Portfolio.com: Executives

The End of Innocence

Fri, 24 Apr 2009 14:30:00 GMT

It seems unthinkable today — but more than two decades ago, when personal computers were still new and everybody listened to music on a Walkman, Steve Jobs was cast out of Apple. The year was 1985. IBM and Microsoft dominated the world of computing. The revolutionary Macintosh, launched with such fanfare just a year earlier, appeared to be foundering. And Jobs, the guiding force at Apple from the beginning, seemed not just expendable but a threat to the company he’d built. In West of Eden — a national best-seller when it was first published in 1989, now updated in a new edition available on Amazon — Wired contributing editor Frank Rose tells how it went down. In this essay, excerpted from the introduction to the new edition, Rose recalls the downward spiral Apple fell into after Jobs was dismissed and ultimately how Jobs could be the fall guy one decade and Apple's savior the next.

Apple has a lot of great qualities, but openness has never been one of them. This January, when it became obvious that its CEO was seriously ill, that lack of candor spawned a crisis. Less than five years earlier, Steve Jobs had undergone surgery for a rare form of pancreatic cancer. He’d recovered well, but now his increasingly gaunt appearance was fueling the Wall Street rumor mill.

Apple’s stock, which a year earlier had been trading at nearly $200 a share, was bouncing up and down in the $100 range. Reporters were calling MDs to check the credibility of the latest corporate health bulletin. Legal experts were publicly debating the board’s responsibility. Even the SEC, newly risen from a long, deep slumber, was said to be investigating.

Over the past decade, Apple has become one of America’s greatest corporate success stories — and Jobs, who co-founded the company back in 1976 and been expelled from it less than a decade later, has been hailed as the man who engineered its triumph.

At a time when one technology giant after another — Dell, Microsoft, Motorola, Sony, Sun, Yahoo — has stumbled, Apple seems to be doing everything right.

It’s not just that the company is making money, or that it's just re-entered the Fortune 100, or that it’s kept growing at 40 per cent per year even as it hit $33 billion in sales — though in the teeth of the worst recession since at least the early 1980s, those two accomplishments alone would be remarkable. It’s that Apple has become a cultural icon. Apple sells us lustrous white laptops and impossibly slim music players and software that transforms bedrooms into recording studios and cell phones that function as fabulous electronic toys and wireless hubs — wireless hubs! — that look like desktop flying saucers.

Apple has confronted first the music labels and then the mobile phone carriers, forcing change on two of the world’s most monopolistic and hidebound industries. Apple papers our cities with dancing silhouettes and exhorts us in banners to “think different.” Apple is not just a source of profits; it’s a source of joy.

But spin the time machine back a quarter-century. In the mid-1980s, when many of Apple’s current enthusiasts had yet to be born, the man now credited with all this was ejected from his company in the power struggle that West of Eden recounts. Defrocked and disillusioned, the young Jobs—he’d turned 30 just a few months earlier — had to watch in exile as his expulsion was celebrated on Wall Street and in the media.

Yes, people agreed, Jobs was brilliant, but he was far too reckless and impulsive to suit the Fortune 500 corporation Apple had become. He was an entrepreneur, and sooner or later the entrepreneurs had to go so their companies could settle down to business. John Sculley, the suave East Coast marketing executive Jobs had recruited from PepsiCo less than three years before, took for himself the mantle of Apple’s visionary leader. Nearly everyone pretended not to notice how badly it fit.

For awhile, all went well. Sales were up. The new regime got great press. Macintosh, the revolutionary personal computer Jobs and his team had built and launched with such fanfare in 1984, regained its momentum. Sculley penned a best-selling book and took on celebrity status. He even invented a new techie term: PDA, for personal digital assistant.

But there were problems. In 1988, Apple jacked up its prices and Macs suddenly stopped selling. The product line proliferated willy-nilly, confusing customers and blurring the image. And when Sculley’s much-heralded PDA, the Newton, finally appeared in 1993, its wretched performance and dismal sales made it the Edsel of Silicon Valley. Sculley was soon out.

His replacement, a hard-charging, German-born Apple executive named Michael Spindler, lasted less than three years. In February 1996, with losses piling up and market share plummeting, the board brought in Gil Amelio, the CEO of National Semiconductor, to run the company.

Amelio had a reputation as a turnaround expert, but essentially he was just a numbers guy, devoid even of the pretense of charisma. Under his watch, Apple appeared to fall into a death spiral. By early 1997 it had just 3.3 per cent of the personal computer market and its stock was down to $14 a share. The venture that was supposed to change the world seemingly had but one hope left: to be a takeover target.

"When a company has as strong a brand and consumer franchise as Apple, it is very hard to destroy it," technology analyst Richard Shaffer told the New York Times. "But it can be done.” And from 1985 to 1997, it very nearly was.

Almost inadvertently, however, Amelio made one smart move: He bought NeXT, the computer company Jobs had started after Sculley showed him the door. NeXT was never terribly successful: Its hardware was gorgeous but far too expensive for the education market it was intended for, and by now it was focusing exclusively on software. But functioning software was something Amelio desperately needed, and for $425 million he got it—and Jobs in the bargain.

Seven months later, in July 1997, Amelio was sacked. The topmost exec left standing was the CFO, who announced that the board would conduct a search for a new chief executive, that Jobs would serve as an advisor to the board, and that no one should even think about the company becoming profitable again any time soon. At this point, Apple was running on momentum alone; the idea that anyone could turn it around seemed almost absurd.

For Jobs, 1997 was shaping up to be a propitious year. Pixar, the little computer animation studio he’d bought a decade earlier, had had the second-highest-grossing film of 1995 with Toy Story, its first release. The year after that, Apple had bought NeXT, the computer startup he’d founded after John Sculley showed him the door, and brought him back as a special advisor. Now, with Apple’s latest CEO ousted and nobody left to challenge him there, he simply assumed power.

First he negotiated a truce with Microsoft, Apple’s one-time nemesis: To help keep its wounded rival alive, Microsoft agreed to buy $150 million in non-voting stock and to continue producing its all-important Office software for Macintosh. He put Jonathan Ive in charge of design and brought in Tim Cook, Compaq’s self-styled “Attila the Hun of inventory,” to run manufacturing, setting up the team that has run the company under his aegis ever since. (Cook is now interim CEO while Jobs is on leave.)

Jobs reconstituted the board, bringing in industry professionals like Intuit CEO Bill Campbell, an Apple veteran, and Larry Ellison, the CEO of Oracle. Then he allowed the board to name him “interim” CEO, but he accepted no pay and reserved the right to walk away at any moment. The message was clear: Apple needed him more than he needed Apple.

Over the next few months, more changes followed — each of them a repudiation of one Sculley initiative or another. The number of product lines was winnowed from 15 to four. The retail channel was streamlined: Instead of selling through competing chains in a misguided drive for “shelf space,” sales were unified through an exclusive national dealer.

Marketing was focused around a single message — the “Think Different” campaign from Chiat/Day, the newly rehired ad agency behind the unforgettable “1984” TV spot that had launched the Mac. The licensing deals that enabled other manufacturers to undercut Apple with Mac clones were terminated. Operating expenses were cut nearly in half. Within months, Apple was back in the black.

It was a stunning performance, made all the more so by the fact that in the time since then it has been repeated every year but one. But the numbers don’t answer the critical question: How did Jobs go from the out-of-control kid who lost a boardroom showdown in 1985 to the leader who took command in 1997 and has steered the company with uncanny precision ever since?

Various explanations have been offered, none of them terribly satisfactory. Jobs did pick up some experience during his years in exile. Running NeXT and Pixar, he acquired on his own the business education he’d hoped — naively, as it turned out — to get from Sculley. But even in the ’80s, he’d known more than Sculley and his lieutenants, most of them from a background in packaged goods rather than computers, were willing to admit.

The operational efficiencies Jobs began to introduce in the latter half of 1997 were for the most part the same tech-savvy changes he’d pushed for in the first half of 1985: slash inventory, shut warehouses, run manufacturing close to the bone. Nor has his style changed dramatically, though the gray in his hair may make it seem more palatable. Driven, obsessive, relentless, controlling, stubborn, messianic: Essentially, the Jobs you saw in 1984 is the Jobs you get today. It’s the rest of us who have changed.

A lot of it has to do with our attitude toward technology. Personal computers in the ’80s were exotic beasts, as pregnant with threat as with promise. As late as 1987 I had to tailor a magazine profile of Alan Kay, the computing pioneer, to satisfy an editor who didn’t “believe in” computers — whatever that meant.

Because of their obvious utility, PCs were becoming accepted in corporate America—not for senior executives, who had secretaries to do their typing, but at least for the white-collar worker drones who needed to manipulate spreadsheets and such. In order to be deemed “safe,” these machines had to be as clunky and dreary as possible, and until Compaq made clones acceptable they had to bear the IBM logo as well. To anyone in business or finance, Macintosh seemed at best a toy and Jobs weirdly erratic.

But it went deeper than that. Jobs liked to trumpet his ambition to change the world, and by the mid-’80s that no longer struck most people as reasonable or even desirable. Those were the Reagan years. Idealism wasn’t dead, but certainly it had changed its stripes. Faced with the choice, as the Mac team had it, of being a pirate or joining the navy, most of the population seemed ready to line up and enlist. As presented by Tom Cruise in Top Gun, the number-one box office smash of 1986, the navy didn’t even look half-bad. But in the end, as the music industry has learned to its chagrin, piracy is always more appealing.

We live today in an Apple world. Whether or not we use a Mac — and more and more of us do, to the point that Apple entered 2009 with nearly 10 per cent of the US personal computer market — we work and play in the environment that Jobs and his team defined a quarter-century ago.

Long before there was a blogosphere there was desktop publishing — a development so ground-breaking it’s difficult to conceive of the one without the other. The do-it-yourself revolution that began with the little 128K Macintosh and its PageMaker software has spread to graphics, photography, music, video, and nearly every other creative endeavor. Flickr, YouTube, Wikipedia, del.icio.us, almost the entire panoply of sites and services known as Web 2.0 — there is a tiny spark of Jobs in each of them.

