Bailing Out One of the 20th Century's Best Business Models
What's black and white and red all over? Newspapers looking for a handout, that's what!
Matt WelchHere's a new holiday cocktail for you: Combine one part bailout seasoning with another part perennial journalistic self-pity, pour it out over the Christmas/New Year's publishing interregnum and presto!—it's time for patriotic men and women to get behind a government rescue of what was until very recently one of the most profitable sectors in the United States: The newspaper industry.
"We're more worthy of a bailout than the jokers on Wall Street," argued Kansas City Star columnist Jason Whitlock on Dec. 20. "You can't have a democracy without us. If newspapers are dying, so is our system of government."
Quite. Without Whitlock in the trenches covering the Big 12 North conference, how is the Republic to survive?
I kid (Whitlock can actually be a pretty interesting journalist) because I love. Newspapers, that is. Not necessarily their employees, and certainly not their employees' self-inflated, anti-competitive, and occasionally please-help-me-Washington ideas about how to get out of a mess largely of their own making. With a 100-year head start on putting the "new" in media and the "class" in classifieds, loyalists of companies that once printed money as well as papers now want the rules changed so that they can survive, or at least still afford private school.
Take former New York Times foreign correspondent Joel Brinkley, now a professor of journalism at Stanford (as an aside: how many industries are fortunate enough to have an entire wing of academia primed and ready as a backup employment plan?). Writing in the Dec. 21 San Francisco Chronicle—ironically, one of the papers that has embraced Web-based competition most effectively through the mere act of putting all its stories online, for free, at a static URL—Brinkley made the curious argument that giving news consumers what they obviously and understandably want (free news) was the biggest threat to print publications. "The newspaper industry," Brinkley suggested, "should ask the Justice Department for an antitrust exemption that would allow publishers to collaborate on a decision to begin charging for their Web sites….[I]f most papers in a region—San Francisco, Oakland and San Jose, for example—began charging for Web access at more or less the same time, many readers would likely subscribe."
Yes, and many (in fact most) likely would not!
Blaming the customer is the second-to-last refuge of any crappy industry, business, or organization (the last refuge being asking for a handout on Capitol Hill). As my ex-L.A. Times colleague and current Reason magazine Contributing Editor Tim Cavanaugh has noted in our pages, the paper we both short-timed for was filled with people making jokes about whether we could just "fire our readers." Over the recent holidays, an entire journalistic Festivus celebration of customer-blaming broke out over New Yorker finance columnist James Surowiecki's lament that, "The real problem for newspapers…isn't the Internet; it's us. We want access to everything, we want it now, and we want it for free." To extrapolate, if only us greedy human beings would realize that our very democracy was at stake, that we "are taking an active step in the formation of a country without a civic conscience," then we'd damned well volunteer to pay an unnecessary premium to keep our finest journalists in permanent six figures. Sounds precisely as convincing as the argument that enlightened voters will surely agree to pay extra taxes so that political campaigns can be financed through "clean" money.
At the risk of alienating what few old newspaper pals of mine still have jobs, the industry they (and I!) so cherish, which has suffered mind-blowing valuation losses and several dozen rounds of downsizing both in personnel and column inches, is still bloated after all these years, with costs that no publisher would dream of incurring if he was starting a newspaper from scratch in 2009.
In an era where there are no journalists left who don't have an e-mail address, newspapers still employ strange woodland creatures known as ombudsmen to "interface" with readers. On their first beer, newspaper hacks will talk bitterly about Jeff Jarvis and Mickey Kaus and Jay Rosen, all those ivory tower types who think newspapers could somehow be better with less staffing...and by the third they're talking smack about the writer across the hall who hasn't filed a thing in four months (and who never took any of the voluntary buyouts, for obvious reasons).
As I have had the privilege to experience, there still exists these 19th century things called "editorial boards," in which up to a dozen (though usually more like half that) wiseacres and a couple of dames sit around, listen to grandees, and between the lot of them write maybe 1,000 words a day of grave, unsigned, top-down wisdom about the State of the Union address (Hey! I wrote one of those!), or the latest fighting in Gaza. The opinion journalist Michael Kinsley, a man I once disdained but grew to have enormous respect for after learning what he tried to do with the L.A. Times opinion page, once wrote the world's most brutal (and ultimately self-defeating) memo on the insane economics of editorial boards…I can't find a public copy of it right now, but you can see a few of his similar sentiments here.
Suffice it to say, as one who is familiar with the numbers, you could probably print at least three Reason magazines (complete with website, blog, the whole nine yards) for the cost of one elite-newspaper opinion section, with its 14 pages a week. Are the elites three times better? You tell me.
Think of those economics—and of the fact that not one single ballyhooed newspaper poll organization added as much value to this year's presidential race as a lone Internet baseball geek named Nate Silver—the next time you see some politician push for government assistance to our endangered newspapers, or read some columnist confuse her own job security with the very health of the nation. Mark my words: This will not be the last time you hear about newspaper bailouts. Not if journalists have anything to say about it.
