Author Martin Amis is being paid more per hour than Wayne Rooney
Alexi Mostrous, The Times, January 26, 2008
Just like Wayne Rooney, he earned global fame as an outrageously gifted young tearaway, became a magnet for controversy as he matured, and secured a transfer to a leading Manchester institution. But until yesterday no one suspected that Martin Amis earned more per hour lecturing at the University of Manchester than England’s finest footballer does playing up front for United.
The celebrated author, who once wrote that “weapons are like money; no one knows the meaning of enough”, is contracted at just under £3,000 per hour to teach creative writing at the university. His £80,000 salary obliges him to work a distinctly achievable total of 28 hours a year.
In contrast, Rooney makes £50,000 per week — far more than Amis in real terms. But the footballer trains for 30 hours a week, meaning that his hourly rate is 50 per cent lower than the novelist’s.
Amis strongly defended his pay deal yesterday. “It’s very much Manchester University’s decision to make and I abide by it,” he told The Times. “This is really an invidious conversation. Who’s to say I wouldn’t earn less money anywhere else?
“Why aren’t you having this conversation with Wayne Rooney? Some footballers earn huge amounts. Not every footballer gets a hundred thousand a week like Rooney. And that’s all I want to say on the matter.”
Rooney became an overnight sensation when he scored a breathtaking goal for Everton against Arsenal when he was 16. An early scandal about his private life and occasional flare-ups on the pitch have failed to stall his progress towards the top of the game, boosted by a big-money move to Manchester United in 2004.
Amis electrified the global literary scene with his debut novel The Rachel Papers, published when he was 24. In an outspoken career since then he has balanced commercial success with critical acclaim and shown an appetite for controversy.
The most recent example of the latter was claiming that his illustrious father, Kingsley, was mildly anti-semitic while “I’m pretty free of racism, but I get little impulses, urges and atavisms now and then”. He was appointed Professor of Creative Writing at Manchester last February.
Details of Amis’s salary were released by the Government under freedom of information laws. He is one of a number of prominent figures to have been appointed. Others have included two Nobel prize winners — Joseph Stiglitz, the economist, and John Sulston, the geneticist.
His salary is more than 240 times that of an average full-time academic, who earns £38,933 a year for 59 hours a week. But it pales in comparison to fees charged by big political figures. In November it was reported that Tony Blair received up to £240,000 for one 20-minute speech in China. That works out at £720,000 an hour.
Amis’s appointment represents a general move by universities to engage famous academics, at any cost, to bolster their reputation and encourage applications. The university has been forced to shed up to 750 jobs recently, including those of lecturers, to get itself out of £30 million of debt.
About £10 million of that debt is reported to have been taken on to pay for the appointment of Amis and other big-name academics as the university pushes to be recognised as one of the world’s top institutions by 2015.
Union leaders criticised the size of the salaries. Most visiting lecturers are paid between £20 and £50 an hour.
Since Amis’s appointment the number of students applying for the £3,000-a-year course this year has risen from 100 to 150.
The working week
Martin Amis’s week: on average 32 minutes’ work
Run a 90-minute seminar for students on his creative writing course (12 weeks out of 52)
Make a two-hour public appearence at the univeristy’s summer writing school (4 weeks out of 52)
Teach a two-hour session at the school(once)
Total per year: 28 hours
Wayne Rooney’s week: on average 26 hours
Play two 90-minute football matches (48 weeks a year)
Prepare for 3 hours for the football matches (48 weeks a year)
Train for four hours a day, five days a week (48 weeks a year)
Total per year: 1,248 hours
Other celebrity fees
Tony Blair, £100,000 -£200,000 per speech
Cherie Blair, £15,000 per speech
Bill Clinton, £150,000 for a lecture
Henry Kissinger, former Secretary of State, £12,000 a lecture
Duchess of York, £8,000 a lecture
Sunday, January 27, 2008
Societe Generale: Who The Hell Knows?
Société générale : de nombreuses zones d'ombre demeurentLE MONDE | 26.01.08 | 11h31 • Mis à jour le 26.01.08 | 11h38
La brigade financière a commencé ses perquisitions au siège de la Société générale, dans le quartier de la Défense, vendredi 25 janvier, au lendemain de l'annonce publique d'une "gigantesque fraude" de 4,9 milliards d'euros, imputée à un employé de la banque. "Les perquisitions sont en cours, pour saisir tous les fichiers informatiques des traders ", a confié au Monde un cadre dirigeant, vendredi en fin de journée. Une femme, responsable opérationnelle des marchés, aurait par ailleurs été entendue, sur suggestion de la Société générale, afinde décrireaux enquêteurs le film de la fraude.
Toujours vendredi, le Parquet de Paris a estimé qu'" à l'heure actuelle, on ne peut pas dire ce qu'il y a derrière cette affaire (…), [et qu'il était] prématuré de tirer une quelconque conclusion " sur ses éventuelles conséquences judiciaires. Cette déclaration nourrit la polémique désormais politique, et d'ampleur nationale, sur les responsabilités dans cette affaire de malversation présumée sans équivalent dans l'histoire de la finance.
L'information tardive donnée au gouvernement. Le premier ministre, FrançoisFillon, a annoncé, lors d'un déplacement au Luxembourg, vendredi, avoir demandé à la ministre des finances, Christine Lagarde, de lui donner "sous huit jours, toutes les indications" sur cette affaire.
Il a exprimé son agacement d'avoir été alerté tardivement de la fraude, par lePDG de la Société générale, Daniel Bouton : "Peut-être le gouvernement aurait-il pu être prévenu plus tôt", a-t-il déclaré.
L'ensemble des autorités de l'Etat n'ont été mises au courant du scandale que mercredi 23 janvier. Soit quatre jours après sa découverte, et alors qu'un " cabinet secret ", composé de M. Bouton, du gouverneur de la Banque de France, Christian Noyer, et du secrétaire général de l'Autorité des marchés financiers (AMF), Gérard Rameix, travaillait déjà, depuis trois jours, àun plan de sauvetage de la troisième banque française (Le Monde du 26 janvier).
En déplacement en Inde, le chef de l'Etat, Nicolas Sarkozy, a confirmé qu'il avait été personnellement informé de la fraude par Mme Lagarde, à l'issue du conseil des ministres du mercredi 23 janvier. La commission des finances du Sénat prévoit d'auditionner les régulateurs financiers (Banque de France, AMF et Fédération bancaire française), mercredi 30 janvier.
L'information divulguée à la Réserve fédérale américaine. Depuis jeudi 24 janvier, la rumeur circule que la Société générale aurait, en cédant en trois jours, du lundi 21 janvier au mercredi 23 janvier, l'équivalent de 48 milliards d'euros de dérivés d'actions fondés sur des indices européens, fait plonger les Bourses.Quela journée noire du lundi 21 janvier aurait inquiété au plus haut point les Etats-Unis. Que la Réserve fédérale américaine (Fed) aurait alors interprété ce"simili-krach" comme une aggravation de la crise des subprimes, qui l'aurait incitée à baisser de façon exceptionnelle son taux directeur de 0,75 point.
"Un trader de 31 ans aurait-il pu, de son bureau de la Défense, faire réagir la Fed ?", s'interroge un gérant parisien. L'hypothèse est jugée "farfelue" par un proche du dossier. M. Noyer, a lui assuré, jeudi, "avoir prévenu toutes les autorités compétentes". C'est-à-dire ses homologues européens, les régulateurs. Et aux Etats-Unis ? "M. Noyer a eu son homologue à la Fed, comme il a eu la BCE [Banque centrale européenne]", assure un proche.
La fiabilité du contrôle des risques. Deux jours après la description de la fraude par la Société générale, les interrogations persistent. Comment un homme, seul, sans complices, a-t-il pu déjouer les contrôles de l'établissement ?
Le montant de 48 milliards d'euros semble trop élevé pour une seule personne. En effet, lorsqu'une transaction dépasse un certain seuil, la "contrepartie", en l'occurrence le vendeur, exige un "appel de marge", une sorte d'avance sur le règlement.
Celle-ci lui permet de limiter sa prise de risque, en cas de défaut de paiement de l'acheteur. "Admettons que cette garantie ne représente que 1 % du montant total [les 48 milliards], ça fait 500 millions d'euros. Cela ne passe pas inaperçu", note Benoît Cougnaud, auteur de L'Univers des risques en finance (éd. Presses de Sciences Po). En outre, pour dissimuler ses ordres, le trader piratait le système informatique de la banque afin de gommer ses positions aux yeux des contrôleurs. "Mais comment a-t-il pu intervenir dans les systèmes des contreparties ou des chambres de compensation chargées d'effectuer le règlement et la livraison des titres ?", s'interroge M. Cougnaud.
Le rôle des régulateurs. Entre 2006 et 2007, la Commission bancaire a effectué dix-sept contrôles au sein de la Société générale. Aucun d'entre eux n'a permis de détecter la fraude.
De son côté, l'AMF, chargée de surveiller les transactions réalisées sur les marchés cotés, a été alertée au plus tôt. Mais pour le gendarme de la Bourse, "il ne semble y avoir, à ce jour, aucune infraction". Le trader a outrepassé les règles de la banque, explique-t-on, pas celles du marché.
Reste toutefois un point que l'AMF semble surveiller de près : la manière dont la Générale, dont le titre a chuté de près de 7 % en deux jours, a informé le marché de ses déboires.
Claire Gatinois et Anne Michel
Sunday, January 20, 2008
Tijuana's Rambo
Tijuana's new chief knows the cartel's killers are after him
They've already shot up his house and gunned down three cops. He urges citizens to stand with him.
By Richard Marosi, Los Angeles Times Staff Writer
January 20, 2008
TIJUANA — The bullet holes pockmarking the walls of his home were just three days old when Alberto Capella Ibarra took over the police force of this violence-plagued city.
Twenty gunmen dressed in black had swarmed his yard in the middle of the night, and he'd fought them off, firing an automatic rifle.
Taking office Dec. 1 as the city's secretary for public security, Capella, a longtime activist, declared war on organized crime and challenged citizens to join him in the battle.
Even he had no idea it would get so bloody.
Seventeen people were killed last week as organized crime struck back. Last Monday night and Tuesday morning, heavily armed men killed three of Capella's senior police officers, shooting one at his home along with his wife and two daughters. Two days later, schoolchildren ran for their lives as police and soldiers battled with drug cartel members in a normally quiet neighborhood. Police found six executed kidnap victims inside the suspects' house. A federal agent and a gunman died in the shootout.
Capella, a chubby, soft-spoken 36-year-old with no police training, is at the center of the storm. He moves around the city in a six-car convoy with 20 bodyguards. He can't even stop at a taco stand without scaring off customers who fear gunmen will drive up and blast away.
Originally a corporate lawyer, Capella gained prominence as an outspoken advocate for crime victims. He has long assumed that killers would one day come for him.
Still, in his role as the head of both the police and fire departments, he keeps the pressure on organized crime and corrupt cops while reassuring citizens during what he calls some of the saddest days ever seen in the city.
On Thursday he told mourners at an honor guard ceremony for the three slain officers that Tijuana's criminals had crossed a historic threshold by adding children to their target lists. "If they've ever had a traditional code, they've broken it," Capella said. "But we are ready to give our last breath to honor our responsibility to society."
After the gunfight at his home in November, Mexican newspapers published cartoon images of Capella as a superhero and dubbed him the Tijuana Rambo.
He could have sat back, enjoying the adulation.
But in his first public appearance after the shooting, Capella rejected it, telling hundreds in a hotel ballroom that society was at fault for meekly tolerating the growth of drug cartels in Tijuana.
He scolded citizens for not holding political leaders accountable and for cynicism. "It's as if criminals have corrupted us all," said Capella, his voice cracking. "Nobody lifts a finger."
"He's been the only public figure who has taken the problem so seriously, that we should take these crimes as a grave insult that speaks badly of us as a state and society in Tijuana," said professor Guillermo Alonso Meneses at El Colegio de la Frontera Norte.
Expectations for police chiefs are low here. At least two of Capella's predecessors have been killed and others indicted.
Meneses likened Capella to Jimmy Stewart's character in the classic western "The Man Who Shot Liberty Valance," a lawyer determined against all odds to inspire citizens and impose order in a lawless town.
What Capella needs, Meneses joked, is a partner like John Wayne to battle the bad guys.
Capella has 2,300 cops on his force, but finding trusted gunslingers hasn't been easy. The police are a dispirited, dysfunctional bunch. Many take bribes, deal drugs and carry out kidnappings. Capella said his first day at headquarters was like entering Ali Baba's cavern. Still, he needs the police.
Mayor Jorge Ramos appointed him to the post after promising to reduce crime in one of Mexico's most violent cities.
To do so, Capella has to take on a deeply entrenched world of drug kingpins and rival armies who roam around the city in convoys of SUVs with tinted windows. Weakened by arrests and killings, the networks are more desperate and violent than ever.
Capella's crackdown started downtown. He created a "safety zone" around Avenida Revolucion, the heart of the tourist district, flooding the area with cops whose sweeps yielded more than 100 arrests.
Last week began with the biggest victory to date. Police swarmed a group of armed men trying to hijack an armored vehicle as it made the round of downtown banks. Police pursued the assailants across the city, trading gunfire in a wild chase that ended with the death of one suspect and the arrests of four others.
The slayings of the three police officers just hours later clearly were revenge. Two of them had taken part in the chase. The neighborhood gun battle Thursday occurred as people were gathered for the officers' memorial.
The violence last week has brought fear but also a rare display of civic unity.
Dozens of religious, business and political leaders took out an unprecedented full-page ad in a leading newspaper, exhibiting the kind of social responsibility that Capella had asked of citizens.
"Tijuana society repudiates these recent cowardly acts by organized crime," the civic leaders wrote in the ad.
"We will continue supporting governmental authorities in their fight against crime . . . because it's the only way our children can one day enjoy a life of peace and liberty."
Capella used to lead a comfortable, quiet sort of life. He ran a thriving law practice high in Tijuana's tallest office tower and vacationed regularly in the U.S. and Europe with his wife and three children.
Then four years ago, a terrible crime wave hit the city.
Violence spread outside the worlds of drug traffickers and corrupt cops. Businessmen, doctors and other professionals were being snatched off streets in broad daylight by well-organized kidnapping rings.
Capella agreed to become president of the Baja California citizens' advisory on public security. He quickly turned the state post into a bully pulpit, making headlines with blunt attacks on organized crime and the politicians and police who were too corrupt or inept to do anything about it.
As his public profile grew, so did the threats. He sent his wife and children to live elsewhere.
That's why he was home alone Nov. 27 when barking dogs awoke him at 2 a.m.
He looked out his window, saw the gunmen and figured they would probably abduct him, then cut him into pieces. Silencing a leading voice in such a gruesome way, he thought, would send a demoralizing message to the citizenry.
Capella decided to fight, firing through different windows to make it appear he had backup. The return fire deafened and disoriented him, he said, and time seemed to slow during the 15 minutes in which bullets whizzed past his head.
He could hear the gunmen trying to break in through the front door, but he had fortified it as he always did by sliding a couch in front of it. He kept running and firing, sending bullets into doors and walls in his terror.
Finally, the gunmen retreated. Capella walked around his property, now littered with more than 200 shell casings. Bullets had cracked mirrors, punctured furniture and shredded every dress shirt in his closet, he said. The book on his nightstand -- "Transnational Crime and Public Security" -- was riddled with bullet holes.
The attack had occurred just after Capella had surfaced as a candidate for the police job. It could have been a preemptive strike by corrupt police or crime bosses warning him against taking the job.
Death threats continue. Menacing voices over police radio frequencies promise harm to him and his family.
Last Saturday, gunfire again erupted outside his house. Criminals have called in bomb scares at police headquarters, where Capella has his office.
Capella said he has no regrets. When he emerged from the gunfight alive, he said, he felt reborn. God gave him another chance and he plans to make the most of it.
"I think it would be stupid and cowardly to say 'Adios. May God bless you. Nothing can be done.' " Capella said. "I would be left living with a very tragic and lamentable weight on my conscience."
richard.marosi@latimes.com
http://www.latimes.com/news/local/la-me-tijuana20jan20,1,7541274.story?coll=la-headlines-california
From the Los Angeles Times
They've already shot up his house and gunned down three cops. He urges citizens to stand with him.
By Richard Marosi, Los Angeles Times Staff Writer
January 20, 2008
TIJUANA — The bullet holes pockmarking the walls of his home were just three days old when Alberto Capella Ibarra took over the police force of this violence-plagued city.
Twenty gunmen dressed in black had swarmed his yard in the middle of the night, and he'd fought them off, firing an automatic rifle.
Taking office Dec. 1 as the city's secretary for public security, Capella, a longtime activist, declared war on organized crime and challenged citizens to join him in the battle.
Even he had no idea it would get so bloody.
Seventeen people were killed last week as organized crime struck back. Last Monday night and Tuesday morning, heavily armed men killed three of Capella's senior police officers, shooting one at his home along with his wife and two daughters. Two days later, schoolchildren ran for their lives as police and soldiers battled with drug cartel members in a normally quiet neighborhood. Police found six executed kidnap victims inside the suspects' house. A federal agent and a gunman died in the shootout.
Capella, a chubby, soft-spoken 36-year-old with no police training, is at the center of the storm. He moves around the city in a six-car convoy with 20 bodyguards. He can't even stop at a taco stand without scaring off customers who fear gunmen will drive up and blast away.
Originally a corporate lawyer, Capella gained prominence as an outspoken advocate for crime victims. He has long assumed that killers would one day come for him.
Still, in his role as the head of both the police and fire departments, he keeps the pressure on organized crime and corrupt cops while reassuring citizens during what he calls some of the saddest days ever seen in the city.
On Thursday he told mourners at an honor guard ceremony for the three slain officers that Tijuana's criminals had crossed a historic threshold by adding children to their target lists. "If they've ever had a traditional code, they've broken it," Capella said. "But we are ready to give our last breath to honor our responsibility to society."
After the gunfight at his home in November, Mexican newspapers published cartoon images of Capella as a superhero and dubbed him the Tijuana Rambo.
He could have sat back, enjoying the adulation.
But in his first public appearance after the shooting, Capella rejected it, telling hundreds in a hotel ballroom that society was at fault for meekly tolerating the growth of drug cartels in Tijuana.
He scolded citizens for not holding political leaders accountable and for cynicism. "It's as if criminals have corrupted us all," said Capella, his voice cracking. "Nobody lifts a finger."
"He's been the only public figure who has taken the problem so seriously, that we should take these crimes as a grave insult that speaks badly of us as a state and society in Tijuana," said professor Guillermo Alonso Meneses at El Colegio de la Frontera Norte.