The lesson of Jobs’s ouster and redemption is twofold. First, never count anyone out — certainly not anyone as determined and intelligent as Jobs. In pulling off one of the greatest second acts in American business, he has not merely confounded his critics, he has induced mass amnesia. Second, savor authenticity. The Jobs who led the Macintosh crew in 1984 was self-centered, imperious, arrogant, unyielding, and flawed in myriad other ways — but more importantly, he had genuine passion and the crucial ability to instill it in others. This made him far more compelling and ultimately more successful than the string of glossy-tongued managers who followed. Rough edges, it turns out, are there for a reason.

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Fri, 24 Apr 2009 14:30:00 GMT

J.P. Morgan Is No. 1

Fri, 24 Apr 2009 04:00:00 GMT

Up until about 2006 or so, to work at J.P. Morgan Chase was to experience the feeling that you were part of the blanding of banking.

In Wall Street's testosterone-fueled pecking order, the company's name might have evoked prestige of the past, but it lost that after it merged with Chase Manhattan in 2000. The esprit de corps of the place was all but obliterated, even if the pay was still pretty good.

In other words, it certainly was no Goldman Sachs. I worked at Goldman for two years after college. Despite perhaps being the most unenthusiastic investment banker in history—I'd had my Jack Kerouac moment around the time I was offered the job, and accepted it only because I had student loans to repay—I actually liked working there. Why? Not because I liked what I did. Rather, it was because I had a job that I knew so many other people would kill for.

Even after the downturn started, the media was still awash in stories about how Goldman Sachs was a modern-day version of the Illuminati, all but secretly controlling the government, and, through its foresight and power, crushing its competition with apparent nonchalance. Goldman employees were different than the rest of us.

In a word, they were, well, better.

But something has changed, at least in the status perceptions of Wall Streeters. Goldman Sachs is no longer the Goldman Sachs of the financial world. J.P. Morgan Chase is.

Sure, Goldman reported blockbuster results in April and followed them with an in-your-face equity offering of $5 billion that was intended to help pay back TARP funds from the government.

But pay no heed. This is not the Goldman of times past. That's because J.P. Morgan chief Jamie Dimon has navigated the shoals of the economic and financial crisis so adeptly that it is his bank, and not Goldman, against which all others are now compared. Let us count the ways.

In the first quarter of 2009, J.P. Morgan's investment bank led the industry's much-watched "league tables" in the most important capital-raising categories. More companies raised debt and equity through J.P. Morgan than anyone else.

While Goldman Sachs claimed to have won the mergers and acquisitions footrace, they had to perform a sleight of hand to get there, changing the criteria from deals that were announced during the quarter to deals that were actually completed. Most Wall Street firms play with the inputs to try and find a way to claim they're No. 1. Goldman never used to, but they're doing it now.

When Goldman Sachs and Morgan Stanley decided—while fearing for their own existence—to transform themselves into bank holding companies in September (bringing with it the ability to access the Federal Reserve's discount window), they essentially brought to an end the era of the standalone investment bank.

Goldman used to be special. Now, Goldman is merely a far smaller bank than J.P. Morgan. Sure, their results beat analyst expectations by nearly double in April. But their revenues only rose 13 percent. J.P. Morgan's top-line gain? A cool 48 percent. More to the point, J.P. Morgan's investment bank brought in $1.4 billion in revenue in the quarter, tops on Wall Street.

Goldman had, for a time, the most badass leader on Wall Street in Hank Paulson. But Paulson is long gone.

Beyond generally seeming mealy-mouthed, the company's current CEO, Lloyd Blankfein, has of late been styling himself a little like Jamie Dimon, in particular in his late-to-the-game calls for compensation reform among the country's most overpaid paper-pushers.

But Dimon actually exudes real confidence instead of merely putting it on as a public-relations costume. Goldman's co-president, Jon Winkelried, recently resigned in the wake of a bailout by his company because he was somehow—and this is really just extraordinary—insolvent. This despite being paid more than $100 million over the past decade.

Goldman Sachs is no longer the Goldman Sachs of the financial world.
J.P. Morgan Chase is.
But most tellingly, it used to be that at the scene of every Wall Street hit-and-run, people would whisper that Goldman had been seen driving away from the wreckage. When talking of the fall of the giant hedge fund Long-Term Capital Management, Wall Streeters always talked about how Goldman pretended to want to save them only to end up trading against all of LTCM's positions.

But last fall, when Lehman Brothers failed and Merrill Lynch jumped into the arms of Bank of America, there was no talk of Goldman. Instead, everyone whispered about how J.P. Morgan and Jamie Dimon had been ruthless with both in terms of collateral calls, pushing both to the brink—actually, pushing Lehman over the brink—of insolvency. (J.P. Morgan, of course, denies that it was the proximate cause of any of this.)

"The way he is conducting himself while all these companies are in distress is shocking," one Wall Streeter told me at the time. "And he can't hide behind layers of management. At a time like that, there's no way, if you're going to do something that severe, that it comes from somebody other than him."

That Wall Streeter, mind you, was a partner at Goldman Sachs. Need I say more?Related Links
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Fri, 24 Apr 2009 04:00:00 GMT

Toxic Pay

Wed, 22 Apr 2009 12:00:00 GMT

All along wall street, bankers are acting like amputees who can still feel their phantom limbs. Despite losing billions and getting bailed out by the government, many seem to think that nothing has changed. That deranged attitude explains why the bonus money has continued to flow despite the bailouts. And it explains why the public and Congress have revolted. Their anger is about more than money; it’s about the infuriating, though not surprising, posture from Wall Street.

It’s only barely an oversimplification to say that banker pay caused the meltdown. Pay schemes were set up to massively reward bankers for short-term profits with little regard to the long-term performance of any deals that they constructed, trades they entered, loans they made, or mergers they advised on. In other words, there was little downside if deals went bad, as many of them did.

That’s why we’ve seen Merrill Lynch accelerate the distribution of $3.6 billion in bonuses after it was desperately grafted to Bank of America, including $33.8 million to the banker who advised on the calamitous Royal Bank of Scotland–ABN Amro merger. Never mind Merrill’s two straight years of multibillion-dollar losses. And the traders in AIG’s financial products unit—the group that arguably did more than any other to bring the world’s economy to its knees—still managed to get $165 million in bonuses even after the U.S. government took control of the insurer.

So is there a better way? Credit Suisse, a Swiss bank that has weathered the credit crisis better than most, created an ingenious and gratifying solution to the problem of outsize pay for Wall Street failure. It decided late last year to pay out part of its bonuses in toxic assets. On Wall Street, the old saying is that you “eat what you kill.” In this case, Credit Suisse is making its employees eat their own garbage.

What’s satisfying about Credit Suisse’s plan is that it shows that investment banks are capable of learning and bowing to outside pressure. Bonuses on average at the bank were down 44 percent in 2008 compared with 2007, and employees in the investment-banking division took a greater hit relative to others. Bankers at Credit Suisse did get about half of their bonuses in cash, but instead of stock, top employees, including all the managing directors (except for the very top dogs, who received no bonus at all last year), received an interest in what the bank is calling the PAF, the Partner Asset Facility. It’s made up of assets the bank valued at just over $5 billion after roughly $2.6 billion in write-downs—meaning that the employees got assets worth about 65 cents on the dollar.

Notably, that valuation is surely higher than what the assets would get if they were sold in the market right now. The great question about all these illiquid assets currently on bank balance sheets—one which goes to the heart of whether Treasury Secretary Tim Geithner’s bank-rescue plan will work—is what are they worth? Is the market setting fire-sale prices that don’t reflect their actual value, or are they truly impaired? The banks argue that the market has become temporarily irrational and that the prices it’s setting don’t represent the assets’ true value. In recent years, this hasn’t been an argument as much as a desperate belief. At least in Credit Suisse’s case, it’s putting its money where its beliefs (and employees’ mouths) are.

The PAF, of which the bonus portion was about $650 million, pays interest to the employees for eight years. It has fairly high leverage, with a debt-to-equity ratio of more than five to one, so if the assets recover by 15 percent, employees will double their money. They also share some risk if its asset values fall. “It cannily reverses the phenomenon of paying bonuses on profits that later vanish. They are now paying bonuses on profits that only materialize over the long term,” says Robert Salwen, a compensation lawyer and consultant. “It gives the employees a real-world incentive to bring these assets back.”

Setting up the PAF raised some fascinating issues. Top managers made sure that the team that devised the PAF didn’t participate in the bonus plan, to prevent them from cherry-picking good assets for their own bonus packages.

The structure is almost the Platonic ideal, the one that Wall Street bankers might have created for all those toxic securities if they knew they were going to own them in the end. No single asset makes up more than 5 percent of the PAF’s portfolio, which includes corporate and leveraged loans and commercial-mortgage-backed debt. They come from the Americas, Europe, and Asia. Credit Suisse is financing the vehicle, so it has what’s known as patient capital—nobody will demand that the PAF pony up more collateral if the assets plunge in value. The bank has also contemplated selling interests to outside investors. Indeed, Geithner’s plan—for private investors to purchase toxic assets from banks—has strikingly similar leverage and financing.

Some employees initially objected to getting saddled with toxic assets, arguing they should be going only to those who created them. Paul Calello, head of Credit Suisse’s investment bank, decided everyone would participate “because we all share the responsibility for the performance of the division.” Good times had raised their boats; now they would share in the bad.

What a novel concept. Credit Suisse officials told me they are wondering why no other banks have followed their example. But is Credit Suisse’s approach a solution to the problem of excessive pay on Wall Street—and excess boardroom pay in general? Not really. Even with the PAF, the employees don’t suffer the whole pain; the bank has taken the bulk of the hit. “This is very different from looking back and trying to give them something that reflects their past performance,” says Lucian Bebchuk, a specialist in executive-compensation issues at Harvard Law School. To have done that, the assets would have to have been given out at their original value.

Pay is going down now on Wall Street. That simply reflects losses and, more recently, public outrage and media pressure. Companies and financial firms will “do something to placate those pressures” but will most likely lose interest. “The problems will reemerge,” Bebchuk says.

The compensation problem is not going to correct itself. Sure, the Obama administration and Congress have implemented some constraints on the pay of bankers whose firms received government aid. But the administration’s plans were toothless, and Wall Street immediately set to work evading the congressional restrictions. Taxing bonuses at 90 percent is simply a bad idea. Ad hoc and emotional responses to outrages, however legitimate, usually fail.

