Tag Archives: New York Times

Remove Government Intervention And Let’s Get On With It!

After being beaten down by the inevitable regulatory stranglehold that the government imposes on anyone attempting to do anything disruptive and creative that might revolutionize the banking industry, and probably any other, I am inspired to spew my general contempt for government intervention in anything. My apologies in advance.

Through decades of research, American neurobiologist James McGaugh discovered that as humans learn information and encounter new experiences, the part of the brain known a the amygdala plays a key role in retention.  The amygadala is activated primarily by stress hormones and other emotionally arousing stimuli.  Memory consolidation, or the forming of long term memories, is typically modulated very strongly by the amygdala.  Put simply, events that invoke significant amounts of emotion make a bigger imprint on one’s brain.

Emotion, while an important element in man’s array of mental tools, can unfortunately triumph over reason in crucial matters.  Excessive anger can lead to violent confrontations.  Heartbreak can lead a person to do drastic things in order to woo back a lost lover.  In the context of simple economic reasoning, today’s intellectual establishment often disregards common sense in favor of emotional-tinged policy proposals that rely on feelings of jealously, envy, and blind patriotism for validation rather than logical deduction.  “Eat the rich” schemes such as progressive taxation and income redistribution are used by leftists who style themselves as champions of the poor.  Plucking on the emotional strings of envy makes it easier to arouse widespread support for economic intervention via the state.

In the aftermath of the financial crisis of 2008, economic growth predictably slowed down in most industrialized countries.  Many commentators on the political left have grasped onto this opportunity to point to the vast amount of income inequality which exists in the United States and reason that it played a part in causing the crash.  This argument is typically paired with a proposal to raise taxes on the rich to balance out societal incomes.  It is alleged that having government brutes step in order to play the role of Robin Hood is the best and most justified way to alleviate income inequality.

Presently, income inequality in America is at its highest peak in decades.  In 2011, a study by the Congressional Budget Office concluded that after tax income grew by 275% for the top 1% of income earners between the years of 1979 and 2007.  The top-fifth of the U.S. population saw a 10 percentage point increase in their share of total income in the same period while all other groups saw their share decrease by 2 to 3 percentage points.  The data undoubtedly shows that income inequality has been increasing over the past few decades.  New York Times columnist and economist Paul Krugman has latched onto the evidence and is suggesting that rising income inequality plays a part in causing recessions.

Economist Joseph Stiglitz, who recently wrote the book “The Price of Inequality,” has argued that without a fair share of the national income, the middle class is unable to spend enough to keep aggregate demand elevated.  Both economists see income inequality as a danger to the prosperity of a nation.   Such a message is appealing to the greater public because it plays on their perceptions that the world is unfair.  It almost seems intuitive to think that the rich posses too much wealth or that a prosperous society is one in which income is more equalized.  Comfortableness in these beliefs paves the way for income redistribution efforts by the ever-scheming political class.

With income inequality a hot topic of debate going into the fifth year of the biggest economic downturn since the Great Depression, the question remains: does income inequality have a negative impact on society as Stiglitz and Krugman suggest?  And is growing income inequality an inherit part of capitalism?

First and foremost, the idea of equality for man in physical attributes, mental fitness, and material security  is essentially anti-human.  The most appealing aspect of mankind is that every person varies from one another in a myriad of different ways.  Some are better athletes, some are quicker studies, some have outer features that make them generally more attractive.  It follows that some men and women will be more apt at producing or better attuned to the demands of the marketplace.  They will have higher incomes by virtue of their own entrepreneurship or capacity to produce.  So, in a sense, income inequality is a fact of the free market.

But it is the possibility of inequality and the ability to achieve a higher income that makes capitalism work.  Punishing those who excel at making consumers better off punishes the very market mechanism that leads to better living standards overall.  In a free society, income inequality is not good or bad; it is part of the functioning order.  Any attempt to make incomes more equal through state measures is unjustified plunder of the rightful earners of wealth.

But what of the inequality in income that exists in today’s state-corporatist economy?  Did the 1% acquire its wealth solely through hard work?  The answer is hardly in many cases.  Though there are some innovative businessmen who became rich by providing new and better products, the sharp increase in income inequality over the past two decades is due to an economic phenomenon outside of normal market operations.  Krugman and Stiglitz rightfully point out that the greatest periods of income inequality in the United States were the late 1920s and the period since the mid-1990s.  What they fail to mention is that both these periods were not defined by capitalism run amok but by massive credit expansion.

This expansion in credit, aided and abetted by the Federal Reserve’s loose money policy, is the real culprit behind vast income inequality.  Economist George Reisman explains:

“the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.”

Since it’s so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices.

Money acts as a medium of exchange but is not neutral in its effects on receivership.  Those first receivers are able to bid up the price of goods before any other market participants.  As the newly created money flows into the economy, the general price level rises to reflect the new volume of currency.  In practice, credit expansion which brings about a reduction in interest rates also increases the amount of time businesses can go without making deductions for depreciation on their balance sheets as they purchase capital goods.  Because investment tends to go toward durable goods during periods of credit expansion, there is less funds left over to devote to labor.  Profits end up being recorded while wages sag behind.  Since credit expansion and inflationary policy go hand in hand in distorting relative prices and must eventually come to an end, the bust that occurs reveals wasteful investment.  Recession sets in shortly thereafter.