Expectations for police chiefs are low here. At least two of Capella's predecessors have been killed and others indicted.
Meneses likened Capella to Jimmy Stewart's character in the classic western "The Man Who Shot Liberty Valance," a lawyer determined against all odds to inspire citizens and impose order in a lawless town.
What Capella needs, Meneses joked, is a partner like John Wayne to battle the bad guys.
Capella has 2,300 cops on his force, but finding trusted gunslingers hasn't been easy. The police are a dispirited, dysfunctional bunch. Many take bribes, deal drugs and carry out kidnappings. Capella said his first day at headquarters was like entering Ali Baba's cavern. Still, he needs the police.
Mayor Jorge Ramos appointed him to the post after promising to reduce crime in one of Mexico's most violent cities.
To do so, Capella has to take on a deeply entrenched world of drug kingpins and rival armies who roam around the city in convoys of SUVs with tinted windows. Weakened by arrests and killings, the networks are more desperate and violent than ever.
Capella's crackdown started downtown. He created a "safety zone" around Avenida Revolucion, the heart of the tourist district, flooding the area with cops whose sweeps yielded more than 100 arrests.
Last week began with the biggest victory to date. Police swarmed a group of armed men trying to hijack an armored vehicle as it made the round of downtown banks. Police pursued the assailants across the city, trading gunfire in a wild chase that ended with the death of one suspect and the arrests of four others.
The slayings of the three police officers just hours later clearly were revenge. Two of them had taken part in the chase. The neighborhood gun battle Thursday occurred as people were gathered for the officers' memorial.
The violence last week has brought fear but also a rare display of civic unity.
Dozens of religious, business and political leaders took out an unprecedented full-page ad in a leading newspaper, exhibiting the kind of social responsibility that Capella had asked of citizens.
"Tijuana society repudiates these recent cowardly acts by organized crime," the civic leaders wrote in the ad.
"We will continue supporting governmental authorities in their fight against crime . . . because it's the only way our children can one day enjoy a life of peace and liberty."
Capella used to lead a comfortable, quiet sort of life. He ran a thriving law practice high in Tijuana's tallest office tower and vacationed regularly in the U.S. and Europe with his wife and three children.
Then four years ago, a terrible crime wave hit the city.
Violence spread outside the worlds of drug traffickers and corrupt cops. Businessmen, doctors and other professionals were being snatched off streets in broad daylight by well-organized kidnapping rings.
Capella agreed to become president of the Baja California citizens' advisory on public security. He quickly turned the state post into a bully pulpit, making headlines with blunt attacks on organized crime and the politicians and police who were too corrupt or inept to do anything about it.
As his public profile grew, so did the threats. He sent his wife and children to live elsewhere.
That's why he was home alone Nov. 27 when barking dogs awoke him at 2 a.m.
He looked out his window, saw the gunmen and figured they would probably abduct him, then cut him into pieces. Silencing a leading voice in such a gruesome way, he thought, would send a demoralizing message to the citizenry.
Capella decided to fight, firing through different windows to make it appear he had backup. The return fire deafened and disoriented him, he said, and time seemed to slow during the 15 minutes in which bullets whizzed past his head.
He could hear the gunmen trying to break in through the front door, but he had fortified it as he always did by sliding a couch in front of it. He kept running and firing, sending bullets into doors and walls in his terror.
Finally, the gunmen retreated. Capella walked around his property, now littered with more than 200 shell casings. Bullets had cracked mirrors, punctured furniture and shredded every dress shirt in his closet, he said. The book on his nightstand -- "Transnational Crime and Public Security" -- was riddled with bullet holes.
The attack had occurred just after Capella had surfaced as a candidate for the police job. It could have been a preemptive strike by corrupt police or crime bosses warning him against taking the job.
Death threats continue. Menacing voices over police radio frequencies promise harm to him and his family.
Last Saturday, gunfire again erupted outside his house. Criminals have called in bomb scares at police headquarters, where Capella has his office.
Capella said he has no regrets. When he emerged from the gunfight alive, he said, he felt reborn. God gave him another chance and he plans to make the most of it.
"I think it would be stupid and cowardly to say 'Adios. May God bless you. Nothing can be done.' " Capella said. "I would be left living with a very tragic and lamentable weight on my conscience."
richard.marosi@latimes.com
http://www.latimes.com/news/local/la-me-tijuana20jan20,1,7541274.story?coll=la-headlines-california
From the Los Angeles Times
Thursday, January 17, 2008
Finance Capital in Britain
Cityphilia
John Lanchester
LRB 3 January 2008
At the point when we bought our house in 1996, average house prices in the UK, adjusted for inflation, were some way below the levels they’d hit in the late 1980s bubble. Clapham was then still a place people moved to when they had families and wanted larger and cheaper houses, and were willing to move south of the river to get them. When house prices began to go up, this area began to be colonised by bankers and City types. We were the last non-City people to move into the street where we live – the last of the aborigines. These days, as houses become an ever more critical capital asset, there is a constant va-et-vient of renovation, a non-stop turmoil of attics being done, basements being dug out, skips being filled, scaffolding put up and everything knockable being knocked through. In a street two hundred metres long, there is at the moment one skip, three sets of scaffolding, two basement conversions, a loft conversion and two full renovations. Most of this activity is generated by the City people, since we aborigines for the most part tend not to move; we’re all still here. But the bankers move all the time, doing up and selling on houses, usually to move to the Old Rectory in Shaghampton, Wiltshire, with the husband spending three or more nights in town until the inevitable happens. (‘Half of my business is “The Old Rectory, Wiltshire”,’ a cheerful divorce lawyer once told me.)
I’ve nothing against bankers; my father was one. But it isn’t possible to deny that in most of London, City money has a negative impact on the quality of life. It’s partly that the men, in particular, can be so insanely boring. That may reflect the way banking has changed, become more intense, more time-consuming and more overtly greedy. David Kynaston, author of a magisterial four-volume history of the City, completed in 2001, observes at the start of the fourth volume that ‘the modern City is in many ways a cruel, heartless place, and its occupants work such cripplingly long hours that inevitably they lack much of the roundedness of earlier generations.’ From a parochial point of view, the City types’ effect on the texture of life is not heartwarming. The bankers don’t use the local schools or hospitals or shops: at least not until the shops catch up with them, and then when the shops do catch up with them they are selling things at such high prices that no one else can afford them. During the week, the men are functionally invisible: they leave the house around 6.30 and are back at about eight. At the weekends, when you see them with the children, they go to heroic lengths – as Jonathan Coe points out in The Closed Circle – to occupy themselves doing exactly the same things they would be doing if the children weren’t there: reading papers, sending emails, talking on the phone. When the children are small the wives occupy themselves in the supervision of nannies and builders: once the children are in school full-time they go back to work; when the time for secondary education comes, they move to the country, and another set of bankers moves in.
Not all City types are vile, obviously. My friend Tony isn’t vile. We have many interests in common and chat easily about all sorts of things. But I’m sometimes made aware of a significant gap between us. It’s a philosophical and practical gap, and it is to do with money. Tony will complain about the price of things – about parking permits, or the cost of the Playstation 3 he’s promised his son – but I’ve begun to wonder if this is a purely formal acknowledgment of the value of money to other people. Tony’s ‘basic’ is £120,000 a year; in a good year he earns a bonus of £500,000. In a very good year he is paid a million pounds. He is polite about this but the details slip out nonetheless. He bought a second home on Ibiza and I was commiserating with his complaints about the usual things (builders, local regulations) until the cost of the house was mentioned: £1.4 million.
A fundamental economic gap of that type does open up a distance between people, however many other things you have in common. He happened once to mention what he (as a head of department) pays new recruits, straight out of university: ‘45k a year, with a bonus of between ten and twelve grand guaranteed.’ I pointed out that in many cases that would mean these 22-year-olds would be earning more than the heads of department in the universities they’d just graduated from. He shrugged and laughed. ‘It is what it is,’ he said. Also, the bottom-performing 10 per cent of people in every department at his firm are sacked every year. He expressed surprise at my surprise. ‘That’s standard,’ he said. ‘I thought everyone did that.’ The moments when I realise Tony and I occupy very different spaces always turn on money and the assumptions built into our attitudes to it.
In London, as a rule, non-City people don’t love City people, and there isn’t much non-economic interaction between them. The bonuses are a big part of that. The City is, collectively, astonishingly wealthy. It earns 19 per cent of Britain’s GDP. People don’t mind that in itself but they do mind City bonuses. Last year, these amounted to a truly boggling £19 billion, all of it paid at the end of the year. In London, the effect of that money has become almost entirely toxic. I’m not talking here about middle-class envy – the resentment increasingly expressed among the ‘middle-class poor’ about how unfair it is that these bankers get paid so much for contributing so little. That resentment seems to me to be largely hypocritical, a middle-class resentment of one of the few forms of inequality that doesn’t benefit them. But City money is strangling London life. The presence of so many people who don’t have to care what things cost raises the price of everything, and in the area of housing, in particular, is causing London’s demographics to look like the radiation map of a thermonuclear blast. In this analogy only the City types can survive close to the heart of the explosion. At this time of year, when the bonus stories come out, you can understand why. A bar announces that it is offering the most expensive cocktail in the world: £35,000. That buys you a shot of cognac, a half bottle of champagne, a diamond ring and the attentions of two security guards to protect you for the rest of the evening. A deli, at the special request of a customer, creates a £50,000 Christmas hamper. Word gets out, and another customer immediately orders two more. The expense of London is forcing people further and further out of the city, and making life harder and harder for the ones who remain.
There is no mystery about how we got to this point: successive governments have, in policy terms, given the City more or less everything it wants. One of the last big things any government did to piss the City off – truly piss it off – was the windfall tax on profits imposed in 1981 by Mrs Thatcher’s chancellor Geoffrey Howe. (Blair or Brown would never dream of doing anything like that to the City.) But the abolition of exchange controls in 1979 and the increasingly international flow of capital, combined with the abolition of restrictions on trading practices which culminated in the ‘Big Bang’ in 1986, have all led to the City’s increasing dominance of British economic life. This, in turn, makes it all the more striking how little knowledge most people have of what goes on in the City: what it is for, what it does, and how it affects everyday life for everybody else.
This can come as a shock to even the best-informed citizens. James Carville, the Svengali behind Clinton’s election win in 1992, was so amazed by the power of freely moving capital, viewed at close range, he said that if reincarnation were real, he would like to be born again as the international bond markets. But the ordinary elector knows almost nothing about how these markets work and the impact they have. Kynaston observes that under Communism children from primary school upwards were taught the principles and practice of the system, and were thoroughly drilled in how it was supposed to work. There is nothing comparable to that in the capitalist world. The City is, in terms of its basic functioning, a far-off country of which we know little. What there is instead is, in Britain, a largely unthinking willingness for government to adopt City approaches to other aspects of society. Kynaston, discussing ‘City cultural supremacy’, says that ‘in all sorts of ways (short-term performance, shareholder value, league tables) and in all sorts of areas (education, the NHS and the BBC, to name but three), bottom-line City imperatives had been transplanted wholesale into British society.’
This uncritical and uninformed governmental Cityphilia received its biggest shock in decades this autumn, with the near collapse of Britain’s fifth largest mortgage lender, Northern Rock. Britain’s first genuine bank run in more than a hundred years shone a light in many places where the sun doesn’t routinely shine, and one of the first things to be brought into question was the ways banks work. As I’ve already said, my father was a banker, and I grew up hearing about that mythical beast, the bank run. It was often spoken of but rarely seen in the wild. Bankers are said to dread a bank run, but my dad talked about them with a certain black humour. They were always a sign that somebody had fucked up, big-time. They can also be a sign that something in the financial system is fundamentally wrong. The question hanging around in the residue of the Rock’s near implosion is which type of bank run this was – a fuck-up, or a harbinger of meltdown?
A well-run bank is a machine for making money. The basic principle of banking is to pay a low rate of interest to the people who lend money, and charge a higher rate of interest to the people who borrow money. The bank borrows at 3 per cent and lends at 6 per cent and as long as it keeps the two amounts in line, and makes sure that it lends money only to people who will be able to pay it back, it will reliably make money for ever. And this institution, in and of itself, will generate activity in the rest of the economy. The process is explained in Philip Coggan’s excellent primer on the City, The Money Machine (2002). Imagine, for the purpose of keeping things simple, a country with only one bank. A customer goes into the bank and deposits £200. Now the bank has £200 to invest, so it goes out and buys some shares with the money: not the full £200, but the amount minus the percentage which it deems prudent to keep in cash, just in case any depositors come and make a withdrawal. That amount, called the ‘cash ratio’, is set by government: in this example let’s say it’s 20 per cent. So our bank goes out and buys £160 of shares from, say, LRB Ltd. Then LRB goes and deposits its £160 in the bank; the bank now has £360 of deposits, of which it needs to keep only 20 per cent – £72 – in cash. So now it can go out and buy another £128 of shares in LRB, raising its total holding in LRB Ltd to £288. Once again, LRB Ltd goes and deposits the money in the bank, which goes out again and buys more shares, and so on the process goes. The only thing imposing a limit is the need to keep 20 per cent in cash, so the depositing-and-buying cycle ends when the bank has £200 in cash – all the cash there is – and £800 in LRB shares; it also has £1000 of customer deposits, the initial £200 plus all the money from the share transactions. The initial £200 has generated a balance sheet of £1000 in assets and £1000 in liabilities. Magic! In real life, it’s even better: the UK cash ratio is 0.15 per cent, so that initial £200 would generate £133,333 on both sides of the balance sheet.
Now let’s consider something a little more realistic: lots of different banks, with lots of different depositors and investments, many of them interlocking and overlapping. The specifics of who owns what, and who owes what, are almost unimaginably complex. Liquidity – the ability to get hold of cash easily – is crucial to this system, because your bank will often need money at shortish notice, to buy things or repay depositors. You know that if you lend money to another bank you’ll get it back without difficulty and they know the same about lending money to you. In normal circumstances, this isn’t a problem: banks lend money to each other all the time, with complete ease and transparency, and this keeps the entire system afloat. But this depends on confidence; and it is this confidence that dried up for Northern Rock in the summer, when other banks became unwilling to lend it money, and it had to go to the Bank of England for the emergency loan which then triggered a bona fide bank run – which is what happens when the people who own the £133,333 turn up demanding their money, and it turns out that the institution is in current possession only of its legally mandated £200 in cash.
The reason banks became reluctant to lend money to each other was linked to risks arising from new types of financial instrument. Recent years have seen huge amounts of ingenuity applied to the devising of new types of investment vehicle. Most of these are forms of derivative, in which a product derives its value from something else. These are not new, nor is their involvement in financial disasters: it was tulip derivatives that underlay the Dutch crash of 1637. Derivatives have a bad press at the moment – we’ll be coming to that shortly – but it is important to understand their role in the long history of man’s attempt to understand, control and make money from risk. The best version of this story is told in Peter Bernstein’s Against the Gods (1998), a fascinating account of risk, which makes the point that the study of risk is a humanist project, an attempt to abolish the idea of unknowable fate and replace it with the rational, quantifiable study of chance.
The simplest forms of derivative are options and futures. An option gives you the right, but not the obligation, to buy or sell something at a specified future date for a specified price. Example: you spend £500 on an option to buy a Ferrari for £50,000 in a year’s time. When the year is up, the Ferrari is on sale for £60,000, so your option is now worth £10,000, because that’s how much money you can make by exercising the option, buying the car and then selling it for its real price. Conversely, if in a year’s time the Ferrari is on sale for £40,000, exercising your option would leave you out of pocket by £10,000 – so you just let it go, and your only loss is the £500 premium (as it’s called). You could alternatively have bought the right to sell the Ferrari for £50,000 – in which case your preferences would be reversed, and you’d be hoping that the price had dropped. In that event you’d buy the car for £40,000 and immediately sell it for £10,000 more. Futures are the same as options, except that they bring with them the obligation to buy or sell at the specified price: with futures, you are committed to the deal. It follows that futures are much riskier than options.
Options and futures have been very important products in the history of finance, and it is no coincidence that derivatives were first extensively developed in commodities markets, especially the great exchange in Chicago (which started life 110 years ago as the Chicago Butter and Egg Board). A farmer facing an uncertain harvest is very grateful for the opportunity to sell his next season’s produce at a fixed price, guaranteed in advance. For years, derivatives existed as useful tools of this type: they were immensely practical but not in their basic essence too complicated. Their use was widespread, and Bernstein’s account of them has some entertaining byways: who knew that the Confederacy funded its war against the Union with a derivative bond to attract foreign currency?
But the trade in derivatives was hampered by one big thing: no one could work out how to price them. The interacting factors of time, risk, interest rates and price volatility were so complex that they defeated mathematicians until Fischer Black and Myron Scholes published a paper in 1973, one month after the Chicago Board Options Exchange had opened for business. Within months, traders were using equations and vocabulary straight out of Black-Scholes (as it is now universally known) and the worldwide derivatives business took off like a rocket.
In an ideal world, one populated by vegetarians and Esperanto speakers, derivatives would be used for one thing only: reducing levels of risk. Because they are bought ‘on margin’ – i.e. not for the full cost of the underlying asset, but for the advance premium, as in the hypothetical Ferrari example above – they offer a cheap and flexible form of insurance against things going wrong. Imagine that you are convinced that the stock market is about to go up by 50 per cent in the next year. You know it in your waters: so much so that you borrow £100,000 and use it to buy shares. If the market goes up you’ll be pleased with yourself, but if you’re wrong, and the market plunges, you’ll be badly out of pocket – unless you take out some insurance. So you buy a £10,000 option to sell the shares. That money is wasted if your shares go up – but you won’t care much because your main position is in serious profit. But if the shares lose half their value, you have some insurance: you can cash in the option to sell the shares and cancel out most of your losses. This is called ‘hedging’: you have used an option to hedge your main risk.
Alas, we don’t live in that kinder, gentler world. In reality, the power of derivatives has a way of proving irresistible to those people who aren’t just sure that the market is going up, but are beyond sure, are super-sure, are possessed by absolute knowledge. In that event, it is very tempting indeed to buy an option that increases your level of risk, in the certainty that this will increase your level of reward. In the above example, instead of hedging the position with an option to sell, you could magnify it with options to buy more shares at the same price, which will be worth a lot if you’re right – sorry, when you’re right. When you’re right and the market goes up by half, your £10,000 option will be worth £50,000 (that’s the £50,000 by which the shares have gone up). In fact, instead of buying £100,000 of shares and a £10,000 option to buy, why not instead buy £100,000 worth of options? This is called leverage: you have leveraged your £100,000 to buy £1,000,000 worth of exposure to the market. That way when you get your price rise, you have just made £500,000, and all with borrowed money. In fact, since you’re not just confident but certain, why not skip the option and instead buy some futures, which are cheaper (because riskier) – let’s say half the price. These futures, at £5000 each, oblige you to buy 20 lots of the shares for £100,000 each in a year’s time. Hooray! You’re rich! Unless the market, instead of doubling, halves, and you are saddled with an obligation to buy £2 million worth of shares which are now worth only £1 million. You’ve just borrowed £100,000 and through the power of modern financial instruments used it to lose £1 million. Oops.