Britain’s Financial Services Authority is threatening to regulate pay in general. So should the U.S. government. It should mandate permanent, serious regulation of banker pay, and not just for firms receiving equity injections from the state. The government’s lending saved the financial system; it can require changes. That means restricting compensation—not just some portion but the entire package—in order to tie it to long-term performance, not just of the company but of each individual’s product. The way to do that is through changes to the tax structure, but ones that are carefully thought out. Without such changes, Wall Street bankers will continue to give themselves what they think they deserve. And they never think they deserve less.
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Wed, 22 Apr 2009 12:00:00 GMT

The Optimist

Wed, 22 Apr 2009 12:00:00 GMT

Bill Ackman’s friends describe him in two ways. They offer the euphemism that the prominent hedge fund manager “does not suffer from low self-esteem.” Then they observe that he is optimistic—almost clinically so. A pop psychologist might diagnose Ackman with hypomania, a condition notable for persistently elevated moods but without the self-destructiveness of true mania. “He doesn’t register reversals and defeats and hard feelings the way other people do,” says David Klafter, a former colleague.

I ask Ackman about the condition while he is driving in a car with his family. He hasn’t heard of it, but says he is an “extremely resilient person.”

His 11-year-old daughter playfully chides from the backseat, “And you’re modest.”

Ackman is an activist investor, a respectable term for people who in the 1980s were known as corporate raiders. He buys big stakes in companies and then offers his opinions—loudly—on how to improve their operations. Often, Ackman has been a contrarian. He bought shares of Rockefeller Center when Manhattan real estate was on its back in the mid-1990s, and he launched an attack in 2002 on MBIA Inc., the powerful and politically connected bond insurer, when everyone else on Wall Street was convinced the company was gold-plated. In early 2007, he sounded one of the most prescient warnings about the credit bubble and the leveraged complex of American finance.

William A. Ackman, who turns 43 this month, has had the seminal financial career of the past two decades, which is to say that he’s had the seminal American career of the era. Almost immediately after business school, he started a hedge fund to manage millions for wealthy people—with no investing track record. About a decade later, he was forced to shut down. He endured regulatory investigations played out in the klieg lights of the press. He relaunched and clawed his way back to respectability, becoming a member of a new generation of Wall Street wise men. No hedge fund manager or investment banker will be able to replicate his trajectory for at least a generation.

Now he’s gearing up for one of the biggest battles of his professional life. After losing nearly $2 billion in a calamitous bet on the retailer Target Corp.—almost all that investors had given him for the investment—he is waging a proxy fight against the company. He will have a tough sell in the leadup to the annual shareholder meeting in May. Taking on a company as big as Target is almost unheard of. Target decries the contest as “costly and disruptive.”

Investors don’t want to hear much from hedge funds these days, and the tide may be turning against activism.

Panicked companies are focusing on their core business, not their capital structure.

At the same time, Ackman is talking about a much bigger turnaround situation: the United States. On a recent day in his glass-walled corner office in midtown Manhattan, he tells me with a smile, “I’m long America!” His tie is slightly loosened, and the sleeves on his blue shirt are rolled up. He is crafting a “plan to save the universe,” he says, with a slight glint that shows he is aware of the hyperbole. He recounts how he and Michael Porter, a Harvard Business School professor, recently had a “fantastic” meeting with Lawrence Summers, the director of President Barack Obama’s National Economic Council, to pitch their proposals for fixing the financial crisis and improving the market for mortgages.

“I’m long-term bullish on America but not on things turning around in the next few months, or even 12 months,” he says. “We’ve had the equivalent of a heart attack, but now we are in recovery, hopefully. It takes time to heal.”

These days, the public, enraged at the moneyed class of Wall Street operators, is in revolt over bonuses and rewards for failure, while Washington plans new regulations for hedge funds, and investors pull their money out of the industry. Ackman, who has been publicly vilified, can’t keep himself away from the spotlight. It’s almost in his nature to stand up and say that he has answers.

Overconfidence from financial types is what caused this grave economic crisis in the first place, of course. It can be a worrisome quality. But if you are Bill Ackman, you’re betting that confidence, correctly administered, might just get us out of it too.

Though often perceived as arrogant, Ackman up close might be the most winning salesman on Wall Street. Partly it’s because he explains each burst of an idea with overwhelming detail, lucidly laid out. But it also has to do with his boyish face—a rounded-off nose and high, rosy cheeks topped incongruously with a signature shock of gray hair that he’s had since high school. Going prematurely gray builds character, Ackman says.

“He’s gained a huge following of admirers, both male and female,” says Laurel Touby, founder of the internet company MediaBistro.com, which Ackman helped bankroll. “People fall in love with him. It’s almost like he’s the Bill Clinton of finance.”
Ackman thinks that the financial rescue of the banks, a plan which has been carried over from the Bush administration, is wrongheaded. And months before his meeting with Summers, that began to concern him. “I always thought the country would survive Washington. Now I feel like I have a civic duty if I have a decent idea for how to solve a financial problem,” he tells me.

A few weeks later, we speak again. “I’m so busy it’s driving me crazy,” he says. “Every day I don’t get this plan out, I feel the country is going to ruin.” In unguarded moments, he has a tendency to become grandiose. In public settings, he’s learned to restrain himself, speaking in interviews with a curious calm.

Ackman believes that the financial-system bailout has been flawed. The government has put taxpayer money into financial institutions at the wrong time and in the wrong place within their capital structures.

So far, we’ve aimlessly given billions to banks. That money could wind up going toward bonuses, dividends, or interest payments on debt, merely delaying the inevitable failure of the insolvent ones. Many economists argue for more aggressive nationalization of insolvent banks, but policymakers have been reluctant to take that route, wary of harming bondholders. Ackman wants these creditors turned into the equity holders of insolvent banks, through carefully adjudicated reorganization processes, before the government ponies up more money.

Ackman and Porter also worry that Treasury Secretary Tim Geithner’s rescue plan is overly focused on shoring up the securities and derivatives tied to mortgages. Instead, the duo would target the mortgages themselves in a way that they contend would be cheaper than the government’s approach. Ackman likens the situation to a $100,000 house with a million-dollar insurance policy. When the house burns down, rather than paying off the policy, the house should just be rebuilt. Ackman’s idea is to have the government offer to buy defaulting mortgages for 50 cents on the dollar. Such a guarantee would put a floor under the market and induce the owners, most of which are mortgage-servicing companies, to sell to the government if they can’t find better deals elsewhere. If values in the mortgage market stabilize, the result will be a beneficial cascade through the value of all those securities and derivatives. Leverage got us into this mess; Ackman wants to reverse it to get us out.

Even as the hedge fund business implodes from its own hubris, Ackman’s three main funds, which are separate from the Target fund, are doing okay, relatively speaking. They were down between 11 and 13 percent last year, much better than the average for hedge funds; he ended up with $4.4 billion under management. As of late March, his main funds were up about 3 percent, while the market had fallen double digits.

Ackman, the son of an affluent commercial-mortgage broker, spent his childhood in Chappaqua, New York. At Harvard Business School, he came off as bright, though sometimes a bit to the manner born. During a case study of Steinway & Sons, the pianomakers, he told the class that he had several pianos, seeming to assume that everyone else did too. (Ackman’s family owned two Steinways and a Yamaha, but they had inherited all three.)

He would say back then that his goal was to allocate as much of the world’s capital to himself as he could so that he could then reallocate it in the way that he thought was best. “He was a larger-than-life guy and came across that way, even in business school,” a former classmate recalls.

Soon after he graduated, he and a classmate, David Berkowitz, formed Gotham Partners, an investment firm. They shared an apartment to save money. One of the bedrooms was much larger than the other, and the two budding Masters of the Universe decided to have a closed-bid auction to figure out who would get the better room. Each wrote down the portion of the rent he was willing to shoulder to win the larger spot. Ackman remembers that he convinced Berkowitz that he badly wanted the big room when actually he was content with the smaller one. He contrived to drive up Berkowitz’s bid, making his part of the rent a fraction of his partner and roommate’s.

Ackman entertained the notion that he and Berkowitz might be able to raise tens of millions of dollars for Gotham’s launch—and he managed to talk his way into meeting with many of the wealthy and powerful moguls that he’d set his sights on. He pitched real estate scion Tom Durst and proposed three investment ideas to demonstrate Gotham’s research capacity. Durst declined to invest with the firm but then, according to Ackman, put his own money to work in the companies that Ackman and Berkowitz had recommended. After each had big gains in a matter of months, Durst came back to them and agreed to put money into their fund.
Gotham didn’t come up with anything close to Ackman’s hoped-for sum, mustering only $3.1 million. But in 1993, he and Berkowitz went ahead and launched the fund anyway. In time, Gotham gathered in millions. The Ziff family came in early; legendary investors such as Jack Nash, Leon Levy, Michael Steinhardt, and Seth Klarman also put money in.

In 1994, Gotham bought shares in a real estate investment trust poised to take control of Rockefeller Center, effectively becoming the largest holder of the real estate complex. At the time, the New York commercial real estate market was in a devastating slump. Thrusting himself into a highly publicized takeover battle, Ackman scored huge returns on his investment when the REIT was bought. He was on the map.

Over the next three years, his fund averaged returns of 40 percent annually after fees. Gotham hardly ever shorted or bet against companies. But one day in early 2002, Whitney Tilson, a friend of Ackman’s since their days at Harvard College, called him at home to recommend that he buy a stake in a company called Farmer Mac, the Fannie Mae of farm mortgages. Ackman printed the annual report and started reading it around 9 that night. Riveted, he continued past midnight. He called Tilson first thing the next morning, excited. Farmer Mac was indeed an opportunity, but Tilson had it wrong. Ackman didn’t want to buy the stock; he wanted to short it.

Gotham placed its bearish bets. Then Ackman confronted a problem—how to get his negative message out. He began by talking to a reporter at the New York Times but didn’t think the resulting story made the case strongly enough, so he set up a website for the express purpose of displaying a report he wrote, with disclosures that his fund was short Farmer Mac’s stock. Going public on a short is an invitation to be attacked by companies and investors.

Ackman relished the frenzy that ensued. He’s still proud of the report’s title, “Buying the Farm.” And he profited spectacularly from the results: By fall, Farmer Mac’s stock had collapsed.

