McDonald’s announced it will no longer serve Heinz ketchup after the condiment company hired Burger King’s former CEO. Daniel Gross on the Brazilian business boom that’s behind all of the burger joint drama.
In this photo illustration, customers order food from a McDonald's restaurant on October 24, 2013 in Des Plaines, Illinois. (Scott Olson/Getty)
There’s less—and more—than meets the eye. The less part? McDonald’s says it only uses Heinz ketchup in the Pittsburgh and Minneapolis markets. So this isn’t a major business disruption for either party. The more part? The relationship between American business icons is being torn asunder by a strange and interesting wrinkle in globalization: the advent of Brazilian investors as major forces in the U.S. market.
A little background. McDonald’s and Heinz are both corporate American royalty. Heinz traces its lineage to 1869 and first started making ketchup in 1876. And while they’re both based in the Midwest (Chicago for McDonald’s and Pittsburgh for Heinz), and while few companies have done more than McDonald’s to promulgate the use of sweet, salty, processed tomato goop around the world, the two firms haven’t had all that much to do with one another over the years.
So why the split? McDonald’s cited “recent management changes” at Heinz.
Heinz has indeed undergone significant management changes. Earlier this year, it was bought for $23 billion by legendary investor Warren Buffett and Brazilian private equity firm 3G. Most Americans have heard of Buffett, and he’s one of the least objectionable corporate personalities around. Few people have heard of 3G Capital, which is based in Brazil and has only made two acquisitions to date.
Founded by Jorge Paulo Lemann, a Harvard graduate, 3G is following in the footsteps of highly sophisticated Brazilian investors and managers, many of them who were educated in the U.S. They have prospered during Brazil’s boom, gained sophistication in an array of markets and are using their balance sheets and knowledge to push into new markets. To Brazilian investors, American companies with global footprints are extremely appealing. The trend started in 2008, when InBev, run by Carlos Brito, a Brazilian executive, acquired Anheuser-Busch for $52 billion (PDF). Brazilian meatpacking company JBS bought Pilgrim’s Pride, a chicken processor. And Marfrig bought Keystone Foods, a major distributor to the fast food industry. “Look out for the Brazilians and the Indians,” the chief executive officer of a consumer products company told me when I wrote about this trend in 2010. A few years later, his company was sold to a Brazilian company.
3G made a splash in the fall of 2010 when it bought Burger King—the perennial Pepsi to McDonald’s Coke. And, having set up shop at Burger King’s headquarters in Miami, the Brazilians are moving aggressively to remake the company. They’re assaulting (get it?) McDonald’s head-on by introducing new French fries, for example.
That glowing new bestseller, that Friday stock bump, that rosy Christmas outlook—they can’t hide that after 20 years, the company still hasn’t managed to turn a profit. Daniel Gross on whether it ever will.
Amazon.com and Jeff Bezos, its founder and chief executive officer, are having a moment. They are the subject of a new, admiring bestselling book, The Everything Store, by Brad Stone. Bezos just plunked down $250 million to buy The Washington Post. The buoyant stock, up 64 percent in the past year, got a nice jolt on Friday as investors were enthused about its third-quarter results: revenues were up 24 percent from a year ago, and Amazon issued a positive forecast for the Christmas season. The company is killing it in books and retailing goods, has a rapidly growing cloud storage and computing business, and is getting into original content and devices. It sports an impressive market capitalization of about $166 billion.
The company, first founded in 1994, still doesn’t make any money. In the third quarter, it reported a $41 million net loss.
Historically speaking, it is rare for a company to be in hypergrowth mode when it is nearly 20 years old and has annual sales of about $65 billion. That’s why investors love Amazon. But historically speaking, it’s also very rare for a company that has been around for 20 years—large or small—not to make money, to run on margins so thin that they can easily be eaten up by interest cost, or capital expenditures, or the loss of value in an investment like Living Social. (Amazon.com had to write down its investment in the daily deal company by $169 million in the most recent quarter.)
Indeed, when you look back through history, it’s very hard to find an analog. Many years ago, about the time that Amazon launched, I wrote a collection of great business stories in American history. (It’s still in print, if you want to check it out at Amazon.com.)
One thing many of the historically great companies share is reliable, decent operating margins. By the 1920s, 20 years after Henry Ford founded the Ford Motor Company, Ford was racking up profits of about $90 million per year. Between 1893 and 1901, John D. Rockefeller’s Standard Oil threw off $250 million in dividends alone. The company was so profitable that Rockefeller didn’t know what to do with the profits and was forced to invent modern philanthropy just to get rid of it.
Some more recent examples: Intel was founded in 1968 and operated in a highly competitive, capital intensive industry. Yet in 1988, Intel earned $452.9 million on $2.87 billion in revenues—a fat 16 percent profit margin. The first Walmart opened in 1962. In 1982, 20 years into its life, Walmart had sales of $2.4 billion and profits of $55.7 million, a razor-thin 2.5 percent margin but a profit nonetheless.
Jeffrey Zients was just appointed to fix Healthcare.gov. Daniel Gross on why the hire is an uncharacteristically brilliant move by Obama.
By any stretch of the imagination, the rollout of Healthcare.gov, the federal health insurance exchange, is going poorly. Three weeks into its existence, it doesn’t seem to work. Slow to anger and cast blame, the Obama administration is now taking action. It is bringing in a SWAT team, staging a technology surge, calling on “the best and the brightest,” as the Department of Health and Human Services noted in a blog post.