It might seem unlikely that anyone would do anything that stupid, but in practice it happens all the time. The list of individual traders who have lost more than a billion dollars at a time betting on derivatives is not short: Robert Citron of Orange County, Toshihide Iguchi at Daiwa, Yasuo Hamanaka at Sumitomo and Nick Leeson at Barings, just to take examples from the early 1990s. In Leeson’s case in 1995, it was a huge unauthorised position in futures on the Nikkei 225, the main Japanese stock exchange. Leeson had been doubling and redoubling his bets in the belief/hope that the index would rise, and hiding the resulting open position – a gigantic open-ended bet – in a secret account. (Incidentally, Leeson’s big bet was on the Nikkei holding its level above 18,000. At the time of writing, 121/2 years later, the index sits at 15,454 – proof, if it were needed, that when prices go down they can stay that way for a long time.) The loss eventually amounted to £827 million, and destroyed Barings, Britain’s oldest merchant bank. The year before it went broke, the chairman of the company, Peter Baring, urbanely told the governor of the Bank of England that it is ‘not actually terribly difficult to make money in the securities business’.
The power of derivatives is one of the main things about them: their ability to hedge risk, but also, and much more alarmingly, to magnify it. The second main thing about them is their complexity. We have come a long, long way from a single quote for next season’s wheat crop. The contemporary derivative is likely to involve a mix of options and futures and currencies and debt, structured and priced in ways that are the closest real-life thing to rocket science. Maths PhDs are all over the place in this business. Some of the derivatives are actively designed to conceal the real nature of the assets involved – bearing in mind that the assets are themselves often debts, repackaged and sold on in ‘black box’ structures designed to hide the entities within. The products thus created are way over the heads of civilians and sometimes, it seems, over the heads of most of the people who buy and sell them. ‘We invented this stuff, so we know how it works,’ Tony told me (his bank was one of the first players in the derivatives market). ‘But I get the feeling that a lot of the banks are doing it just because other people are doing it – they don’t really know what they’re doing.’
The complexity is such that even the people who know what they’re doing don’t always know what they’re doing. Derivatives are extensively used in arbitrage. That’s the name of investments which effectively bet both ways on the market, exploiting small differences in price to make what should be risk-free profits. (It’s what Leeson was supposed to be doing, exploiting tiny differences in the price of Nikkei 225 futures between the Osaka Securities Exchange, where trading was electronic, and the Singapore International Monetary Exchange, where it wasn’t. The gap in price would last only for a couple of seconds, and in that gap Barings would buy low and sell high – a guaranteed, risk-free profit.) The complexity of the mathematics involved in derivatives can’t be exaggerated. This was the reason John Meriwether, a famous bond trader, employed Myron Scholes – of the Scholes-Black equation – and the man with whom Scholes shared the 1997 Nobel Prize in Economics, Robert Merton, to be directors and cofounders of his new hedge fund Long-Term Capital Management. (A word on the term ‘hedge fund’: it is misleading. Hedge funds are pools of private capital, operating without the legal restrictions that affect other forms of collective investment. Many of them make big bets on the markets, using super-sophisticated rocket-sciencey investment techniques.) The idea was to use these big brains to create a highly leveraged, arbitraged, no-risk investment portfolio designed to profit whatever happened, whether the market went up, down, sideways or popped out for a cheese sandwich. LTCM quadrupled in value in its first four years, then imploded in the chaos that followed Russia’s default on its foreign-debt obligations in 1998. The fund had equity – that’s to say, actual money you could put your hands on – of $4.72 billion, which sounds pretty healthy, except that it was exposed, thanks to the miracles of borrowing, leverage and derivatives, to $1.25 trillion of risk. So if it went broke, LTCM would leave a $1.25 trillion hole in the global financial system. The big brains had made a classic mistake: they treated a very unlikely thing (the default and its consequences) as if it were impossible. As Keynes once observed (he who made himself and his college rich by spending half an hour a day in bed playing the stock market), there is nothing so disastrous as a rational policy in an irrational world.
Derivatives, in their modern form, are the most powerful and the most complicated financial instruments ever devised. The third crucial thing about them is that they are everywhere. In 2003 the total size of the world economy was $49,000,000,000,000. The total size of the derivatives being traded was $85,000,000,000,000. In other words, derivatives today are worth far, far more than the total economic activity of the planet. More than $1,000,000,000,000 of derivatives are bought and sold every day. Every single thing that can be traded through derivatives, is. In the words of Warren Buffett, the greatest living stock market investor,
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.
Many companies which look as if their business is to do other things are in reality in the derivatives business – Enron being the best-known example. Buffett is a derivative-phobe, not least because he prefers to know what’s going on in the companies he invests in, and derivatives make that effectively impossible:
No matter how financially sophisticated you are, you can’t possibly learn from reading the disclosure documents of a derivatives-intensive company what risks lurk in its positions. Indeed, the more you know about derivatives, the less you will feel you can learn from the disclosures normally proffered you. In Darwin’s words, ‘Ignorance more frequently begets confidence than does knowledge.’
The Northern Rock crisis saw all these factors being brought together. The Rock is a bank with roots in the North-East. It had grown to be the fifth biggest mortgage lender in the UK by offering an attractive package of loans, many of them via accounts that are managed over the internet. Its rates are competitive and it used to have a good reputation in its dealings with customers, unlike the four main high street banks which are, as James Buchan once wrote, ‘mere burdens on the earth’. Not one saver in ten thousand would have been aware that the reason the Rock’s interest rates were so competitive was that it dealt on the global markets to fund itself. Only 27 per cent of its funds were ‘retail’, i.e. money deposited by savers: fully 70 per cent of the Rock’s funding was ‘wholesale’, i.e. came from international markets. So the Rock is lending long-term, in 25-year mortgages, but borrowing short-term to fund itself. That is a well-known recipe for trouble. In addition, the Rock uses offshore trusts to package its mortgages together into ‘asset-based securities’ – bundles of debt that could be sold on to other investment institutions. One thing worth bearing in mind is that in terms of its underlying assets, the Rock seems fine; there is no reason for thinking that its mortgage-payers are failing to cough up.
The Rock’s problem was that this business model depends on liquidity. Because it gets 70 per cent funding on the wholesale markets, if those markets aren’t working, it is instantly in deep shit. Over the summer, those markets seized up, and banks became reluctant to lend money to each other – and especially reluctant to lend money to anyone with an exposure to high-yield mortgages. Remember the interlocking nature of bank deposits, and how the system relies on liquidity? Over the summer, that liquidity dried up. The Rock had to turn to the Bank of England, ‘the lender of last resort’, to borrow the money to stay in business; when news got out, savers wanted their money back, but the bank’s website crashed, so they began turning up in person to withdraw their deposits, and lo and behold we had a genuine bank run. On 14 September, so many people turned up in person to withdraw money that the bank ended up paying out 5 per cent of its total assets, a cool £1 billion in cash.
The guilty party was the usual baroque financial instrument: in this case, a Collateralised Debt Obligation, or CDO. During boom times, banks lend money more and more freely, and begin to look for growth in places where they hadn’t before. In this case, the growth area for American financial institutions was in lending money to poor people whom they wouldn’t previously touch. The banks didn’t exactly go skipping around trailer parks handing out leaflets offering Buy One Get One Free mortgages – except that they did, sort of. The great thing about these poor people was that because their credit history was poor to non-existent they could be charged extravagantly high rates of interest.
There was a huge demand for these new mortgages, which in many cases allowed people to own their homes for the first time. By 2005, one in five American mortgages was of this new kind. The mortgages were then bundled together and turned into CDOs. These were packages of debt: some of it beautifully high-yielding, high-interest ‘sub-prime’ debt. (‘Prime’ debt refers to the people you’re sure will pay it back; with ‘sub-prime’ debt, you’re less sure, so you charge the borrower more for the privilege of borrowing.) The packages were structured to pay out different rates of interest based on different levels of risk; some of the debt rated AAA, the safest available, and some of it riskier and more lucrative. These were then sold as bonds on the international markets – this being a huge growth area in recent years. The market in mortgage-backed bonds currently stands at $6.8 trillion. It is the biggest component of the $27 trillion US bond market, bigger even than US Treasury bonds: $1.3 trillion of that is ‘sub-prime’ lending.
Then trouble struck. The problem was that interest rates in America went up, just as many of the sub-prime borrowers were coming off their first two years of fixed-rate mortgages, so their rates zoomed up, and many of them couldn’t afford to pay. The result has been a wave of home repossessions. A BBC report made a study of Cleveland, Ohio, where the banks lent heavily in poor black areas. It found that in Cleveland, one home in ten has now been repossessed, and the biggest landlord in the city is Deutsche Bank Trust.
The banking system is facing a multiple whammy. The unpaid mortgages are one thing; the losses on those mortgage-backed bonds are another. And as for the effect on the banks’ share prices . . . So far, the announced losses amount to $60 billion, and the heads of two of the biggest American banks have lost their jobs, Chuck Prince at Citigroup (loss: $5.9 billion announced with $8-11 billion more to come) and Stan O’Neal at Merrill Lynch (loss: $8 billion). But the really big worry concerns a further category of derivatives based on the sub-prime mortgages. Many banks are thought to have huge positions in these, hidden in what are known as ‘structured investment vehicles’. These don’t appear on the banks’ books, but their liabilities are real, and if one or other of them blows up à la LTCM, it could leave a gigantic hole not just in the individual bank’s accounts but in the whole global financial system.
That was the reason banks suddenly became reluctant to lend money to each other, and liquidity dried up, and Northern Rock almost collapsed. The problem was that the sub-prime derivatives were passed around and sold from bank to bank in an entirely untransparent way, in a gigantic game of pass-the-parcel. An unfortunate family is unable to meet its mortgage payments in Dumpsville, Arizona; that default is passed through the mortgage lender via the CDO to the international bond market, where it is sold and resold and ends – well, that’s the whole point: no one knows where it ends. No one knows who is holding the parcel. The complexities are such that even when the parcel is unwrapped and opened, people still don’t know the full details of what’s in it. Merrill Lynch announced a CDO loss of $5 billion on 5 October and then added another $3 billion on 24 October; the supposedly conservative Swiss bank UBS announced a loss of $3.4 billion in October and then another of $10 billion on 10 December. No one knows who is at risk from the imploding sub-prime mortgages, because no one knows who owns that risk. As a result, the banks became reluctant to lend money to each other, because no one wants to lend money to someone who might not be able to pay it back, and because all banks are trying to make their balance sheets look as plumped-up and cashed-up as possible.
Since a ‘credit crunch’ of this type is by no means unknown – it is in fact a pretty regular feature of financial markets – we may well wonder why Northern Rock had a business model that couldn’t survive one. It seems incredibly stupid. It may be that the Bank of England privately thought so too, and wouldn’t have minded allowing the Rock to go under. If the Rock’s shareholders had invested in a business with a fundamental flaw and lost all their money as a result, tough shit: they should have read the fine print. But if the Bank wouldn’t have minded punishing the Rock, it couldn’t take the same attitude to the people who had entrusted it with their savings. Just as the Bank of England had to rescue Johnson Matthey Bank in 1984, because it was one of the five UK banks authorised to trade in gold, it had to rescue the Rock for the sake not of its investors, but of its savers. In this respect, the Bank was asleep at the wheel. The UK system of deposit protection gave a full guarantee only for the first £2000 of savings, and 90 per cent of the next £33,000. Actually extracting that money was famously laborious and would take months of form-filling. After the crisis, when it was too late, the Bank promised to extend its deposit protection to £100,000 and to speed up procedures for repayment. If those measures had been in place in September, the Rock could have been allowed to go broke and the bankers who created this and other similarly over-ingenious structures would have been put on notice. Instead, the Bank of England bailed out the Rock to the tune, so far, of £25 billion. That’s the biggest sum any government anywhere in the world has ever given to a private company. It may turn out the government has no choice but to announce that it has (accidentally and inadvertently) nationalised the Rock.
So the story of Northern Rock was a fuck-up. The trouble is that it may turn out to be a harbinger of meltdown too. As Clive Briault of the Financial Services Authority pointed out on 4 December, we in the UK have had 67 consecutive quarters of economic growth. Inflation is low and so is unemployment. (Actually, the unemployment figures are almost laughably rigged – but that’s another subject. Suffice it to say that pretty much everybody who wants work can find it.) Everything that goes up must come down, and it was inevitable and indeed necessary for things to cool off a bit. The danger is that they might do much more than that. Our economic good times have been funded to a large extent by personal debt, which has in turn been funded by rising house prices. This has made people feel very confident about their finances, and often led them to treat their homes, via remortgaging, as giant cash machines. But the fright caused by the sub-prime disaster – a disaster playing out in slow motion, with more bad news certain to come – is going to cause a tightening up of credit. Banks are going to become increasingly cautious about lending money. They’ll lend it to fewer people and charge more money for the privilege. People think that mortgages are priced at a rate linked to the Bank of England’s interest rates, but that’s not directly the case: they are priced according to the rate at which banks can borrow money from each other. That rate is under pressure from the sub-prime fiasco. UK personal debt comes to a cool £1,400,000,000,000, and all of it is about to be costlier to pay off. Next year, 1.4 million fixed-rate mortgages are due to come onto the new floating rates, which will be much more expensive. It’s the same thing that triggered the wave of repossessions across the US. Add to that the fact that the British market now has £108 billion worth of buy-to-let mortgages, which are particularly exposed to a dip in house prices combined with a rise in interest rates, and you would be forgiven for thinking that some sort of crash is imminent. The central banks obviously think the risk is very real, because on 12 December, the US, EU, UK, Canadian and Swiss central banks announced that they were joining together to provide £50 billion worth of liquidity to the financial markets. Because banks are reluctant to lend to each other, the central banks will make the funds available instead. This might help, or it might be a sign of anxiety so big that it accidentally makes things worse – but it was worth a shot.
My friend Tony, however, is sanguine. ‘Sorting out who’s in the shit is going to be a nightmare, but when it all shakes out, all it’ll mean is that credit is a little bit more expensive. That’s a good thing. It had got crazy. It was cheaper for companies to borrow money from other companies than it was for governments. That’s nuts. These things are cyclical, it had all just gone too far and we needed a correction.’
‘So we’ll have to stop running around spending money like drunken sailors,’ I said.
‘Well, drunk sailors tend to be spending their own money,’ Tony said. ‘By contemporary standards they’re quite prudent.’
This is a good moment for a reappraisal of the City’s relationship with the rest of Britain. We are about to have a slowdown, or a recession, or a meltdown, that is in some part triggered by high-risk activities on the part of financial institutions. It comes down to a question of risk, which in turn is a question of just who is bearing the risks – and this, it seems to me, is where the current financial system is badly out of kilter.
Before John Meriwether became the mastermind behind Long-Term Capital Management, he was one of the star characters in Michael Lewis’s highly entertaining Liar’s Poker, an account of the excesses of Wall Street bond traders in the 1980s. Meriwether is the lead character in the book’s famous first scene, in which John Gutfreund, the chairman of Salomon Brothers, challenges him, then the chief bond trader, to a game of Liar’s Poker: ‘One hand, one million dollars, no tears.’ (Liar’s Poker is a game of bluffing in which you bet on the serial number of dollar bills.) That wasn’t a colossal sum to Gutfreund, though it was to Meriwether – which made what he did next all the more audacious.
‘No, John,’ he told his boss, ‘if we’re going to play for those kind of numbers, I’d rather play for real money. Ten million dollars. No tears.’
That amount would have bankrupted Meriwether, but it would have put a horrible crimp even in Gutfreund’s style; he’d have had to sell things to raise it, and explain to his wife why they wouldn’t be having a holiday this year, and all that. So the chairman of Salomon slunk away with his tail between his legs and Meriwether’s reputation was permanently established as – to use the elegant period phrase – a ‘big swinging dick’.
Societies don’t have to love people like Meriwether, just as we don’t have to love the kind of people who become soldiers or surgeons, but we do need them – gamblers, risk-takers. The longest and best established principle of investment is that rewards are linked to risks: you can’t earn more than other people without risking more than they do. The early capitalists who funded sea voyages, for instance, did so on the clear understanding that if the ship came back, they would be rich, and if it didn’t come back, they would be broke. Playing Liar’s Poker, Meriwether was risking his own money. The trouble with derivatives, however, is that they magnify the risk and spread it through the financial system to such an extent that now, when men like Meriwether, or indeed like the management of Northern Rock, make their colossal bets, we bear the risk as well, unwillingly and unwittingly. A trillion-dollar market catastrophe would have consequences for everybody. In the words of Warren Buffett,
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
He said that five years ago, and there is no sign that effective action has been taken or even seriously contemplated. Banks are exercising greater notional care over their exposure to risk – it’s not as if anyone actively wants to lose money. But the yearning for increased rewards is as strong as it ever was, and higher rewards mean higher risks. Most City commentators would tell us that this is yet another area in which the cure for a problem caused by the markets is more reliance on market forces. That faith seems to me to verge on the mystical.
Bank legislation tends to be reactive. When the market blows up, laws are passed to try and prevent a repetition of whatever it was that just happened. The most recent example was the Sarbanes-Oxley Act in the US, designed to control corporate accounting practices and passed in the aftermath of the Enron and other dégringolades. If there is a derivative-induced meltdown over the next months, similar laws will be passed. I’m not going to pretend to know what they’ll be, but an obvious target would be the off-the-balance-sheet structures which at the moment allow banks to hide huge risks from public disclosure. One of the few victories of the collective polity over the financial industries – though it’s not one much celebrated in the financial press – came in 1991. The House of Lords ruled that Hammersmith and Fulham didn’t have to pay the huge sums it had lost investing in swaps (a kind of derivative) because its participation in the activity had been illegal to start with. That ruling affected 130 councils which had done similar deals, almost always to get around Tory rate-capping, and cost the 75 banks involved an estimated £750 million. The City hated that but the principle established was an important one: these deals are not beyond the law. If our laws are not extended to control the new kinds of super-powerful, super-complex and potentially super-risky investment vehicles, they will one day cause a financial disaster of global-systemic proportions.
Still, let’s look on the bright side: at least City bonuses will be smaller this year.