Printed money is not the same as accumulated savings which would otherwise fund sustainable lines of investment.  And it is only through adding to the economy’s pool of real savings that productive capacity is able to increase in the long term.  The wealthy have a higher propensity to save precisely because they have a higher income.  It is through their savings that new business ventures are funded and the economy is able to grow without the faux profits from government-enabled credit expansion.  This is why raising taxes on the rich is a backwards solution to income inequality.  Taxation only funnels money out of the productive, private sector and into the public sector which focuses on spending to meet political ends rather than consumer satisfaction.  All government spending boils down to wasted capitalThe truth is that capital is always scarce; there is never enough of it.

Pointing out this fact is by no means corporate shilling.  Many corporations and well connected businesses lobby for tax increases in order to burden their competitors.  Currently in California, Governor Jerry Brown is campaigning for a ballot measure which would raise taxes on the state’s richest residents.  According to the Wall Street Journal, companies such as Disney, NBC, Warner Bros., Viacom, CBS, and Sony have each already pitched in $100,000 for the initiative.  Various energy companies are financially supporting the ballot measure to make sure that a 25% tax on natural gas and oil extraction isn’t next.  As the scope of government becomes all the more encompassing, big business starts seeing profit opportunity in using its forceful authority to better its own competitive position.  In their unceasing tirades over income inequality, Stiglitz and Krugman recognize the trouble rent-seeking poses to competitive markets yet both reason that the problem doesn’t lie with the state but with those politicians and bureaucrats who occupy its enforcement offices.

To put it bluntly, this notion isn’t just juvenile; it rests on the fallacious assumption that government is staffed by only the most well-meaning of individuals in society.  As history and reason dictate however, good souls are not attracted to positions of absolute power.  The state, by Max Weber’s definition, holds the monopoly over force in a given area.  Practically every action taken by state officials introduces violence or the spoils from violence into an otherwise free society.  It follows that only those seeking to use state authority for their own benefit naturally gravitate toward politics.

Krugman and Stiglitz believe, as most do, that Americans should be born with the opportunity to succeed.  To create an environment of fairness, they propose a variety of government policies so that even the most impoverished individuals will have a shot at the American Dream.  Their arguments rest largely on emotion instead of reason and are aimed at inspiring reactionary protest.  What they fail to see (or refuse to acknowledge) is that the free market provides the best opportunities for someone to make a decent living by providing goods and services.

In a totally uninhibited market, profits come only to those who satisfy consumers more than their competition.  Contrary to Stiglitz’s suggestion, Henry Ford wasn’t a great businessman because he paid his workers a high wage.  He made his fortune by streamlining the process from which cars were built in order to sell them at a lower price.  The employees at Ford were able to increase their productivity, and thus wages, through the previous accumulation of capital and investment in machinery.  Ford’s massive profits didn’t last long however as domestic and foreign competition copied the mass production model and were able to attract market share of their own.  The greater the amount of cars on the market meant lower prices for all consumers in the end.

Again, in a truly free market the only way to maintain a rising income is to continually produce at a more efficient and more innovative rate.  In an economy plagued by the heavy hand of government, the market becomes rigged in favor of those connected to the ruling establishment.  Competition is decreased by the rising cost of adhering to regulations, innovation stagnates, and more income flows to the top.  Through central banking and credit expansion, profits are able to be recorded by the financial industry and first receivers of money before the rest of the population; which in turn leads to further evidence of income inequality.

No matter how you slice it, taxation is theft It is indiscernible from highway robbery and devoid of any moral justification.  Income inequality is a problem not because the government isn’t doing enough to combat it but because politicians and bureaucrats never tire of intervening into the private affairs of society.

With government intervention present in practically all market transactions, the solution to income inequality is to remove the intervention; not empower the state further by increasing the amount of funds at its disposal.


Grexit Day!

So, the burning question of the day is who will prevail in Athens?

As Greek voters prepare to the go to the polls on Sunday and central banks around the world prepare to enter crisis mode if far left-wing candidate Alexis Tsipras wins and reneges on the country’s bailout package, thus threatening euro zone solidarity, the Greek economy may slip into something resembling medieval Europe‘s Dark Ages.

All of the money managers in the U.S. and around the globe will have a busy afternoon and evening watching and waiting and finally executing their market calls. BlackBerries and iPhones will be at the ready during Father’s Day barbecues. Most predict a future for the Euro, though admittedly fraught with weakness and instability.

In recent days, international companies have been divesting their Greek branches. French supermarket giant Carrefour SA  sold its Greek branch to its local partner at a loss, Coca Cola’s Greek operations were downgraded by Moody’s Investors Service, and various import-export insurance companies have stopped covering transactions with Greek companies.

In addition, Greece risks blackouts as Russian gas giant Gazprom has said it will cut the country off if it does not pay its bills by June 22 

While international companies have withdrawn from Greece, the Greeks themselves have stopped buying everything from clothing to medicine.

The only things that have been selling well recently have been staple foods like pasta and canned goods, which have been flying off the shelves. Greeks are stocking up on non-perishable food in panic-buying mode as they prepare for shadowy worst-case-scenarios following the election. A quiet rush on banks has been occurring, with $1 billion in deposits leaving Greek banks each day for some time.

As for the euro itself, it may not really matter much, at least in the medium term, as most money managers are betting that the euro, the currency of 17 nations from the Baltic to the Mediterranean, will eventually weaken, whatever the outcome on Sunday.

“The hundred billion bought us two hours of relief, and then interest rates began to go up again and markets began to zoom in on Italy,” says one money manager, referring to last weekend’s 100 billion euro bailout for Spanish banks. “It has become a systemic issue. Until we see a lasting resolution of those doubts, we feel the euro will remain under pressure.”

