feel good that we did it,” she said.
The ongoing debate over austerity highlights the larger way in which politics can pose a threat to economic recovery. “In many countries, there is the tyranny of the minority,” Lagarde said. In the U.S. and elsewhere, small minorities of political actors are unwilling to see the world economy as a tightly interconnected whole and prefer to look only in their own backyards. “It takes brave people to raise their voice and say, ‘We all matter to each other,’” she said.
Lagarde, who was the first woman to run the international law firm Baker & McKenzie, also spoke of the need to value women in the workplace and in the world’s political systems—at the highest levels of finance and in everyday life. “Here are some numbers: 50 percent of cars, 50 percent of computers, and 85 percent of consumer goods are bought by women,” she said. “It’s not a claim. It’s just the market.” To continue to thrive and prosper, she said, all countries must figure out ways to make the workforce and educational systems more open to women. Lagarde noted that when she met with corporate leaders, she would ask about the representation of women on the boards, and she carried a list in her back pocket of women qualified to serve on boards. When Brown asked why there weren’t more women running banks, Lagarde cited the barriers imposed by strong networks in the financial world and “the barriers we have in our own mind.” Two women are running banks in Iceland, she said—banks that went bust during that country’s financial crisis but are now recovering.
Notably missing from this year’s World Economic Forum in Davos are the U.S. mainstays of years past. Paging Tim Geithner, Hillary Clinton and the Google guys? Daniel Gross on why we’re keeping a low profile.
The U.S. has a relatively muted presence at this year’s World Economic Forum in Davos, Switzerland. That’s largely because we’re in a time of transition. Davos mainstay Timothy Geithner is on his way out, and Jack Lew, Obama’s pick to replace Geithner as treasury secretary, has yet to be confirmed. In 2008, then-Secretary of State Condeleezza Rice set the tone with a keynote address. The current secretary of state, Hillary Clinton, is stepping down, and anyway, is busy this week with Benghazi hearings back home. Google isn’t throwing its traditional Saturday night bash, nor has it sent its top three execs, known by the mononyms Eric, Larry, and Sergei, and Facebook’s Mark Zuckerberg isn’t in the program. The big U.S. banks that typically swarm the place and host high-profile events are here in much smaller numbers and keeping a much lower profile.
James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co., speaks during a panel discussion on the opening day of the World Economic Forum (WEF) in Davos, Switzerland, on Jan. 23, 2013. (Chris Ratcliffe/Bloomberg, via Getty)
Not everyone agrees with my assessment. One American diplomat, overhearing me bemoan the lack of a U.S. presence to a group of journalists in the main lounge of the Congress Center—a kind of Star Wars bar scene for the international economy—piped in with a gruff “Excuse me.” There were plenty of important officials here, including Federal Trade Commission Chairman John Leibowitz, Undersecretary of State Robert Hormats, Federal Communications Commission Chairman Julius Genachowski, and Housing Secretary Sean Donovan.
But these people aren’t boldface names, even in Washington.
Even if it is a transition time in the U.S., it doesn’t make sense to me that the U.S. should take a back seat at Davos, especially considering the theme for this year’s gathering is “Dynamic Resilience.” I’d argue that in the developed world no economy has done a better job of reinvention and reconstruction than the U.S. in the last few years. But Americans aren’t exactly beating their chests about it. The country has avoided the deep damage of self-imposed austerity that Europe has. It pays low interest rates on its debt. It largely processed the housing and banking failure, and has, all the while, developed new energy sources. It is growing at about a 2.4 percent annual rate this quarter, according to Macroeconomic Advisers. By contemporary terms, that qualifies as rapid growth. “I think you’ve passed the height of your political madness,” said Martin Wolf of the Financial Times, dean of the economic columnists.
Economically, in other words, the U.S. has recovered some of its aggression. That was on display Wednesday morning in Davos, when JPMorgan Chase CEO Jamie Dimon, America’s leading banker (for better or worse) came out firing. At a panel, he defended his bank, the U.S. banking system, and America’s actions generally. He apologized to the company’s shareholders for the losses racked up by a trader now known as the London Whale, but not for the complexity of the business. "Businesses can be opaque. They are complex. You don't know how aircraft engines work, either," he said—the “you” referring to policymakers. (True, but aircraft engines don’t explode en masse and threaten the global economy. And when failures do occur, enginemakers don’t get bailed out by the government.) Speaking of aggression, after the session, I saw Dimon holding court in a lounge, standing just a few feet away from Dan Loeb, the edgy hedge-fund investor who has been shaking things up at Yahoo!, Morgan Stanley, and Herbalife.