Fresh from the Farmer Mac success, Ackman launched an audacious assault on MBIA, a company at the center of both Wall Street and state and local finance across the country. This move would prove remarkably insightful once the financial crisis hit, but vindication would be years in coming. First, Ackman was forced to undergo a remarkable battle with the company and its regulators.

MBIA dominated a sleepy, safe, and wonderful business: insuring municipal bonds from default. Since muni bonds almost never defaulted, MBIA almost never had to pay off the insurance. But when Ackman surveyed the company’s filings, he realized that MBIA had, to a degree utterly unrecognized by Wall Street, shifted into the business of insuring a vast array of much more dangerous paper: collateralized-debt obligations, or CDOs, which were constructed by the big banks to combine the bonds of multiple companies.

Expecting MBIA to default, Gotham began buying credit-default swaps, a form of short-selling in the unregulated derivatives market. If other investors became worried that MBIA would default, Ackman could sell the credit-default swaps for a gain; if MBIA actually did default, he would make a king’s ransom.

MBIA got wind of Ackman’s research and asked to meet with him. On November 21, 2002, Gotham representatives sat down with top MBIA executives. As people who were there recall the meeting, Jay Brown, the CEO of MBIA, began by saying how long he had been in the insurance business. “No one has ever questioned my reputation or my company’s,” he said. “You are using an unregulated market to manipulate a regulated market,” referring to MBIA’s insurance business. “You’re a young guy. It’s early in your career. You want to think very hard before you release that report,” Brown said, pointing out that MBIA was the largest guarantor of municipal bonds in New York State and the country.

“Is there anything you disagree with or that’s factually inaccurate?” Ackman asked.

“This is not about the facts,” Brown replied. “Let’s put it this way: We have friends in high places.” (An MBIA spokesperson says that the purpose of the meeting was to learn Ackman’s intentions and to request an early copy of his report to be able to point out any inaccuracies.)

The tense encounter lasted less than a half-hour. As they walked out, Ackman’s analyst shook Brown’s hand. Ackman then held his hand out to the CEO. Brown looked at it, lifted his arm up, and said, “I don’t think so.”

The hedge fund young turks walked away feeling threatened, thinking that MBIA would sue them. Ackman, though, was also exhilarated. On December 9, 2002, Gotham put out a devastating 66-page summation of the company’s precarious financial position called “Is MBIA Triple A?”

Nothing much happened. The stock actually went up that day.
The months that followed probably mark the period during which Ackman’s optimism-to-reality ratio hit a peak. As the case against MBIA was building, Gotham was falling down. Ackman and Berkowitz’s performance had been lackluster for several years running. Gotham had made several investments in privately held companies, and like many hedge funds in 2008, it found itself stuck with these illiquid assets as some investors were asking for their money back. Ackman and Berkowitz decided they had to wind Gotham down.

Things got worse. In January 2003, the office of then New York State Attorney General Eliot Spitzer subpoenaed Ackman. The Securities and Exchange Commission began an informal inquiry a few weeks later. At first glance, Gotham’s MBIA report looked as if it might be a case of a hedge fund trying to generate a huge amount of negative attention for a stock and then profit from the fear—a “short and distort” campaign. Gotham was pilloried in the press.

A dual investigation is almost every hedge fund manager’s nightmare. Not Ackman’s. “Now I’m going to be able to sit across from Eliot Spitzer and explain to him my concerns!” he told his skeptical Gotham colleagues.

Between March and June, the attorney general’s investigators hauled him in for six grueling days of testimony. Aaron Marcu, Ackman’s lawyer, tried to rein him in and keep him from saying anything that might later be used against him. Once, he interrupted Ackman to tell him he had already answered a question.

“Leave me alone,” Ackman snapped. “I’m not finished yet.” With that, he rose, unbidden, to a large pad perched on an easel and started diagramming MBIA’s serpentine financial structure. He expected to flip the AG’s team against MBIA.

Remarkably, he succeeded.

After a nearly four-year-long investigation, MBIA agreed to settle civil securities-fraud cases with the SEC and the attorney general’s office, paying $75 million in fines and restating seven years of earnings. David Klafter, who was then working as Gotham’s general counsel, says, “How often does a complaint go to a regulator and it boomerangs and the complainant ends up getting sanctioned? Not often, right? It happened to Bill.”

By January 2004, Ackman was back in the investment business, launching his current hedge fund, Pershing Square Capital Management. Over the next few years, he honed his approach to shareholder activism, scoring big investment wins with Wendy’s and McDonald’s.

Throughout that time, though, MBIA’s stock held strong. Employees at Pershing Square “thought I had gone off the deep end. And there were investors who did not invest in Pershing Square because they thought I had just lost it on this MBIA thing,” Ackman says. As time went on, he couldn’t stop thinking about the company. “I have trouble saying ‘MBA’ without saying ‘MBIA,’ ” he tells me. Once he was walking down a street on Manhattan’s Upper West Side, and he saw a woman wearing a sweatshirt with MBIA on it. Was it some kind of division of the company that he didn’t know about, he wondered? He repeated the word on the sweatshirt out loud to himself: “Co-loo-M-B-I-A, Co-loo-M-B-I-A.” Suddenly, he realized he was looking at a woman dressed in Columbia University garb.

In his office one recent late afternoon, he beckoned me over to his computer, with a look of pride. He launched a video of two young girls performing a catchy, singsongy tune. A few years ago, his two daughters had composed this song-and-dance routine as a present for their father:

MBIA is a bad company
They make people promises
they don’t keep
MBIA is a bad company
MBIA is a bad company
They lie to people and the
government and do bad things
MBIA is a bad company
MBIA is a bad company
Yes it is. Yes it is. Yes it is.

Ackman’s MBIA investment led him to a conclusion that proved pivotal in light of the coming credit crisis. In the spring of 2007, when the Dow was over 13,000 and the world was awash in money, he began giving a speech to investors called “Who’s Holding the Bag?”

The talk began with a warning that a virtuous credit cycle works viciously in reverse. It discussed the risks in mortgage-backed collateralized-debt obligations, corporate lending, and commercial real estate markets. He raised alarms about the credit-rating agencies’ conflicts of interest in the structured-finance market. He concluded that since the most highly rated paper, the triple-A portion, was more vulnerable than anyone realized because of poor lending, bond insurers like MBIA were in deep trouble. And if they were in trouble, all the parties that thought they were insured would also be in trouble. “When the losses hit, these guarantees will have no value, and counterparties are left holding the bag,” he said.
Few investors bought it at the time, but that’s exactly what happened over the next two years. It became clear that bond insurers wouldn’t be able to make good on their insurance, so banks—the bond insurers’ customers—were forced to take hundreds of billions of dollars in losses. MBIA reported $1.9 billion in losses in 2007 and an additional $2.7 billion in 2008. When Ackman started giving his talk, MBIA’s stock was in the upper $60s per share, close to an all-time high. By early March, MBIA was trading at approximately $3 a share. “The original thesis [about the company] was very much incorrect,” says Kevin Brown, MBIA’s spokesman. “I’m not going to deny his call on the mortgage market was correct.”

Late last year, Ackman closed out his MBIA positions. Overall, after six years of battle, his MBIA investments returned about $1.1 billion in profit. He has pledged all his personal proceeds to charity. He’s already donated about $50 million to his Pershing Square Foundation and to education causes and still owes about $100 million to make good on his promise.

Perhaps more surprising, Ackman managed to turn Spitzer into one of his defenders. While Spitzer was governor of New York, they met to discuss mortgage insurers, including MBIA. Today, Spitzer says of short-sellers, “In terms of contribution to the marketplace, they are critically important and unpopular because of it. We know there’s bias in favor of affirmative analytical work.” The former governor also tells me, “Bill is extremely smart,” adding that “he is obviously a guy who understands finance.”

When I ask Ackman how he feels now that this epic Wall Street battle is over, he pauses maybe for the first time that I’ve heard since we’ve met. He laughs uncomfortably. “I don’t feel like it’s over because MBIA still exists,” he says finally.

Despite his insight about the precariousness of the financial system, Ackman puzzlingly didn’t follow through to anticipate the pain of the American consumer. That led to a series of mistaken investments in retail. His Target investment has been the worst of all.

In 2007, he set up a special fund to invest in a single stock in a highly leveraged way. In a sign of how frothy the markets were, he raised $2 billion from start to finish in a week, about two-thirds of which came from other hedge funds. Investors knew the outlines of the investment but not that it would be in Target.

In his main funds, Ackman buys big positions in a few stocks. He maintains little leverage to reduce the risks inherent in this concentrated investing style. But he gets his risk jones on with single-stock funds. They are at once flying-too-close-to-the-sun ventures and deeply savvy moves. Even if the ideas flop, he is still in business.

Ackman urged Target’s management to sell its credit-card business to get rid of consumer-credit exposure and use the proceeds to buy back stock. He also wanted the company to realize the underlying value of its vast real estate holdings. Target bought back stock, but so far that has been a poor use of money. The company also moved partly on his credit-card suggestion but hasn’t heeded his real estate advice.

By the fall of last year, Ackman was getting into a bad spot. Some of his long-dated options were set to expire at the beginning of 2009. He couldn’t renegotiate them in the middle of the market panic.

On October 29, Ackman rented a giant theater in the Equitable Building in midtown Manhattan. He presented to hundreds of investors and reporters his plan for Target to spin off its real estate into an innovative real estate investment trust. The lengthy, complicated presentation of roughly 150 slides took about an hour and a half, with an extra 15 minutes for questions.

Ackman wasn’t the only one under strain. Target’s sales in stores open a year or more were falling. In December, Gregg Steinhafel, the retailer’s CEO, came to New York to meet with some investors. He panned the REIT idea and said Ackman was simply buried in his position and trying to jack up the shares to get out. In a sign of frayed nerves, he also attacked customers of Kohl’s, one of Target’s competitors, as having “low IQs.” Target smacked Ackman down twice, rejecting the proposal.

Target’s stock was tumbling; Ackman’s leveraged fund was doing much worse. By early March, as Target’s stock continued to fall, Ackman’s Target fund was down 93 percent.
The broken investment led to at least one strained friendship. Hedge fund manager Dan Loeb had put money into the Target fund and had been bombarding Ackman with emails, demanding that he let him out of his investment or wind down the fund. Loeb essentially ran an activist campaign against him, prompting Ackman to reorganize the fund: He waived management and incentive fees for investors in it, put $25 million of his own money in, and finally succeeded in extending the options. But he’s had enough of the excitement and leverage of a single-stock fund. “I think I may never do it again,” he says, chastened.