John Lanchester
LRB 3 January 2008
At the point when we bought our house in 1996, average house prices in the UK, adjusted for inflation, were some way below the levels they’d hit in the late 1980s bubble. Clapham was then still a place people moved to when they had families and wanted larger and cheaper houses, and were willing to move south of the river to get them. When house prices began to go up, this area began to be colonised by bankers and City types. We were the last non-City people to move into the street where we live – the last of the aborigines. These days, as houses become an ever more critical capital asset, there is a constant va-et-vient of renovation, a non-stop turmoil of attics being done, basements being dug out, skips being filled, scaffolding put up and everything knockable being knocked through. In a street two hundred metres long, there is at the moment one skip, three sets of scaffolding, two basement conversions, a loft conversion and two full renovations. Most of this activity is generated by the City people, since we aborigines for the most part tend not to move; we’re all still here. But the bankers move all the time, doing up and selling on houses, usually to move to the Old Rectory in Shaghampton, Wiltshire, with the husband spending three or more nights in town until the inevitable happens. (‘Half of my business is “The Old Rectory, Wiltshire”,’ a cheerful divorce lawyer once told me.)
I’ve nothing against bankers; my father was one. But it isn’t possible to deny that in most of London, City money has a negative impact on the quality of life. It’s partly that the men, in particular, can be so insanely boring. That may reflect the way banking has changed, become more intense, more time-consuming and more overtly greedy. David Kynaston, author of a magisterial four-volume history of the City, completed in 2001, observes at the start of the fourth volume that ‘the modern City is in many ways a cruel, heartless place, and its occupants work such cripplingly long hours that inevitably they lack much of the roundedness of earlier generations.’ From a parochial point of view, the City types’ effect on the texture of life is not heartwarming. The bankers don’t use the local schools or hospitals or shops: at least not until the shops catch up with them, and then when the shops do catch up with them they are selling things at such high prices that no one else can afford them. During the week, the men are functionally invisible: they leave the house around 6.30 and are back at about eight. At the weekends, when you see them with the children, they go to heroic lengths – as Jonathan Coe points out in The Closed Circle – to occupy themselves doing exactly the same things they would be doing if the children weren’t there: reading papers, sending emails, talking on the phone. When the children are small the wives occupy themselves in the supervision of nannies and builders: once the children are in school full-time they go back to work; when the time for secondary education comes, they move to the country, and another set of bankers moves in.
Not all City types are vile, obviously. My friend Tony isn’t vile. We have many interests in common and chat easily about all sorts of things. But I’m sometimes made aware of a significant gap between us. It’s a philosophical and practical gap, and it is to do with money. Tony will complain about the price of things – about parking permits, or the cost of the Playstation 3 he’s promised his son – but I’ve begun to wonder if this is a purely formal acknowledgment of the value of money to other people. Tony’s ‘basic’ is £120,000 a year; in a good year he earns a bonus of £500,000. In a very good year he is paid a million pounds. He is polite about this but the details slip out nonetheless. He bought a second home on Ibiza and I was commiserating with his complaints about the usual things (builders, local regulations) until the cost of the house was mentioned: £1.4 million.
A fundamental economic gap of that type does open up a distance between people, however many other things you have in common. He happened once to mention what he (as a head of department) pays new recruits, straight out of university: ‘45k a year, with a bonus of between ten and twelve grand guaranteed.’ I pointed out that in many cases that would mean these 22-year-olds would be earning more than the heads of department in the universities they’d just graduated from. He shrugged and laughed. ‘It is what it is,’ he said. Also, the bottom-performing 10 per cent of people in every department at his firm are sacked every year. He expressed surprise at my surprise. ‘That’s standard,’ he said. ‘I thought everyone did that.’ The moments when I realise Tony and I occupy very different spaces always turn on money and the assumptions built into our attitudes to it.
In London, as a rule, non-City people don’t love City people, and there isn’t much non-economic interaction between them. The bonuses are a big part of that. The City is, collectively, astonishingly wealthy. It earns 19 per cent of Britain’s GDP. People don’t mind that in itself but they do mind City bonuses. Last year, these amounted to a truly boggling £19 billion, all of it paid at the end of the year. In London, the effect of that money has become almost entirely toxic. I’m not talking here about middle-class envy – the resentment increasingly expressed among the ‘middle-class poor’ about how unfair it is that these bankers get paid so much for contributing so little. That resentment seems to me to be largely hypocritical, a middle-class resentment of one of the few forms of inequality that doesn’t benefit them. But City money is strangling London life. The presence of so many people who don’t have to care what things cost raises the price of everything, and in the area of housing, in particular, is causing London’s demographics to look like the radiation map of a thermonuclear blast. In this analogy only the City types can survive close to the heart of the explosion. At this time of year, when the bonus stories come out, you can understand why. A bar announces that it is offering the most expensive cocktail in the world: £35,000. That buys you a shot of cognac, a half bottle of champagne, a diamond ring and the attentions of two security guards to protect you for the rest of the evening. A deli, at the special request of a customer, creates a £50,000 Christmas hamper. Word gets out, and another customer immediately orders two more. The expense of London is forcing people further and further out of the city, and making life harder and harder for the ones who remain.
There is no mystery about how we got to this point: successive governments have, in policy terms, given the City more or less everything it wants. One of the last big things any government did to piss the City off – truly piss it off – was the windfall tax on profits imposed in 1981 by Mrs Thatcher’s chancellor Geoffrey Howe. (Blair or Brown would never dream of doing anything like that to the City.) But the abolition of exchange controls in 1979 and the increasingly international flow of capital, combined with the abolition of restrictions on trading practices which culminated in the ‘Big Bang’ in 1986, have all led to the City’s increasing dominance of British economic life. This, in turn, makes it all the more striking how little knowledge most people have of what goes on in the City: what it is for, what it does, and how it affects everyday life for everybody else.
This can come as a shock to even the best-informed citizens. James Carville, the Svengali behind Clinton’s election win in 1992, was so amazed by the power of freely moving capital, viewed at close range, he said that if reincarnation were real, he would like to be born again as the international bond markets. But the ordinary elector knows almost nothing about how these markets work and the impact they have. Kynaston observes that under Communism children from primary school upwards were taught the principles and practice of the system, and were thoroughly drilled in how it was supposed to work. There is nothing comparable to that in the capitalist world. The City is, in terms of its basic functioning, a far-off country of which we know little. What there is instead is, in Britain, a largely unthinking willingness for government to adopt City approaches to other aspects of society. Kynaston, discussing ‘City cultural supremacy’, says that ‘in all sorts of ways (short-term performance, shareholder value, league tables) and in all sorts of areas (education, the NHS and the BBC, to name but three), bottom-line City imperatives had been transplanted wholesale into British society.’
This uncritical and uninformed governmental Cityphilia received its biggest shock in decades this autumn, with the near collapse of Britain’s fifth largest mortgage lender, Northern Rock. Britain’s first genuine bank run in more than a hundred years shone a light in many places where the sun doesn’t routinely shine, and one of the first things to be brought into question was the ways banks work. As I’ve already said, my father was a banker, and I grew up hearing about that mythical beast, the bank run. It was often spoken of but rarely seen in the wild. Bankers are said to dread a bank run, but my dad talked about them with a certain black humour. They were always a sign that somebody had fucked up, big-time. They can also be a sign that something in the financial system is fundamentally wrong. The question hanging around in the residue of the Rock’s near implosion is which type of bank run this was – a fuck-up, or a harbinger of meltdown?
A well-run bank is a machine for making money. The basic principle of banking is to pay a low rate of interest to the people who lend money, and charge a higher rate of interest to the people who borrow money. The bank borrows at 3 per cent and lends at 6 per cent and as long as it keeps the two amounts in line, and makes sure that it lends money only to people who will be able to pay it back, it will reliably make money for ever. And this institution, in and of itself, will generate activity in the rest of the economy. The process is explained in Philip Coggan’s excellent primer on the City, The Money Machine (2002). Imagine, for the purpose of keeping things simple, a country with only one bank. A customer goes into the bank and deposits £200. Now the bank has £200 to invest, so it goes out and buys some shares with the money: not the full £200, but the amount minus the percentage which it deems prudent to keep in cash, just in case any depositors come and make a withdrawal. That amount, called the ‘cash ratio’, is set by government: in this example let’s say it’s 20 per cent. So our bank goes out and buys £160 of shares from, say, LRB Ltd. Then LRB goes and deposits its £160 in the bank; the bank now has £360 of deposits, of which it needs to keep only 20 per cent – £72 – in cash. So now it can go out and buy another £128 of shares in LRB, raising its total holding in LRB Ltd to £288. Once again, LRB Ltd goes and deposits the money in the bank, which goes out again and buys more shares, and so on the process goes. The only thing imposing a limit is the need to keep 20 per cent in cash, so the depositing-and-buying cycle ends when the bank has £200 in cash – all the cash there is – and £800 in LRB shares; it also has £1000 of customer deposits, the initial £200 plus all the money from the share transactions. The initial £200 has generated a balance sheet of £1000 in assets and £1000 in liabilities. Magic! In real life, it’s even better: the UK cash ratio is 0.15 per cent, so that initial £200 would generate £133,333 on both sides of the balance sheet.
Now let’s consider something a little more realistic: lots of different banks, with lots of different depositors and investments, many of them interlocking and overlapping. The specifics of who owns what, and who owes what, are almost unimaginably complex. Liquidity – the ability to get hold of cash easily – is crucial to this system, because your bank will often need money at shortish notice, to buy things or repay depositors. You know that if you lend money to another bank you’ll get it back without difficulty and they know the same about lending money to you. In normal circumstances, this isn’t a problem: banks lend money to each other all the time, with complete ease and transparency, and this keeps the entire system afloat. But this depends on confidence; and it is this confidence that dried up for Northern Rock in the summer, when other banks became unwilling to lend it money, and it had to go to the Bank of England for the emergency loan which then triggered a bona fide bank run – which is what happens when the people who own the £133,333 turn up demanding their money, and it turns out that the institution is in current possession only of its legally mandated £200 in cash.
The reason banks became reluctant to lend money to each other was linked to risks arising from new types of financial instrument. Recent years have seen huge amounts of ingenuity applied to the devising of new types of investment vehicle. Most of these are forms of derivative, in which a product derives its value from something else. These are not new, nor is their involvement in financial disasters: it was tulip derivatives that underlay the Dutch crash of 1637. Derivatives have a bad press at the moment – we’ll be coming to that shortly – but it is important to understand their role in the long history of man’s attempt to understand, control and make money from risk. The best version of this story is told in Peter Bernstein’s Against the Gods (1998), a fascinating account of risk, which makes the point that the study of risk is a humanist project, an attempt to abolish the idea of unknowable fate and replace it with the rational, quantifiable study of chance.
The simplest forms of derivative are options and futures. An option gives you the right, but not the obligation, to buy or sell something at a specified future date for a specified price. Example: you spend £500 on an option to buy a Ferrari for £50,000 in a year’s time. When the year is up, the Ferrari is on sale for £60,000, so your option is now worth £10,000, because that’s how much money you can make by exercising the option, buying the car and then selling it for its real price. Conversely, if in a year’s time the Ferrari is on sale for £40,000, exercising your option would leave you out of pocket by £10,000 – so you just let it go, and your only loss is the £500 premium (as it’s called). You could alternatively have bought the right to sell the Ferrari for £50,000 – in which case your preferences would be reversed, and you’d be hoping that the price had dropped. In that event you’d buy the car for £40,000 and immediately sell it for £10,000 more. Futures are the same as options, except that they bring with them the obligation to buy or sell at the specified price: with futures, you are committed to the deal. It follows that futures are much riskier than options.
Options and futures have been very important products in the history of finance, and it is no coincidence that derivatives were first extensively developed in commodities markets, especially the great exchange in Chicago (which started life 110 years ago as the Chicago Butter and Egg Board). A farmer facing an uncertain harvest is very grateful for the opportunity to sell his next season’s produce at a fixed price, guaranteed in advance. For years, derivatives existed as useful tools of this type: they were immensely practical but not in their basic essence too complicated. Their use was widespread, and Bernstein’s account of them has some entertaining byways: who knew that the Confederacy funded its war against the Union with a derivative bond to attract foreign currency?
But the trade in derivatives was hampered by one big thing: no one could work out how to price them. The interacting factors of time, risk, interest rates and price volatility were so complex that they defeated mathematicians until Fischer Black and Myron Scholes published a paper in 1973, one month after the Chicago Board Options Exchange had opened for business. Within months, traders were using equations and vocabulary straight out of Black-Scholes (as it is now universally known) and the worldwide derivatives business took off like a rocket.
In an ideal world, one populated by vegetarians and Esperanto speakers, derivatives would be used for one thing only: reducing levels of risk. Because they are bought ‘on margin’ – i.e. not for the full cost of the underlying asset, but for the advance premium, as in the hypothetical Ferrari example above – they offer a cheap and flexible form of insurance against things going wrong. Imagine that you are convinced that the stock market is about to go up by 50 per cent in the next year. You know it in your waters: so much so that you borrow £100,000 and use it to buy shares. If the market goes up you’ll be pleased with yourself, but if you’re wrong, and the market plunges, you’ll be badly out of pocket – unless you take out some insurance. So you buy a £10,000 option to sell the shares. That money is wasted if your shares go up – but you won’t care much because your main position is in serious profit. But if the shares lose half their value, you have some insurance: you can cash in the option to sell the shares and cancel out most of your losses. This is called ‘hedging’: you have used an option to hedge your main risk.
Alas, we don’t live in that kinder, gentler world. In reality, the power of derivatives has a way of proving irresistible to those people who aren’t just sure that the market is going up, but are beyond sure, are super-sure, are possessed by absolute knowledge. In that event, it is very tempting indeed to buy an option that increases your level of risk, in the certainty that this will increase your level of reward. In the above example, instead of hedging the position with an option to sell, you could magnify it with options to buy more shares at the same price, which will be worth a lot if you’re right – sorry, when you’re right. When you’re right and the market goes up by half, your £10,000 option will be worth £50,000 (that’s the £50,000 by which the shares have gone up). In fact, instead of buying £100,000 of shares and a £10,000 option to buy, why not instead buy £100,000 worth of options? This is called leverage: you have leveraged your £100,000 to buy £1,000,000 worth of exposure to the market. That way when you get your price rise, you have just made £500,000, and all with borrowed money. In fact, since you’re not just confident but certain, why not skip the option and instead buy some futures, which are cheaper (because riskier) – let’s say half the price. These futures, at £5000 each, oblige you to buy 20 lots of the shares for £100,000 each in a year’s time. Hooray! You’re rich! Unless the market, instead of doubling, halves, and you are saddled with an obligation to buy £2 million worth of shares which are now worth only £1 million. You’ve just borrowed £100,000 and through the power of modern financial instruments used it to lose £1 million. Oops.
It might seem unlikely that anyone would do anything that stupid, but in practice it happens all the time. The list of individual traders who have lost more than a billion dollars at a time betting on derivatives is not short: Robert Citron of Orange County, Toshihide Iguchi at Daiwa, Yasuo Hamanaka at Sumitomo and Nick Leeson at Barings, just to take examples from the early 1990s. In Leeson’s case in 1995, it was a huge unauthorised position in futures on the Nikkei 225, the main Japanese stock exchange. Leeson had been doubling and redoubling his bets in the belief/hope that the index would rise, and hiding the resulting open position – a gigantic open-ended bet – in a secret account. (Incidentally, Leeson’s big bet was on the Nikkei holding its level above 18,000. At the time of writing, 121/2 years later, the index sits at 15,454 – proof, if it were needed, that when prices go down they can stay that way for a long time.) The loss eventually amounted to £827 million, and destroyed Barings, Britain’s oldest merchant bank. The year before it went broke, the chairman of the company, Peter Baring, urbanely told the governor of the Bank of England that it is ‘not actually terribly difficult to make money in the securities business’.
The power of derivatives is one of the main things about them: their ability to hedge risk, but also, and much more alarmingly, to magnify it. The second main thing about them is their complexity. We have come a long, long way from a single quote for next season’s wheat crop. The contemporary derivative is likely to involve a mix of options and futures and currencies and debt, structured and priced in ways that are the closest real-life thing to rocket science. Maths PhDs are all over the place in this business. Some of the derivatives are actively designed to conceal the real nature of the assets involved – bearing in mind that the assets are themselves often debts, repackaged and sold on in ‘black box’ structures designed to hide the entities within. The products thus created are way over the heads of civilians and sometimes, it seems, over the heads of most of the people who buy and sell them. ‘We invented this stuff, so we know how it works,’ Tony told me (his bank was one of the first players in the derivatives market). ‘But I get the feeling that a lot of the banks are doing it just because other people are doing it – they don’t really know what they’re doing.’
The complexity is such that even the people who know what they’re doing don’t always know what they’re doing. Derivatives are extensively used in arbitrage. That’s the name of investments which effectively bet both ways on the market, exploiting small differences in price to make what should be risk-free profits. (It’s what Leeson was supposed to be doing, exploiting tiny differences in the price of Nikkei 225 futures between the Osaka Securities Exchange, where trading was electronic, and the Singapore International Monetary Exchange, where it wasn’t. The gap in price would last only for a couple of seconds, and in that gap Barings would buy low and sell high – a guaranteed, risk-free profit.) The complexity of the mathematics involved in derivatives can’t be exaggerated. This was the reason John Meriwether, a famous bond trader, employed Myron Scholes – of the Scholes-Black equation – and the man with whom Scholes shared the 1997 Nobel Prize in Economics, Robert Merton, to be directors and cofounders of his new hedge fund Long-Term Capital Management. (A word on the term ‘hedge fund’: it is misleading. Hedge funds are pools of private capital, operating without the legal restrictions that affect other forms of collective investment. Many of them make big bets on the markets, using super-sophisticated rocket-sciencey investment techniques.) The idea was to use these big brains to create a highly leveraged, arbitraged, no-risk investment portfolio designed to profit whatever happened, whether the market went up, down, sideways or popped out for a cheese sandwich. LTCM quadrupled in value in its first four years, then imploded in the chaos that followed Russia’s default on its foreign-debt obligations in 1998. The fund had equity – that’s to say, actual money you could put your hands on – of $4.72 billion, which sounds pretty healthy, except that it was exposed, thanks to the miracles of borrowing, leverage and derivatives, to $1.25 trillion of risk. So if it went broke, LTCM would leave a $1.25 trillion hole in the global financial system. The big brains had made a classic mistake: they treated a very unlikely thing (the default and its consequences) as if it were impossible. As Keynes once observed (he who made himself and his college rich by spending half an hour a day in bed playing the stock market), there is nothing so disastrous as a rational policy in an irrational world.