J. Scott Applewhite/AP
Health Department Secretary Kathleen Sebelius lacks the technology and management chops to bring this project home. So Obama has called in Jeffrey Zients, whom White House Spokesman Jay Carney called “an expert in the field of effective management.” Zients, who cut his teeth as a management consultant at Bain & Company, helped David Bradley build the Advisory Board Company, a health care consulting firm, into a juggernaut, and grew rich after it went public. Zients has served as a super capable Geek-on-Call, helping to fix programs that have gone awry and stepping in to fill crucial rolls. He worked on the Cash for Clunkers program in 2009, served as Chief Performance Officer at the White House, and served two stints as acting head of the Office of Management and Budget, from July 2010-November 2010, and from January 2012-April 2012.
It’s possible—even likely—that Zients will turn Healthcare.gov into a model of efficiency and high functionality. The problem for the White House—and it’s a recurring one—is that someone with Zients’s capabilities, stature, and record wasn’t running the operation from the beginning.
President Obama has shown a remarkable ability to get hyper-effective, brilliant, and public-spirited executives to come serve in the administration. But few of them have stayed for long. That’s in part because a job inside the White House is so exhausting, and it’s in part because the financial pressures outside the White House are simply too great and irresistible. So former Treasury Secretary and Harvard President Larry Summers came to run the National Economic Council, and stayed for about two years. Peter Orszag, another great economic mind, served as OMB Director—for about a year and a half. Gene Sperling, perhaps the longest-serving senior member of the economics team, joined Treasury in 2009—and just left after nearly five years. He looks as if he’s aged ten years.
It’s great the “best and the brightest” are willing to serve. (Of course, after the way the “Best and the Brightest” performed during the Vietnam Era, you’d think Democratic administrations would eschew the term on a permanent basis.) But what Obama needs isn’t an archetype from the Kennedy years. He needs an archetype from the Roosevelt years: a heroic, committed administrator with a long attention span, a bleeding heart, and a desire to achieve great things. Somebody who is fully committed and willing to stay the course, who regards a high-level government position as the culmination of a career, not as one of many stops. Someone who sees making government projects work for people as his or her life’s work, as a journey. He needs, in short, a Righteous Pilgrim. Someone like Harold L. Ickes.
Most politicos today probably are more familiar with his son, Harold M. Ickes, a combative campaign operative who worked in the early Clinton White House. But with all due respect to the son, the father was far more influential, and a far more towering figure in his day.
Nearly 20 years ago, when I interviewed Harold M. Ickes in his White House office, I saw a photograph on the wall. It showed Harold L. Ickes and a bunch of people at a groundbreaking for a huge building. The inscription read: ““Harold, stop making mud pies. Franklin Roosevelt.”
Today’s delayed employment report wasn’t very good, but it had some glimmers of hope. Daniel Gross on the signs that the forces holding down job growth are beginning to lift.
In the old days, the personal was the political. These days, the personal finance is the political as government policies, Washington dysfunction, and brinkmanship wreak havoc on the markets and the economy.
The government’s heavy hand has been visible in the monthly jobs report for the last several years. On the left, analysts have generally pointed to the Bureau of Labor Statistics release and noted that austerity—reduced government spending at the state, federal, and local level—is tamping down employment. On the right, analysts have combed through the same report to find evidence that regulation and the advent of the Affordable Care Act are pushing more Americans into part-time work.
Hundreds of job seekers wait in line with their resumes to talk to recruiters at the Colorado Hospital Association health care career fair in Denver. (Rick Wilking/Reuters)
In the ultimate sign of D.C.-induced economic dislocation, the September jobs report, which was supposed to be released on the first Friday in October, was delayed due to the shutdown. It was released Tuesday morning. And, ironically, the post-shutdown jobs report showed that the two big political talking points surrounding the jobs report are becoming inoperative.
First, the basics. The government reported that in September, as businesses nervously cast their eyes to the Beltway, the economy didn’t add many jobs. According to the establishment survey, in which companies are asked how many people are on their payrolls, 148,000 new positions were added, which is pretty lame and significantly lower than the pace to which the economy has become accustomed. The unemployment rate, which is determined by the household survey, in which individuals are asked about their working status, fell to 7.2 percent. The workforce grew in September from August, but the number of people reporting themselves as working rose by a slightly higher margin. All in, a very meh report.
But there were two interesting tidbits. For years, we’ve had what I’ve dubbed the +“conservative recovery.” Every month since February 2010, the private sector has added jobs—about 7.5 million in total. And virtually every month since May 2010, the public sector—state, local, and federal government—has cut jobs. That does not typically happen in a normal recovery. Thanks to austerity, about one million government positions have vanished, many of them at the state and local level. In Washington, the furloughs, the sequester, and the general drive for lower spending has helped keep a lid on federal employment. In September, the federal government cut 6,000 positions. It has reduced employment by 87,000 job in the past year.
But at the state and local level, something is beginning to change. We’ve noted that the fiscal picture in states and cities has been brightening. Thanks to tax increases, reforms, and economic growth, state revenues have risen for 12 straight quarters. And dozens of states, many of which cut jobs to close their annual deficits, are now reporting surpluses. As a result, state, cities, and counties are finding they are able to hire or re-hire, teachers, police officers, and other workers. In September, state governments added 22,000 positions while local government added 6,000 posts. State governments have added jobs for two straight months—33,000 in August and September. And local governments have added jobs for six straight months—74,000 since February. Local governments actually employed 43,000 more people in September 2013 than they did in 2012. That’s an important shift.