In early March, Ackman had another run-in with a New York State attorney general. Andrew Cuomo called him about the Target fund situation. “It’s kind of a scary way to begin a conversation with the AG!” Ackman says.

But Cuomo was calling to compliment him on how he treated his investors in revamping the fund and waiving his fees, saying that is what the hedge fund business needs. “How cool is that?” asks Ackman, excited as a boy.

Some investors think Ackman doesn’t understand the subtleties of retailing. “Activists may have been well intentioned, but many have seriously hurt many retailers by urging them to buy back shares and to increase debt,” says David Berman, a retail investment specialist who runs the hedge fund Durbin Capital. “Businesses were made unhealthy in front of our eyes, and management and boards were fooled by smooth-talking activists and bankers alike who misguided them.” Ackman counters that his advice has never saddled a company with too much debt.

By March, Ackman owned stock and controlled options in Target worth about 7 percent of the company. And he was gearing up for the big fight to get board seats. At Target’s annual meeting in May, Ackman is running for a position on the company’s board. He has recruited four other candidates who have specialized in real estate, credit cards, and retailing to serve on his slate. “It’s going to be very high-minded,” he says of his campaign. But he is also evincing the old stubbornness. “The only Stalinesque election process in America is the election for directors of American corporations,” he tells me. “And I just think that’s wrong.”

Maybe because Ackman has lost so much money with Target, he’s been more reflective lately. “The investment business is about being confident enough to know that you’re right and everyone else is wrong. Yet you have to be humble enough that you recognize when you’ve made a mistake,” he says. “Earlier in my career, I think I had the confidence part pretty solid. But the humbleness part I had to learn.’’

While he concedes that the Target investment was structured badly at first, he won’t back down on it. It’s up more than 40 percent since he injected his own cash: “I continue to believe that the investment in Target is not a mistake.”

Bill Ackman remains optimistic.

Presented By:

Wed, 22 Apr 2009 12:00:00 GMT

The Guy Behind The Wheel Is a Billionaire

Wed, 22 Apr 2009 12:00:00 GMT

It’s just another day at the office for Russ Gerdin, which, even these days, means it’s a pretty good day. Gerdin’s a big guy, and at 67 years of age, he looks all right for somebody who boxed with liver cancer for a couple of years, beat it back, and then learned not too long ago that it had spread to his lungs. So he’s fighting again. So far, he hasn’t let either cancer or the most severe economic downturn in 80 years keep him from running Heartland Express Inc., the trucking company he founded, took public, and still manages with an iron will and a scrupulous attention to detail that both intimidates and awes those who work for him.

Gerdin (pronounced jur-deen) is one of those unassuming Midwesterners who has quietly become a billionaire by sweating every detail in an unglamorous but indispensable business. Heartland has no debt, a nearly new fleet of 3,000 trucks, an enviable list of shipping clients, and profit margins triple those of some of its bigger competitors. Though net income was down 8 percent in 2008, the company continues to widen its lead over others in the trucking industry as scores of competitors go bankrupt.

So Gerdin has been preparing for the eventual economic rebound: He’ll buy 1,000 new trucks this year, and he recently refurbished a Texas terminal to support the company’s expansion. He’s scrambling to load up on experienced drivers who have been idled by the downturn, so that the company will be able to grow when the economy slips back into gear.

Gerdin doesn’t have a secret; he has a method. He is a grinder who pushes his employees to do dozens of little things just a tiny bit better than the competition does them. It sounds like a mundane strategy with limited application in the modern business world, but it isn’t—especially now. Sure, innovative products (iPhones) and cool new services (YouTube) get a lot of attention. But eventually, most businesses end up delivering an everyday commodity (just ask Michael Dell), and then you need someone like Gerdin who can “gut it out” rather than give up. “I’ve never had an innovative idea in my life,” Gerdin tells me during a series of interviews at Heartland’s headquarters in North Liberty, Iowa, conveniently located near the intersection of two interstates, 380 and 80.

Gerdin’s obsessive ways have built Heartland into what might be called a recession buster. Few, if any, companies are recession-proof, but in many industries, there are dominant, lean-and-mean organizations that manage to emerge from each economic downturn even farther ahead of the pack. These firms tend to be financially conservative, operating with little debt and low costs, and are tightly coiled and ready to spring into action when a downturn ends. While the more loosely run competitors are stuck fighting for survival—holding off creditors and shedding employees—the recession busters are busy trying to steal market share.

Gerdin is old-school. His office has no computer, and he doesn’t use email. He runs the company using reports, handed to him weekly, printed on old-fashioned continuous-feed computer paper, with columns of numbers showing how each truck, each customer, and each load, dispatched from one of 10 terminals across the country, is performing. When he sees something appalling, he lumbers over to the company’s sales desk, or to its dispatchers, and chews someone out. He recently delivered a tirade when he discovered that on repeated trips across Nebraska, trucks failed to detour to a customer in the small town of Crete and had been needlessly running freightless—meaning unpaid—for 121 miles.

On the day I visited, two big truckmakers, Freightliner and International, were bidding to supply Heartland’s next round of tractor trailers. “I play them both to the last dollar. It’s really dirty pool,” Gerdin says one morning. Mike Gerdin, Russ’ 39-year-old son and designated successor, walks in with a salesman from International in tow. There is a question on the trade-in value Heartland has been promised on its current rigs. Russ doesn’t like the paperwork he’s shown. “No, that’s not right,” he says, lifting an eyebrow like it’s a rifle.

He plows through a stack of papers. “See here,” he says, as his finger comes down forcefully on a number—the minimum he’ll take for the used trucks. The salesman winces, agrees to pass that along to his bosses, then shuffles out. (International later got the contract.) “I’ll do truck deals till I die,” Gerdin says. “I enjoy fighting.”

Indeed, being the wealthiest guy in town didn’t stop Gerdin from battling, over the course of 10 years, to get $750,000 in property-tax rebates from the local government when Heartland opened its new headquarters in 2007. Gerdin’s Heartland shares are valued at about $550 million. Stock sales and dividends have brought him an extra $200 million or so over the years. Shrewd real estate deals appear to put his net worth at about $1 billion, though Gerdin, who’s good at math, insists he’s currently shy of that figure.

When approached in 1986 about taking Heartland public, Gerdin says he “did not know what IPO meant.” But he did an initial public offering anyway and pocketed $13 million. “That set me up,” he says.

Since then, he has kept his Heartland salary unchanged at $300,000 a year—no bonuses, no options. To get to where he is today, he swore off old trucks and debt, and grew steadily but never spectacularly. Swift Transportation Co. and Schneider National Inc. are much bigger truck lines. J.B. Hunt Transport Services Inc. is more innovative, operating an intermodal truck-and-rail service. But of these companies, Heartland has been the most consistently profitable.

With Gerdin’s precarious health, though, there is no telling how far into an economic recovery he’ll be able to expand his company. When I visit, he tells me that he’s spent 200 of the past 300 days getting treatments or checkups. But, he adds, looking remarkably hale in his corner office, surrounded by hunting trophies, “If I’m here, I’m having a hell of a good day.”
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Presented By:

Wed, 22 Apr 2009 12:00:00 GMT

Shifting Gears

Wed, 22 Apr 2009 12:00:00 GMT

What’s next for you?
For the first six months, I plan to do absolutely nothing. I’ll hopefully lose 10 to 15 pounds and take five to 10 strokes off my golf handicap. I’ll figure out where the next great hunting or fishing spot is. After 40 years, I think I’ve earned at least a six-month break.

It’s no secret that you’ve been paid handsomely at Symantec—$121 million in the past five years. How should CEOs be compensated?
I think there’s a benchmark that says, in an industry of this size and shape that requires skills of this type, this is what a competitive compensation range is. And if a company’s investors aren’t complaining about its executive compensation, you might want to ask yourself, Whose issue is it?

Everybody’s being laid off these days. As CEO, how have you managed a company in hard times?
Bottle of wine. [Laughs.] Look, it’s always about sustaining the enterprise, and you have to recognize that it is not personal; it is about making a business decision for the benefit of those who are going to stay. If you focus on the people who are going to leave, to the detriment of the thousands who are going to stay, you are out of balance.

You love cars. What’s your dream ride?
Having my 1949 Town and Country Woody convertible back from the shop and cruising up to Napa Valley this summer. It’s a spectacular old car. It was, once upon a time, owned by Bruce Springsteen.

There’s a relative lack of minority representation in executive suites and in boardrooms.
I had noticed that.

With Barack Obama in office—whom you enthusiastically supported—will we see more minorities and women in top posts in business?
If women and minorities work hard to prepare themselves, they will clearly be considered. In the early days of my career, I’d say, “I’d rather play tennis than golf.” But it was a golfing culture, so why wouldn’t I learn to play golf? To the extent that they’re willing to embrace the cultural idiosyncrasies of the business, minorities and women have every bit as much opportunity to succeed as their white male counterparts.

Who do you think faces more difficulty in the business world—women or minorities?
I don’t know. I have never, ever felt that I could not get my job done because I was African American. I remember the day I arrived at Symantec. Lo and behold, one of the local newspapers discovered, “Holy shit! He’s black.” At that point, hell, I’d had 49 years of being an African American. What’s the big deal? This is more about “Am I qualified?” than the color of my skin.

You were considered for secretary of commerce. Are you disappointed that you didn’t get it?
I’ve had a fabulous career, and I’ll soon be 60 years old. If I could have topped off my career by serving the country, that would have been a fantastic end. But I’ll certainly find other interesting things to do with my next 60 years.
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Presented By:

Wed, 22 Apr 2009 12:00:00 GMT

Jeffrey Sachs, International Man of Misery

Wed, 22 Apr 2009 12:00:00 GMT

1. Do-Gooders Are...IrritatingTokyo: The Palace Hotel. Breakfast with Jeffrey Sachs.
Admit it: Do-gooders are irritating. They make the rest of us seem so self-serving, selfish, and self-absorbed. And of course—for the most part—we are, but who likes to be reminded of it? Yes, millions are starving to death in Africa, but we’ve got our own problems to worry about now. Yet the do-gooders still want to make us feel guilty about famine somewhere far off. Irritating.