Derivatives, in their modern form, are the most powerful and the most complicated financial instruments ever devised. The third crucial thing about them is that they are everywhere. In 2003 the total size of the world economy was $49,000,000,000,000. The total size of the derivatives being traded was $85,000,000,000,000. In other words, derivatives today are worth far, far more than the total economic activity of the planet. More than $1,000,000,000,000 of derivatives are bought and sold every day. Every single thing that can be traded through derivatives, is. In the words of Warren Buffett, the greatest living stock market investor,
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.
Many companies which look as if their business is to do other things are in reality in the derivatives business – Enron being the best-known example. Buffett is a derivative-phobe, not least because he prefers to know what’s going on in the companies he invests in, and derivatives make that effectively impossible:
No matter how financially sophisticated you are, you can’t possibly learn from reading the disclosure documents of a derivatives-intensive company what risks lurk in its positions. Indeed, the more you know about derivatives, the less you will feel you can learn from the disclosures normally proffered you. In Darwin’s words, ‘Ignorance more frequently begets confidence than does knowledge.’
The Northern Rock crisis saw all these factors being brought together. The Rock is a bank with roots in the North-East. It had grown to be the fifth biggest mortgage lender in the UK by offering an attractive package of loans, many of them via accounts that are managed over the internet. Its rates are competitive and it used to have a good reputation in its dealings with customers, unlike the four main high street banks which are, as James Buchan once wrote, ‘mere burdens on the earth’. Not one saver in ten thousand would have been aware that the reason the Rock’s interest rates were so competitive was that it dealt on the global markets to fund itself. Only 27 per cent of its funds were ‘retail’, i.e. money deposited by savers: fully 70 per cent of the Rock’s funding was ‘wholesale’, i.e. came from international markets. So the Rock is lending long-term, in 25-year mortgages, but borrowing short-term to fund itself. That is a well-known recipe for trouble. In addition, the Rock uses offshore trusts to package its mortgages together into ‘asset-based securities’ – bundles of debt that could be sold on to other investment institutions. One thing worth bearing in mind is that in terms of its underlying assets, the Rock seems fine; there is no reason for thinking that its mortgage-payers are failing to cough up.
The Rock’s problem was that this business model depends on liquidity. Because it gets 70 per cent funding on the wholesale markets, if those markets aren’t working, it is instantly in deep shit. Over the summer, those markets seized up, and banks became reluctant to lend money to each other – and especially reluctant to lend money to anyone with an exposure to high-yield mortgages. Remember the interlocking nature of bank deposits, and how the system relies on liquidity? Over the summer, that liquidity dried up. The Rock had to turn to the Bank of England, ‘the lender of last resort’, to borrow the money to stay in business; when news got out, savers wanted their money back, but the bank’s website crashed, so they began turning up in person to withdraw their deposits, and lo and behold we had a genuine bank run. On 14 September, so many people turned up in person to withdraw money that the bank ended up paying out 5 per cent of its total assets, a cool £1 billion in cash.
The guilty party was the usual baroque financial instrument: in this case, a Collateralised Debt Obligation, or CDO. During boom times, banks lend money more and more freely, and begin to look for growth in places where they hadn’t before. In this case, the growth area for American financial institutions was in lending money to poor people whom they wouldn’t previously touch. The banks didn’t exactly go skipping around trailer parks handing out leaflets offering Buy One Get One Free mortgages – except that they did, sort of. The great thing about these poor people was that because their credit history was poor to non-existent they could be charged extravagantly high rates of interest.
There was a huge demand for these new mortgages, which in many cases allowed people to own their homes for the first time. By 2005, one in five American mortgages was of this new kind. The mortgages were then bundled together and turned into CDOs. These were packages of debt: some of it beautifully high-yielding, high-interest ‘sub-prime’ debt. (‘Prime’ debt refers to the people you’re sure will pay it back; with ‘sub-prime’ debt, you’re less sure, so you charge the borrower more for the privilege of borrowing.) The packages were structured to pay out different rates of interest based on different levels of risk; some of the debt rated AAA, the safest available, and some of it riskier and more lucrative. These were then sold as bonds on the international markets – this being a huge growth area in recent years. The market in mortgage-backed bonds currently stands at $6.8 trillion. It is the biggest component of the $27 trillion US bond market, bigger even than US Treasury bonds: $1.3 trillion of that is ‘sub-prime’ lending.
Then trouble struck. The problem was that interest rates in America went up, just as many of the sub-prime borrowers were coming off their first two years of fixed-rate mortgages, so their rates zoomed up, and many of them couldn’t afford to pay. The result has been a wave of home repossessions. A BBC report made a study of Cleveland, Ohio, where the banks lent heavily in poor black areas. It found that in Cleveland, one home in ten has now been repossessed, and the biggest landlord in the city is Deutsche Bank Trust.
The banking system is facing a multiple whammy. The unpaid mortgages are one thing; the losses on those mortgage-backed bonds are another. And as for the effect on the banks’ share prices . . . So far, the announced losses amount to $60 billion, and the heads of two of the biggest American banks have lost their jobs, Chuck Prince at Citigroup (loss: $5.9 billion announced with $8-11 billion more to come) and Stan O’Neal at Merrill Lynch (loss: $8 billion). But the really big worry concerns a further category of derivatives based on the sub-prime mortgages. Many banks are thought to have huge positions in these, hidden in what are known as ‘structured investment vehicles’. These don’t appear on the banks’ books, but their liabilities are real, and if one or other of them blows up à la LTCM, it could leave a gigantic hole not just in the individual bank’s accounts but in the whole global financial system.
That was the reason banks suddenly became reluctant to lend money to each other, and liquidity dried up, and Northern Rock almost collapsed. The problem was that the sub-prime derivatives were passed around and sold from bank to bank in an entirely untransparent way, in a gigantic game of pass-the-parcel. An unfortunate family is unable to meet its mortgage payments in Dumpsville, Arizona; that default is passed through the mortgage lender via the CDO to the international bond market, where it is sold and resold and ends – well, that’s the whole point: no one knows where it ends. No one knows who is holding the parcel. The complexities are such that even when the parcel is unwrapped and opened, people still don’t know the full details of what’s in it. Merrill Lynch announced a CDO loss of $5 billion on 5 October and then added another $3 billion on 24 October; the supposedly conservative Swiss bank UBS announced a loss of $3.4 billion in October and then another of $10 billion on 10 December. No one knows who is at risk from the imploding sub-prime mortgages, because no one knows who owns that risk. As a result, the banks became reluctant to lend money to each other, because no one wants to lend money to someone who might not be able to pay it back, and because all banks are trying to make their balance sheets look as plumped-up and cashed-up as possible.
Since a ‘credit crunch’ of this type is by no means unknown – it is in fact a pretty regular feature of financial markets – we may well wonder why Northern Rock had a business model that couldn’t survive one. It seems incredibly stupid. It may be that the Bank of England privately thought so too, and wouldn’t have minded allowing the Rock to go under. If the Rock’s shareholders had invested in a business with a fundamental flaw and lost all their money as a result, tough shit: they should have read the fine print. But if the Bank wouldn’t have minded punishing the Rock, it couldn’t take the same attitude to the people who had entrusted it with their savings. Just as the Bank of England had to rescue Johnson Matthey Bank in 1984, because it was one of the five UK banks authorised to trade in gold, it had to rescue the Rock for the sake not of its investors, but of its savers. In this respect, the Bank was asleep at the wheel. The UK system of deposit protection gave a full guarantee only for the first £2000 of savings, and 90 per cent of the next £33,000. Actually extracting that money was famously laborious and would take months of form-filling. After the crisis, when it was too late, the Bank promised to extend its deposit protection to £100,000 and to speed up procedures for repayment. If those measures had been in place in September, the Rock could have been allowed to go broke and the bankers who created this and other similarly over-ingenious structures would have been put on notice. Instead, the Bank of England bailed out the Rock to the tune, so far, of £25 billion. That’s the biggest sum any government anywhere in the world has ever given to a private company. It may turn out the government has no choice but to announce that it has (accidentally and inadvertently) nationalised the Rock.
So the story of Northern Rock was a fuck-up. The trouble is that it may turn out to be a harbinger of meltdown too. As Clive Briault of the Financial Services Authority pointed out on 4 December, we in the UK have had 67 consecutive quarters of economic growth. Inflation is low and so is unemployment. (Actually, the unemployment figures are almost laughably rigged – but that’s another subject. Suffice it to say that pretty much everybody who wants work can find it.) Everything that goes up must come down, and it was inevitable and indeed necessary for things to cool off a bit. The danger is that they might do much more than that. Our economic good times have been funded to a large extent by personal debt, which has in turn been funded by rising house prices. This has made people feel very confident about their finances, and often led them to treat their homes, via remortgaging, as giant cash machines. But the fright caused by the sub-prime disaster – a disaster playing out in slow motion, with more bad news certain to come – is going to cause a tightening up of credit. Banks are going to become increasingly cautious about lending money. They’ll lend it to fewer people and charge more money for the privilege. People think that mortgages are priced at a rate linked to the Bank of England’s interest rates, but that’s not directly the case: they are priced according to the rate at which banks can borrow money from each other. That rate is under pressure from the sub-prime fiasco. UK personal debt comes to a cool £1,400,000,000,000, and all of it is about to be costlier to pay off. Next year, 1.4 million fixed-rate mortgages are due to come onto the new floating rates, which will be much more expensive. It’s the same thing that triggered the wave of repossessions across the US. Add to that the fact that the British market now has £108 billion worth of buy-to-let mortgages, which are particularly exposed to a dip in house prices combined with a rise in interest rates, and you would be forgiven for thinking that some sort of crash is imminent. The central banks obviously think the risk is very real, because on 12 December, the US, EU, UK, Canadian and Swiss central banks announced that they were joining together to provide £50 billion worth of liquidity to the financial markets. Because banks are reluctant to lend to each other, the central banks will make the funds available instead. This might help, or it might be a sign of anxiety so big that it accidentally makes things worse – but it was worth a shot.
My friend Tony, however, is sanguine. ‘Sorting out who’s in the shit is going to be a nightmare, but when it all shakes out, all it’ll mean is that credit is a little bit more expensive. That’s a good thing. It had got crazy. It was cheaper for companies to borrow money from other companies than it was for governments. That’s nuts. These things are cyclical, it had all just gone too far and we needed a correction.’
‘So we’ll have to stop running around spending money like drunken sailors,’ I said.
‘Well, drunk sailors tend to be spending their own money,’ Tony said. ‘By contemporary standards they’re quite prudent.’
This is a good moment for a reappraisal of the City’s relationship with the rest of Britain. We are about to have a slowdown, or a recession, or a meltdown, that is in some part triggered by high-risk activities on the part of financial institutions. It comes down to a question of risk, which in turn is a question of just who is bearing the risks – and this, it seems to me, is where the current financial system is badly out of kilter.
Before John Meriwether became the mastermind behind Long-Term Capital Management, he was one of the star characters in Michael Lewis’s highly entertaining Liar’s Poker, an account of the excesses of Wall Street bond traders in the 1980s. Meriwether is the lead character in the book’s famous first scene, in which John Gutfreund, the chairman of Salomon Brothers, challenges him, then the chief bond trader, to a game of Liar’s Poker: ‘One hand, one million dollars, no tears.’ (Liar’s Poker is a game of bluffing in which you bet on the serial number of dollar bills.) That wasn’t a colossal sum to Gutfreund, though it was to Meriwether – which made what he did next all the more audacious.
‘No, John,’ he told his boss, ‘if we’re going to play for those kind of numbers, I’d rather play for real money. Ten million dollars. No tears.’
That amount would have bankrupted Meriwether, but it would have put a horrible crimp even in Gutfreund’s style; he’d have had to sell things to raise it, and explain to his wife why they wouldn’t be having a holiday this year, and all that. So the chairman of Salomon slunk away with his tail between his legs and Meriwether’s reputation was permanently established as – to use the elegant period phrase – a ‘big swinging dick’.
Societies don’t have to love people like Meriwether, just as we don’t have to love the kind of people who become soldiers or surgeons, but we do need them – gamblers, risk-takers. The longest and best established principle of investment is that rewards are linked to risks: you can’t earn more than other people without risking more than they do. The early capitalists who funded sea voyages, for instance, did so on the clear understanding that if the ship came back, they would be rich, and if it didn’t come back, they would be broke. Playing Liar’s Poker, Meriwether was risking his own money. The trouble with derivatives, however, is that they magnify the risk and spread it through the financial system to such an extent that now, when men like Meriwether, or indeed like the management of Northern Rock, make their colossal bets, we bear the risk as well, unwillingly and unwittingly. A trillion-dollar market catastrophe would have consequences for everybody. In the words of Warren Buffett,
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
He said that five years ago, and there is no sign that effective action has been taken or even seriously contemplated. Banks are exercising greater notional care over their exposure to risk – it’s not as if anyone actively wants to lose money. But the yearning for increased rewards is as strong as it ever was, and higher rewards mean higher risks. Most City commentators would tell us that this is yet another area in which the cure for a problem caused by the markets is more reliance on market forces. That faith seems to me to verge on the mystical.
Bank legislation tends to be reactive. When the market blows up, laws are passed to try and prevent a repetition of whatever it was that just happened. The most recent example was the Sarbanes-Oxley Act in the US, designed to control corporate accounting practices and passed in the aftermath of the Enron and other dégringolades. If there is a derivative-induced meltdown over the next months, similar laws will be passed. I’m not going to pretend to know what they’ll be, but an obvious target would be the off-the-balance-sheet structures which at the moment allow banks to hide huge risks from public disclosure. One of the few victories of the collective polity over the financial industries – though it’s not one much celebrated in the financial press – came in 1991. The House of Lords ruled that Hammersmith and Fulham didn’t have to pay the huge sums it had lost investing in swaps (a kind of derivative) because its participation in the activity had been illegal to start with. That ruling affected 130 councils which had done similar deals, almost always to get around Tory rate-capping, and cost the 75 banks involved an estimated £750 million. The City hated that but the principle established was an important one: these deals are not beyond the law. If our laws are not extended to control the new kinds of super-powerful, super-complex and potentially super-risky investment vehicles, they will one day cause a financial disaster of global-systemic proportions.
Still, let’s look on the bright side: at least City bonuses will be smaller this year.
Wednesday, January 9, 2008
The Dangerous Wealth of the Ivy League
Higher education is increasingly a tale of two worlds, with elite schools getting richer and buying up all the talent
Business Week, November 29, 2007
It's only fitting that Whitman College, Princeton's new student residence, is named for eBay (EBAY) CEO Meg Whitman, because it's a billionaire's mansion in the form of a dorm. After Whitman (Class of '77) pledged $30 million, administrators tore up their budget and gave architect Demetri Porphyrios virtual carte blanche. Each student room has triple-glazed mahogany casement windows made of leaded glass. The dining hall boasts a 35-foot ceiling gabled in oak and a "state of the art servery." By the time the 10-building complex in the Collegiate Gothic style opened in August, it had cost Princeton $136 million, or $272,000 for each of the 500 undergraduates who will live there.
Whitman College's extravagance epitomizes the fabulous prosperity of America's top tier of private universities. Princeton and its "Ivy Plus" peers (the seven other members of the Ivy League, plus Stanford University and Massachusetts Institute of Technology) have long flourished as elite institutions, both socially and academically. Increasingly, though, their predominance is defined by the great magnitude of their wealth relative to their modest size and to the rest of the higher-ed universe. The gilding of the Ivies offers a striking manifestation of the contemporary American tendency of the rich to get much richer.
Fancifying campus living isn't the half of it. The Ivy Plus schools also are investing huge sums to enlarge their central role in research. Harvard, Columbia, and the University of Pennsylvania are developing whole new science-centric campuses, and Yale just acquired one ready-made, buying a 30-building complex from pharmaceutical giant Bayer (BAY). The schools are adding more top-notch faculty members and shrinking class sizes. And they are increasing financial aid outlays for lower-income students who otherwise couldn't afford to attend.
The question of whether all this spending is a good thing defies easy answers. Gold-plating new dorms raises issues of taste and donor ego. More than before, impressionable students and ambitious parents have come to view college as a form of conspicuous consumption. But there's no evidence that the tilt toward super-luxury on some campuses has hurt the quality of Ivy Plus education. Smaller classes draw universal applause. Graduation rates remain impressive, and products of the Ivy Plus schools continue to ascend to leadership positions in business, science, the arts, and politics.
However, the increasingly plush Ivy Plus model casts into sharp relief the travails of America's public institutions of higher learning, which educate 75% of the country's college students. While the Ivies, which account for less than 1% of the total, lift their spending into the stratosphere, many public colleges and universities are struggling to cope with rising enrollments in an era when most states are devoting a dwindling share of their budgets to higher ed. "Policymakers seem to have concluded that flat funding is all that public higher education can expect from the state," says Ronald G. Ehrenberg, an economist who directs Cornell University's Higher Education Research Institute.
STEALING STARS
The Ivies cannot fairly be blamed for public education's financial predicament, but they certainly are exploiting it. Even the most prestigious of public universities are increasingly hard-pressed to repulse richly financed Ivy Plus raiding sorties seeking to steal distinguished faculty members and their research grants. Public schools are being drained for the benefit of the ultra-elite, says Robert J. Birgeneau, chancellor of the University of California at Berkeley. "The further you project into the future, the more frightening it becomes."
It's unlikely that more money has ever been lavished on the education of so few. Even as Ivy Plus budgets have spiraled upward, the schools' enrollments have barely budged. From the 1997-98 academic year through 2006-07, graduate enrollment at the 10 institutions inched up by 10%, to 55,708, while the number of undergraduates actually fell by 1.4%, to 68,492.
Meanwhile, the wealth gap between the Ivies and everyone else has never been wider. The $5.7 billion in investment gains generated by Harvard's endowment for the year that ended June 30 exceeded the total endowment assets of all but six U.S. universities, five of which were Ivy Plus: Yale, Stanford, Princeton, MIT, and Columbia. Ivy dominance extends to fund-raising. A mere 10 schools accounted for half the growth in donations to all U.S. colleges and universities last year. All of the top five on the list were Ivies, led by Stanford, which set a record for higher education in 2006, collecting $911 million in gifts.
During 2006-07, the Ivy "Big Three"—Harvard, Yale, and Princeton—collectively spent $6.5 billion on operations, up over 100% from a decade ago. This was more than double the 41% average budget increase for all U.S. colleges and universities over this period and quadruple the 26% rise in the consumer price index. The Big Three sank a further $1.2 billion into new construction and other capital spending last year. "Yale is wealthier now, so we can add resources in almost every dimension," says its president, Richard C. Levin.
