Portfolio.com: First Draft

What Katy Did

Wed, 11 Feb 2009 13:00:00 GMT

Playing to her audience, a crowd of several thousand in Toronto, pop singer Katy Perry wiggles through the last teasing bars of her latest hit single, “Hot N Cold.” She slides between the open legs of a muscular male dancer and delivers her punch line. “I wish you were straight,” she says, looking the dancer up and down.

She gets an avalanche of applause.

When you’re a former Christian singer whose breakthrough hit is “I Kissed a Girl,” your fans want you to be bad. Or at least campy. Perry, 24, manages well on both fronts. She has girl-next-door looks but paints her Kewpie-doll mouth in bright-red lipstick and favors retro, Bettie Page-like getups. She purposefully belly flopped into an anniversary cake on an MTV awards show in Guadalajara, Mexico, and teased the gay community with her song “Ur So Gay.” (Opening line: “I hope you hang yourself with your H&M scarf.”) As a button-pushing act, Perry sells. To date, she has sold more than a million and a half copies of her debut, One of the Boys, and more than 3 million of the single “I Kissed a Girl.” She has also been nominated for a Grammy.

Yet as the recording industry is remaking itself for the digital age, Perry stands out not just for her faux naughty-girl antics but for her career trajectory. To offset declining budgets and CD sales, labels are beginning to turn to the Web as a cheaper way of discovering new talent. The British pop singer Lily Allen, for example, was discovered on MySpace. The rock band Journey recruited its current vocalist, Arnel Pineda, after seeing him perform on YouTube. At least a half-dozen startups are trying to “crowdsource” the A&R process, Wikipedia-style, by studying what internet users listen to. Even EMI chairman Guy Hands—who took over when the private equity group Terra Firma Capital Partners bought the company—has suggested that the music business use social-networking sites to find new acts.

Perry, instead, is an old-school performer who worked toward her big break for almost a decade. The daughter of born-again Christians who didn’t allow pop music in their home, Perry released her first album—a collection of gospel songs—on a small label in Nashville in 2001. The CD didn’t sell, but Perry wrangled an audition with Glen Ballard, producer of Alanis Morissette’s Jagged Little Pill. Ballard signed Perry to his label, through which she recorded several albums of material that were supposed to come out on Island Def Jam and Columbia. But neither label felt the music Perry had recorded had commercial potential. Def Jam executives, Ballard says, “point-blank told me they didn’t think she was a star.”

By late 2006, frustrated that Columbia wouldn’t release a CD, Perry negotiated an exit deal. To make ends meet, she took a job at a small California company that critiques work by aspiring songwriters. That’s where she was in January 2007 when Capitol Records chairman and CEO Jason Flom (son of legendary corporate lawyer Joseph Flom) called her with an offer. “It was a 917 number, so I picked it up,” she says, referring to one of New York City’s area codes. Though Flom had heard a recording of Perry’s in 2006, it took a while for him to pull the trigger. “We almost made a big mistake,” he told her.

Flom wanted to pair Perry with Dr. Luke, a proven hitmaker who’d written for stars like Carlos Santana and Kelly Clarkson. “It was a tough deal to make because Luke is a very astute guy who wanted very particular things, but I managed to broker something where everyone felt good working together,” Flom says. The matchmaking took. The first single Dr. Luke and Perry collaborated on was “I Kissed a Girl.”

Though Flom declines to give details of the deal, top producers typically receive an advance against future royalties. A pop album like One of the Boys might cost $500,000 to make, and Flom started promoting it early by releasing the track “Ur So Gay” on iTunes. When Madonna mentioned that she liked the song in a radio interview, Perry became a gossip-column item. Capitol, which is a division of EMI Records, stoked interest further by placing a handful of Perry’s songs on the MTV hit series The Hills and in the movie Baby Mama. By the time One of the Boys was released, in June 2008, fans were ready to buy her music. The CD debuted at No. 9 on Billboard’s Top 200 list and went gold in September. “Hot N Cold” finished the year in the No. 1 spot on Billboard’s Top 40 airplay chart.