But take a moment and consider the plight of Jeffrey Sachs, one of the world’s most prominent poverty fighters, America’s intellectual do-gooder-in-chief. Even when the West was flush with cash, his was no easy task: maniacally crisscrossing the globe, going from one poverty confab to another, trying to get the do-gooder bureaucracies of the world on the same page. Now that we’re in economic free fall? Forget it.

Nobody wants to hear about the eternal “plight of the poor” or what seems like an endless series of famines and slaughters. An estimated $500 billion in aid has been funneled into Africa in the past half-century, and it was never enough. There were always well-meaning types like Sachs, coming around again and again with a metaphorical begging bowl for some new plan or other that would finally fix things and allow us to cross an item off our bucket list: “Cure poverty—done.” ( View a slideshow featuring some of Jeffrey Sachs' celebrity friends.)

But now we’ve got people being forced out into the streets in the great cities of the West, and we’ve got to pay multimillion-dollar bonuses to thank the bankers for bankrupting our economy, for god’s sake. Who wants to hear about starving children?

I’d been wondering about the dynamics of do-gooderism even before the crash, back when I had breakfast with Sachs in Tokyo at the Palace Hotel (named after the nearby Imperial Palace) in March 2008. Sachs, the PowerPoint man for Bono and Bill Gates, Kofi Annan and Angelina Jolie, had let me accompany him on one of his high-level begging missions to Japan. ( View a graphic outlining Jeffrey Sach's grueling itineary.)

It was a surreal scene that morning. People wearing full-face, high-tech surgical masks and garbed in business attire drifted through the hotel lobby, acting as if that combination weren’t a bit weird or ominous. I thought there must have been some post-atomic Japanese horror movie being filmed nearby until Sachs explained.

It was not fear of breathing in germs, pollution, or radiation-tainted air that motivated the mask wearers, he said. Rather, it was a manifestation of the admirable politesse of Japanese culture: Those who had a cold or the flu wore a mask to better avoid infecting others.

Still, instinctively, it was hard not to feel disapproved of—that the masks were a reproof, as if the wearers were protecting themselves from our uncleanliness. I came to think of this as a kind of metaphor for the way one feels in the presence of all types of do-gooders; it’s as if they’re wearing invisible masks to protect themselves from the cynical, inertial moral contagion of our indifference.

Sachs himself doesn’t give off that vibe of do-gooder disdain. His is not the guilt-tripping emotionalism of a Sally Struthers trudging through the muck of a third-world village on a late-night TV ad, swatting flies away from children with famine-swollen bellies, rubbing our noses in the stench of our unconcern.

No, Sachs is careful to make understated appeals to reason, logic, and economic theory. His two bestselling books, The End of Poverty and Common Wealth, are replete with challenging charts and eye-glazing graphs. Here’s where we are; here’s where the differential equations say we can be, saving the starving from Sally Struthers.
Sachs is, after all, a supreme rationalist, a numbers man among bleeding hearts, an economist with a PhD from Harvard and one of the youngest professors ever to get tenure there. He now heads up his own academic mega-think tank, Columbia University’s Earth Institute. He is poverty’s chief public intellectual, the go-to guy when, say, Charlie Rose wants to get serious about the poor. He has been called “the most important economist in the world” by the New York Times Magazine. The Daily Telegraph referred to him as a dispenser of “moral medicine.”

There are doubters, though: policy critics within the “dev biz,” as some insiders call the global antipoverty development institutions. Indeed, Sachs is at the center of a great debate—actually, several linked and probably interminable and unresolvable great debates—over the eternal poverty questions: How bad are things, really? Has the half-trillion dollars funneled into Africa in the past 50 years helped, or—as Zambian economist Dambisa Moyo, among others, says—has it actually hurt?

How could it hurt? By distorting the political culture of Africa—fattening corrupt kleptocrats who have diverted untold billions away from the needy and into Swiss bank accounts and crippled their countries’ progress toward self-sufficiency. In other words, the question is whether the corrupt political culture in these poverty-stricken nations must be reformed before aid can make a difference, or whether aid and accompanying development can reform the political culture.

Certain of Sachs’ critics within the dev biz dismiss him as “one of the world’s most gifted self-publicists” flogging “superficially attractive but deeply flawed ideas,” as former World Bank official David Ellerman puts it. He says that Sachs’ prescriptions rely on top-down, neocolonial, interventionist solutions that have failed in the past.

Meanwhile, Naomi Klein, an antiglobalization writer and activist, calls Sachs “Doctor Shock.” She accuses him of having a dark past in which he prescribed not “moral medicine” but “shock therapy” economics for populations that were already too stunned to resist.

Other critics blame him and his whiz-kid colleagues—the so-called Harvard boys, including Obama’s economics guru Lawrence Summers—for missing a historic opportunity more than a decade ago in post-Soviet Russia. The disastrous attempt to turn a titanic collectivist economy into a capitalist democracy virtually overnight—an attempt that “privatized” the Russian economy into poverty, oligarchy, and gangsterism in the ’90s—gave capitalist democracy a bad name and paved the way for Putinism and renewed political and even military hostility, as evidenced by the invasion of Georgia. Will Sachs be remembered for saving the world in Africa or setting it on the path to destruction in Russia?

Sachs calls the reporting on his role in Russia “unfair” and even “ridiculous,” but no doubt he’s a global player: He’s one of the few individuals who can be both credited with a plan for global salvation and blamed for the renewed potential for global destruction.

But we like our do-gooder icons to have problematic pasts, don’t we? It allows us to fit their lives into our favorite contemporary narrative: redemption. Reputational rehab. Becoming the Sally Struthers of intellectuals has allowed Jeffrey Sachs to largely erase his identification with the Russian fiasco and become the white knight of do-gooders, or at least their Don Quixote.

Nonetheless, what Sachs is quick to call the cynicism of his critics can, at times, get under his skin. When it happens, it comes as a bit of a surprise, because on the surface he seems a mild, unassuming, just-the-facts-ma’am type, at least in the presence of a reporter. His undramatic manner is reflected in his emphatically bland garb, the Midwestern flatness of his voice, and the hairpiece-looking (but in fact real) haystack atop his head, all of which suggest not some Northeast Corridor slickster but rather a Corn Belt farm-implements salesman. But once in a while, one can hear what sounds like a combination of injury and outrage in his voice when he gets going on the topic of those who question his solutions.

“I find the level of cynicism among thinking people unacceptably high,” he told me over the phone shortly before the Tokyo trip. “What I don’t really appreciate is the complacency of thinking people—in the sense that there are a lot of very well-trained people who should know better. And if they don’t like my ideas, they should at least feel some responsibility to not just naysay but come up with other ideas. But not to accept 10 million children dying every year of extreme poverty?”
Note that figure of “10 million children,” the ones “dying every year of extreme poverty.” That’s the rhetorical club he wields against cynics, citing it without melodrama during long disquisitions on the conditions necessary to abolish extreme poverty. “Extreme poverty,” by the way, is a technical term in the jargon of the poverty-industrial complex. It doesn’t simply refer to those who are really, really poor. It is the threshold that defines the “bottom billion” of the world’s poor, the ones who earn less than a dollar a day. Extreme poverty—according to the Sachsians, at least—differs from ordinary poverty because the extremely impoverished are so poor, they lack the ability to lift themselves out of the “poverty trap,” another key Sachsian term. That phrase refers to the quicksand of disease, drought, and famine that renders a population unable to escape poverty by their own efforts.

The human cost: approximately 10 million children a year. We never see them appear and disappear from the planet. They may as well be 10 million miles away. Sachs doesn’t tell weepy sob stories about them. He just mentions the number and leaves it up to us to make of it what we will—or to convict ourselves of callousness if we use the abstract number to hold the suffering at arm’s length.

2. The Willy Loman of Antipoverty ProductsSeeing Sachs in action in Tokyo was useful for thinking about these questions. I sat in on about a half-dozen meetings and a shabu-shabu luncheon in the basement restaurant of a Tokyo skyscraper with foreign-ministry officials and got a sense of how Sachs does his job—saving the world and all that—on a daily basis. It’s low-key, collegial, often technical and intellectual, but when you come down to it, Sachs is the Willy Loman of the dev biz. He’s got a six-point program to restore antipoverty programs after the crash. No, two six-point programs. (Point three of program two: “The dollar will need to depreciate relative to a basket of Asian currencies, a tricky maneuver but no less important for that.”) He has 80 Millennium Villages, demonstration communities in underdeveloped sub-Saharan Africa that need investment at a time when nobody’s investing, even in developed countries. He needs R&D funding for giant arrays of parabolic mirrors in the desert that he thinks could solve the renewable-energy problem. On and on.

So at the heart of the do-gooder’s job is incessant travel to do-gooder conferences, public and private, to sell a line of goods. He just got in from Norway, he said in Tokyo. “Norway was a meeting on climate change hosted by the minister of foreign affairs,” he told me over the breakfast buffet at the Palace Hotel. “Since they do such good things, and I have so many links with them, when they called I just had to squeeze it in.”

It’s all about those links. After Tokyo, he’s off to Shanghai and then to South Korea, where a member of the Jeffrey Sachs do-gooder mafia has just been elected prime minister. “The new prime minister is a longtime friend and colleague of mine,” Sachs says. “He is the mentor, in many ways, of the secretary general”—United Nations secretary general Ban Ki-moon—“who was his deputy, and he’s now acting as special envoy, and suddenly he became prime minister just a couple of weeks ago, and I told him I was going to be in Asia and would like to stop by.”

“At this stage of my life”—Sachs is 54—“it’s actually quite remarkable to see so many colleagues from graduate school or from early days in senior positions. Bob Zoellick and I worked together at Harvard, and he’s of course president of the World Bank now. But we go back 30 years. Today, a classmate of mine was nominated to be deputy governor of the central bank of Japan.” It’s not that Sachs is well-connected. He is the connection.

While he’s known for his association with celebs like Bono and Angelina Jolie (MTV made a documentary called The Diary of Angelina Jolie and Dr. Jeffrey Sachs in Africa), it’s this government-NGO-academia-think-tank-consultant network that powers the Sachs machine. He makes the connections between the PowerPoints and the power people.

3. Monetizing the Western ConscienceEven in good economic times, altruism is a hard sell. Good luck getting anything out of Congress, where foreign aid has long been about as popular as child porn and which has lately reserved its largesse for the bankers who destroyed our economy.