The data also revealed another interesting trend. For months, conservative analysts have been decrying the fact that a great deal of private-sector job growth seems to come in the form of part-time jobs. The supposed culprit is obvious: Obamacare (which forces companies that employ people for more than 30 hours per week to offer them health care), and the Obama administration generally. But the data in today’s report shatter upends that talking point. As Michael Strain of the American Enterprise Institute notes, the number of people who report themselves as working part-time “for economic reasons”—i.e. they’d rather be working full-time, but aren’t because their employer won’t give them the hours—has actually fallen in the past few months and in the past year. In September, some 7.926 million Americans fell into this category. That’s down from 8.226 million in July, and down from 8.607 million in September 2012. That’s a decline of 681,000, or 8.5 percent, in the past 12 months. If employers were cutting people from full-time to part-time status in anticipation of the Affordable Care Act, that number would be going up, not down. While the figure of Americans working part-time for economic reasons is elevated compared with the height of the last expansions, it’s actually below where it was in January 2009, and is well off the September 2010 peak of 9.226 million.
Is a $13 billion fine to settle mortgage misconduct by two of the bank’s 2008 acquisitions really persecution? JPMorgan was happy to make the deal at the time—and now must face the consequences, says Daniel Gross.
Over the weekend, it was reported that JPMorgan Chase had agreed to a $13 billion settlement over the sale of mortgage-backed securities during the credit boom. The tentative deal would settle charges that the bank, along with institutions it ultimately acquired in 2008—Bear Stearns and Washington Mutual—misrepresented the quality of loans that had been packaged into mortgage-backed securities.
This deal would be the biggest in a long series of settlements in recent years that have spurred the bank to push more and more cash into legal reserves. In the most recent quarter, the bank had to put so much aside to deal with legal problems that it wound up reporting a loss for the first time in years.
To a degree, we have become inured to these settlements. And inevitably, a certain degree of fatigue is settling in. At some point, can’t the regulators move on? In an editorial, The Washington Post fretted that the latest investigation was a “backward-looking attack” on the bank for the types of securities it sold in the boom era. In JPMorgan’s defense, the Post noted that “roughly 70 percent of the securities at issue were concocted not by JPMorgan but by two institutions, Bear Stearns and Washington Mutual, that it acquired in 2008.” Indeed, a common talking point among the company’s defenders is that it did the financial world, the government, and the whole economy a great service by wading in to save two troubled institutions—and that it is now being repaid by being dunned repeatedly for nine- and 10-figure sums.
This won’t do. As Dean Baker notes, while Bear Stearns and Washington Mutual were responsible for a lot of the mortgage misconduct, JPMorgan Chase concocted about 30 percent of the securities at issue. That’s not nothing. The bank, which wanted us to think it simply performed better, was involved in all the same practices as the institutions that blew up. Meanwhile, we’ve learned that even in the years since the crisis, JPMorgan Chase’s compliance efforts are subpar. The London Whale debacle took place in 2012. For the most part, the bank has been punished for actions by JPMorgan Chase employees at a time when CEO Jamie Dimon was overseeing them and when the executive team was taking great credit for the profits the bank was reaping.
The line of argument misses another important point. And it typifies the heads-I-win, tails-you-lose mentality that gets so many Americans angry at Wall Street. When you buy a company, or a piece of property, you don’t just acquire the assets. You acquire the liabilities—the contracts, the leases, the bank debt, the environmental problems. The price you pay isn’t just for the good stuff, in other words. Anybody who has negotiated the process of buying a home knows this. You settle on the price, and then, when the inspector says the roof is pretty much done, you adjust the price accordingly. That’s why it pays to conduct due diligence, whether you’re buying a condo or a giant bank.
While the Bear and WaMu deals were conducted hastily, and amid market turmoil, the rules still apply. In agreeing to take the good, JPMorgan Chase agreed to take the bad. And make no mistake, the bank was really pleased to do both deals. It was perfectly happy to acquire the functional businesses of Bear Stearns and the deposits and branches of Washington Mutual. A reasonable person might have assumed there were some serious problems at Bear Stearns, which competed in many of the same market sectors and whose headquarters were just a couple of blocks from JPMorgan Chase’s headquarters. For years, people referred to the bank as Bear Sleaze. Hedge funds it owned, which had employed vast leverage to bet on subprime bonds, loudly blew up in the summer of 2007. Its septuagenarian CEO, James Cayne, was spending a lot of time playing golf and going to bridge tournaments, where, Kate Kelly alleged in The Wall Street Journal, he was known to spark up a doober. (Cayne emphatically denied the charge.)
What’s more, we should dispense with the notion that JPMorgan Chase deserves some legal and regulatory slack because it was doing everybody a favor and because it had done the deals at the instigation of the government. Sure, Treasury Secretary Henry Paulson and other regulators were pleased that JPMorgan Chase agreed to take over faltering Bear Stearns. But I was there at the time. And JPMorgan Chase people thought they were getting a steal, the value of a lifetime. The price paid, $10 a share, came to about $1.2 billion. But the value of Bear Stearns’s headquarters building at 383 Madison was pegged at $1 billion. As Charlie Gasparino, then of CNBC, reported in the spring of 2008 Steve Black, the co-head of investment banking at JPMorgan Chase, said the bank “got something that has far more value than the price we paid” and that it expected to earn $1.1 billion from Bear Stearns businesses in 2009.
It’s not going gangbusters, but the Connecticut system hasn’t broken down yet amid headlines blasting the HealthCare.gov glitches nationwide, the state exchange’s CEO tells Daniel Gross.
At the national level, the rollout of Obamacare has gone poorly. The big federal health-care exchange, HealthCare.gov, is a poorly designed, badly functioning mess.