The benefits of the Ivies' surge in prosperity range all across campus, and in some cases seem less than central to a liberal arts education. Stanford spent $4 million to restore the Red Barn, a Victorian-era structure that's part of the university's equestrian center and now provides a place for undergraduates to house their own horses at a cost of $500 a month. Seven employees groom and feed the steeds and clean their stalls.
It's hard to imagine now, but for most of the Ivy League's long history many students lived austerely, as befitted schools with roots sunk deep in New England Puritanism. This began to change noticeably in the 1990s as schools used growing endowment incomes to modernize classrooms and dorms and to build lavish new student quarters. One of the last remnants of Ivy asceticism vanished last year when Yale gave in to student demands and began supplying dormitory bathrooms with hand soap, at a cost of $100,000 a year. "People used to look at every penny," says John Meeske, Yale's longtime dean of administrative affairs. "The mind-set is different now."
Beyond the over-the-top comforts of Whitman College, Princeton bestows ever more comprehensive counseling, health care, and other services on its students. Starting this year, all PhD students who give birth will receive their full stipend during a three-month suspension of academic work. Princeton also has begun covering the living expenses of foreign undergraduates who remain on campus during breaks.
The Ivies have steadily raised the list price they charge their traditional clientele: the wealthy and the well-born. Tuition, room and board, and fees now run an average of $45,000 a year, which, the schools are quick to point out, covers only one-half to two-thirds of operating costs. But even at those prices, demand, in the form of undergraduate applications, continues to soar. On average, the Ivies rejected about 90% of applicants for the Class of 2011.
Extraordinary wealth has allowed the Ivy Plus schools to mitigate their extreme exclusivity by offering bigger discounts to more students of modest means—a move that few would object to. Princeton has doubled its budget for grants, loans, and other aid since 2001-02, to $82 million, as the percentage of undergrads receiving financial support has jumped from 44% to 53%. The average award is $32,200, against total charges of $44,950.
SALARY GAP
The Ivies' biggest expense category by far is labor. At Harvard, compensation and benefits accounted for 49% of its $3.2 billion in operating expenses in 2006-07. Although salary gains have consistently outpaced inflation, it is the addition of new teaching positions that is chiefly responsible for driving up the cost of instruction. Harvard, the largest of the Ivies, employs 2,164 faculty members, 55% more than in 1997-98. All of the Ivies increasingly are emphasizing small-group learning, independent study, and hands-on experience. "It's a much more personal connection between teacher and student, and a lot less delivering education in large lecture halls with armies of teaching assistants," says Carol L. Folt, a Dartmouth biology professor who doubles as its dean of faculty.
The Ivies' heavy spending to enlarge and upgrade their faculties has contributed to an ever-widening salary gap between private and public universities. The $106,496 average salary earned by full professors at PhD-granting public universities in 2006-07 amounted to just 78% of what their counterparts earned at private universities, according to the American Association of University Professors. This figure was 91% in 1980-81.
The Ivies' superior spending power puts even the finest public universities at a disadvantage in the competition for faculty. One of the many academic areas in which Yale has brought its financial muscle to bear is physics, which until recently was chaired by Ramamurti Shankar. "Yale told us: Let's go after who you want. We will make it happen,'" says Shankar, who is particularly proud of having bested several other top private schools to lure the quantum mechanics expert Steven M. Girvin away from Indiana University, a Big Ten public stalwart. "There was a huge war," Shankar says. "Everybody wanted him." Shankar declines to disclose the price he paid for Girvin in 2002, but says that the going annual rate today for theoreticians of his caliber is $400,000 to $600,000, which includes salary and research support. This is for an assistant professor, the level at which Yale does most of its hiring. The price tag for top experimentalists, who have far more extensive laboratory needs, is $1.5 million to $2 million, according to Shankar, who remains on the Yale faculty.
To house their enlarged faculties, the Ivies have turned their campuses into continuous construction zones. Each now boasts a new science facility that is its most expensive structure ever. At Stanford, the distinction belongs to the $140 million "Bio-X" building. Designed by the famed British architect Norman Foster, the glass-walled center provides offices and labs for 30 faculty members whose research combines cutting-edge subspecialties in biology and medicine. Over the next few years, says Stanford President John L. Hennessy, the school plans to invest an additional $600 million to put up five more buildings at an astronomical cost of $800 per square foot on average. Under President Amy Gutmann, Penn is launching its expansion onto 24 acres adjoining its Philadelphia campus by building three high-tech medical research facilities at a total cost of $682 million. Harvard is beginning work on a $1 billion complex that includes a new stem cell institute, the first stage of a planned 200-acre adjunct campus in Allston, Mass.
THE RESEARCH EDGE
Ivy administrators argue that gathering the best researchers in resource-rich havens has a synergistic and broadly beneficial effect. Scientists are more likely to do their best work, expanding knowledge and improving lives, when attached to academia's deepest pockets, or so holds the rationale for Ivy aggrandizement. The research productivity of elite private universities is roughly twice that of their public counterparts, according to a recent study of America's 102 top research universities by economists James D. Adams and J. Roger Clemmons. The study measured volume of academic papers and citations during 1981-99. "You are going to have an edge in research if you have great students, but not too many students; freedom from bureaucratic and political meddling; and generous alums who are more interested in academics than the football program," says Adams, acting head of economics at Rensselaer Polytechnic Institute, a private college in Troy, N.Y.
But even if the Ivies succeed in making one plus one equal three, will the benefits to society outweigh the damage to the public universities they are stripping of star professors, who tend to take their outside research money with them when they go? There is not likely to be enough talent or funding to go around as the Ivies pursue their ambitious goals. "One thing we all must worry about—I certainly do—is the federal support for scientific research. And are we all going to be chasing increasingly scarce dollars?" says Drew Gilpin Faust, Harvard's new president.
Not that Faust seems worried about Harvard or other top-tier research schools. "They're going to be—we hope, we trust, we assume—the survivors in this race," she says. As for the many lesser universities likely to lose market share, she adds, they would be wise "to really emphasize social science or humanities and have science endeavors that are not as ambitious" as those of Harvard and its peers.
Administrators at many public research universities are not willing to accept Faust's invitation to surrender. "We have no choice but to recognize the realities of the marketplace we work in," says Patrick V. Farrell, provost and vice-chancellor for academic affairs at the University of Wisconsin at Madison. "But we intend to remain at least as good, if not better, a research-intensive institution as we have been in the past."
These are brave words, especially given that the state of Wisconsin ranks among the least generous funders of public higher education. Over the past decade, Wisconsin's state tax appropriations have risen by a total of 21.7%, or about half the increase in the Higher Education Price Index, compiled by the nonprofit Commonfund Institute. This puts it 41st among all states, according to the Center for the Study of Education Policy at Illinois State University. Other conspicuous laggards include Colorado, Iowa, Michigan, and Ohio.
Today, twice as many Wisconsin-Madison professors are leaving to work elsewhere as was the case five years ago. Huge piles of cash aren't always the issue; sometimes it's the bureaucratic or political constraints more common on public campuses. Among the faculty that Farrell particularly regretted losing was Robert W. Carpick, a fast-rising associate professor specializing in nanotribology (the study of friction at the atomic level) who defected to the University of Pennsylvania a year ago. Carpick, who took much of his $550,000 in outside research grants with him to Penn, accepted a salary only 10% higher than the $90,000 he was making. The main reason he left Wisconsin is that it is prohibited by state law from paying domestic partner benefits, Carpick says. "I also was concerned about the effects of dwindling state support on the public university model."
The spending explosion within the Ivy Plus ranks strengthens those already-potent institutions and makes campus life cushier for many of their students. Will it lead to scientific breakthroughs that otherwise wouldn't have been possible? Or will it mainly serve to accelerate the deterioration of many other schools that have a vital role to play in training the next generation to compete more successfully in math and the sciences? The benefits of more generous undergraduate financial aid are obvious. The answers to these questions, much less so.
For better or worse, the infusion of riches at the Ivy Plus schools has dramatically extended their lead over everyone else, especially the public colleges and universities that collectively serve the vast majority of American students. This dominance—and the inequities that it fosters—are likely only to grow.
Business Week, November 29, 2007
It's only fitting that Whitman College, Princeton's new student residence, is named for eBay (EBAY) CEO Meg Whitman, because it's a billionaire's mansion in the form of a dorm. After Whitman (Class of '77) pledged $30 million, administrators tore up their budget and gave architect Demetri Porphyrios virtual carte blanche. Each student room has triple-glazed mahogany casement windows made of leaded glass. The dining hall boasts a 35-foot ceiling gabled in oak and a "state of the art servery." By the time the 10-building complex in the Collegiate Gothic style opened in August, it had cost Princeton $136 million, or $272,000 for each of the 500 undergraduates who will live there.
Whitman College's extravagance epitomizes the fabulous prosperity of America's top tier of private universities. Princeton and its "Ivy Plus" peers (the seven other members of the Ivy League, plus Stanford University and Massachusetts Institute of Technology) have long flourished as elite institutions, both socially and academically. Increasingly, though, their predominance is defined by the great magnitude of their wealth relative to their modest size and to the rest of the higher-ed universe. The gilding of the Ivies offers a striking manifestation of the contemporary American tendency of the rich to get much richer.
Fancifying campus living isn't the half of it. The Ivy Plus schools also are investing huge sums to enlarge their central role in research. Harvard, Columbia, and the University of Pennsylvania are developing whole new science-centric campuses, and Yale just acquired one ready-made, buying a 30-building complex from pharmaceutical giant Bayer (BAY). The schools are adding more top-notch faculty members and shrinking class sizes. And they are increasing financial aid outlays for lower-income students who otherwise couldn't afford to attend.
The question of whether all this spending is a good thing defies easy answers. Gold-plating new dorms raises issues of taste and donor ego. More than before, impressionable students and ambitious parents have come to view college as a form of conspicuous consumption. But there's no evidence that the tilt toward super-luxury on some campuses has hurt the quality of Ivy Plus education. Smaller classes draw universal applause. Graduation rates remain impressive, and products of the Ivy Plus schools continue to ascend to leadership positions in business, science, the arts, and politics.
However, the increasingly plush Ivy Plus model casts into sharp relief the travails of America's public institutions of higher learning, which educate 75% of the country's college students. While the Ivies, which account for less than 1% of the total, lift their spending into the stratosphere, many public colleges and universities are struggling to cope with rising enrollments in an era when most states are devoting a dwindling share of their budgets to higher ed. "Policymakers seem to have concluded that flat funding is all that public higher education can expect from the state," says Ronald G. Ehrenberg, an economist who directs Cornell University's Higher Education Research Institute.
STEALING STARS
The Ivies cannot fairly be blamed for public education's financial predicament, but they certainly are exploiting it. Even the most prestigious of public universities are increasingly hard-pressed to repulse richly financed Ivy Plus raiding sorties seeking to steal distinguished faculty members and their research grants. Public schools are being drained for the benefit of the ultra-elite, says Robert J. Birgeneau, chancellor of the University of California at Berkeley. "The further you project into the future, the more frightening it becomes."
It's unlikely that more money has ever been lavished on the education of so few. Even as Ivy Plus budgets have spiraled upward, the schools' enrollments have barely budged. From the 1997-98 academic year through 2006-07, graduate enrollment at the 10 institutions inched up by 10%, to 55,708, while the number of undergraduates actually fell by 1.4%, to 68,492.
Meanwhile, the wealth gap between the Ivies and everyone else has never been wider. The $5.7 billion in investment gains generated by Harvard's endowment for the year that ended June 30 exceeded the total endowment assets of all but six U.S. universities, five of which were Ivy Plus: Yale, Stanford, Princeton, MIT, and Columbia. Ivy dominance extends to fund-raising. A mere 10 schools accounted for half the growth in donations to all U.S. colleges and universities last year. All of the top five on the list were Ivies, led by Stanford, which set a record for higher education in 2006, collecting $911 million in gifts.
During 2006-07, the Ivy "Big Three"—Harvard, Yale, and Princeton—collectively spent $6.5 billion on operations, up over 100% from a decade ago. This was more than double the 41% average budget increase for all U.S. colleges and universities over this period and quadruple the 26% rise in the consumer price index. The Big Three sank a further $1.2 billion into new construction and other capital spending last year. "Yale is wealthier now, so we can add resources in almost every dimension," says its president, Richard C. Levin.
The benefits of the Ivies' surge in prosperity range all across campus, and in some cases seem less than central to a liberal arts education. Stanford spent $4 million to restore the Red Barn, a Victorian-era structure that's part of the university's equestrian center and now provides a place for undergraduates to house their own horses at a cost of $500 a month. Seven employees groom and feed the steeds and clean their stalls.
It's hard to imagine now, but for most of the Ivy League's long history many students lived austerely, as befitted schools with roots sunk deep in New England Puritanism. This began to change noticeably in the 1990s as schools used growing endowment incomes to modernize classrooms and dorms and to build lavish new student quarters. One of the last remnants of Ivy asceticism vanished last year when Yale gave in to student demands and began supplying dormitory bathrooms with hand soap, at a cost of $100,000 a year. "People used to look at every penny," says John Meeske, Yale's longtime dean of administrative affairs. "The mind-set is different now."
Beyond the over-the-top comforts of Whitman College, Princeton bestows ever more comprehensive counseling, health care, and other services on its students. Starting this year, all PhD students who give birth will receive their full stipend during a three-month suspension of academic work. Princeton also has begun covering the living expenses of foreign undergraduates who remain on campus during breaks.
The Ivies have steadily raised the list price they charge their traditional clientele: the wealthy and the well-born. Tuition, room and board, and fees now run an average of $45,000 a year, which, the schools are quick to point out, covers only one-half to two-thirds of operating costs. But even at those prices, demand, in the form of undergraduate applications, continues to soar. On average, the Ivies rejected about 90% of applicants for the Class of 2011.
Extraordinary wealth has allowed the Ivy Plus schools to mitigate their extreme exclusivity by offering bigger discounts to more students of modest means—a move that few would object to. Princeton has doubled its budget for grants, loans, and other aid since 2001-02, to $82 million, as the percentage of undergrads receiving financial support has jumped from 44% to 53%. The average award is $32,200, against total charges of $44,950.
SALARY GAP
The Ivies' biggest expense category by far is labor. At Harvard, compensation and benefits accounted for 49% of its $3.2 billion in operating expenses in 2006-07. Although salary gains have consistently outpaced inflation, it is the addition of new teaching positions that is chiefly responsible for driving up the cost of instruction. Harvard, the largest of the Ivies, employs 2,164 faculty members, 55% more than in 1997-98. All of the Ivies increasingly are emphasizing small-group learning, independent study, and hands-on experience. "It's a much more personal connection between teacher and student, and a lot less delivering education in large lecture halls with armies of teaching assistants," says Carol L. Folt, a Dartmouth biology professor who doubles as its dean of faculty.
The Ivies' heavy spending to enlarge and upgrade their faculties has contributed to an ever-widening salary gap between private and public universities. The $106,496 average salary earned by full professors at PhD-granting public universities in 2006-07 amounted to just 78% of what their counterparts earned at private universities, according to the American Association of University Professors. This figure was 91% in 1980-81.
The Ivies' superior spending power puts even the finest public universities at a disadvantage in the competition for faculty. One of the many academic areas in which Yale has brought its financial muscle to bear is physics, which until recently was chaired by Ramamurti Shankar. "Yale told us: Let's go after who you want. We will make it happen,'" says Shankar, who is particularly proud of having bested several other top private schools to lure the quantum mechanics expert Steven M. Girvin away from Indiana University, a Big Ten public stalwart. "There was a huge war," Shankar says. "Everybody wanted him." Shankar declines to disclose the price he paid for Girvin in 2002, but says that the going annual rate today for theoreticians of his caliber is $400,000 to $600,000, which includes salary and research support. This is for an assistant professor, the level at which Yale does most of its hiring. The price tag for top experimentalists, who have far more extensive laboratory needs, is $1.5 million to $2 million, according to Shankar, who remains on the Yale faculty.
To house their enlarged faculties, the Ivies have turned their campuses into continuous construction zones. Each now boasts a new science facility that is its most expensive structure ever. At Stanford, the distinction belongs to the $140 million "Bio-X" building. Designed by the famed British architect Norman Foster, the glass-walled center provides offices and labs for 30 faculty members whose research combines cutting-edge subspecialties in biology and medicine. Over the next few years, says Stanford President John L. Hennessy, the school plans to invest an additional $600 million to put up five more buildings at an astronomical cost of $800 per square foot on average. Under President Amy Gutmann, Penn is launching its expansion onto 24 acres adjoining its Philadelphia campus by building three high-tech medical research facilities at a total cost of $682 million. Harvard is beginning work on a $1 billion complex that includes a new stem cell institute, the first stage of a planned 200-acre adjunct campus in Allston, Mass.
THE RESEARCH EDGE
Ivy administrators argue that gathering the best researchers in resource-rich havens has a synergistic and broadly beneficial effect. Scientists are more likely to do their best work, expanding knowledge and improving lives, when attached to academia's deepest pockets, or so holds the rationale for Ivy aggrandizement. The research productivity of elite private universities is roughly twice that of their public counterparts, according to a recent study of America's 102 top research universities by economists James D. Adams and J. Roger Clemmons. The study measured volume of academic papers and citations during 1981-99. "You are going to have an edge in research if you have great students, but not too many students; freedom from bureaucratic and political meddling; and generous alums who are more interested in academics than the football program," says Adams, acting head of economics at Rensselaer Polytechnic Institute, a private college in Troy, N.Y.
But even if the Ivies succeed in making one plus one equal three, will the benefits to society outweigh the damage to the public universities they are stripping of star professors, who tend to take their outside research money with them when they go? There is not likely to be enough talent or funding to go around as the Ivies pursue their ambitious goals. "One thing we all must worry about—I certainly do—is the federal support for scientific research. And are we all going to be chasing increasingly scarce dollars?" says Drew Gilpin Faust, Harvard's new president.
Not that Faust seems worried about Harvard or other top-tier research schools. "They're going to be—we hope, we trust, we assume—the survivors in this race," she says. As for the many lesser universities likely to lose market share, she adds, they would be wise "to really emphasize social science or humanities and have science endeavors that are not as ambitious" as those of Harvard and its peers.
Administrators at many public research universities are not willing to accept Faust's invitation to surrender. "We have no choice but to recognize the realities of the marketplace we work in," says Patrick V. Farrell, provost and vice-chancellor for academic affairs at the University of Wisconsin at Madison. "But we intend to remain at least as good, if not better, a research-intensive institution as we have been in the past."
These are brave words, especially given that the state of Wisconsin ranks among the least generous funders of public higher education. Over the past decade, Wisconsin's state tax appropriations have risen by a total of 21.7%, or about half the increase in the Higher Education Price Index, compiled by the nonprofit Commonfund Institute. This puts it 41st among all states, according to the Center for the Study of Education Policy at Illinois State University. Other conspicuous laggards include Colorado, Iowa, Michigan, and Ohio.