If the left-wing parties win in Greece and back away from austerity, prompting a default or a disorderly exit from the euro, “we would expect the euro to drop like a stone,” says another money manager. “The consequences would be dramatic.” The currency could sink to parity with the dollar, he says.

The larger point is that whatever happens in Athens, doubts about Spain and Italy will only continue to grow. Those nations’ debt loads are large, and both are increasingly seen as unable to make the kind of changes that will persuade investors to keep buying their debt.

The ultimate answer is for European governments, led by Germany, to agree on concrete and credible steps toward greater fiscal and political integration, including the issuance of broader euro zone debt. That would eventually allow Spain and Italy to borrow what they need with Continent wide backing. In addition, leaders should come up with a euro zone wide bank guarantee to avert full-scale bank runs in shaky countries.

Ultimately, the market will force policy makers’ hands. But with 17 parties sitting at the table, the decisions are glacial. The markets move in a rapid-fire fashion. The stakes are increasing every day. 


Czech’s Say, “No Thanks!”

In my earlier post this morning, I focused on the ridiculous European Commission proposal for regulators and a European banking union. Here’s what the Czechs think about that:

The Czechs, who have been highly Eurosceptic, have absolutely no plans to join the euro zone, and have a healthy banking sector, have long opposed moves to centralize banking oversight.

The Daily Hospodarske Noviny (the Czech version of the New York Times) quoted Prime Minister Petr Necas today, as saying that regulation should be kept on a national basis. “We are convinced that the very high quality supervision by the Czech National Bank should not be diluted into some pan-European supervision,” Necas said.

Czech central bank Vice Governor Vladimir Tomsik said he was against raising moral hazard in the banking sector and creating a mismatch between national responsibilities of regulators while their authority would be moved to a European level.

“And the third pillar, a pan-European deposit insurance fund: I believe that is also unacceptable, because it is not possible for other countries to pay for mistakes of individual banks or supervisors,” he said in a transcript of a television interview posted on the central bank’s website http://www.cnb.cz.

And, as we mentioned in that earlier post, the UK is violently against any such proposal. British finance minister George Osborne said today that London will want to ensure safeguards are in place to protect its financial sector if the euro zone moves towards establishing a banking union.

“There is no way that Britain is going to be part of any euro zone banking union,” Osborne said in a radio interview.

So, now we have two Eurozone participants, Germany and England, making it crystal clear that they oppose any such move, and are joined by a conservative, non-Eurozone member with a healthy banking sector, who will also be severely impacted by frivolous proposals like this one.

Who are these guys and why are they allowed to speak in public?

While it is difficult for America to step into this mess, the situation in Europe is crying out for an intervention. Bernanke, Geithner and Obama have a herculean task on their hands just wrestling the U.S. economy back into grow mode with no assistance from U.S. banks, but they really need to get involved and act before the whole union catches fire.

The potential impact of a European banking collapse goes way beyond the $39 billion exposure our U.S. banks maintain. The end-result will be chaos that will drive the entire global banking community to freeze credit of all kinds, including government and corporate bonds, the last bastion of conservative investment safety.

Either the Fed and the Administration agree that Europe can be solved by a huge stimulus influx that will be sourced in a coordinated and equal effort by the U.S., Germany, China, Korea, Japan, Middle East, The UK and the rest of Europe, both in and out of the union, or agree to let it fail and accept the global consequences. This is a lot larger problem than Lehman Brothers. Maybe we need to bring Paulsen back. He was so good at bad news.

In the very short (weeks) meantime, the Fed needs to bully/scare lawmakers into actually doing something helpful. In other words, Bernanke needs to continue pressuring Congress to act now instead of bringing the economy to a so-called fiscal cliff at the end of the year where several tax cuts could expire and the debt ceiling may need to be raised again.

If I were Bernanke, I would be yelling at Congress to do something right with fiscal policy. There can’t be any more uncertainty about the fiscal cliff at the end of the year. Democrats and Republicans have to stop playing politics and actually turn into statesmen.

The European Union itself is clearly doomed. I am starting to worry about the U.S. union as well.


Don’t Believe What You Read In The Papers.

There was a big front page article in the New York Times today trumpeting the banks’ return to extending credit, now that they have written down all of their junked up sub-prime debt and have recovered from the losses on loans made to troubled borrowers. The article points out that some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.

I think the truth about this report is that the banks’ media relations folks got together with the NYT‘s editorial folks and everyone decided it would be nice to have a little media party and give regular folks a glimmer of hope about the credit markets and the banks a glimmer of “really not such bad guys after all” patina on their hopeless public images. 

They, of course rolled out their stat machines and pointed out that credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said. Of course, Experian is in on the deal as well, as positive lending news benefits them immensely. It is similar to the housing report by our HUD secretary today (covered in the Yes, This Really Happened. post later) which makes everyone in charge including of course, the current administration look better.

The banks, for their part, are looking to make up the billions in fee income wiped out by regulations enacted after the financial crisis by focusing on two parts of their business — the high and the low ends — industry consultants say. Subprime borrowers typically pay high interest rates, up to 29 percent, and often rack up fees for late payments.

Consumer advocates and lawyers worry that the financial institutions are again preying on the most vulnerable and least financially sophisticated borrowers, who are often willing to take out credit at any cost. “These people are addicted to credit, and banks are pushing it,” said Charles Juntikka, a bankruptcy lawyer in Manhattan. Some former banking regulators said they worried that this kind of lending, even in its early stages, signaled a potentially dangerous return to the same risky lending that helped fuel the credit crisis. No. You think? 

“It’s clear that we are returning to business as usual,” said Mark T. Williams, a former Federal Reserve bank examiner. Ah, lighten up Mark, this is just banking.