Still, you have to admire the shrewd way in which Sachs has managed to find a chink in the armor of some of America’s largest private corporations. He divulges his strategy one afternoon at his elegant Upper West Side townhouse, which he shares with his wife, Sonia, and their three children. Columbia University bought the property when it lured him from Harvard in 2002; the university, not Sachs, owns it. It’s an enviable if not showy abode, the walls of which are covered with intricately patterned Bolivian woven fabrics.

The secret of his pitch to corporate America is the way he has sought to put a price on meaning. A low, low price.

He has intuited that, deep down, we all would find a greater sense of meaning in life if we believed that we were engaged, even at a distance, in saving 10 million children a year. Sachs is offering that at rock-bottom rates.

“If my theory is right, and just 1 percent of what we have could make the transformative difference abroad?” he says. “First of all, a lot of people are willing to spend 1 percent on meaning, you know. If it turned out that really you need 10 percent or 15 percent of what we have” to end extreme poverty, “then it’s going to have to be someone else giving a sermon, probably about salvation and fire and brimstone. But if it’s just 1 percent, you can see so many pathways.”

If my theory is right... Of course, there’s that little matter.

But through strength of will, savvy publicity, and a boost from the U.N., Sachs has pushed his agenda to the fore, to the bestseller lists, to Charlie Rose and the New York Times editorial page. For better or worse, the Sachs plan is the most visible one on the table.

What does it consist of? In patchwork charity efforts of the past, “humanitarian rescue” has meant parachuting in vaccination teams here, distributing seed stock there, but with little coordination. As Sachs’ PowerPoint presentation shows, if you bring five or six key elements together, you reach critical mass—the antipoverty tipping point—and you boost the victims of extreme poverty over the threshold to ordinary poverty, where they are able to make a transition to sustainable living, if not immediate prosperity. That’s what he says he has already accomplished with his Millennium Villages in sub-Saharan African nations.

“These are all previously existing villages,” Sachs told me. “They were impoverished, hungry, and basically devoid of infrastructure and public services at the start of the project.” Sachs persuaded the U.N. to endorse his “quick-impact” program to put the villages on the road to sustainability in 2005. He got key funding from the government of Japan and from private philanthropists he roped in himself, as well as from the U.N. By 2006, after the Sachs blitz, villages like Sauri, in Kenya; Koraro, in Ethiopia; and Mwandama, in Malawi, were seeing food-production increases of 5, 8, and 15 times, respectively.

The idea is that once these villages—which now incorporate a total of about a half-million people, he says—reach economic self-sufficiency, they begin to spread, attracting government and private investment.

Critics have disagreed; one called the Millennium Villages “development Disneylands,” public-relations showcases. But Sachs says what they really show is that it would cost less than seven-tenths of a penny from each dollar of the developed world’s gross national product to end extreme poverty.

“You’ve monetized the Western conscience, right?” I found myself asking Sachs, almost plaintively. “You’ve put a price on how little it would cost to feel good about ourselves.”

“I guess it’s true,” he said. “I’m trying to give people no excuses not to do this.”

When he talks to companies, his pitch is all about talent recruitment and “reputational costs.” He says, “These businesses are finding that when they go to the campuses in the U.S.” to recruit, “often the first thing they hear is, ‘So what are you doing in Africa?’ And they’re stunned. ‘What do you mean, what are we doing? We’re not doing anything in Africa.’ And the students say to them, ‘Well, I want to work for a company that’s doing something in Africa, because I think that’s important.’ And so many companies have come to me and said, ‘We want to do something in Africa; otherwise we can’t recruit.’ It’s very practical.”
Everyone benefits, Sachs says. He allows the companies to buy a good reputation, which recruiters can then sell to the best and brightest in the talent pool.

“I’ve heard it over and over again from CEOs, who say, ‘We’re so happy we’re doing this. It’s the most meaningful thing our business has done, and I can’t tell you how much employee feedback I’m getting and how exciting this is,’ ” Sachs says. And he’s not talking about small fry. “We’re working with General Electric, which has equipped clinics and surgical units and so forth in all of these extremely poor communities, and with fantastic results. And with Ericsson, they’re providing the cell-phone and internet connectivity in all of the village areas, and it’s just a phenomenally—it’s breakthrough technology. To go from a completely isolated world—no electricity, no road, no contact, dying of extreme poverty—to having cell-phone connectivity, which means emergency-health-delivery services, being able to call for one of a hundred reasons, including figuring out what market prices are in three potential places where an output might be transported.

“And KPMG, they’re doing a lot of due diligence and investment-environment and business-environment analysis in these small cities near the villages where we’re working. So they’re using their absolute core business, consulting and accounting acumen, to help cities that most people have never heard of—Kumasi, Ghana; Kisumu, Kenya; or Akure, Nigeria—get their business environment straightened out so that foreign investment can come in. Becton Dickinson has helped us with a lot of diagnostic equipment and support, and Novartis has provided antimalaria medicines to the communities, and Sumitomo Chemical has provided long-lasting insecticide-treated bed nets. And the list really does go on.”

Is this the way the world will end poverty? Will Sachs get a Nobel? Or will the crash crush his hopes? Will he turn out to be just another Quixote whose failure leaves the field once again to Sally Struthers? Before getting into these matters, perhaps now is the time for a brief PowerPoint-like presentation of the life of Jeffrey Sachs up to that morning in Tokyo.

FIRST SLIDE: Here’s young Jeffrey Sachs growing up in a Detroit suburb, practicing card tricks. His parents were civil-rights activists who inculcated him with reverence for F.D.R. and the New Deal’s use of government intervention to alleviate a downward spiral into misery that free markets alone could not cure. (Sound familiar?)

“I’m a product of a household that is a product of the New Deal,” Sachs told me. “If you look back, that for me is a watershed of good political sense—of how to make a civil society and how to make a peaceful, coherent society that addresses urgent needs and at the same time takes the benefits of free markets. Back to college, I’ve believed in a mixed economy.”

NEXT SLIDE: Here’s Sachs at Harvard, dazzling his elders to such an extent that, at age 29, he becomes one of Harvard’s youngest tenured full professors ever (I hear he did well on his SATs too), being called upon by the government of Bolivia to cure its 14,000 percent yearly inflation rate.

At Harvard, he said, he was powerfully influenced by iconic liberal economist John Kenneth Galbraith, disciple of economist John Maynard Keynes and the Keynesian tradition of mixed capitalism and government intervention.

Perhaps one reason Sachs emphasizes the F.D.R.-J.K.G.-J.M.K. connection is that critics like Naomi Klein have argued that, in his Bolivian and Eastern European interventions, Sachs had been seduced by the doctrines of Galbraith’s archrival, Milton Friedman, the strict laissez-faire theorist whose “Chicago boys” used “shock therapy” to privatize Chile’s economy without objecting strenuously to the death squads that enforced their “free-market reforms.”

NEXT SLIDE: Here’s Poland, a Sachs success story—after some travail. The trade union Solidarity called in Sachs almost immediately after it took over the government from the Communist Party. In one of Sachs’ favorite stories, he told the union it could save the economy from collapsing under the weight of a $40 billion foreign debt load by just refusing to pay. In a moment that Sachs is obviously fond of recalling, he said, in effect, “Just send all your creditors a postcard telling them the new regime is not honoring any Communist-era incurred debt.” Not a single zloty. It worked!
NEXT SLIDE: Here’s Sachs defending the collateral damage incurred by his sudden “transformations” of collapsing economies, the kind of thing his critics call shock therapy. (In Bolivia, the government kidnapped and sequestered labor leaders to prevent them from interfering with Sachs’ draconian revamping of the economy—“junta-lite” tactics, Naomi Klein called them.) “When a guy comes into the emergency room and his heart’s stopped,” Sachs said, “you just rip open the sternum, and you don’t worry about the scars that you leave. The idea is to get the guy’s heart beating again.”

NEXT SLIDE: There are a lot of debates about how big a role he played in post-Soviet Russia and how much of the blame he deserves, but most agree that it wasn’t a pretty sight by the end. Sachs—along with the other Harvard boys, as they came to be called, à la Friedman’s Chicago boys—parachuted in and convinced Boris Yeltsin’s economic team of “reformers” that rather than move gradually, they needed to privatize immediately, mainly by selling off state assets and giving citizens soon-to-be-useless vouchers to buy stock in the privatized companies that resulted.

It was, by almost all accounts, a horror story. Sachs told me that he feels he’s been victimized by unfair reporting about his role.

I had heard he was touchy about it, and the most I could get out of him was this: “I just think we made a lot of mistakes.” He left it a little unclear who “we” were, suggesting that the key mistake was the Harvard boys’ excessive optimism that the U.S. government, the World Bank, and the International Monetary Fund would cobble together a Marshall Plan-type rescue of Russia in the name of capitalist democracy. They wouldn’t miss a once-in-history opportunity like that, would they? In fact, they would, and they did.

4. Bono and Moron InsuranceNEXT SLIDE: Close-up on Bono, around the year 2000, when he was making the transition from singer-songwriter to would-be saint, getting deeply involved with Africa and antipoverty efforts.

Then, Bono meeting Sachs. “My great friend Bobby Shriver,” Bono wrote in his introduction to Sachs’ The End of Poverty, “had advised me to meet [Sachs] in order to know what I was talking about before I went up to Capitol Hill to lobby on behalf of Jubilee 2000”—Bono’s third-world debt-cancellation campaign. (Gotta love “my great friend Bobby Shriver.” Bono has picked up the rhetoric of the rich, presumably the better to help the poor.)

Here we see the template for the transaction that has allowed Sachs to put his solutions—his agenda—in the forefront of the public mind, even if some economists don’t consider him to be in the forefront of his profession. (“He’s not even a development economist,” one grumbled to me. “He’s a macroeconomist.”) Sachs is moron insurance for aspiring saintly celebs who want to be do-gooders but don’t want to be seen as celeb airhead do-gooder clichés. In return, the celebs shine their light on Sachs’ projects, like the Millennium Villages, which are photo-op lures for the novice celeb do-gooder. This arrangement may have reached its apogee with MTV’s 2005 documentary about Sachs and Angelina Jolie in Africa.