Outreach and eligibility associate Shannon Bali, left, helps Boguslaw Dudek, right, enroll in the nation’s new health insurance system at the Community Health Center, in New Britain, Conn. on October 1, 2013. (Jessica Hill/AP)
But many states have embraced Obamacare as their own and have been working diligently on indigenous systems to enroll people through homegrown exchanges, either by enrolling them in Medicaid or helping them set up accounts to purchase health insurance. Kentucky has been an early, noteworthy, success. Washington, for its part, has already enrolled more than 40,000 state residents in the expanded Medicaid program, slashing its population of uninsured by nearly 10 percent in two weeks. No train wreck there.
Connecticut would seem to make a pretty good laboratory. It’s a highly Democratic, wealthy, small state (population: about 3.6 million). It has a relatively low rate of uninsured people, about 9 percent. And it is home to a lot of health insurance companies and professionals with knowledge of the industry. Gov. Dannel Malloy has been an avid backer of the plan. And while most of the state’s moderate Republicans are no longer in office, the land of steady habits isn’t exactly a hotbed of Tea Party Obamacare obstructionism.
Thus far, the progress has been solid, but not spectacular. Counihan says the system is noteworthy in part for what it hasn’t done: break down. “We’re the only state to have a consistently stable IT system,” he said. “Beginning two weeks ago, we’ve never been down.” The state contracted (PDF) with Deloitte to build the system for $44.1 million. And Counihan said the system was designed to be as simple and self-sufficient as possible. Rather than ping the federal data hub—which amalgamates all the income, citizenship, employment and other federal data needed to confirm eligibility—at the end of the application, the Connecticut system does so as each piece of information is entered. And it bundles the requests together. “That puts less pressure on the hub,” he said.
The state isn’t simply relying on its website. Connecticut has hired 309 internal assisters and navigators, and has trained more than 700 brokers. It is in the process of opening storefronts in population centers where people can come in to learn about their options.
Here’s the challenge. The state has about 344,000 people without insurance living within its borders. The best that can be hoped for is a reduction in that number to 70,000, Counihan said: “Even in states with universal health care and European countries with national health, there’s a 2 percent rate of uninsured.” That means the state has a goal of enrolling about 275,000 people over a three-year period. Counihan said he believes that between 50,000 and 60,000 people in Connecticut will be eligible for expanded Medicaid benefits. In addition to signing people up for Medicaid, therefore, the state will have to convince between 175,000 and 200,000 residents to purchase insurance through the exchange.
Soon after Healthcare.gov launched, users started reporting major problems. As blame flies around, there's one party that seems to have emerged unscathed—the company that built the faulty site.
A funny thing happens to the shares of large, largely anonymous federal contractors when they become implicated in a debacle: they rise. We saw this at work earlier this year with Booz Allen Hamilton. The firm, which gets virtually all of its revenue from the federal government, employed Edward Snowden, who proceeded to use the access afforded him by his post to grab and make public all sorts of embarrassing secret government information. But Booz Allen didn’t lose any contracts as a result or suffer much opprobrium in the public markets.
Now something similar is happening with CGI, the giant Canada-based information technology outsourcing company that has been heavily involved in the heavily botched roll out of Healthcare.gov, the federal health insurance exchange that is the centerpiece of Obamacare.
CGI, which very few people had heard of before this month, shows how a company can grow to become large, highly profitable, and very influential without being in the public eye—even when a big chunk of its business is funded by taxpayers. Based in Montreal, CGI was started by founder and executive chairman Serge Godin in 1976 when Godin was 26. Today, it boasts 69,000 employees who work in an impressive array of offices around the world. You can learn about the firm’s history here, and read about its Constitution (!) here.
CGI’s mission involves the usual gobbledygook about providing “end-to-end IT and business process services that facilitate the ongoing evolution of our clients’ businesses.” Translation: it’s an outsourcer. Don’t want to set up your own payroll, h.r. system, records-keeping system, computer system? CGI will gladly do it for you. “At CGI, we are in the business of delivering results,” the company notes.
Inevitably, companies like this do a lot of business with governments. Over the years, it has become easier for governments to hire outside companies who are up on the latest technology to handle such tasks. And, ironically, in this age of austerity, CGI has been doing quite well. As the chart below shows, the stock is up 38 percent in the past year.
CGI grew organically for much of its life. And then, like all firms that want to expand rapidly, it started to gobble up other companies whole. In 2010, CGI purchased Stanley, Inc., which, the company notes, “nearly doubled the size of CGI’s U.S. operations.” In addition, the company continues, “the combination of talent and capabilities created further opportunity for growth in the key U.S. federal market.” (Emphasis mine.) By purchasing an American company, this Canadian firm began federal government contracting in a big way at the right time. Last year, CGI merged with Logica, an Anglo-Dutch company that was larger than CGI. In effect, it more than doubled the company’s size. “With this acquisition, we became the world’s fifth largest independent IT and business process services company.”
As a result of the Stanley acquisition, CGI is a big player in the U.S. government market. “Our client experience in North America includes over 100 U.S. federal agency clients and more than 95 Canadian federal clients,” the company notes. It has done work for the State Department, the Environmental Protection Administration, and the Defense Department. One of its units “manage[s] the financials of 100+ U.S. federal agencies.” In September, CGI’s Stanley unit won a $32.8 million deal to provide visa-processing services to the State Department in several European countries, bringing the total countries in which it provides these services to 57.
Sorry to be the pessimist, but even if Congress reopens the government and agrees on lifting the debt ceiling, we’re in for a rocky ride come the new year. Welcome to the year of the groundhog. By Daniel Gross
The budget wars are almost over! Long live the budget wars!
On Monday night the contours of a deal to defuse the ticking fiscal bomb emerged in the Senate. The government would reopen and stay funded through January, and the debt ceiling would be increased to get the nation through February. The Affordable Care Act would remain essentially intact. The two houses of Congress would agree to hold talks about long-term budget deficits. In other words – take two delays and agree to keep arguing over the same topics in the morning.