Last year, Perry admitted to never having actually kissed a girl. But no matter. Her fans today greet her waving tubes of cherry ChapStick—a reference to a line in “I Kissed a Girl”—and there’s even a Katy Perry doll on the market.Related Links
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Cease and Resist

Wed, 11 Feb 2009 13:00:00 GMT

Stop eating out—29.4%

Stop buying lattes—11.6%

Cancel a vacation—10.9%

Move in with parents—8.1%

Stop buying clothes—7.3%

Take a menial job—6.2%

Sell eggs or sperm—5.4%

Give up a gym membership—4.7%

Stop giving to charity—4.1%

Cash in 401(k)—3.5%

Sell home—1.8%

Let go of housekeeper—1.6%

Let go of nanny—1.6%

Stop coloring hair—1.1%

The Big Fix

Wed, 07 Jan 2009 13:00:00 GMT

In the aftermath of the stock market crash of 1987, reformers moved to remake America’s regulatory structure. Some experts proposed tinkering with the oversight agencies, merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, for instance. Others recommended regulating derivatives, which were in their infancy. George Soros, not yet the bête noire of right-wingers, took to the editorial page of the Wall Street Journal to warn that nobody was thinking big enough: “The longer markets function without supervision explicitly aimed at maintaining stability, the greater the danger of an accident like October 19, 1987.”

Anyone remember the landmark 1987 Securities Act? It never materialized. And did anything happen in 1998, after Long-Term Capital Management nearly went under and a similar dance took place? Many of the same players strutted on the same stage, and Soros again predicted that without sweeping international regulatory reform, we risked “the breakdown of the gigantic circulatory system which goes under the name of global capitalism.” Again, no ’98 Securities Act—perhaps not surprising, given that what followed was a market recovery that we now know was a massive equity bubble. (View a graphic showing how investment vehicles escaped current regulatory measures.)

In our current financial mess, hardly a day goes by without another hearing on the failures of the U.S. regulatory system or speech on regulatory affairs. In November, Henry Waxman, chairman of the House Committee on Oversight and Government Reform, hauled five of the most influential hedge fund managers before the committee and extracted pronouncements from each of them—some less full-throated than others—that the markets, including hedge funds, needed more regulation. Once again, there was George Soros, as right as ever, leading the Regulatory Light Brigade.

This time, the calamity in the markets is more devastating than any of the previous crises since the Great Depression. Luckily, it’s looking like history won’t repeat itself. One of the enduring legacies of this economic collapse will be that the government finally had to embark on a wholesale financial rethinking. Right now, finding a way to end the crisis and reinvigorate the economy is the most pressing issue. But in a few months, after the Obama administration settles in—assuming we aren’t all eating cat food under a bridge—we are going to have the debate we need about how to rebuild the regulatory system.

The pressure to put off this debate will be enormous. The financial industry is bound to resist. But Wall Street is at its weakest point in decades; the new administration has to strike while the public temper is at its hottest.

“Investors have lost confidence in everything: the regulators, the system, the oversight of Congress, the fairness of our markets,” says Arthur Levitt, a former S.E.C. chairman. “How do you restore that?”

One hopeful sign is that President Obama has given the matter significant thought. In a campaign speech in March, he talked about regulating the derivatives markets and raising the capital standards for banks. If that speech becomes the template for reform, it’s a promising start. It’s also promising that Gary Gensler was named co-head of Obama’s search team for a new S.E.C. leader. Gensler has been a prescient critic of excesses at Fannie Mae and Freddie Mac (which were not remotely the cause of the crisis but were inarguably pockets of systemic risk).

First, regulators need to change their ninnyish attitudes. They have gone about their jobs in the past decade like hall monitors at the prom, deeply afraid of being ostracized. They need to bring some mettle to their roles. The challenge is to remake the system so that it’s up to the task of preventing, or at least minimizing, the next global meltdown. Alter the structure all you want, but unless you have the right regulatory attitude, it’ll be for naught.