The lenders argue that they have learned their lesson and are distinguishing between chronic deadbeats and what some in the industry call “fallen angels,” those who had good payment histories before falling behind as the economy foundered. A spokesman for Chase, Steve O’Halloran, said the bank “seeks to be a careful, responsible lender,” adding that it “is constantly evaluating the risks and costs of funding loans.”

Regulators with the Office of the Comptroller of the Currency, which oversees the nation’s largest banks, said that as long as lenders adhered to strict underwriting standards and monitored risk, there was nothing inherently dangerous about extending credit to a wider swath of people. Snicker, snicker. 

In fact, an increase in lending is a sign that the economy is improving, economists say. While unemployment remains high, consumers have been reducing their debts. Delinquencies on credit card accounts and auto loans are down sharply from their heights in the crisis. “This is a natural loosening of credit standards because the banks feel they can expand again,” said Michael Binz, a managing director at Standard & Poor’s. And lenders miss many potential customers if they focus just on people with perfect credit. WOW! Really?

“You can’t simply ignore this segment anymore,” said Deron Weston, a principal in Deloitte’s banking practice.

The definition of subprime borrowers varies, but is generally considered those with credit scores of 660 and below, which is interestingly a “FAIR” credit score according to the Experian web site. So, again the message is mixed, and I suspect you will find that if you applied for a credit card with a credit score of 695, you will be rejected. 

The banks, regardless of what they are “saying”, will treat you in much the same way as the two leading peer-to-peer lenders do; that is, if you don’t have a FICO credit score above 700, you will be rejected. So, beware of what you read in the press and consider the source and the underlining motivations of these lending behemoths. They didn’t get too big to fail by being nice to your loan applications. 

Not unlike Capital One, the one lender that has been courting borrowers with damaged credit, even those who have just emerged from bankruptcy, with pitches like, “We want to win you back as a customer.”, these banks all have their own self-interest at heart. Notice Capital One said “even those who have just emerged from bankruptcy” but they didn’t say “even those who have just emerged from foreclosure”. They love bankrupted borrowers, because they can’t erase their future debts in bankruptcy again for many years. Not so much foreclosed borrowers. If they believe you won’t repay your debt, you won’t get a loan.

Pam Girardo, a spokeswoman for Capital One, said, “Our strategy is to provide reasonable access to credit with appropriate guardrails in place to ensure consumers stay on track as they rebuild their credit.”

Pam, that is absolute nonsense. Have you no shame, and what’s in your wallet?


Greg Smith’s Resignation: Are Wall Street Traders Psychopathic?

When a Goldman Sachs executive director, Greg Smith, resigned on Wednesday, he left in his wake a scathing op-ed in the New York Times excoriating the firm for its greedy values. The op-ed shook Goldman “like a bomb,” according to another story on the front page the following day. Smith claimed that Goldman’s current leadership had let the firm’s values disintegrate. Where once the Goldman culture encouraged employees to serve their clients for mutual benefit, now, Smith said, the driving force was rapacious avarice. The firm promotes “ripping their clients off,” he wrote.

To the average 99-percenter, this hardly seems like a revelation. Unethical behavior and Wall Street go hand in hand — especially at the top, right? Goldman supporters might say this perspective reflects sheer jealousy and resentment; however, a growing body of research suggests that there’s more to it than that.

One 2010 study looked directly at the prevalence of psychopathic traits in a sample of 203 executives at seven companies who had been chosen for their leadership potential to participate in additional management training. (The researchers did not reveal the nature of the businesses that employed the managers, so the results here don’t apply only to financial firms.)

Just over 5% of the trainees in the study met the full criteria for psychopathy — a rate five times higher than that seen in general public. Many of those who qualified were already in high-level senior management positions. So, the snakes are indeed overrepresented at the top.

Psychopathic traits include being highly manipulative and callous, lacking empathy and remorse, having little concern about consequences, being willing to use deceit or threats to get what you want and caring little for others except in terms of what you can get from them. Although the stereotype of a psychopath is a serial killer, they are actually more likely to be con artists or shady business people.

While no available research includes only financial firms, it’s not implausible to think that those whose primary values are materialistic and power-driven would be especially attracted to the business that currently fuels many of America’s biggest fortunes. Indeed, a psychologist whose practice is focused on Wall Street recently told [paywall] CFA magazine that he thinks that, at minimum, 10% of workers in financial services are outright psychopaths.

Like other personality traits and disorders, however, psychopathy lies on a spectrum. As with autism and schizophrenia, there are far more people who have related traits that do not cause disability than there are those with the full conditions themselves. In fact, in the 2010 study of managers, 4% of executives were found to score abnormally high on psychopathic traits, but not over the cutoff point that defines psychopathy.

As Dr. Ronald Schouten, who is writing a book about people who are psychopathic but don’t quite meet the full criteria, put it on the Harvard Business Review blog:

Psychopathy is mistakenly regarded as an all or nothing affair: you either are a psychopath or you aren’t. If that were the case, saying that 10% of people on Wall Street are psychopaths could actually be somewhat comforting, since it implies that the remaining 90% are not and so shouldn’t cause us any concern.

That yes-or-no approach dangerously ignores the fact that psychopathic behavior exists on a continuum. A great deal of damage can be done by individuals who fall in between folks who are “normal” and true psychopaths. These are individuals who would never be diagnosed as a psychopath, but whose behavior to varying degrees can be just as deceptive, dangerous, and remorseless as that of a full-blown psychopath.