Tuesday, the House GOP reacted to the emerging deal by throwing its usual fit. But the histrionics in that caucus are simply a prelude to an ultimate cave. In the end, as he always does, Boehner will turn to Democrats and the minority of sane Republicans to pass a crisis-defusing deal. Whether a resolution comes today, Wednesday, or Thursday, it is likely to closely resemble the nascent Senate deal.
The shutdown according to everyone else.
Bondholders, government employees, contractors, and beltway types whose weekends have been ruined by incessant brinksmanship may breathe a sigh of relief. The markets were placid Tuesday morning. But don’t be mistaken. Even if this deal passes, it won’t represent a major breakthrough. And we are likely to get more of the same – government-imposed austerity, uncertainty, excessive focus on short-term deficits, and brinksmanship that kills confidence and harms the real economy.
The great irony of this episode, in which Republicans have engineered a massive crisis in the name of confronting deficits, is that we are living in a Golden Age of Deficit Reduction. The August 2011 debt ceiling stalemate set into a motion a set of actions that would lead to deficit reduction – the Budget Control Act, the sequester, the fiscal cliff resolution. Those measures, combined with continued sustained growth and increasing taxes, have helped pare the deficit.
Low clouds and fog roll across Washington at sunrise on Oct. 15, 2013 as Congress continues to negotiate their way free from the budget standoff that has shutdown many part of the U.S. government for 15 days. (J. David Ake/AP)
When the normally level-headed titans of high finance start to sell off in a frenzy, you know things are bad. Daniel Gross on the debt ceiling's newest freak out.
The Davos crowd – bankers, finance ministers, central bankers, large-asset managers – is generally not prone to panic. These are people who traffic in incremental change, who wear stiffer upper lips to match their bespoke suits, who avoid hyperbole the way they avoid flying coach.
Traders work on the floor of the New York Stock Exchange October 10, 2013. (Richard Drew/AP)
But as the U.S. government remains shut down for a third week, and as America careens toward the debt ceiling, this normally unflappable crowd is starting to sweat. It’s as if they haven’t been paying attention to the absurd pageant of brinksmanship that has been playing out in Washington over the last few years, and are only now waking up to the horror that one house of Congress – and hence a branch of government – is essentially controlled by a group of people who care not a whit for the prerogatives of global bondholders.
Fidelity Investments, among the largest, most-sober asset managers in the world, said it had sold the short-term government bonds held in its money-market mutual funds that were supposed to mature around the debt ceiling cut-off date. In theory, it sounds like a smart move. Who wants to be caught holding the bag if Republicans really decide not to raise the debt ceiling? And since investors tend to treat money-market funds like cash, it makes sense for funds to maintain maximum flexibility. In practice, though, perhaps it was not a particularly smart move. One way or another, the government will pay the interest and principal on the bonds in time. And should the government actually default on those bonds, the evasive maneuver won’t really count for much. The bonds sold account for only a small percentage of the company’s overall U.S. Treasury bond holdings, which are sprinkled liberally throughout other Fidelity mutual funds. And their value would surely plummet in the event of a default.
Over the weekend, there were two big events in the world of global finance: the annual meetings of the International Monetary Fund and the Institute of International Finance. Each featured panels and events at which very high-profile speakers spoke in near-apocalyptic terms about the situation in Washington.
At the IMF confab, one of the most well-attended sessions was a panel on restructuring sovereign debt. (The subtext was that, instead of sussing out how a restructuring of Argentinian or Malaysian debt might look, the world might have to think about what a restructuring of America’s much larger debt might look like.) On Sunday, IMF Managing Director Christine LaGarde appeared on Meet the Press and warned that casting doubt on the credibility of America’s bond offerings could push the global economy into recession for only the second time since World War II. “If there is that degree of disruption, that lack of certainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over,” she said. Jim Hong Kim, the former Dartmouth president who now helms the World Bank, said the global economy is “days away from a very dangerous moment.”
At the IIF annual meeting, a parade of big-shot bankers – guys whose empires are perched on mountains of private- and public-sector debt – sounded the toxins. The relative calm in the markets simply can’t be trusted. “As you get closer to it, the panic will set in and something will happen,” said Jamie Dimon, chief executive officer of J.P. Morgan Chase. “I don’t personally know when that problem starts.” While Dimon didn’t say the bank had been dumping government bonds, its highly paid employees are busy doing the equivalent of filling sandbags and buying bottled water. Dimon said that the bank is “spending huge amounts of time and money and effort to be prepared.”
Bankers, who generally traffic in hard data and soothing bromides, are instead speaking in sound-bites that could be cribbed from an apocalypse-movie trailer. Here’s Jamie Dimon in the Wall Street Journal: a default “would ripple through the global economy in a way you couldn’t possibly understand.” Anshu Jain, the head of Germany’s giant Deutsche Bank, compared a default to a deadly virus – “a rapidly spreading fatal disease.” One gets the impression that were the bond market open today (it’s closed for Columbus Day) bankers would be quietly trying to dump large quantities of short-term bonds.
No one likes a shutdown. But Starbucks CEO Howard Schultz’s petition for a bipartisan solution is just absurd. The GOP made this mess, and the GOP oughtta fix it, writes Daniel Gross.
For the record, I love Starbucks. I’ve got a Starbucks card in my wallet. I regularly wow bystanders by brandishing the Starbucks mobile payment app on my iPhone. At home, I start the day by scooping out a couple of heaping tablespoons of Starbucks espresso roast into my Breville machine.