This is not a moment to think small. First, we raze the S.E.C. and the C.F.T.C., along with most, if not all, of the federal banking and state insurance regulatory structure. We should strip the Federal Reserve of its responsibility for regulating banks; it’s enough to oversee the economy. And just as everyone was trying to express how bumbling and irrelevant the S.E.C.’s enforcement approach has been, the agency provided perfect examples.

In mid-November, headlines blared that the S.E.C. had charged Mark Cuban, the billionaire owner of the Dallas Mavericks and a frequent blogger, with insider trading. Did he gain secret knowledge of the failure of A.I.G. and sell his stake? Had he done something untoward with regard to Lehman Brothers? No. Four and a half years ago, Cuban sold stock in a company called Mamma.com based on inside information, according to the S.E.C., and thereby avoided $750,000 in losses. Today, Copernic, Mamma.com’s successor, sports a market value of less than $3 million. Cuban may well be guilty. But who cares? It’s as if Homeland Security had a ceremony in 2008 to announce that it had erected a gold-plated bollard at ground zero. And come December, it became clear that the S.E.C. had shockingly botched multiple chances to upend confessed Ponzi schemer Bernie Madoff.

Before the economic crisis became acute, Treasury Secretary Hank Paulson put forward his plan to remake the regulatory system. Like most of Paulson’s initiatives, it was inadequately explained and poorly sold. And the motivation was exactly wrong, born of a fear of regulation that looks ridiculous today. It died on arrival, as it should have.

But surprisingly enough, given the dubious way it began, a Paulson-like framework is a good place to start. It was influenced by what is known in regulatory circles as the Twin Peaks approach, used in Australia and the Netherlands. The idea is to create two financial regulators that are given separate responsibilities not based on financial firms’ lines of business. Currently, we have separate regulators for securities, futures, banks, and insurance. That antediluvian division of labor needs to be scrapped. Under a Twin Peaks structure, one agency would focus on the safety and soundness of financial institutions: the strength of their balance sheets, whom they trade with, and how strong their risk controls are. An agency with this structure would remedy one of the glaring limitations of the S.E.C.—that it has too many lawyers and too few market experts.

The second peak will be more familiar. It would focus on business conduct and investor protection, otherwise known as lying, cheating, inadequate disclosure, and manipulation. This would encompass much of what the S.E.C. is currently supposed to be doing. It would go after big targets and not monkey around with dinky companies and small-time insider-trading issues.

The Twin Peaks model has good-cop, bad-cop appeal. The safety-and-soundness regulator can work with firms to make sure they are solid or else the enforcer will come in. And we should consider a third peak as well: one with responsibility for surveying systemic risk. It would monitor the safety and soundness of the entire financial system, rather than assess it on a company-by-company basis.

One debate—sometimes drawn as a Europe-vs.-U.S. argument—is about whether we should reorder regulation based on broad “principles” rather than strict “rules.” This is a red herring, despite the energy expended on it. Rules come from principles, after all. Whatever we have, it needs to be enforced.

In remaking the regulatory architecture, we will need to update the regulatory mandate to deal with 21st-century financial products. Accounting rules should be tightened to prevent anything from being moved off the balance sheet unless there is a true sale of the assets. No entity or instrument should be untouched by some form of regulation.

Regulators need to monitor positions taken by banks, other financial institutions, and major investors, including hedge funds. To its credit, the S.E.C. did attempt in recent years a modest hedge fund registration requirement. The courts struck it down. Congress will have to expand the regulatory mandate to include private investment partnerships, or at least those of a certain size.

Clearly, the regulators will need new powers. We must install higher capital requirements for all financial institutions. Given the disastrous incompetence of the rating agencies, Congress will have to undertake the enormous task of decoupling our regulatory framework from its dependence on ratings. Right now, ratings are written into the fabric of thousands of laws and regulations. Instead, market prices should be used.