And unfortunately, there’s even more reason for concern than this. Additional research suggests that rich people in general tend to behave less ethically than those who are not at the top of the financial heap. Several studies have found that wealthy people are typically less empathetic than poor people, both in terms of being able to read other people’s emotions and in terms of sharing or caring for others.

BMW M3 2012 black

In a recent set of experiments, researchers observed drivers at an intersection and found that people driving fancy cars — a stand-in for high economic status — were more likely than those driving beaters to cut off other drivers and to fail to stop for pedestrians at crosswalks. Really? The researchers also found in subsequent experiments that wealthier people were more likely to cheat at a gambling game and to take candy that would otherwise be given to children.

The same research revealed that unethical behavior wasn’t linked directly to being wealthy but rather to how much people believed that greed was good — a view that correlated highly with wealth. But even poor people behaved just as badly as the rich when they were primed to believe that selfish, greedy behavior was acceptable. Indeed, according to some research, just being in the physical presence of visible wealth reduces sharing. And, of course, simply working in a financial district is likely to provide an abundance of such cues.

All of this suggests that Wall Street offers a perfect storm of an environment that is not only likely to attract psychopaths and to promote them to the top, but also to encourage them to behave in antisocial ways. There are many exceptions to the rule, of course, and these studies, which only hint at tendencies, shouldn’t be seen as condemning everyone in finance. But the findings do raise troubling questions.

Smith claims that Goldman Sachs previously went to great lengths to create a culture in which service to the client was the highest value. The overall idea was to make money, certainly, but in a mutually beneficial way. Now, he says:

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets” [a derogatory term for clients], “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

The thing about psychopathic values is that they’re contagious. We pick up the values of our leaders and often mirror their behavior. But determining what to do about it is a lot harder than making the diagnosis. Unless, of course, you are the 99%.


Why I Am Leaving Goldman Sachs.

This is an article written by GREG SMITH in today’s New York Times.
goldman sachs logo

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

Blankfein     Gary Cohn

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus,God’s work, Carl LevinVampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.


The King of Hate Radio Strikes Again.

Tracie McMillan calls Rush Limbaugh comments ‘unconscionable and sexist’.

 
Not only is El Rushbo undaunted by the flack over Sandra Fluke, it actually appears to energize him and encourages him to seek out other female targets. This time, “Authorettes” and the “Over-educated”. If there are women in America who are willing to vote for the Republican candidates who are unable/unwilling to condemn Rush Limbaugh, then there is either something seriously wrong with our culture or me.

Author and Holly (MI) native Tracie McMillan was surprised by comments from radio talk show host Rush Limbaugh Tuesday regarding her gender and education. Does losing 40 sponsors and 2 radio stations send a message to Rush that he should push down on the accelerator?

“What he was saying about me was completely unconscionable and sexist,” said McMillan, 35, of Limbaugh calling her an “authorette” and over-educated” while discussing her new book “The American Way of Eating.” And, not only that, it was stupid! Tracie McMillan is a working class, blue collar woman who grew up in Holly, Michigan. Her father was a lawnmower salesman and her mother had an English degree. Tracie was the oldest of three girls, and helped out at home when her mother fell ill around the time she was 7. The insurance company didn’t want to pay for her care, so when she got too ill to live at home, she bounced between institutions that would hold off on charging the family until the insurance company settled. Her mother left their home when she was 12; they lost the case with the health insurance company when she was 14, and her mother died when she was 16.

Her first job, at 14, was making caramel apples at an apple orchard. At 16, she got a job at Big Boy, stocking the salad bar before moving on to waitress. At 17, she earned a partial scholarship to NYU, moved to New York City, and cobbled together the rest of her tuition and living expenses as a tutor, nanny, waitress, personal assistant and intern; at one point she simultaneously juggled five part-time jobs. She stayed here because she landed in a rent-stabilized apartment that kept the city affordable. Clearly, an elitist authorette and way over-educated.

This “Over-educated Authorette” kept tutoring and freelancing until she got herself a job at City Limits as managing editor. She was a copy editor, photo editor, office manager and deadline nag, and in her free time, she started writing stories about the things that interested her: welfare, child care, anything, really, about how working families eked out a living. She’s proud, and a little shocked, that she’s now won several national awards, including the Harry Chapin Media Award and the James Aronson Award for Social Justice Journalism, and has been recognized by the James Beard Foundation, for her work on these topics. Even though she’s not on staff at a big  magazine or newspaper, the awards put her work in the same league as the publications she beat to win them: the New York Times, Fortune, Businessweek and Time.  But, I’m sure El Rushbo thinks these awards are leftist jack-offs that mean nothing outside of the elitist, self-congratulatory East Coast liberal book clubs.

You want to talk about over-educated authorettes? How about Ann Coulter, who grew up in a wealthy suburb in Connecticut, Then, while attending Cornell University, Coulter helped found The Cornell Review,[5] and was a member of the Delta Gamma national women’s fraternity.[6] She graduated cum laude from Cornell in 1984 with a B.A. in history, and received her J.D. from the University of Michigan Law School in 1988, where she achieved membership in the Order of the Coif and was an editor of the Michigan Law Review.[7] At Michigan, Coulter was president of the local chapter of the Federalist Society and was trained at the National Journalism Center.[8]

After law school, Coulter served as a law clerk in Kansas City, for Pasco Bowman II of the United States Court of Appeals for the Eighth Circuit. After a short time working in New York City in private practice, where she specialized in corporate law, Coulter left to work for the United States Senate Judiciary Committee after the Republican Party took control of Congress in 1994. She handled crime and immigration issues for Senator Spencer Abraham of Michigan and helped craft legislation designed to expedite the deportation of aliens convicted of felonies. She later became a litigator with the Center for Individual Rights. I don’t remember Rush calling Coulter an over-educated authorette, but maybe it’s just me.