But another Dimon quote that got less attention was more apropos. Dimon spoke glowingly of America’s much-maligned central bank. "I think they saved the system,” he said, nothing that the Federal Reserve bailed out the global financial system, not just America’s. Indeed, it struck me that good monetary policy that benefits others has been a form of a U.S. export. The way Brazil dispatches soccer players to leagues around the world, the U.S. loans out monetary experts to other countries. In the space of a minute in the Congress Center, I saw Adam Posen, the American economist who, until recently, served on the Bank of England’s monetary policy committee, where he was a rare voice for stimulus amid stagnation, and Stanley Fischer, the former MIT economist who is the Governor of the Bank of Israel, who has helped steer that turbulent nation’s economy through relatively calm waters.
A participant of the World Economic Forum talks on the phone at the 43rd Annual Meeting of the World Economic Forum in Davos, Switzerland, on Jan. 23, 2013. (Anja Niedringhaus/AP)
Bonuses and salaries have been cut at all of the big Wall Street firms. What’s a $500,000-a-year worker supposed to do?
“It is what it is. But what are you going to do?”
Standing in Grand Central Terminal, a veteran employee of a giant financial-services firm—one of those companies with two names that is in the news a lot—was uncharacteristically fatalistic. His firm had just announced disappointing news about compensation and bonuses.
T.S. Eliot famously said that April is the cruelest month. But for bankers, January is turning out to be pretty harsh. Typically employees receive their bonuses—the raison d’être of most financial whizzes—in the first month of the year. This week Morgan Stanley announced that instead of paying out cash and stock bonuses in January, it would give bankers with base salaries of more than $350,000 IOUs—that is to say, the sum of their 2012 bonus would be paid out over the course of three years. Those who leave earlier are simply out of luck.
Goldman Sachs has traditionally been the highest-paying investment bank on Wall Street. But last year compensation was capped at 38 percent of revenue, down from 42 percent in 2011. The average Goldman employee was paid nearly $400,000 in 2012. That’s a lot. But in 2007 the average employee was paid about $660,000.
JPMorgan Chase on Wednesday slashed the compensation of CEO Jamie Dimon in half as punishment for big trading losses racked up by the bank’s London Whale. Thursday morning, Citi, in the midst of a painful restructuring, announced ugly results. In past years, the typical reaction to a reduction in bonuses would have been rage, followed by swift action. The dissatisfied could walk across the street to another firm, or jump to a private-equity or hedge fund, or start their own asset-management firm. But now, the whole complex is under pressure.
“It’s musical chairs, and there are fewer chairs,” says one 20-year veteran of the industry. “Everyone thinks they’re special, but it’s very Darwinian out there.”
Yes, the elite players will find their way to hedge funds and alternative asset-management firms. Jes Staley, a top executive at JPMorgan Chase, recently jumped ship for hedge fund Blue Mountain Capital. But Wall Street’s middle-class bankers and traders “don’t have the options to go elsewhere,” one investment-banking veteran notes.
To a degree, the bonus clampdown is just a deferred recognition of reality. The bailouts and huge support that the government provided to the markets and individual firms in 2008 and 2009 allowed Morgan, Goldman, and Merrill to carry on as usual for a few years. That enraged the public, but kept employees happy. Now, however, the bailouts have largely been paid back, the guarantees have been lifted, and large banks are left facing a changed climate. Regulations (and the market) forbid them from using too much leverage. The Dodd-Frank financial-reform bill prevents them from gambling too much with shareholders’ money. Sen. Elizabeth Warren, a foe of the industry, has been seated on the Senate banking committee. And technology has eroded a lot of the advantage they once had in trading stocks, bonds, and other products on behalf of clients and for themselves.
The ultimate go-go 1990s company has struggled in the past decade. Is Dell now a candidate for a leveraged buyout?
Trading of the shares of Dell Computer briefly stopped this afternoon on news that the company is considering being acquired by private-equity firms. The company didn’t comment on the rumors.