There is wide consensus, as there should be, that derivatives will be brought under the umbrella. In the 1990s, the definitive fight was over the regulation of derivatives. Brooksley Born, then the head of the C.F.T.C., pushed to regulate them. Alan Greenspan, Robert Rubin, and Lawrence Summers fought her. She was right. It’s encouraging that people like former S.E.C. commissioner Levitt, who sided with the crowd that argued that regulation would plunge the market into legal chaos, are now having second thoughts. Let’s hope the same is true for Summers, who is now in Obama’s inner circle. “I have regrets that I didn’t use that as an opportunity to say, ‘Wait a second, maybe it will create uncertainty, but what about going forward? And what about mandating a clearinghouse?’ ” Levitt says. “I could have and should have, and I regret not doing it.”

Other problems are thornier. Can we do something about outrageous compensation for executives and Wall Street? Can we prevent institutions from becoming too big to fail or, worse, too interconnected to fail? Right now, unfortunately, regulators are encouraging mergers, giving us a land of one-eyed institutions buying blind ones. They have to be followed by a complete re-thinking of our capital requirements. Stronger capital requirements might help with excessive bonuses too. They will make financial firms more stable, less profitable, and therefore more parsimonious with their own employees in order to leave more for shareholders.

But a revitalized regulatory sector won’t be enough. We need more dissidents. We need to make the world a safer place for short-sellers to criticize companies. Regulators should publicly praise short-sellers, rather than periodically ban their activities. Critics and whistleblowers, no matter how self-motivated, should be regularly consulted about suspicious companies, not dismissed as cranks once they expose wrongdoing.

And then we need to bring back plaintiffs’ lawyers. In the past decade and a half, Republicans not only weakened regulation but also led an attack on these lawyers. Corporate America hated them—and why not? They seem like parasites, ready to pounce on every corporate mistake. But they are vital to keeping capital markets functioning because they keep boardrooms scared. Frank Partnoy, a University of San Diego law professor and prescient critic of the fragile financial markets, says that “it’s crucial that standards not stand alone and they be enforced with real teeth. We need public enforcement and private litigation.”

The current catastrophe presents us with an opportunity. But the Obama administration and a Barney Frank-led congressional effort have to be aggressive and ambitious. Reforms can always be scaled back if they overshoot the mark. But the reform-minded cannot enter the debate in a defensive crouch. As new chief of staff Rahm Emanuel says, Don’t let a crisis go to waste.
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The Case for Chapter 11

Mon, 10 Nov 2008 03:00:00 GMT

These are desperate times in Detroit. General Motors attempted to merge with Ford Motor, only to be rebuffed. As of this writing, it was exploring a buyout of Chrysler, which is an intriguing possibility but faces very long odds. (Who would lend G.M. money for that deal right now? In fact, who would lend G.M. money for anything right now?) In the meantime, all three carmakers are burning through cash as if they were internet companies circa 1999. Ford and G.M. have explicitly stated they aren’t considering filing for bankruptcy, further fueling rumors that they will. But maybe they should, especially G.M., which is currently in the most dire situation of the Big Three and has perhaps the most to gain from a Chapter 11 reorganization.

To be sure, Ford isn’t exactly comfortable, but it has more cash than G.M.—about $27 billion as of the most recent quarter—and is consuming it less rapidly. Ford also has some attractive assets that could find buyers, like its Volvo division and its 33 percent stake in Mazda, whose profits remain healthy. As for Chrysler, the company’s best hope isn’t a U.S. government bailout but Cerberus bailing out. The private equity firm bought an 80 percent stake in Chrysler last year for just $7.4 billion—less than a quarter of what Germany’s Daimler had paid a decade earlier. Yet in hindsight, Daimler probably got the better deal. Chrysler’s sales have plunged 25 percent this year, far more than any other major car company’s. Still, like Ford, Chrysler has some assets—specifically its Jeep brand, its minivans, and its Dodge pickup-truck division—that could attract a healthy foreign automaker looking to expand in the U.S.