Today, twice as many Wisconsin-Madison professors are leaving to work elsewhere as was the case five years ago. Huge piles of cash aren't always the issue; sometimes it's the bureaucratic or political constraints more common on public campuses. Among the faculty that Farrell particularly regretted losing was Robert W. Carpick, a fast-rising associate professor specializing in nanotribology (the study of friction at the atomic level) who defected to the University of Pennsylvania a year ago. Carpick, who took much of his $550,000 in outside research grants with him to Penn, accepted a salary only 10% higher than the $90,000 he was making. The main reason he left Wisconsin is that it is prohibited by state law from paying domestic partner benefits, Carpick says. "I also was concerned about the effects of dwindling state support on the public university model."
The spending explosion within the Ivy Plus ranks strengthens those already-potent institutions and makes campus life cushier for many of their students. Will it lead to scientific breakthroughs that otherwise wouldn't have been possible? Or will it mainly serve to accelerate the deterioration of many other schools that have a vital role to play in training the next generation to compete more successfully in math and the sciences? The benefits of more generous undergraduate financial aid are obvious. The answers to these questions, much less so.
For better or worse, the infusion of riches at the Ivy Plus schools has dramatically extended their lead over everyone else, especially the public colleges and universities that collectively serve the vast majority of American students. This dominance—and the inequities that it fosters—are likely only to grow.
Sunday, January 6, 2008
Using Temps Hurts Japan
January 7, 2008
HELP WANTED
Growing Reliance on Temps Holds Back Japan's Rebound
Firms Increasingly Add Part-Time Workers; Spending Power Lags
By YUKA HAYASHI
January 7, 2008; Page A1, Wall Stree Journal
TOKYO -- Five years ago, Japan chugged back into expansion mode after a decadelong slump. Yet its economy remains lethargic, its consumer spending anemic, its corporations cautious about capital spending and its stock market fragile.
With the rest of the world battered by continuing credit problems emanating from the U.S., the state of the world's No. 2 economy -- key to world economic health -- is an increasing concern.
Such worries have sparked a heavy selloff in Japanese stocks in recent months. The benchmark Nikkei stock average tumbled 4% Friday, the first trading day of the year, after falling 11.1% in 2007, its first losing year in the last five.
One reason Japan's rebound hasn't gotten traction: companies' growing reliance on temporary workers, who earn less -- and spend less -- than full-time employees. The shift in hiring can be seen at companies like Hino Motors Ltd. The truck-making unit of Toyota Motor Corp. is paying record dividends this year. But it also has been filling thousands of factory jobs with temporary workers, who start at $10 an hour and get few benefits.
"I always look for the cheapest meat to cook with, usually ground chicken or shreds of pork," says Ikkei Ikeda, 28 years old, who worked as a temp at Hino setting heavy metal discs onto machines for 2½ years before quitting in August. He says he rode his bike wherever he could to save train fare, because his monthly take-home pay averaged just $1,300. In other words, although Mr. Ikeda was employed, he wasn't doing much to boost consumer demand.
Companies across Japan have gone on a binge of hiring temps in the past few years. They earn about two-thirds of what full-timers do and can often be hired and fired with just a few days' notice. More than a third of the people in Japan's labor force are categorized as "nonpermanent" workers: part-timers, temps on fixed-term contracts and people sent to companies by temporary-staffing agencies. That compares with 23% in 1997 and 18% in 1987.
The trend has been good for Japan's economy in some ways. Use of temps gives companies flexibility and cost control, helping them succeed in highly competitive global industries like manufacturing. Big Japanese companies have reported earnings growth for five straight years.
Yet the heavy use of temps also has created an obstacle to the virtuous cycle typically seen in an expanding economy: When companies make better profits they eventually raise wages, which boosts consumer spending -- and leads to more corporate profits.
In the past decade, average wages in Japan have fallen every year except two because of an increase in temps and stagnant wages for full-timers. Consumption by working families declined on a year-on-year basis in six of the past eight quarters. This even though the Japanese are also saving less: A Bank of Japan survey showed that some 23% of households had no savings last year, compared with just 10% in 1996.
The result is sluggish domestic demand and growth that is supported by exports to a lopsided extent. In the July-September quarter, when Japan's economy grew at an annualized rate of 1.5%, exports were rising at an annualized 11% rate and domestic demand was shrinking slightly. Personal consumption is so weak in Japan that it accounts for only a little over half of the economy, compared with 70% in the U.S.
The temp-hiring trend thus adds to other elements restraining Japan's growth. The population is aging rapidly, and an increase in the number of frugal retirees has also meant lower spending on everything from clothing to electric appliances. Sharp cuts in regional public-works spending, part of the government effort to reduce its huge fiscal deficit, have hurt local economies and consumption. Capital spending by corporations has been strong until recently, propping up the economy along with exports. But there are signs that companies are also beginning to slow down their spending because of a recent rise in the yen's value and concerns about problems in the global credit market.
Its reliance on exports has left Japan's economy more vulnerable. Partly because U.S. housing-sector woes cloud the outlook for Japanese exporters, many economists have recently trimmed their forecasts for Japan's growth rate for next year.
Looking for Growth
Another slump in Japan would be bad news for the global economy, which was counting on Japan to pick up some slack as the U.S. economy stumbled. Consumption growth is also weak in Europe, leaving the world economy reliant for growth on China and other developing nations, plus stressed U.S. consumers.
As with Japan, many economists expect the euro zone's economic growth for the fourth quarter to come in at lower than in the prior one, when it was 2.6% at an annualized rate. European countries also have been relying more heavily on temporary workers, a factor that economists say may be slowing the growth of their consumption.
Countries have different definitions of temporary workers. In Germany, temps last year made up 14% of the work force, according to the Organization for Economic Cooperation and Development. In the U.S., "contingent" workers -- those lacking permanent job arrangements -- totaled only about 4% of the work force in 2005, a Labor Department survey showed. By any definition, Japan's reliance on temps is among the highest in developed nations.
In Japan, the proliferation of temps is creating a new social divide. For decades, big Japanese companies hired workers fresh out of school on a full-time basis, offered years of training and all but guaranteed steady pay increases. This afforded a middle-class lifestyle to nearly everyone.
Now, the media are filled with stories about the "working poor." The number of families receiving public financial support for children is soaring. There's even a new kind of homeless people -- young folks who sleep at Internet cafés. The opposition Democratic Party of Japan scored a major election victory in July by making the growing income gap its main issue.
The rise of temps began in the 1990s as Japan entered its long slump and low-cost nations such as China posed unprecedented competition. To compete, Japanese companies shifted large chunks of their manufacturing capacities overseas. At home, cost-cutting came slowly, partly because layoffs were taboo.
Then, labor-law deregulation gave companies a new way to restructure, while keeping some of their treasured manufacturing capabilities in Japan.
Until the late '90s, worker-friendly laws forbade temporary-labor contracts except for a few specialized areas, such as computer programming. A change in 1999 allowed temp agencies to dispatch workers to many more types of jobs. And in 2004, manufacturers were allowed to use workers sent by temporary-help agencies.
That change encouraged companies such as Toyota and Canon Inc. to start hiring temps en masse. At Canon and its subsidiaries and affiliates, the number of part-timers and temps nearly quadrupled from 2003 to last June, to about 40,000, according to securities filings. Full-timers are more numerous, at 127,000, but their numbers rose a more modest 24%.
Temps find it difficult to become full-time. When the economy began recovering about five years ago and companies needed more full-time workers, they got them by hiring fresh graduates. In a 2006 survey by staffing agency Pasona Group, two-thirds of companies responding said they were reluctant to make part-timers or temps full time. Many firms cited a lack of skills. Temps rarely get much training from their employers.
Longtime temps say conditions have deteriorated. Yoko Mitome, 49, was a sales executive at a travel agency for two decades, jetting about and planning package tours to exotic spots. She lost this $50,000-a-year job in 1998 as the employer sought to cope with falling sales near the bottom of Japan's long slump. She got a temp job as an operator for international calls at a unit of phone company KDDI Corp.
Since then, the hourly wages have stayed fairly stable but the company has stopped paying transportation expenses and good-attendance bonuses, has shortened breaks and has shortened employment contracts to three or six months from a year.
The annual pay of operators comes to less than $20,000 for six-hour work days, before taxes and social security contributions. Ms. Mitome lives with her mother and works a second job but still has to economize. Long gone are her days of buying $400 suits; now she shops only at casual-clothing stores where T-shirts go for $9.
"At least I own a house and have savings from my previous job," she says. "Things are very grim for a lot of my young co-workers."
Her employer, KDDI Evolva Inc., says changes in employment conditions have come as demand for phone operators has declined. It says it has mitigated the impact by measures such as raising hourly pay to try to make up for the loss of transportation aid.
Temp agencies are proliferating. One called Mobaito.com sends workers emails on their cellphones about short-term jobs, often for the following morning. The service is used by companies that want workers when they need them, without the trouble of recruiting them or insuring them.
One temp agency, Goodwill Inc., has been around for 12 years and says it has 2.9 million people registered for job placement. Masami Fujino has been registered with it for seven years. He has often worked a different job every day, ranging from disposing of industrial waste to stocking food warehouses.
"The absolute worst," he says, "was when I had to haul household items out of a home in foreclosure, over the heads of crying kids." A full day of work leaves Mr. Fujino with about $55 after taxes and transportation, barely enough to get by in Tokyo.
Companies are seeking more labor deregulation so they can use temp workers even more flexibly. They want to abolish a rule that says if a company fills a job with a temp for three years, it has to make that job a full-time one. Companies commonly get around this by changing the job description slightly and starting the three-year clock running again.
Age Gap
As the number of temps grows, some experts see worrying long-term effects. While many temps are older workers who lost full-time jobs, the sharpest rise is among people in their late 20s and 30s, who finished school during Japan's economic slump and never got a full-time job. Among workers aged 25 to 34, about 26% are temps, compared with 14% a decade ago.
Some companies are concerned about workplace tension in this two-tier system. As earnings have improved, a few have started to convert temp workers to full-timers. Sumitomo Mitsui Banking Corp. recently decided it would turn 2,000 temps and affiliated-company employees working as tellers or loan assistants into permanent staffers of the parent company.
Toyota's all-union labor federation has begun inviting temps and part-time workers to join, saying the increase in the number of nonpermanent workers is threatening unity in the work place.
But for companies like Hino Motors, temps remain an important resource. Between 1998 and 2002, Hino reduced full-time workers to 8,600 from 9,500. When sales picked up and it needed more workers, Hino turned to temp agencies. As of March 31, Hino had 4,770 temps and part-time workers, up from 684 in 1998.
The company doesn't disclose pay scales. According to an ad by a staffing agency, a temp job at Hino pays about $10 an hour. This translates to pretax pay of about $21,000 a year. The average pay for all of its full-time people, including executives, was about $55,000 in the year ended March 31.
"The level of our production fluctuates sharply each year," a Hino spokesman says. "Bringing in temporary people whenever we have a shortage is simply what we have to do in manufacturing."
When Mr. Ikeda failed three years ago to get a job as a teacher, he found that signing up at a temp agency swiftly landed him temp work at Hino. But when he missed work for three days because of food poisoning, the staffing company called up to say he would be asked to quit if he doesn't come back soon. Though he survived that, he quit later, and now is looking for another temp job. "I don't mind the factory work at all," he says. "But as long as I'm a temp, I have to live with the fear that the job may be gone tomorrow."
Write to Yuka Hayashi at yuka.hayashi@wsj.com1
URL for this article:
http://online.wsj.com/article/SB119939511325465729.html
Hyperlinks in this Article:
(1) mailto:yuka.hayashi@wsj.com
HELP WANTED
Growing Reliance on Temps Holds Back Japan's Rebound
Firms Increasingly Add Part-Time Workers; Spending Power Lags
By YUKA HAYASHI
January 7, 2008; Page A1, Wall Stree Journal
TOKYO -- Five years ago, Japan chugged back into expansion mode after a decadelong slump. Yet its economy remains lethargic, its consumer spending anemic, its corporations cautious about capital spending and its stock market fragile.
With the rest of the world battered by continuing credit problems emanating from the U.S., the state of the world's No. 2 economy -- key to world economic health -- is an increasing concern.
Such worries have sparked a heavy selloff in Japanese stocks in recent months. The benchmark Nikkei stock average tumbled 4% Friday, the first trading day of the year, after falling 11.1% in 2007, its first losing year in the last five.
One reason Japan's rebound hasn't gotten traction: companies' growing reliance on temporary workers, who earn less -- and spend less -- than full-time employees. The shift in hiring can be seen at companies like Hino Motors Ltd. The truck-making unit of Toyota Motor Corp. is paying record dividends this year. But it also has been filling thousands of factory jobs with temporary workers, who start at $10 an hour and get few benefits.
"I always look for the cheapest meat to cook with, usually ground chicken or shreds of pork," says Ikkei Ikeda, 28 years old, who worked as a temp at Hino setting heavy metal discs onto machines for 2½ years before quitting in August. He says he rode his bike wherever he could to save train fare, because his monthly take-home pay averaged just $1,300. In other words, although Mr. Ikeda was employed, he wasn't doing much to boost consumer demand.
Companies across Japan have gone on a binge of hiring temps in the past few years. They earn about two-thirds of what full-timers do and can often be hired and fired with just a few days' notice. More than a third of the people in Japan's labor force are categorized as "nonpermanent" workers: part-timers, temps on fixed-term contracts and people sent to companies by temporary-staffing agencies. That compares with 23% in 1997 and 18% in 1987.
The trend has been good for Japan's economy in some ways. Use of temps gives companies flexibility and cost control, helping them succeed in highly competitive global industries like manufacturing. Big Japanese companies have reported earnings growth for five straight years.
Yet the heavy use of temps also has created an obstacle to the virtuous cycle typically seen in an expanding economy: When companies make better profits they eventually raise wages, which boosts consumer spending -- and leads to more corporate profits.
In the past decade, average wages in Japan have fallen every year except two because of an increase in temps and stagnant wages for full-timers. Consumption by working families declined on a year-on-year basis in six of the past eight quarters. This even though the Japanese are also saving less: A Bank of Japan survey showed that some 23% of households had no savings last year, compared with just 10% in 1996.
The result is sluggish domestic demand and growth that is supported by exports to a lopsided extent. In the July-September quarter, when Japan's economy grew at an annualized rate of 1.5%, exports were rising at an annualized 11% rate and domestic demand was shrinking slightly. Personal consumption is so weak in Japan that it accounts for only a little over half of the economy, compared with 70% in the U.S.
The temp-hiring trend thus adds to other elements restraining Japan's growth. The population is aging rapidly, and an increase in the number of frugal retirees has also meant lower spending on everything from clothing to electric appliances. Sharp cuts in regional public-works spending, part of the government effort to reduce its huge fiscal deficit, have hurt local economies and consumption. Capital spending by corporations has been strong until recently, propping up the economy along with exports. But there are signs that companies are also beginning to slow down their spending because of a recent rise in the yen's value and concerns about problems in the global credit market.
Its reliance on exports has left Japan's economy more vulnerable. Partly because U.S. housing-sector woes cloud the outlook for Japanese exporters, many economists have recently trimmed their forecasts for Japan's growth rate for next year.
Looking for Growth
Another slump in Japan would be bad news for the global economy, which was counting on Japan to pick up some slack as the U.S. economy stumbled. Consumption growth is also weak in Europe, leaving the world economy reliant for growth on China and other developing nations, plus stressed U.S. consumers.
As with Japan, many economists expect the euro zone's economic growth for the fourth quarter to come in at lower than in the prior one, when it was 2.6% at an annualized rate. European countries also have been relying more heavily on temporary workers, a factor that economists say may be slowing the growth of their consumption.
Countries have different definitions of temporary workers. In Germany, temps last year made up 14% of the work force, according to the Organization for Economic Cooperation and Development. In the U.S., "contingent" workers -- those lacking permanent job arrangements -- totaled only about 4% of the work force in 2005, a Labor Department survey showed. By any definition, Japan's reliance on temps is among the highest in developed nations.
In Japan, the proliferation of temps is creating a new social divide. For decades, big Japanese companies hired workers fresh out of school on a full-time basis, offered years of training and all but guaranteed steady pay increases. This afforded a middle-class lifestyle to nearly everyone.
Now, the media are filled with stories about the "working poor." The number of families receiving public financial support for children is soaring. There's even a new kind of homeless people -- young folks who sleep at Internet cafés. The opposition Democratic Party of Japan scored a major election victory in July by making the growing income gap its main issue.
The rise of temps began in the 1990s as Japan entered its long slump and low-cost nations such as China posed unprecedented competition. To compete, Japanese companies shifted large chunks of their manufacturing capacities overseas. At home, cost-cutting came slowly, partly because layoffs were taboo.
Then, labor-law deregulation gave companies a new way to restructure, while keeping some of their treasured manufacturing capabilities in Japan.
Until the late '90s, worker-friendly laws forbade temporary-labor contracts except for a few specialized areas, such as computer programming. A change in 1999 allowed temp agencies to dispatch workers to many more types of jobs. And in 2004, manufacturers were allowed to use workers sent by temporary-help agencies.
That change encouraged companies such as Toyota and Canon Inc. to start hiring temps en masse. At Canon and its subsidiaries and affiliates, the number of part-timers and temps nearly quadrupled from 2003 to last June, to about 40,000, according to securities filings. Full-timers are more numerous, at 127,000, but their numbers rose a more modest 24%.
Temps find it difficult to become full-time. When the economy began recovering about five years ago and companies needed more full-time workers, they got them by hiring fresh graduates. In a 2006 survey by staffing agency Pasona Group, two-thirds of companies responding said they were reluctant to make part-timers or temps full time. Many firms cited a lack of skills. Temps rarely get much training from their employers.
Longtime temps say conditions have deteriorated. Yoko Mitome, 49, was a sales executive at a travel agency for two decades, jetting about and planning package tours to exotic spots. She lost this $50,000-a-year job in 1998 as the employer sought to cope with falling sales near the bottom of Japan's long slump. She got a temp job as an operator for international calls at a unit of phone company KDDI Corp.
Since then, the hourly wages have stayed fairly stable but the company has stopped paying transportation expenses and good-attendance bonuses, has shortened breaks and has shortened employment contracts to three or six months from a year.
The annual pay of operators comes to less than $20,000 for six-hour work days, before taxes and social security contributions. Ms. Mitome lives with her mother and works a second job but still has to economize. Long gone are her days of buying $400 suits; now she shops only at casual-clothing stores where T-shirts go for $9.