Chairman Howard Schultz of Starbucks. (Junko Kimura/Getty)
But I was a bit dismayed by this morning’s news that Starbucks CEO Howard Schultz is spearheading a nonpartisan drive to jolt Washington into action. On the company’s home page there’s a plea to “our leaders in Washington, D.C.” to come together to reopen the government, pay our debts, and “pass a bipartisan and comprehensive long-term budget deal by the end of the year.”
That isn’t doppio. It’s dopey-yo.
Why is this annoying? Look, it isn’t D.C. leaders who have shut down the government and refuse to open it. It isn’t Washington that is blithely threatening not to meet our collective financial obligations. And it isn’t D.C. leaders who are refusing to enter negotiations about a longer-term budget deal. Rather, it’s Republicans behind all three. The debt-ceiling brinksmanship and government shutdown are pure Republican enterprises. Even professional centrists like Tom Friedman are acknowledging as much.
In the past couple of decades, there have been plenty of bad outcomes that Washington produced that were bipartisan: the Iraq War, the deregulation of the banking sector, letting Alan Greenspan run the Federal Reserve for 19 years. But the shutdown and the debt ceiling brinksmanship isn’t one of those outcomes.
Worse, the events were engineered, from the beginning—transparently and directly—by a group of people who identify themselves in opposition to Starbucks and everything it stands for. Senators Ted Cruz and Mike Lee identify with the Tea Party, not the Coffee Party. It is very common for conservatives to use “latte-sipping” as an epithet. Indeed, the very idea of Starbucks – the fair trade coffee, the emo acoustic music, the effete foreign offerings (vanilla scones? croissants?) – is much more attuned to liberal sensibilities than conservative ones. Starbucks may be a global corporation, and has a presence in every state. But it’s a blue-state company. It’s based in liberal Seattle, and thick in university towns, high-end suburbs and urban areas. According to the company’s store locator, Caspar, Wyoming, has three Starbucks stores. I’m pretty sure there are intersections in Manhattan that have more than that.
The disagreements carry over into policy. Starbucks believes in global warming and climate change; today’s Congressional Republicans, not so much. Last month, Starbucks told customers it would really, really prefer that they don’t bring weapons with them into company stores. Schultz has come out in favor of a higher minimum wage. He’s for same-sex marriage, and told stockholders who disapproved of his company’s stance that they should just sell their shares and move on.
The guys on Wall Street will report to a woman as their boss—but that isn’t what’s truly remarkable. For the first time in a generation an actual Democrat will be in charge of monetary policy.
After months of indecision and the flotation—and puncturing—of a Larry Summers trial balloon, President Obama is set to nominate Janet Yellen to be the next chair of the Federal Reserve.
Janet Yellen speaks at the National Association of Business Economics (NABE) 2013 Economic Policy Conference in Washington, D.C. on March 4, 2013. (Joshua Roberts/Bloomberg, via Getty)
The fact that Yellen,the current vice chair of the nation’s central bank, is a woman isn’t the most remarkable historical fact about her impending appointment. Of course, that is remarkable. For the first time in their careers, the heads of Wall Street’s investment banks and hedge funds will, in effect, be reporting to a woman as their boss. No, the remarkable fact is this: for the first time in a generation, an actual Democrat will be in charge of monetary policy.
At the presidential level, we seem to be in an age of Democratic dominance. Democrats have won the popular vote in five of the last six presidential elections, and seem to hold a structural advantage given the nation’s changing demographics. Democrats have sat in the White House for the 13 of the last 21 years. And yet, when President Clinton and President Obama had the opportunity to name a head of the Federal Reserve, they chose to leave in place the man appointed by their Republican predecessors. Clinton reappointed Reagan appointee Alan Greenspan twice (in 1996 and 2000), and Obama reappointed Bush appointee Ben Bernanke in 2010.
They did so for a couple of reasons. First, the markets like continuity, and dislike abrupt changes. Greenspan was presiding over a broad expansion when he was reappointed. Bernanke was nursing the traumatized economy through a halting recovery when he was re-upped. Also, as is often the case with Pentagon appointments, there’s a presumption (wrong, it turns out) that lifelong Democrats aren’t cut out for the job. To compensate for the party’s perceived historic weakness in a policy area, Democratic presidents have occasionally felt the need to appease the markets, CEOs, and business by installing people in the position who don’t always share their political and economic views.
This is not to say that Bernanke has been working at odds with the Obama administration. Far from it. In fact, the mild-mannered Bernanke has proven to be quite aggressive in using unorthodox tools to spur the economy as it recovered from the financial crisis and has labored under Republican attempts to impose austerity and generally sandbag economic growth. In the absence of any fiscal stimulus (and in the presence of a very large fiscal anti-stimulus), Bernanke has been furiously creating new money to purchase bonds in an effort to keep interest rates low and spur growth. For his sins—the quantitative easing efforts that are continuing—the lifelong Republican has become a hate object among large sections of the GOP base.
In that regard, Yellen, 67, won’t represent much of a departure from Bernanke. But she will bring another dimension to the role, which has nothing to do with her gender. The Federal Reserve famously has a dual mandate. It is supposed to fight inflation while promoting full employment. In recent years, it has done a fabulous job of the first. Despite the carpings you’ll hear from economically illiterate right-wingers, inflation has been, and remains, remarkably muted. On the second, by its own measure, the Fed has fallen down on the job. The official unemployment rate remains at 7.3 percent, while a broader measure of underemployment, which takes into account part-time workers and people who have dropped out of the labor force, stands at 13.7 percent.
While Bernanke wasn’t exactly indifferent to the poor labor situation, it didn’t appear to keep him up at night. He didn’t use his bully pulpit to urge Congress (or the White House, for that matter) to do much about it. And earlier this year, his Federal Reserve indicated that it would start reducing the amount of its support for the economy even as unemployment remained quite high.