Michael Dell, chairman and CEO of Dell Inc. (Alexander F. Yuan/AP)
No firms have stepped forward publicly to express interest. But Blackstone Group, one of the largest private-equity firms, is an obvious candidate. Last week, David Johnson, senior vice president for strategy at Dell, took a new post with Blackstone. And any deal is likely to be friendly and would include corporate founder Michael Dell. According to the most recent proxy filing, he owns about 14 percent of the company’s common shares. Private-equity veterans suggest that firms like Silver Lake Partners and TPG, which have long had a focus on technology firms, might also be interested.
This marks one of the few times that Dell’s stock has been in the news in recent years. And therein lies a tale of fragility and obsolescence that can be told in two tidy charts. Call it a tale of two decades.
Dell was a company custom-built for the go-go 1990s. Michael Dell pioneered a direct-sales model from his dorm room at the University of Texas and ultimately built it into an Internet powerhouse. In the 1990s, everybody bought PCs (PCs, not Macs) because they wanted to go online. The explosion of the Internet—email, website, audio, gaming, video—meant people were eager to upgrade their computers every couple of years. Which mean they bought more PCs (PCs, not Macs). And it became cool and simple to purchase desktops—and then laptops, printers, speakers, and other accessories—online through Dell. Because it had a head start in direct sales against incumbents Iike IBM and Hewlett-Packard, and because it worked like crazy on logistics and its supply chain, Dell was able to reduce prices and gain market share while also turning a profit.
The upshot. As the chart below shows, Dell was arguably the best-performing stock of the 1990s. Between January 1991 and March 2001, its shares rose a stunning 2,407 percent.
But Dell’s dominance wasn’t to last. Once everybody was online and the market was saturated, it was difficult to boost sales. Throughout the first decade of the 21st century, profit margins for computer makers continued to slip. IBM sold off its PC business to a Chinese competitor, Lenovo, in 2004. Gateway was sold to Acer in 2007. And then, seemingly out of nowhere, Apple stormed back to gain market share in desktops, laptops, and a whole new range of devices in which Dell didn’t really have serious offerings: iPods, iPhones, iPads. And so while Dell rolled out clever ads, and boosted its physical presence with mall kiosks, its position in the culture shrunk. So did the company’s margins. And so did the stock.
Check out this chart of Dell from March 2000 to the present, in which the stock lost nearly 80 percent of its value. The broader stock market has enjoyed two epic rallies, and new technology companies have sprung from the fertile ground of Silicon Valley. But Dell has wilted. In order to get investors to stick around, last year it resorted to that old-economy tactic: paying a quarterly dividend of eight cents a share.
Obama taps poverty’s ‘rock star.’
in the first week of January, most of America’s best-known economists were in San Diego, thronging the American Economic Association’s annual meeting at the Manchester Grand Hyatt resort. But one of the profession’s sharpest young economic minds, Esther Duflo, was off doing fieldwork in India.
Esther Duflo. (Baltel/SIPA)
Duflo, 40, is enjoying quite a run. Born and raised in France, she arrived at the Massachusetts Institute of Technology in 1995 to pursue a Ph.D.; in 2009 she won a MacArthur “genius” grant; then in 2010 took home the John Bates Clark Medal, given to the best economist under the age of 40. Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, coauthored with her partner (and father of her child), Abhijit V. Banerjee, won the 2011 Financial Times/Goldman Sachs Business Book of the Year Award. And then in late December, she was nominated for a post on the White House’s new Global Development Council, an entity designed to rationalize the government’s approach to foreign aid. “She’s an absolute rock star,” said Dean Karlan, professor of economics at Yale University and a colleague. “She’s a great example of the new wave of development economists—people who are really bright and dedicated to theory, but are driven by improving the world around them.”
Development economics has long been a contentious field tied up with geopolitics, ideology, and bitter, ego-driven feuds. Duflo and her colleagues have sought to defuse the dispute between what they call the “supply wallahs”—folks like Columbia’s Jeffrey Sachs who believe that the poor simply need more resources—and the “demand wallahs,” experts like New York University’s William Easterly who believe that top-down aid programs don’t work.
Instead of endlessly debating ideology, Duflo and company pursue empirical evidence. The method they embrace is the scientific one, employing randomized trials, with one group of patients getting the economic “treatment,” the other a placebo. As Duflo put it: “If we don’t know whether [aid is] doing any good, we are not any better than the medieval doctors and their leeches.”