Back to Tracie. Over time, her work has appeared in a wide range of publications including the New York Times, Harper’s, Slate, Saveur, Salon and Gastronomica. In October 2012, she was named a Senior Fellow at Brandeis University’s Schuster Institute for Investigative Journalism. (It’s unpaid, but the title helps). Her first book, The American Way of Eating, a nonfiction project examining food and class in America, was published by Scribner in February 2012.

McMillan is currently on a book tour, describing her experience in which she works undercover in fields in California, the produce department of a Walmart store outside of Detroit and an Applebee’s restaurant in New York City to research how food comes to people’s tables and questioning why Americans eat the way they do every day.

The 35-year-old McMillan said she was about to shut off her Internet access when a couple of tweets showed up on her Twitter page regarding Limbaugh’s comments.

“I had no idea Rush Limbaugh had any idea who I am,” she said. “Frankly, I don’t think he does have any idea who I am other than the (New York) Times (book) review.”

McMillan moved to New York after receiving a partial scholarship to NYU, where she received a bachelor’s degree in political science, while working several part-time jobs.

During his comments on-air, Limbaugh stated, “What is it with all of these young single white women?,  They’re over-educated, but that doesn’t mean they’re intelligent,” according to show transcript.

“To say that women who have worked their butts off to get a B.A. are over-educated … do you think any women shouldn’t go to school?” McMillan said.

Students at the University of Michigan-Flint were taken aback by Limbaugh’s comments about McMillan and Sandra Fluke, a Georgetown University law student he called a “slut” and “prostitute” last week after discussing her approval of the use of birth control during a recent hearing on Capitol Hill.

“You’re not looking at their education, but their gender,” said Davison resident Corynn Bowden, a 21-year-old University of Michigan-Flint junior. “He’s not a woman himself. He can’t even be in their shoes if he tried.’

Alyssa Miller, 24, of Lapeer, MI, said sexism is “obviously still around and something that’s still prevalent,” and the bias may be more hidden than other forms of prejudice.

A pre-med student majoring in biology, Miller said she’s had people suggest a change in her major because of the prevalence of men in the field.

“I took it as insulting my intelligence, personally,” she said. “It’s something that’s probably never going to change.” 

While calling Limbaugh’s comments “a whole other level of jerk,” McMillan said the attention has helped get out her message on nutritional problems among Americans, including obesity.

Mark Valacak, health officer of the Genesee County Health Department, said the problem is widespread in Flint, with a recent poll showing the Flint/Genesee County area as the fifth-most obese in the nation.

He said the issue stems from a lack of healthy food options, with just one national food retailer with a store within Flint’s city limits. 

“I think it’s a contributing factor to the obesity problem in this community,” he said. “You have to have access to healthy food options and easy access.”

McMillan tackled the issue to focus on a growing problem among the American population, which allowed her to continue to touch on social issues.

She’s written articles for the New York Times, Salon, Slate and other publications on a variety of issues, but McMillan wants her latest work to show the issues in the food industry and open up dialogue on nutrition.

“Figuring out how to build that kind of an infrastructure is a big part of the book,” she said. “I want a conversation on how we make sure everyone has good food.”

Despite the comments, McMillan has found the controversy “really fascinating” and joked that “I need to send (Rush) some flowers” for creating the attention.

“I think my work is worth as much on its (own) merits,” she said. “He’s certainly helped me professionally in a way I’d never be able to manufacture.”

And, I think El Rushbo has a serious case of grandiose, insecure, psychopathic misogyny and should see a talking doctor. And, his audience should do the same. And, now I am convinced he will be with us for a long time.


A Mortgage Settlement That Is As Bogus As The Mortgage, And The Foreclosure.

Details about the $25 billion mortgage settlement signed off by 49 state attorneys general tamp down early expectations about how many mortgage borrowers might receive relief.

The much-ballyhooed bank settlement over mortgage lending and foreclosure abuses is eerily reminiscent of the scandal itself. Beware of the fine print.

Forty-nine state attorneys general signed off on a $25 billion deal with five major banks — one is tempted to say robo-signed — that first and foremost protects the banks from government lawsuits.

Exactly which struggling homeowners will benefit is still being sorted out. If a mortgage is owned or backed by Fannie Mae or Freddie Mac — about 55 percent of all mortgages — it is not eligible for help. Underwater, but making your payments? Do not expect any relief.

Borrowers who lost their homes to dodgy foreclosures might collect $2,000 for what they went through. In theory they could sue their lender, but imagine how much legal time two grand would pay for.

The New York Times reported an audit of recent foreclosures in San Francisco County found most all involved legal violations or suspicious documentation. It is not clear the settlement goes after the abuses found in the audit.

Past industry standards of confirming a borrower’s credit, capability and collateral sound so ’70s. Instead the lenders signed documents without verifying information. Those instincts carried through at the other end with foreclosures that did not follow legal processes of notice and filings.

The latest wrinkle in the settlement story comes via The Associated Press, which reported that $2.75 billion for states to help prevent foreclosures is being sucked up in state budgets. Governors and legislators covet the cash to plug budget holes.

Lessons learned from the mortgage scandal are about the details. Same for the settlement. And at the end of the day, the tiny, elite minority who govern and control this country slide out the back door. Un-accountable, un-controllable and un-punished.


Audit Uncovers Extensive Flaws in Foreclosures.