NEXT SLIDE: 9/11. “My response to September 11 was that I wanted to do something more for the United Nations, and I thought it was particularly urgent and a dangerous time, and I wanted to support multilateral processes,” Sachs said. “And at the same time, Columbia was trying to recruit me. Kofi said, ‘Come as my adviser on the Millennium Development Goals and organize an effort,’ and Columbia University offered me the Earth Institute position, and so after 31 years, I said goodbye to Harvard.”

5. Quixote or Card Sharp? There was a moment in the Palace Hotel in Tokyo that morning that threw into relief the issues raised by Sachs and his critics. We had adjourned from the breakfast room to the lounge, where Sachs was meeting with then-Prime Minister Yasuo Fukuda’s science adviser.

Sachs is trying to make the transition from being known mainly as a poverty-development person to someone who can straddle the looming divide—death match, really—between the poverty-development do-gooders and the climate-change do-gooders. The rapid development that has raised literally billions of people out of extreme poverty in India and China has been dependent on dirty coal-burning plants. The climate-change people want to reduce dirty-energy use, but doing so, say some of the poverty people, risks cutting off the means of raising starving people out of extreme poverty. Look what happened when the climate-change do-gooders’ cry for biofuels led to land once used for food crops being shifted to growing plants to make fuel: soaring food prices, food riots, starvation spreading again.
Sachs knows of some ingenious ideas for dealing with the energy crisis, one of which he discussed with the science adviser: giant arrays of parabolic mirrors in the Sahara desert. According to Sachs, with the right technology, you could focus the glare of sunlight off the desert sand and use the heat to boil water to drive enough energy-producing turbine generators to power all of Europe.

Well, I’m no techie, but it sounded a little far off in the future, if not utterly undoable, to me. (Where does the water come from?) Nonetheless, there was something about the grand, visionary reach of it. It suddenly captured what I found appealing about Sachs: He’s Don Quixote, and the giant parabolic mirrors—the analogy is not precise—are his windmills.

But then, after the meeting with Fukuda’s science adviser, came the revealing moment. I’d asked Sachs what he did in his downtime during his globe-trotting “endless tour.”

Sachs was silent. Then one of his chief assistants, Joanna Rubenstein, prompted him.

“There is sleight of hand,” Rubenstein said.

It turns out, Sachs is something of a card sharp, or anyway a clever trickster with cards.

Sachs didn’t look entirely happy with this disclosure. He says it just kind of happened, his learning to do card tricks. He’d spent a lot of time with cards as a young devotee of bridge.

Still, this unexpected Music Man sharpie side of him dramatizes the divide in the dev biz regarding Sachs: Should we place our confidence in him, or is he a kind of confidence man in the do-gooder trade whose main skill is making himself the center of attention?

“If ending poverty is so easy, why hasn’t it been done?” William Easterly, Sachs’ most vocal opponent, asks. Easterly, a former World Bank official now at New York University and the Brookings Institution, wrote a well-received book called The White Man’s Burden, which accused Western aid programs of being neocolonialist.

And later during that day in Tokyo, I thought I picked up skepticism from some of the earnest Japanese poverty bureaucrats to whom Sachs was appealing for funding for more Millennium Villages, among other projects.

Sachs wanted to encourage the Japanese government to promote private investment in Africa, particularly in ventures that would bring added support and “sustainability” to his development villages and the surrounding areas. The Japanese seemed to me to be politely suggesting that the political culture of these nations (none of which were named) had to change before Japanese businesspeople could be persuaded to set up shop there and provide markets for the products of the Millennium Villages. I got the impression Sachs, on the other hand, believed that successful development was the very thing that could bring about an economic transformation of the political culture of these places—or at least that those 10 million starving children couldn’t wait until after the political culture was changed to be saved. It’s the perennial chicken-and-egg question of antipoverty economics.

It’s difficult for an outsider to judge the different sets of facts and interpretations of facts that each side uses. Even one of Sachs’ allies, Oxford’s Paul Collier, says that Sachs “has overplayed the importance of aid” and that Easterly “is right to mock the delusions of the aid lobby.” On the other hand, Collier says, Easterly “exaggerates the downside and again neglects the scope for other policies.”

True, waiting for trial-and-error, pragmatic, self-generated development sounds far more holistic than Sachs’ interventionist approach. But even his opponents will concede that to wait for the right political and economic culture to evolve before getting vaccination teams and antimalarial medicine into stricken villages is not justified.

Some of Sachs’ successes have been undeniable—particularly his role in implementing the U.S. anti-AIDS and antimalaria campaigns and in advancing the “green revolution” in seed stocks that has allowed once-infertile drylands to feed millions who otherwise would have starved. Such achievements have allowed Sachs to transcend his controversial past. It fits the redemption narrative.

But that’s the past. The future is looking bleak.

6. The Billionaire BegathonOne afternoon in his townhouse in March 2008, months before the crash of the global economy, Sachs was telling me about how exhausting it was to fit the pieces together to get the funding for his programs, how much effort it took to get governments, NGOs, and corporations on the same page.
In a kind of despair, he spoke about what I like to call his billionaire-begathon fantasy.

Sachs said there were going to be 1,100 billionaires on that year’s Forbes list and their assets would be something like $4.2 trillion. If they allowed him to manage their money, he said, he could show them how they could end extreme poverty all by themselves without the rest of us lifting a finger.

“They wouldn’t have to give away a cent,” Sachs said. He’d just need the interest: “They could just put half their assets into an interest-bearing trust.” He’s done the math. “That would be $2.1 trillion, and 5 percent payment on that would be $105 billion a year. That would do the job. Actually, that would be quite good.”

“Are you serious?” I asked.

“I’m getting ready to go door-to-door,” he said, at least half seriously.

Still, I kind of like Sachs’ idea for a billionaire begathon: fast, efficient, no more global-poverty confabs. But when I spoke to him a month into the Obama administration, he conceded that the crash had wiped out so much wealth that even his fantasy was, in effect, defunded: This year, Forbes listed just 793 billionaires, worth a total of $2 trillion.

He’s back to doing multipoint programs for the G-20 nations. He emailed me a 45-page, small-type proposal, “Smallholder Food Production and Poverty Reduction: Principles for a Financial Coordination Mechanism (FCM) to Support Smallholder Farmers.”

On the phone, he was talking a mile a minute, dancing as fast as he could, describing the multitude of effects that the economic crisis has had, about how “it’s been a very, very tough few months. With African economic growth cut in half, cuts in foreign aid, everything has been made more urgent, especially the food crisis, and I’ve been spending a major amount of time trying to mobilize desperately needed funding for peasant farmers, and—it’s just overwhelming.” He uses phrases like “shockingly difficult” and “nightmare” and wonders aloud, almost hopelessly, why, when trillions are being thrown around, a few billion can’t be found to fight the extreme poverty that kills 10 million kids a year.

I took it all in, and later I found myself wondering, Why does he do it? Especially now, when it seemed to me the subtext of all these new six-point proposals and 45-page G-20 programs is that everything he’s built up in the past decade is sliding down the tubes, and he’s engaged in a desperate Sisyphean effort to roll the rock up the hill from the bottom again.

I can’t read minds. But I have a feeling that at least part of the answer to
why he does it is because he can, and because there are not too many others who can hold the whole miserable picture in their mind and, instead of giving up hope, translate the misery into salvific equations.

It’s probably hopeless, even more now than it was before, but he does it because, I suspect, he thinks no one else could.

And he just doesn’t want to leave the job to Sally Struthers.
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Wed, 22 Apr 2009 12:00:00 GMT

Economic Optimists

Wed, 22 Apr 2009 12:00:00 GMT

Indra Nooyi, CEO of PepsiCo
The world’s largest snack-food manufacturer saw shares drop 28 percent in 2008, but net revenue was up 3 percent. “We are entering the new year cautiously optimistic,” Nooyi said during a February conference call. The company has predicted rising profit in 2009, thanks to aggressive marketing and new logos.

Ben Bernanke, Chairman of the Federal Reserve
In boom times, the Fed chairman often acts as a market cheerleader, but sunny predictions are harder to come by now. During congressional testimony in February, however, Bernanke seemed hopeful about the country’s short-term outlook: “There is a reasonable prospect that the current recession will end in 2009, and 2010 will be a year of recovery.”

Jeremy Grantham, Chairman of Grantham Mayo Van Otterloo & Co.
Over the past decade, Grantham, whose firm manages more than $120 billion, was nicknamed Permabear for urging investors to avoid the market. Nowadays, he’s bullish: Not long after Lehman went bust, Grantham said, “You are looking at the best prices in 20 years. The last time I was this optimistic was in 1982.”

John Stumpf, CEO of Wells Fargo & Co.
In spite of pervasive worries about his firm’s health, Stumpf appears almost bubbly. “What started out 18 months ago as a credit crisis has turned into a confidence crisis,” he said in a February speech. “Things will improve. We’re a country of optimists. We’ve so much to look forward to. There are lots of opportunities out there disguised as problems.”

Edward Bramson, Chairman of Spirent Communications
Businesses related to internet infrastructure may be poised to better weather the recession. Spirent, which tests broadband networks, saw a 91 percent rise in its 2008 operating profit. In February, Bramson said that Spirent had entered the year “well placed to face the uncertainties of the market.”

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Wed, 22 Apr 2009 12:00:00 GMT

Brother, Can You Spare a Loan?

Wed, 22 Apr 2009 12:00:00 GMT

The 7(a) Loan ProgramPresident Obama announced plans to increase the government-guaranteed portion of the Small Business Administration’s 7(a) loans to 90 percent. Borrowers must apply through their skittish banks, but the stronger backing will probably stimulate more lending. For information, go to sba.gov.

The SBA’s Micro-loan ProgramBusinesses with fewer than 10 employees can apply for very small loans (they top out at $35,000) through community-based not-for-profits that are funded through the SBA. For information, go to sba.gov.

Private Micro-loan VenturesThough many of the nonprofits that specialize in providing small loans have dried up in the past year, a few—like Accion USA and Grameen America—are still funding promising entrepreneurial ideas from the people who need credit the most. For information, go to accionusa.org or grameenamerica.com.

Peer-to-Peer BorrowingYou can log on to Prosper.com or Lendingclub.com, describe your venture, and propose the terms of a loan. Then watch as private individuals compete to finance your business. (At least that’s how it’s supposed to work.)

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Wed, 22 Apr 2009 12:00:00 GMT