Matt Welch is Editor in Chief of Reason magazine.
Citigroup must recruit a zombie-slayer
Citigroup must recruit a zombie-slayer
By John Gapper
Dick Parsons may have believed his days at troubled companies were over, after spells running the tiny Dime Savings Bank in the 1990s and the huge AOL Time Warner this decade. But just when you think you are out, the feds drag you back in.
Mr Parsons is likely to be named shortly as chairman of Citigroup, which has taken two injections of US government money without altering its downward trajectory. It is expected to sustain a $10bn (€7.5bn, £6.8bn) fourth-quarter loss in addition to the $18bn it suffered in the previous four.
In some ways, Mr Parsons is ideally suited to take over at Citigroup. After all, his previous job at Time Warner was to untangle an ill-conceived and poorly-executed merger that left a giant company adrift.
Yet the stakes at Time Warner, which had a paltry $22bn in debt, were comparatively low. Shareholders were angry at being taken for an expensive ride by America Online and Steve Case, its chairman, in the 2000 merger. For the rest of us, the fiasco was as entertaining as one of Warner Brothers’ better films.
The case of Citigroup is different. Citi, one of the biggest banks in the world, has abruptly had to abandon its grandiose ambitions to be a global financial supermarket. It is selling assets to raise capital, having found that the $89bn it has obtained already, and a $309bn US government loan guarantee, are insufficient.
In November, Vikram Pandit, Citi’s chief executive, declared his “love” for Smith Barney, Citi’s stockbroking arm. On Tuesday, he sold Morgan Stanley a majority in Smith Barney to gain $6.5bn of equity and he is now hawking other divisions, including consumer finance in the US.
By the time he, or perhaps his successor, finishes, Citigroup will look roughly as it did before it merged with Sandy Weill’s Travelers Group in 1998 to create a new financial animal. Virtually the only piece left from Travelers will be a hobbled version of the investment bank formerly known as Salomon Brothers.
If everything goes well, that is. The alternative is that the US government will take control of Citigroup to stop it becoming a 1990s Japanese-style zombie bank, drifting from crisis to crisis with inadequate capital, unable to extricate itself from a swamp of bad loans and toxic securities.
Welcome to the job, Mr Parsons.
Actually, there is one formality to complete before he takes it. Someone else is doing it at the moment: Sir Win Bischoff, the former head of Schroders, who was catapulted into the Citi chairmanship in December 2007 after Chuck Prince, Citi’s chairman and chief executive, resigned ignominiously.
That is unlikely to detain him long. I am told that, after Mr Pandit was appointed, Mr Parsons had lunch with him as Citi’s lead non-executive director. He told Mr Pandit, in his seemingly amiable manner, that a chief executive of a public company only has one natural predator – his own board of directors.
Well, the board also has a natural predator – the shareholders. Mr Parsons may have overlooked this point since, at Time Warner, he shrugged off a bear hug from Carl Icahn. But there is no escaping the rough embrace of the US government, which is now Citi’s biggest investor and lender of last resort.
The Treasury and the Federal Reserve do not want a British-style non-executive chairman who flies in from London two or three days a week to look over Mr Pandit’s shoulder. They want to be reassured that the US taxpayers’ money is in familiar American hands.
No one seems completely to believe in Mr Pandit. The universal response of those around him when asked whether he is the right man for the job is: “Vikram is very smart.” That is undeniably true: he has a degree in electrical engineering, a PhD in finance and was an investment banker and a hedge fund manager.
But is a Wall Street whizz the best person to run a wholesale and retail bank that employs 350,000 people? Wall Street people have been in the ascendant over the past decade: Josef Ackermann, for example, was one before he thrust himself to the helm of Deutsche Bank.
These days, the idea that clever guys who understand securities and derivatives, and get paid tens of millions of dollars a year, should run things rings hollow. Mr Ackermann, whose bank until now navigated the credit crisis well, expects to declare a €4.8bn fourth-quarter loss.
In light of this, Citi’s top team looks thin. Both Sir Win and Mr Pandit were sponsored by Robert Rubin, the former Goldman Sachs chairman and éminence grise who last week resigned as a director, finally conceding his “great regret” at his ambiguous part in Citi’s downfall.
The second step in changing Citi’s leadership is likely to be that Mr Parsons takes the place of Sir Win (who, by the way, has done a decent job in tough circumstances).
The third step is to find a tough, seasoned commercial banker – someone along the lines of Walter Wriston or John Reed, Citi’s last two chief executives before it fell into Mr Weill’s hands – to become chief executive. Mr Parsons insists that he has complete confidence in Mr Pandit, but he looks predatory to me.
There are, admittedly, not many candidates around, especially since Ken Lewis at Bank of America and Jamie Dimon at JPMorgan Chase face their own difficulties. Mr Parsons was once a banker, since he ran the aptly named Dime for a while, but it hardly stacks up against Citi.
Someone could be found, however. It would be rough on Mr Pandit who is, as they say, a clever man. But the stakes are high, not only for Citi and the US government but for the global economy. Unless someone stops Citi sinking, we are all in trouble.