If 1995 is any guide, the government shutdown won’t be too bad, right? Wrong, says Daniel Gross. Ours is a very different economy.
I’m generally an optimist about the resilience of the U.S. economy, its ability to bounce back from shocks and power through disasters, whether they’re imposed by nature, markets, or politics. But today, four years into an expansion that few people saw coming, I’m more pessimistic than many about the impact of the shutdown.
President Barack Obama answers a question during a press conference in the Brady Press Briefing Room at the White House. (Jewel Samad/AFP/Getty)
The predictions have come fast and furious. The shutdown costs $300 million in lost gross domestic product per day, according to IHS Global Insight. Economists surveyed by Bloomberg last week said a one-week shutdown would reduce fourth quarter GDP growth by .1 percent. Macroeconomic Advisers, one of the most sober and best forecasters, said a two-week shutdown could shave .3 percent off the fourth quarter. Neil Irwin at the Washington Post has helpfully aggregated a bunch of Wall Street forecasts that project that a one-month shutdown could reduce fourth-quarter growth by anywhere from .5 percent to 2.0 percent.
That’s a pretty big dispersion.
Market and economic analysts have looked back to the experience of 1995 and 1996 for guidance. The stock market actually rose during those two shutdowns. (Therefore, the suggestion goes, this time won’t be so bad for stocks either.) Paul Ashworth, chief U.S. economist at Capital Economics, told Reuters that “the shutdowns in late 1995 caused Federal spending to contract by 14.2 percent annualized in the fourth quarter, subtracting around 1.0 percent from overall GDP growth.”
It is natural to look back and make comparisons. But investment professionals often note that past performance is no guarantee of future performance. And there’s plenty of reason to be skeptical of the models and forecasts analysts are making, whether they rely on data from 1995 or data from 2011. That’s because the U.S. economy is an extremely dynamic organism. Just as the economy of 1995 looked a hell of a lot different than the economy of 1978, the economy of late 2013 looks a lot different than the U.S. economy of 1995. (I could provide a lot of data to support this claim, but the Bureau of Economic Analysis’s website is shut down.)
"Veep," "Parks and Recreation," and "The West Wing" take on the government shutdown.
Think about it. In 1995, the internet wasn’t really a commercial force, China was still a minor economic power, and the acronym “HELOC” (Home Equity Line of Credit) had yet to enter the vernacular. Many of the forces that define our economic lives simply didn’t exist. I’d argue that many of the big changes in the way America works make the U.S. economy more vulnerable to government-shutdown-induced damages. When you look back over the past 18 years, one of the unavoidable conclusions is that, for a variety of reasons, the federal government is much more involved in the economy than it was. What’s more, the economy is now more dependent on certain sectors that can’t operate at their fullest capacity without the government being entirely open.
Don’t be fooled by the blue ribbon that’s he got, he’s still Benjamin Franklin from the Federal Reserve. Daniel Gross on the $100 bill’s 100th-birthday facelift.
The U.S. government remains shut, crippling a growing range of businesses and gumming up the gears of commerce at home and abroad. Amid all this chaos, however, America is about to launch a new version of one of the government’s most important and valuable products: the $100 bill.
The Federal Reserve this week is rolling out new Benjamins as part of its continuing efforts to stay ahead of cheaters. “The U.S. government basically redesigns Federal Reserve notes to stay ahead of counterfeiting,” said Michael Lambert, associate director at the Federal Reserve. The central bank is constantly redesigning and rethinking the design of every bank note—except the lowly $1 bill. “There’s very little threat to the $1 note,” said Lambert. “There’s also specific legislation that prohibits redesign of the dollar note, because of the burden it would impose on vending machines.”
But for its 100th birthday (the first Federal Reserve $100 note was issued in 1914), the Benjamin is getting a major makeover. You can get a look at it here.
The portrait of Benjamin Franklin won’t be touchéd, or touchéd up. “It is still Benjamin Franklin and still easily recognized,” said Lambert. “And that’s really important to global users, that they recognize the Benjamins as the $100 note.” (Despite Lambert’s momentary lapse, it should be noted that the Fed emphatically does not refer to the $100s as “Benjamins.” Of course, technically, every dollar created in the last several years should be a “Benjamin Bernanke.”)
The new note will have several new important security features. The most noticeable will be a three-dimensional security ribbon, a solid blue vertical stripe on the front of the note woven into the paper just to the right of Franklin’s portrait. “When you tilt the note, you’ll see images of 100s that changes into bells back and forth,” said Lambert. Move the bill from side to side, and the bells will move up and down. The second feature involves a quill and inkwell that will also be featured on the front of the note. “Both the quill and the inkwell are copper until you move the note,” said Lambert. “As you tilt it you’ll see the quill change from copper to green, and the quill will give the appearance that it’s disappearing in to the inkwell and reappear as you tilt it at a 45-degree angle.” Also, the counter—the number 100—in the right hand corner will shift from copper to green.
These new features are layered on top of existing security feature—like images that appear when you hold the note up to the light. Such watermark images are features more generally seen in foreign currencies than American ones. But, as Lambert notes, that’s intentional. “We have security features in the banknote today that resonate with the international community.”
Note Lambert’s repeated references to international users of the $100 bill. This gets to something important and not very well understood. The $100 bill is much more than an instrument of domestic exchange or a handy hook for rap lyrics. The dollar is stable, beloved, and used around the world for commerce and savings. It is also a major global store of value. Around the world, people who may not trust their own currencies, or fear for the safety of their banks, or who just like to have ready cash on hand (regardless of the purpose) tend to keep $100 bills handy. (And if we’re being completely honest, lots of people who engage in illicit activities also use dollars.) The $100 denomination is small enough to be accessible to lots of people and yet big enough not to occupy a lot of space. If you were to try to store your net worth in $1 bills under your mattress, it would create a pretty big lump.