"At least I own a house and have savings from my previous job," she says. "Things are very grim for a lot of my young co-workers."
Her employer, KDDI Evolva Inc., says changes in employment conditions have come as demand for phone operators has declined. It says it has mitigated the impact by measures such as raising hourly pay to try to make up for the loss of transportation aid.
Temp agencies are proliferating. One called Mobaito.com sends workers emails on their cellphones about short-term jobs, often for the following morning. The service is used by companies that want workers when they need them, without the trouble of recruiting them or insuring them.
One temp agency, Goodwill Inc., has been around for 12 years and says it has 2.9 million people registered for job placement. Masami Fujino has been registered with it for seven years. He has often worked a different job every day, ranging from disposing of industrial waste to stocking food warehouses.
"The absolute worst," he says, "was when I had to haul household items out of a home in foreclosure, over the heads of crying kids." A full day of work leaves Mr. Fujino with about $55 after taxes and transportation, barely enough to get by in Tokyo.
Companies are seeking more labor deregulation so they can use temp workers even more flexibly. They want to abolish a rule that says if a company fills a job with a temp for three years, it has to make that job a full-time one. Companies commonly get around this by changing the job description slightly and starting the three-year clock running again.
Age Gap
As the number of temps grows, some experts see worrying long-term effects. While many temps are older workers who lost full-time jobs, the sharpest rise is among people in their late 20s and 30s, who finished school during Japan's economic slump and never got a full-time job. Among workers aged 25 to 34, about 26% are temps, compared with 14% a decade ago.
Some companies are concerned about workplace tension in this two-tier system. As earnings have improved, a few have started to convert temp workers to full-timers. Sumitomo Mitsui Banking Corp. recently decided it would turn 2,000 temps and affiliated-company employees working as tellers or loan assistants into permanent staffers of the parent company.
Toyota's all-union labor federation has begun inviting temps and part-time workers to join, saying the increase in the number of nonpermanent workers is threatening unity in the work place.
But for companies like Hino Motors, temps remain an important resource. Between 1998 and 2002, Hino reduced full-time workers to 8,600 from 9,500. When sales picked up and it needed more workers, Hino turned to temp agencies. As of March 31, Hino had 4,770 temps and part-time workers, up from 684 in 1998.
The company doesn't disclose pay scales. According to an ad by a staffing agency, a temp job at Hino pays about $10 an hour. This translates to pretax pay of about $21,000 a year. The average pay for all of its full-time people, including executives, was about $55,000 in the year ended March 31.
"The level of our production fluctuates sharply each year," a Hino spokesman says. "Bringing in temporary people whenever we have a shortage is simply what we have to do in manufacturing."
When Mr. Ikeda failed three years ago to get a job as a teacher, he found that signing up at a temp agency swiftly landed him temp work at Hino. But when he missed work for three days because of food poisoning, the staffing company called up to say he would be asked to quit if he doesn't come back soon. Though he survived that, he quit later, and now is looking for another temp job. "I don't mind the factory work at all," he says. "But as long as I'm a temp, I have to live with the fear that the job may be gone tomorrow."
Write to Yuka Hayashi at yuka.hayashi@wsj.com1
URL for this article:
http://online.wsj.com/article/SB119939511325465729.html
Hyperlinks in this Article:
(1) mailto:yuka.hayashi@wsj.com
Frank Rich on Iowa Results
They Didn’t Stop Thinking About Tomorrow
By FRANK RICH
New York Times, January 6, 2008
AFTER so many years of fear and loathing, we had almost forgotten what it’s like to feel good about our country. On Thursday night, that long-dormant emotion came rushing back, like an old dream that pops out of the deepest recesses of memory, suddenly as clear as light. “They said this day would never come,” said Barack Obama, and yet here, right before us, was indisputable evidence that it had.
What felt good was not merely the improbable and historic political triumph of an African-American candidate carrying a state with a black population of under 3 percent. It was the palpable sense that our history was turning a page whether or not Mr. Obama or his doppelgänger in improbability, Mike Huckabee, end up in the White House. We could allow ourselves a big what-if: What if we could have an election that was not a referendum on either the Clinton or Bush presidencies? For the first time, we found ourselves on that long-awaited bridge to the 21st century, the one that was blown up in the ninth month of the new millennium’s maiden year.
The former community organizer from Chicago and the former Baptist preacher from Arkansas have little in common in terms of political views. But as I wrote here a month ago, the author of “The Audacity of Hope” and the new man from Hope, Ark., are flip sides of the same coin. The slogan “change” — a brand now so broad and debased that both Hillary Clinton and Mitt Romney appropriated it for their own campaigns — does not do justice to the fresh starts that Mr. Obama and Mr. Huckabee represent.
The two men are the youngest candidates in the entire field, the least angry and the least inclined to seek votes by saturation-bombing us with the post-9/11 arsenal of fear. They both radiate the kind of wit and joy (and, yes, hope) that can come only with self-confidence and a comfort in their own skins. They don’t run from Americans who are not in their club. Mr. Obama had no problem winning over a conclave of white Christian conservatives at Rick Warren’s megachurch in Orange County, Calif., even though he insisted on the necessity of condoms in fighting AIDS. Unlike the top-tier candidates in the G.O.P. presidential race, or the “compassionate conservative” president who refused for years to meet with the N.A.A.C.P., Mr. Huckabee showed up last fall for the PBS debate at the historically black Morgan State University and aced it.
The “they” who did not see the cultural power of these men, of course, includes not just the insular establishments of both their parties but the equally cloistered echo chamber of our political journalism’s status quo. It would take a whole column to list all the much-repeated Beltway story lines that collapsed on Thursday night.
But some are worth recounting because they prove nearly as instructive as they are laughable. The Benazir Bhutto assassination was judged as a boon for Mrs. Clinton because it would knock the silly voters to their senses by reminding them it was no time to roll the dice with foreign-policy novices. Oprah Winfrey’s Obama rallies were largely viewed as a routine celebrity endorsement, while Mr. Romney’s address on “Faith in America” was judged as momentous as “Mission Accomplished.” Only a week ago, Mr. Huckabee was literally laughed at by reporters for his “Howard Dean meltdown” at a press conference where he contradictorily exhibited and then disowned an attack ad on Mr. Romney.
The final Des Moines Register poll — Mr. Huckabee up by six points and Mr. Obama by seven — was greeted with near-universal skepticism. John Edwards and John McCain, we were reliably informed by those “on the ground,” were surging in Iowa. Mr. Huckabee might have fatally insulted voters by ditching Iowa on the eve of the caucus to appear with Jay Leno. All those collegiate Obama enthusiasts, like the Dean brigades of the last Iowa political insurgency, were just too flighty to actually bother to caucus.
What was mostly forgotten in these errant narratives were the two largest elephants in the room: Iraq and George W. Bush. The conventional wisdom had it that both a tamped-down war and a lame-duck president were exiting so quickly from center stage that they were receding from the minds of voters. In truth, they were only receding from the minds of those covering those voters.
The continued political import of Iraq could be found in three different polls in the past six weeks — Pew, ABC News-Washington Post and Wall Street Journal-NBC News. They all showed the same phenomenon: the percentage of Americans who believe that the war is going well has risen strikingly in tandem with the diminution of violence — from 30 percent in February to 48 percent in November, for instance, in the Pew survey. Even so, these same polls show no change at all in the public’s verdict on this misadventure or in President Bush’s dismal overall approval rating. By the same margins as before (sometimes even slightly larger), a majority of Americans favor withdrawal no matter what happened during the “surge.” In another poll (Gallup), a majority still call the war a mistake, a finding that has varied little since February 2006.
It’s safe to assume that these same voters did not forget that Mrs. Clinton and Mr. Edwards enabled the Iraq fiasco. Or that Mr. Obama publicly opposed it. When Mrs. Clinton attacked Mr. Obama for his supposedly “irresponsible and frankly naïve” foreign policy ideas — seeking talks with enemies like Iran — she didn’t diminish him so much as remind voters of her own irresponsibility and naïveté about Mr. Bush’s Iraq scam in 2002.
In the Republican field, no candidate has less association with Iraq than Mr. Huckabee, a politically lucky and unintended consequence of his spectacular ignorance about foreign policy in general. When he finally did speak up in a newly published essay in Foreign Affairs, he condemned the Bush administration for its “arrogant bunker mentality” in its execution of the war. Mr. Romney, sensing an opening among the party faithful, loudly demanded that Mr. Huckabee “apologize to the president” for this insult. But Mr. Huckabee had the political savvy not to retreat, and in Iowa’s final hours even Mr. Romney desperately reversed himself to slam Mr. Bush’s mismanagement of Iraq.
Among the Republican candidates, Mr. Huckabee is also as culturally un-Bush as you can get. He constantly reminds voters that he did not go to an Ivy League school and that his plain values derived from a bona fide blue-collar upbringing, as opposed to, say, clearing brush on a vacation “ranch” bought with oil money attained with family connections. “People are looking for a presidential candidate who reminds them more of the guy they work with rather than the guy that laid them off,” he told Mr. Leno, in a nifty reminder of Mr. Romney’s corporate history as a Bush-style, Harvard-minted M.B.A.
It’s such populist Huckabee sentiments that are already driving the Republican empire to strike back. The party that has milked religious conservatives for votes for two decades is traumatized by the prospect that one of that ilk might actually become its standard-bearer. Especially if the candidate in question is a preacher who bashes Wall Street and hedge-fund managers and threatens to take a Christian attitude toward those too poor to benefit from the Bush tax cuts.
No wonder the long list of party mandarins eager to take down Mr. Huckabee includes Rush Limbaugh, Robert Novak, the Wall Street Journal editorial page and National Review. Dan Bartlett, the former close Bush adviser, has snickered at Mr. Huckabee’s presumably low-rent last name. Fred Barnes was reduced to incoherent babbling when a noticeably gloomy Fox News announced Mr. Huckabee’s victory Thursday night.
But if, as the new narrative has it, Mr. McCain will ride to the party’s rescue, the Republicans’ relief may be short-lived. He is their most experienced and principled horse, but he’s also the oldest and the most encumbered by Bush and Iraq baggage. The NBC News analyst Chuck Todd may be on to something when he half-jokingly suggested last week that there was a 5 percent chance that the G.O.P. may have to find a nominee not yet in the race.
Mr. Obama is in a far better position in his more-or-less ideologically united party than Mr. Huckabee is among Republicans, but, of course, he could lose for a myriad of reasons. Mr. Obama could make some world-class mistakes; the Clinton machine could land some attacks more devastating than its withering critique of his kindergarten paper.
But if Clinton operatives know how to go negative, they don’t have the positive balance of a 21st-century message. Iowa confirmed that the message the campaign has used to date — experience — is D.O.A. in post-Bush America. It was fascinating to watch that realization sink in on Thursday night. In her concession speech, Mrs. Clinton had her husband, the most tangible totem of her experience, standing right beside her, yet she didn’t mention him or so much as acknowledge him.
Even before that tableau was swept away by the sight of the Obama family all but dancing across the stage in celebration, it looked like the passing of an era.
By FRANK RICH
New York Times, January 6, 2008
AFTER so many years of fear and loathing, we had almost forgotten what it’s like to feel good about our country. On Thursday night, that long-dormant emotion came rushing back, like an old dream that pops out of the deepest recesses of memory, suddenly as clear as light. “They said this day would never come,” said Barack Obama, and yet here, right before us, was indisputable evidence that it had.
What felt good was not merely the improbable and historic political triumph of an African-American candidate carrying a state with a black population of under 3 percent. It was the palpable sense that our history was turning a page whether or not Mr. Obama or his doppelgänger in improbability, Mike Huckabee, end up in the White House. We could allow ourselves a big what-if: What if we could have an election that was not a referendum on either the Clinton or Bush presidencies? For the first time, we found ourselves on that long-awaited bridge to the 21st century, the one that was blown up in the ninth month of the new millennium’s maiden year.
The former community organizer from Chicago and the former Baptist preacher from Arkansas have little in common in terms of political views. But as I wrote here a month ago, the author of “The Audacity of Hope” and the new man from Hope, Ark., are flip sides of the same coin. The slogan “change” — a brand now so broad and debased that both Hillary Clinton and Mitt Romney appropriated it for their own campaigns — does not do justice to the fresh starts that Mr. Obama and Mr. Huckabee represent.
The two men are the youngest candidates in the entire field, the least angry and the least inclined to seek votes by saturation-bombing us with the post-9/11 arsenal of fear. They both radiate the kind of wit and joy (and, yes, hope) that can come only with self-confidence and a comfort in their own skins. They don’t run from Americans who are not in their club. Mr. Obama had no problem winning over a conclave of white Christian conservatives at Rick Warren’s megachurch in Orange County, Calif., even though he insisted on the necessity of condoms in fighting AIDS. Unlike the top-tier candidates in the G.O.P. presidential race, or the “compassionate conservative” president who refused for years to meet with the N.A.A.C.P., Mr. Huckabee showed up last fall for the PBS debate at the historically black Morgan State University and aced it.
The “they” who did not see the cultural power of these men, of course, includes not just the insular establishments of both their parties but the equally cloistered echo chamber of our political journalism’s status quo. It would take a whole column to list all the much-repeated Beltway story lines that collapsed on Thursday night.
But some are worth recounting because they prove nearly as instructive as they are laughable. The Benazir Bhutto assassination was judged as a boon for Mrs. Clinton because it would knock the silly voters to their senses by reminding them it was no time to roll the dice with foreign-policy novices. Oprah Winfrey’s Obama rallies were largely viewed as a routine celebrity endorsement, while Mr. Romney’s address on “Faith in America” was judged as momentous as “Mission Accomplished.” Only a week ago, Mr. Huckabee was literally laughed at by reporters for his “Howard Dean meltdown” at a press conference where he contradictorily exhibited and then disowned an attack ad on Mr. Romney.
The final Des Moines Register poll — Mr. Huckabee up by six points and Mr. Obama by seven — was greeted with near-universal skepticism. John Edwards and John McCain, we were reliably informed by those “on the ground,” were surging in Iowa. Mr. Huckabee might have fatally insulted voters by ditching Iowa on the eve of the caucus to appear with Jay Leno. All those collegiate Obama enthusiasts, like the Dean brigades of the last Iowa political insurgency, were just too flighty to actually bother to caucus.
What was mostly forgotten in these errant narratives were the two largest elephants in the room: Iraq and George W. Bush. The conventional wisdom had it that both a tamped-down war and a lame-duck president were exiting so quickly from center stage that they were receding from the minds of voters. In truth, they were only receding from the minds of those covering those voters.
The continued political import of Iraq could be found in three different polls in the past six weeks — Pew, ABC News-Washington Post and Wall Street Journal-NBC News. They all showed the same phenomenon: the percentage of Americans who believe that the war is going well has risen strikingly in tandem with the diminution of violence — from 30 percent in February to 48 percent in November, for instance, in the Pew survey. Even so, these same polls show no change at all in the public’s verdict on this misadventure or in President Bush’s dismal overall approval rating. By the same margins as before (sometimes even slightly larger), a majority of Americans favor withdrawal no matter what happened during the “surge.” In another poll (Gallup), a majority still call the war a mistake, a finding that has varied little since February 2006.
It’s safe to assume that these same voters did not forget that Mrs. Clinton and Mr. Edwards enabled the Iraq fiasco. Or that Mr. Obama publicly opposed it. When Mrs. Clinton attacked Mr. Obama for his supposedly “irresponsible and frankly naïve” foreign policy ideas — seeking talks with enemies like Iran — she didn’t diminish him so much as remind voters of her own irresponsibility and naïveté about Mr. Bush’s Iraq scam in 2002.
In the Republican field, no candidate has less association with Iraq than Mr. Huckabee, a politically lucky and unintended consequence of his spectacular ignorance about foreign policy in general. When he finally did speak up in a newly published essay in Foreign Affairs, he condemned the Bush administration for its “arrogant bunker mentality” in its execution of the war. Mr. Romney, sensing an opening among the party faithful, loudly demanded that Mr. Huckabee “apologize to the president” for this insult. But Mr. Huckabee had the political savvy not to retreat, and in Iowa’s final hours even Mr. Romney desperately reversed himself to slam Mr. Bush’s mismanagement of Iraq.
Among the Republican candidates, Mr. Huckabee is also as culturally un-Bush as you can get. He constantly reminds voters that he did not go to an Ivy League school and that his plain values derived from a bona fide blue-collar upbringing, as opposed to, say, clearing brush on a vacation “ranch” bought with oil money attained with family connections. “People are looking for a presidential candidate who reminds them more of the guy they work with rather than the guy that laid them off,” he told Mr. Leno, in a nifty reminder of Mr. Romney’s corporate history as a Bush-style, Harvard-minted M.B.A.
It’s such populist Huckabee sentiments that are already driving the Republican empire to strike back. The party that has milked religious conservatives for votes for two decades is traumatized by the prospect that one of that ilk might actually become its standard-bearer. Especially if the candidate in question is a preacher who bashes Wall Street and hedge-fund managers and threatens to take a Christian attitude toward those too poor to benefit from the Bush tax cuts.
No wonder the long list of party mandarins eager to take down Mr. Huckabee includes Rush Limbaugh, Robert Novak, the Wall Street Journal editorial page and National Review. Dan Bartlett, the former close Bush adviser, has snickered at Mr. Huckabee’s presumably low-rent last name. Fred Barnes was reduced to incoherent babbling when a noticeably gloomy Fox News announced Mr. Huckabee’s victory Thursday night.
But if, as the new narrative has it, Mr. McCain will ride to the party’s rescue, the Republicans’ relief may be short-lived. He is their most experienced and principled horse, but he’s also the oldest and the most encumbered by Bush and Iraq baggage. The NBC News analyst Chuck Todd may be on to something when he half-jokingly suggested last week that there was a 5 percent chance that the G.O.P. may have to find a nominee not yet in the race.
Mr. Obama is in a far better position in his more-or-less ideologically united party than Mr. Huckabee is among Republicans, but, of course, he could lose for a myriad of reasons. Mr. Obama could make some world-class mistakes; the Clinton machine could land some attacks more devastating than its withering critique of his kindergarten paper.
But if Clinton operatives know how to go negative, they don’t have the positive balance of a 21st-century message. Iowa confirmed that the message the campaign has used to date — experience — is D.O.A. in post-Bush America. It was fascinating to watch that realization sink in on Thursday night. In her concession speech, Mrs. Clinton had her husband, the most tangible totem of her experience, standing right beside her, yet she didn’t mention him or so much as acknowledge him.
Even before that tableau was swept away by the sight of the Obama family all but dancing across the stage in celebration, it looked like the passing of an era.
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