Washington's Wealth Boom
Washington's Wealth Boom
The D.C. metro area is getting richer every year. That's a problem for the rest of America.
Radley BalkoTake a look at this map. The areas shaded in red are the 100 wealthiest counties in America according to per capita income. At first glance, it's a little misleading, because in the American West, counties tend to be larger in geographic area. But look closely, and you'll see that after the New York City metropolitan area, the largest cluster of wealth in the U.S. is huddled around Washington, D.C.
If we look at household income, the picture grows starker. After the 2000 Census, the richest county in America was Douglas County, Colorado. By 2007, Douglas County had fallen to sixth. The new top three are now Loudon County, Virginia; Fairfax County, Virginia; and Howard County, Maryland. All three are suburbs or exurbs of Washington, D.C. In 2000, 14 of the 100 richest counties were in the Washington, D.C., area. In 2007, it was nine of the richest 20.
All of this is fine if you happen to live in the D.C. area. It's not so great for the country as a whole.
While the D.C. metro area hasn't completely escaped the recession, it's doing much better than most everywhere else. Real estate advisers Grub & Ellis Company recently ranked the D.C. metro area the top market in the country for commercial real estate investment. Investment advisers are high on D.C. area real estate even in down times, because they know the federal government's only going to get bigger. That means more federal employees, more grantees and contractors, and more wealthy lawyers and lobbyists setting up shop inside the Beltway—both to get a piece of the federal budget (or, more recently, the $7 trillion-and-growing pot of federal bailout honey), and, as the federal regulatory state expands, to lobby for regulations most favorable (or, least unfavorable) for their clients.
The problem is that, save for the tech corridor in D.C.'s Virginia exurbs, the Washington Metro area doesn't actually produce anything. Washington doesn't create wealth, it just moves it around—redistributes it. As government grows and takes control of more and more of the private economy—either through spending, regulation, or taxes—more and more wealth that's created elsewhere comes to Washington to be devoured.
The Washington wealth boom is the result of the massive expansion in government over the last 10 years, which has populated the region with an increase in well-paid federal employees, and wealthy federal contractors and lobbyists.
As for federal employees, according to the Bureau of Labors Statistics, as of January 2007, there were 284,000 federal employees living in the Washington, D.C. area, up from 268,000 in 2000. The Cato Institute's Chris Edwards estimates that in 2005, the average federal employee made $106,579 per year including benefits, about twice as much as the average person makes in the private sector. Federal wages are also rising at about twice the rate that wages are rising in the private sector.
What about contractors? New York University's Paul C. Light estimates about 7.6 million people earned their paycheck through federal government contracts in 2005, a 50 percent increase since 2002. That increase in contractors doesn't seem to be trimming the number of full-time government jobs, either. The civil service workforce increased over that period, too, though not nearly as dramatically. Taxpayers paid $400 billion to federal contractors in 2007, double what they paid in 2000. Less than half those contracts were won with competitive bidding.
And lobbyists? The Washington Post reports that the number of registered lobbyists in Washington doubled between 2000 and 2005, to nearly 35,000. Not coincidentally, federal outlays increased over that period from $1.79 to $2.29 trillion. The government put more money on the table, so firms were willing to pay more lobbyists higher salaries to go snatch a piece of it.
"People in industry are willing to invest money because they see opportunities here," one lobbyist told the Post. "They see that they can win things, that there's something to be gained. Washington has become a profit center." Well, not exactly. "Profit" usually means providing products or services their customers want, which leads to voluntary, mutually beneficial transactions that leave both parties better off. In Washington, companies pay lawyers to procure money the government has forcibly taken from taxpayers. The only ones better off there are the companies and the politicians-which is worth keeping in mind the next time you hear how public service is an endeavor filled with honor, while the private sector is a playground for the greedy.
National Journal reported in April that D.C. firms spent $2.79 billion lobbying the federal government in 2007, up 7.7 percent from 2006 - in a down economy. Companies spend money only when they're relatively certain they'll get a good return on their investment. I can only speculate what that $2.79 billion bought, but rest assured, its worth a lot more than $2.79 billion.
The outlook from here is grim. As bad as the Bush administration has been about expanding the size and scope of government, President-elect Barack Obama and the Democrats in Congress aren't exactly promising cutbacks. They've promised to expand the federal budget, the federal payroll, and the federal government's influence over the private sector. Obama's stimulus package calls for 600,000 new government employees.
And then there's all of that bailout money. At its core, the concept of a bailout is for the government to take money from people and businesses that didn't make mistakes, and give it to businesses that made lots of them. The waste comes not just from the initial cost to taxpayers, but also in all the money companies will then pay high-dollar lobbyists in Washington to procure a part of it.
America's wealthiest counties ring a city where the chief industry is government - and the entire region's only getting richer. That doesn't seem like a trend that bodes well for the health of a market-based economy.
Radley Balko is a senior editor at Reason magazine. This article originally appeared at FoxNews.com.
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