This attitude informs the work of J-PAL, a 10-year-old center at MIT now with offices in every continent except Australia, which Duflo helped found and now runs. A case study in Poor Economics describes an experiment in Hyderabad, in which half the city’s neighborhoods participated in a microlending program and the other half didn’t. In the microloan neighborhoods, it turned out that residents were more likely than their placebo counterparts to have purchased large durable goods, like bikes or refrigerators, that made life easier. But microlending, often held up as a miracle cure for poverty, brought no sign of “radical transformation.” The proportion of families that started new businesses in the microloan zones went up from 5 percent to 7 percent: “not nothing, but hardly a revolution,” Duflo and Banerjee write.
This approach, refined in India, has a natural audience in Obama’s Washington. The administration, which insisted on efficacy studies for treatment in Obamacare, wants to place U.S. development assistance on a similar evidence-based path. But Duflo is an economist in the Obama mold in other ways as well: cosmopolitan, ambitious, a dreamer with qualities of a community organizer, a rationalist in a field dominated by ideologues. And a high-powered thinker with a sense of professional modesty. The last chapter of Poor Economics is entitled “In Place of a Sweeping Conclusion.” And among those non-conclusions: “Economists (and other experts) seem to have very little useful to say about why some countries grow and others do not.”
The company is shedding 5,400 of its 63,500 employees and taking a number of charges that will halve its quarterly profits. But the real blow is its outmoded consumer and business travel business, says Daniel Gross.
“We’ve been working on this change. I’ve talked about the convergence of online and offline. We have implemented actions to be able to operate more effectively in the digital marketplace.” A media executive speaking prepared notes for Davos? A big-box retailer holding forth at the Consumer Electronics Show? No, that was Kenneth Chenault, CEO of American Express, speaking in a conference call Thursday night in which the financial-services giant announced it would lay off 5,400 people and take a series of charges that would halve its quarterly profits.
American Express Co. corporate credit cards. (Andrew Harrer/Bloomberg, via Getty )
Headquartered in the World Financial Center, American Express has blanketed the globe and segmented the market—gold, platinum, centurion. In the process, it has become a brand for the 1 percent and its many aspirants. Chenault, having run the firm since 2001, enjoys one of the longest tenures of any big New York financial firm. Virtually alone among the city’s financial bigwigs, his reputation is of such quality that his name was seriously floated for Treasury secretary.
American Express makes money by facilitating and processing all sorts of retail transactions, by lending money to its customers, and by helping people and companies arrange travel. The core business is doing quite well. Card spending was up 8 percent in the most recent quarter, and customers are doing a much better job keeping up with their payments. “The write-off rate of the U.S. lending portfolio (principal only) was 2.0 percent for the quarter,” the company reported.
While AmEx’s card business benefited from one of the big business-friendly trends of 2012, the improving consumer, the company was hurt by some of the year’s other big trends: tougher regulation and the relentless disintermediation of established business models by the digital revolution.
AmEx announced Thursday that its earnings would be impaired by three major charges. The first, $342 million, was done to account for a slight uptick in participants cashing in their points in its Membership Rewards program, in which card users accrue points redeemable for travel and other rewards based on spending. Given that Membership Rewards points are a liability for American Express—they have a cash value to customers and will be used at some point—the fact that more will be redeemed in 2013 rather than 2014 is more of an accounting issue than a fundamental business one.
A second charge can be directly ascribed to Washington forcing financial firms to change their behavior. AmEx is reporting a charge for $153 million to account for money it will have to return to card members. “This amount deals with fees, interest and bonus rewards as well as an incremental expense related to the consent orders entered into with regulators last October,” the company said. Translation: the Consumer Financial Protection Bureau, the creation of Sen. Elizabeth Warren (D-Mass.), last year nailed American Express for a host of violations.
“This action is the result of a multipart federal investigation which found that at every stage of the consumer experience, from marketing to enrollment to payment to debt collection, American Express violated consumer protection laws,” the CFPB said. The litany of accusations included levying illegal late fees and wrongly charging late fees. American Express had agreed to refund at least $85 million to some 250,000 consumers and pay a penalty of $27.5 million. The sum the company announced yesterday is the result of its own accounting for customers it had wronged.
The white-shoe firm is cutting back on bankers and traders, and doubling down on the old-fashioned brokerage business.
And then there was one.
Today’s headlines are about Morgan Stanley, the famously white-shoe investment bank, cutting up to 1,600 posts in banking and trading—not in back offices or low-margin areas, but in the sexy, white-hot heart of the financial-services industry.