So, now that I am back in the saddle, here goes: 

An audit by San Francisco county officials of about 400 recent foreclosures there determined that almost all involved either legal violations or suspicious documentation, according to a report released Wednesday.

Phil Ting, the San Francisco assessor-recorder, found widespread violations or irregularities in files of properties subject to foreclosure sales.

Anecdotal evidence indicating foreclosure abuse has been plentiful since the mortgage boom turned to bust in 2008. But the detailed and comprehensive nature of the San Francisco findings suggest how pervasive foreclosure irregularities may be across the nation.

The improprieties range from the basic — a failure to warn borrowers that they were in default on their loans as required by law — to the arcane. For example, transfers of many loans in the foreclosure files were made by entities that had no right to assign them and institutions took back properties in auctions even though they had not proved ownership.

Commissioned by Phil Ting, the San Francisco assessor-recorder, the report examined files of properties subject to foreclosure sales in the county from January 2009 to November 2011. About 84 percent of the files contained what appear to be clear violations of law, it said, and fully two-thirds had at least four violations or irregularities.

Kathleen Engel, a professor at Suffolk University Law School in Boston said: “If there were any lingering doubts about whether the problems with loan documents in foreclosures were isolated, this study puts the question to rest.”

The report comes just days after the $26 billion settlement over foreclosure improprieties between five major banks and 49 state attorneys general, including California’s. Among other things, that settlement requires participating banks to reduce mortgage amounts outstanding on a wide array of loans and provide $1.5 billion in reparations for borrowers who were improperly removed from their homes.

But the precise terms of the states’ deal have not yet been disclosed. As the San Francisco analysis points out, “the settlement does not resolve most of the issues this report identifies nor immunizes lenders and servicers from a host of potential liabilities.” For example, it is a felony to knowingly file false documents with any public office in California.

In an interview late Tuesday, Mr. Ting said he would forward his findings and foreclosure files to the attorney general’s office and to local law enforcement officials. Kamala D. Harris, the California attorney general, announced a joint investigation into foreclosure abuses last December with the Nevada attorney general, Catherine Cortez Masto. The joint investigation spans both civil and criminal matters.

The depth of the problem raises questions about whether at least some foreclosures should be considered void, Mr. Ting said. “We’re not saying that every consumer should not have been foreclosed on or every lender is a bad actor, but there are significant and troubling issues,” he said.

California has been among the states hurt the most by the mortgage crisis. Because its laws, like those of 29 other states, do not require a judge to oversee foreclosures, the conduct of banks in the process is rarely scrutinized. Mr. Ting said his report was the first rigorous analysis of foreclosure improprieties in California and that it cast doubt on the validity of almost every foreclosure it examined.

“Clearly, we need to set up a process where lenders are following every part of the law,” Mr. Ting said in the interview. “It is very apparent that the system is broken from many different vantage points.”

The report, which was compiled by Aequitas Compliance Solutions, a mortgage regulatory compliance firm, did not identify specific banks involved in the irregularities. But among the legal violations uncovered in the analysis were cases where the loan servicer did not provide borrowers with a notice of default before beginning the eviction process; 8 percent of the audited foreclosures had that basic defect.

In a significant number of cases — 85 percent — documents recording the transfer of a defaulted property to a new trustee were not filed properly or on time, the report found. And in 45 percent of the foreclosures, properties were sold at auction to entities improperly claiming to be the beneficiary of the deeds of trust. In other words, the report said, “a ‘stranger’ to the deed of trust,” gained ownership of the property; as a result, the sale may be invalid, it said.

In 6 percent of cases, the same deed of trust to a property was assigned to two or more different entities, raising questions about which of them actually had the right to foreclose. Many of the foreclosures that were scrutinized showed gaps in the chain of title, the report said, indicating that written transfers from the original owner to the entity currently claiming to own the deed of trust have disappeared.

Banks involved in buying and selling foreclosed properties appear to be aware of potential problems if gaps in the chain of title cloud a subsequent buyer’s ownership of the home. Lou Pizante, a partner at Aequitas who worked on the audit, pointed to documents that banks now require buyers to sign holding the institution harmless if questions arise about the validity of the foreclosure sale.

The audit also raises serious questions about the accuracy of information recorded in the Mortgage Electronic Registry System, or MERS, which was set up in 1995 by Fannie Mae and Freddie Mac and major lenders. The report found that 58 percent of loans listed in the MERS database showed different owners than were reflected in other public documents like those filed with the county recorder’s office.

The report contradicted the contentions of many banks that foreclosure improprieties did little harm because the borrowers were behind on their mortgages and should have been evicted anyway. “We can deduce from the public evidence,” the report noted, “that there are indeed legitimate victims in the mortgage crisis. Whether these homeowners are systematically being deprived of legal safeguards and due process rights is an important question.”


Why There Won’t be a Jobs Recovery and Why Congress Needs to Get Real.

 

History is telling. Modernization has always caused some kinds of jobs to change or disappear. As the American economy transitioned from agriculture to manufacturing and then to other industries, farmers became steelworkers, and then salesmen and middle managers. These shifts have carried many economic benefits, and in general, with each progression, even unskilled workers received better wages and greater chances at upward mobility.

But in the last two decades, something more fundamental has changed. Midwage jobs started disappearing. Particularly among Americans without college degrees, today’s new jobs are disproportionately in service occupations — at restaurants or call centers, or as hospital attendants or temporary workers — that offer fewer opportunities for reaching the middle class. That job increase in December? Mostly minimum wage, service jobs.