The most sensible buyers would be Japan’s Nissan or India’s Tata Motors.

Which brings us back to G.M. and the case for Chapter 11. A bankruptcy filing, if managed properly, might not be a death sentence for G.M. but instead a chance for it to streamline its operations. A desperate move? Sure, but less so than acquiring Chrysler, which is akin to tying two stones together to see if they’ll float. A G.M.-Chrysler merger, should it happen, would produce lots of fancy PowerPoint slides about synergies and savings. But it would also be an enormous distraction for a company that has dithered too long without addressing its urgent need to restructure and downsize.

Numbers tell the story: G.M. reported $21 billion in cash at the end of the second quarter and then added $4.5 billion by tapping existing credit lines. During the third quarter, the company’s cash probably dropped back to $21 billion or so. Even before the global financial crisis, G.M. was tearing through about $1 billion a month, and with vehicle sales now slowing not just in the U.S. but also overseas (formerly a growth area for G.M.), the burn rate is only increasing. Management can’t drain the cash hoard all the way to zero—the company says it needs $11 billion to $14 billion at any given time just to meet payroll, buy parts, and keep the lights turned on. If you do the math, General Motors will likely run out of cash next summer.

The company could raise money by unloading assets, but which ones? In October, it tried to refinance its headquarters, downtown Detroit’s Renaissance Center, with the city’s public-employees pension fund. G.M. was flexible; it was willing to sell the building and lease it back, or even put it up as collateral for a loan. But the fund declined, which is a little like, say, the City of Chicago rebuffing the Cubs. G.M. has also put Hummer on the block, but who wants a maker of gas-swilling S.U.V.’s? A federal bailout might happen, but the U.S. government just gave Detroit $25 billion to develop fuel-efficient cars, so additional funds might be tough to come by. Besides, betting on a bailout is no way to run a company.

That leaves bankruptcy. The main advantage of Chapter 11 is that it would give G.M. a chance to wipe the slate clean and do what pretty much everyone agrees it needs to—reduce its number of brands and cut costs. Right now, it can’t take those steps because the opposing parties (car dealers, labor unions, and suppliers) are strong enough to push back. When G.M. killed Oldsmobile, in 2004, it was forced to spend more than $1 billion to buy out all the disgruntled Olds dealers. The company still has eight domestic brands but probably needs only two or three—Cadillac, Chevrolet, and perhaps GMC. The others (Buick, Hummer, Pontiac, Saab, and Saturn) need to be sold or folded. That means about 60 percent of G.M.’s more than 6,000 dealers have to go, says automotive guru Steve Girsky of Centerbridge Partners, a private equity firm. A ballpark estimate for shutting down those dealerships is about $4 billion. G.M. can’t spend that kind of money at the moment, but in a bankruptcy filing, it would essentially be taking itself hostage to force dealers into accepting less favorable terms.

The process would also help the company secure better deals with suppliers and the United Auto Workers union. G.M. is on the hook for about $11 billion to settle claims with its biggest parts supplier, Delphi (formerly part of G.M., and currently mired in its own Chapter 11 proceedings). The U.A.W. has already agreed to let G.M. restructure its pension and health-care obligations for retirees, but those savings won’t show up until 2010. Bankruptcy proceedings would give G.M. a better chance to accelerate the timing.

Of course, there are downsides. Shareholders would be wiped out, but the stock is down 74 percent this year alone, so they’ve been pretty much obliterated anyway. The more serious objection is that it would be a catastrophe for vehicle sales. No one, the theory goes, will buy a car from a bankrupt company out of fear that the warranties would be worthless and parts wouldn’t be available. But G.M. has access to plenty of $1,000-an-hour lawyers, and one of them should be able to find a way to guarantee warranty protection to G.M. vehicle owners. Get a court guarantee; buy coverage from Midas or Hertz or whomever.