Define ‘nonessential.’ From mines to loans to oil fields, businesses across the country say they need federal employees back on the job to keep their work going. By Daniel Gross.
You know the adage. For want of a nail, the shoe was lost, triggering a chain of events that leads to much greater debacles. For want of a nail, ultimately, the kingdom was lost.
Traders work on the floor of the New York Stock Exchange on October 1, 2013 in New York City. (Spencer Platt/Getty Images)
That’s a great lesson in leverage—how the removal of one small, seemingly insignificant item can trigger much larger consequences. It’s also a great metaphor for the way in which the government shutdown is affecting the economy.
Fox News may tell its audience that the shutdown is in fact a “slimdown.” Talking points may hold that the only federal employees furloughed are nonessential—useless, unproductive bureaucrats—so the effect on the private sector will be minimal. If you see the private sector as something that operates largely independent of government—a bunch of heroic entrepreneurs running around and getting things done as bureaucrats, politicians, and regulators try to hold them down—this view makes complete sense.
Of course, the reality is far more complicated. U.S. government spending is equal to 22 percent of gross domestic product. The federal government accounts for a very significant chunk of direct employment and consumption—unemployment benefits, payments to doctors, purchases of vehicles and ammunition for the military, salaries of federal marshals. Which is why analysts say that every week the shutdown lasts reduces quarterly growth in GDP by 0.15 percent.
But that’s really just the beginning. As with the nail in the shoe, the government has a huge amount of leverage. Many parts of the economy are, in fact, highly dependent on the government. The presence of a relatively small group of people allows an awful lot of economic activity to happen; their absence can shut down a great deal of it. This goes way beyond the employees who operate national parks, airports, and ports. Whether they are providing information, credit, licenses, or oversight, small numbers of federal employees have a huge effect on business.
First, information. Economics and stock-market writers have been joking about not knowing what to do with ourselves because the Bureau of Labor Statistics won’t be publishing its much-awaited monthly jobs report Friday morning. But the government controls other vital information necessary for commerce. Fannie Mae and Freddie Mac, which buy almost every mortgage originated in the U.S., are still functioning. They don’t get funding as part of the appropriations process. In fact, they are helping to fund the government. Fannie Mae in September paid a $10.2 billion dividend and Freddie Mac paid a $4.4 billion dividend. But let’s say you’re applying for a loan, and you need a document from the IRS to verify income—you (and your mortgage broker, and your real-estate agent) could be out of luck.
Second, think about credit. Credit is the lubricant that moves the machinery of global commerce. And the government provides a great deal of it—through loans, guarantees, and other programs.
It’s all about taxes, friends. Taxes, and holding on to as much cash as possible, however possible, and whatever the consequences. Daniel Gross on the continuing insanity of the GOP-CEO lovefest.
Are the Republicans finally losing big business?
Lloyd Blankfein has friends in Washington. (Photo Illustration by The Daily Beast)
On Wednesday, a group of Wall Street chief executive officers came to Washington to meet at the White House. At the end of the meeting, Goldman Sachs CEO Lloyd Blankfein obliquely took Republicans to task. “Individual members of our group represent every point on the political spectrum,” Blankfein said. “But the one thing they have in common is: You can litigate these policy issues, you can relitigate these policy issues in a public forum, but they shouldn’t use the threat of causing the U.S. to fail on its obligation to repay debt as a cudgel.”
Wall Street, which has generally been unruffled by the shutdown, is really freaked out about the prospect of a hint of a whiff of an inkling of a debt default. If U.S. government bonds fall sharply in value, institutions like Goldman Sachs would suffer greatly.
In the Washington Post this morning, Zachary Goldfarb wrote that corporate America may be souring on congressional Republicans’ constant brinkmanship and inability to conduct business as usual. In a world where government spending is about 22 percent of gross domestic product, a government shutdown is bad for all sorts of business. As Goldfarb noted, the Washington, D.C.–based U.S. Chamber of Commerce on Monday put out a letter decrying “a government shutdown that will be economically disruptive and create even more uncertainties for the U.S. economy.”
The response of the Senate and House GOP to such urgings has essentially been: whatever, dudes. The mindless shutdown, the refusal to negotiate a budget, the obsession with Obamacare, and the willingness to storm into a debt crisis is making corporate CEOs annoyed, angered, and even anxious. But it’s nowhere near enough for them to come out and do what would be necessary to change the dynamic in Washington.
This has been going on for years. Big business—including the Chamber of Commerce and many major infrastructure companies—has been arguing for the need for more spending and private-public partnerships to improve America’s ailing infrastructure. The congressional GOP has responded with the sequester and budget cuts. Big business has been begging for comprehensive tax reform that will simplify their lives. The congressional GOP won’t countenance any such reform that involves raising net revenues. And so there hasn’t been any action. Big business desperately wants immigration reform, so it can have access to skilled workers (at the high end) and not have to worry about being busted for employing undocumented workers (at the low end). The House GOP says no. And so on. And so on. Most large corporations have either made their peace with—or actively lobbied for—greater protections and respect for the rights of gay Americans. The congressional GOP is anti. Business claims that uncertainty in fiscal policy hinders its ability to make plans and invest. For the past two years, since August 2011, the congressional GOP has actively and vocally embraced a strategy of hostage-taking and brinksmanship.
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.
Forget Comcast being on the ropes over its proposed multibillion-dollar merger with Time Warner Cable. It smoothly overrode concerns at a Senate hearing Wednesday.