Here is the iPhone story and it is an insight into how the world has changed and how out of touch our political leadership really is.

 

When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

 

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products.

Apple has become one of the best-known, most admired and most imitated companies on earth, in part through an unrelenting mastery of global operations. Last year, it earned over $400,000 in profit per employee, more than Goldman Sachs, Exxon Mobil or Google.

However, what has vexed Mr. Obama as well as economists and policy makers is that Apple — and many of its high-technology peers — are not nearly as avid in creating American jobs as other famous companies were in their heydays.

Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.

“Apple’s an example of why it’s so hard to create middle-class jobs in the U.S. now,” said Jared Bernstein, who until last year was an economic adviser to the White House.

“If it’s the pinnacle of capitalism, we should be worried.”

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

 

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

Similar stories could be told about almost any electronics company — and outsourcing has also become common in hundreds of industries, including accounting, legal services, banking, auto manufacturing and pharmaceuticals.

But while Apple is far from alone, it offers a window into why the success of some prominent companies has not translated into large numbers of domestic jobs. What’s more, the company’s decisions pose broader questions about what corporate America owes Americans as the global and national economies are increasingly intertwined.

“Companies once felt an obligation to support American workers, even when it wasn’t the best financial choice,” said Betsey Stevenson, the chief economist at the Labor Department until last September. “That’s disappeared. Profits and efficiency have trumped generosity.”

Companies and other economists say that notion is naïve. Though Americans are among the most educated workers in the world, the nation has stopped training enough people in the mid-level skills that factories need, executives say.

To thrive, companies argue they need to move work where it can generate enough profits to keep paying for innovation. Doing otherwise risks losing even more American jobs over time, as evidenced by the legions of once-proud domestic manufacturers — including G.M. and others — that have shrunk as nimble competitors have emerged.

Apple was provided with extensive summaries of The New York Times’ reporting for this article, but the company, which has a reputation for secrecy, declined to comment.

This article is based on interviews with more than three dozen current and former Apple employees and contractors — many of whom requested anonymity to protect their jobs — as well as economists, manufacturing experts, international trade specialists, technology analysts, academic researchers, employees at Apple’s suppliers, competitors and corporate partners, and government officials.

Privately, Apple executives say the world is now such a changed place that it is a mistake to measure a company’s contribution simply by tallying its employees — though they note that Apple employs more workers in the United States than ever before.

They say Apple’s success has benefited the economy by empowering entrepreneurs and creating jobs at companies like cellular providers and businesses shipping Apple products. And, ultimately, they say curing unemployment is not their job.

“We sell iPhones in over a hundred countries,” a current Apple executive said. “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.”

‘I Want a Glass Screen’

In 2007, a little over a month before the iPhone was scheduled to appear in stores, Mr. Jobs beckoned a handful of lieutenants into an office. For weeks, he had been carrying a prototype of the device in his pocket.

Mr. Jobs angrily held up his iPhone, angling it so everyone could see the dozens of tiny scratches marring its plastic screen, according to someone who attended the meeting. He then pulled his keys from his jeans.

People will carry this phone in their pocket, he said. People also carry their keys in their pocket. “I won’t sell a product that gets scratched,” he said tensely. The only solution was using unscratchable glass instead. “I want a glass screen, and I want it perfect in six weeks.”

After one executive left that meeting, he booked a flight to ShenzhenChina. If Mr. Jobs wanted perfect, there was nowhere else to go.

For over two years, the company had been working on a project — code-named Purple 2 — that presented the same questions at every turn: how do you completely reimagine the cellphone? And how do you design it at the highest quality — with an unscratchable screen, for instance — while also ensuring that millions can be manufactured quickly and inexpensively enough to earn a significant profit?

The answers, almost every time, were found outside the United States. Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

In its early days, Apple usually didn’t look beyond its own backyard for manufacturing solutions. A few years after Apple began building the Macintosh in 1983, for instance, Mr. Jobs bragged that it was “a machine that is made in America.” In 1990, while Mr. Jobs was running NeXT, which was eventually bought by Apple, the executive told a reporter that “I’m as proud of the factory as I am of the computer.” As late as 2002, top Apple executives occasionally drove two hours northeast of their headquarters to visit the company’s iMac plant in Elk Grove, Calif.

 

But by 2004, Apple had largely turned to foreign manufacturing. Guiding that decision was Apple’s operations expert, Timothy D. Cook, who replaced Mr. Jobs as chief executive last August, six weeks before Mr. Jobs’s death. Most other American electronics companies had already gone abroad, and Apple, which at the time was struggling, felt it had to grasp every advantage.

In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

The impact of such advantages became obvious as soon as Mr. Jobs demanded glass screens in 2007.

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

The Chinese plant got the job.

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

In Foxconn City

An eight-hour drive from that glass factory is a complex, known informally as Foxconn City, where the iPhone is assembled. To Apple executives, Foxconn City was further evidence that China could deliver workers — and diligence — that outpaced their American counterparts.

That’s because nothing like Foxconn City exists in the United States.

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day. While factories are spotless, the air inside nearby teahouses is hazy with the smoke and stench of cigarettes.

 

Foxconn Technology has dozens of facilities in Asia and Eastern Europe, and in Mexico and Brazil, and it assembles an estimated 40 percent of the world’s consumer electronics for customers like Amazon, Dell, Hewlett-Packard, Motorola, Nintendo, Nokia, Samsung and Sony.

“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

Indeed, none. End of story. Please don’t ever say “Let’s bring jobs back to America, and make America great again!” you incredibly uninformed and irresponsible, lying politicians. Except for my buddy, Obama.

Please.


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