Bankers walk in front of Morgan Stanley headquarters in Manhattan. (Mario Tama/Getty)
As Tom Wolfe documented in this space, Wall Street’s Masters of the Universe—beset by high-frequency trading, the triumph of Silicon Valley nerds, limits on leverage, years of poor stock performance, and a host of new regulations—have morphed into the Eunuchs of the Universe. And now Morgan Stanley is about to neuter 1,600 more.
It’s all happened very fast. Five years ago, there were five huge, New York–based investment banks: Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns. These big-shots controlled the lucrative advisory and initial-public-offering businesses, ran internal hedge funds, managed assets, and traded with abandon. Using huge amounts of borrowed cash, they minted giant profits, paid large bonuses, and bolstered the economy of the tristate metropolitan area—all without pesky government oversight. Each employed tens of thousands of people, and sent its top executives to key posts in Washington.
But when the mortgage crisis hit, the wheels came off.
Bear Stearns, the runt of the litter, was the first to go. Undone by excessive leverage, poor management, and bad bets on subprime mortgages, it was taken over by JPMorgan Chase (with the assistance of the Fed) at a fire-sale price in March 2008.
Five months later, Lehman Brothers, undone by excessive leverage, poor management, and bad bets on subprime mortgages (sense a theme?), hurtled into bankruptcy, and nearly took the whole global financial system down with it.
Why aren’t business leaders more concerned about the debt ceiling? Everyone rallied to prevent a fall off the fiscal cliff, but that damage would’ve been contained, while a failure to raise the ceiling would be catastrophic, writes Dan Gross.
There’s always an encore in cabaret and in Washington fiscal crises. The ink was barely dry on the cliff deal—or if you prefer a more up-to-date metaphor, we’d barely disabled our fiscal-cliff countdown widgets—when we started to focus on the next drama: the debt ceiling.
On the plus side, this latest crisis at least sounds more benign: while you fall off a cliff, you only bump your head into a ceiling. But economically, the ceiling has the capacity to deliver far more damage. Had the U.S. gone over the fiscal cliff, taxes would have reverted to higher levels, and unemployment benefits for some would have ended. But the damage could easily have been undone by a post-cliff deal.
A breach of the debt ceiling, by contrast, and a failure to pay government debts, even for a day or two, would be far more problematic. The Bipartisan Policy Center says the “X” date—the date on which the U.S. will have exhausted its borrowing authority and won’t have sufficient funds to pay all its debt—is between Feb. 15 and March 1.
So what happens when we hit the “X” date? Some people who are expecting government payments wouldn’t get them, and the republic would survive. But if the government refused (or was unable) to pay interest on its bonds for a few days, the republic wouldn’t survive. And neither would the global financial system.
Why not? Treasury bonds, the safest form of capital known to man, are held in huge volumes by U.S. and foreign banks, by the U.S. and foreign central banks, and by companies and savers around the world. A default, or even a quasi-serious threat of default, would cause U.S. bonds to lose a lot of value immediately. That would trigger a round of margin calls, capital flight, and unintended consequences that would make September 2008 seem like a paddle in a swan boat in the Boston Public Garden. The unique role that Treasuries play, and the fact that leveraged institutions (including the Fed and the Bank of China) hold so many of them, means that it’s doubly, triply important not to goof around with America’s promise to pay.
Of course, the markets, as they did with the fiscal-cliff situation, have thus far declined to freak out over the debt ceiling: the VIX, a measure of stock-market volatility, has slumped in the past week. The stock market is surging ahead. And while yields on U.S. government bonds have risen a little so far this year, the bond vigilantes are still blissed out at their all-inclusive resort in Turks & Caicos.
And yet Washington Republicans, with the tacit approval of much of the press corps, seem willing—even eager—to create a new hostage situation. Democrats believe, rightly, that the debt limit has nothing to do with future spending and everything to do with carrying out past tax and spending policies. President Obama doesn’t want to negotiate over it. Republicans are eager to use the debt ceiling as leverage to get President Obama to cut entitlements. And they’re eager to have the conversation—again and again. House Speaker John Boehner even mused about staging a debt-ceiling hostage crisis every month.
After a University of Massachusetts student found significant errors in a study beloved by budget cutters world over by Harvard economists Kenneth Rogoff and Carmen Reinhart, Stephen Colbert does what he does best -- leaves them in the dust.
Fed chief Ben Bernanke has been working like a dog to keep the economy moving, he told Congress today.