The bottom line: General Motors can no longer be Generous Motors, as the automaker was long called in Detroit. A successful bankruptcy would require warranty guarantees, a public-relations blitz to reassure consumers, and a solid plan to inject capital into a revamped and rejuvenated company. “There’s a reason the corporate bankruptcy law exists,” says Daniel Montgomery, of Montgomery Advisors, a restructuring firm. “If it’s used effectively, it’s better than letting a franchise melt down.”
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Motor Skills

Wed, 15 Oct 2008 12:00:00 GMT

Rick Wagoner joined General Motors in 1977, at age 24, as an analyst in the treasurer’s office, and he became the company’s youngest C.E.O. 23 years later. The onetime college basketball player (for Duke University’s Blue Devils) hasn’t had an easy tenure. Since Wagoner took the wheel, in 2000, G.M. has endured difficult union negotiations and rapidly lost market share to Toyota. Despite G.M.’s extensive cost-cutting, high gas prices have hurt its sales. In the summer, it put its fabled Hummer division on the block, and in September, Wagoner advised Congress that a $25 billion loan would be a “tremendous help” to the industry in meeting tougher fuel-efficiency rules. Here, he talks about the auto industry and investing during a troubled era.

When will Detroit’s fortunes turn around?
When the U.S. economy begins to turn around and resume its traditional rate of growth, the U.S. auto market will follow suit. G.M. has had to take some tough actions to become cost-competitive with foreign manufacturers. We’re dramatically reducing spending on pensions and post-retiree health care starting in 2010, and we’ve aligned our capacity with market demand. We’ve also been moving to revitalize our U.S. car business and grow our crossover business, especially in response to the rapid shift in the sales mix as a result of higher gas prices.

Is it better to buy or to lease?
Given recent developments in the credit markets, the U.S. auto industry seems to be trending back toward consumers purchasing rather than leasing vehicles. For most people, I think buying is going to be the best option. Certainly under some circumstances, they will still find it beneficial to lease, although that will cost more than in the past.

Which clean, renewable energies will be the most important to the auto industry?
I’m not sure I can say which one will be the winner. But the U.S. needs to diversify the energy sources it relies on, and G.M. is working on a range of technologies—biofuels like cellulosic ethanol, battery and electric power, and hydrogen fuel cells.

What’s a good next move for an auto professional who’s been laid off?
Employees might find it best to leverage their skills into positions in other industrial, financial, or manufacturing businesses. These industries greatly value the skills that auto-industry professionals offer. And we’re actually adding engineers to work on hybrid systems, advanced batteries, fuel cells, and other cutting-edge technologies.

Which presidential candidate has Detroit’s best interests in mind?
We appreciate the sincere interest that both candidates have shown in the role our industry plays in the country’s economic future.

Will low oil prices ever return?
We’re planning on seeing prices continue at their current levels in the near term and to increase over the midterm—more gradually than they have during the past year.

What will a gallon of gas cost in a year and five years from now?
I wish I knew. If you meet anyone who does, please have them give me a call.

The Baddest Boy in Silicon Valley

Thu, 18 Sep 2008 12:00:00 GMT

At the gleaming offices of Minor Ventures, Halsey Minor’s new investment firm in downtown San Francisco, tens of millions of dollars’ worth of art—including expensively lit works by Dennis Hopper, Pop artist Ed Ruscha, and contemporary favorite Richard Prince—is displayed alongside gaping, fist-size holes in the plaster walls.

Until recently, several of Damien Hirst’s tableaux of real butterflies suspended in paint hung there. But then the British art star argued with Minor over a work that Minor sold at auction rather than through the artist’s private dealer—apparently a serious breach of art-world etiquette. An angry email exchange ensued. Now it’s war.

Says Minor, “He identically copied one of my paintings for Eli Broad, and it was not part of a series, so as you might imagine, I was not very concerned with what he thought I should do.”

Minor then began dumping the rest of his Hirst collection—at auction.

So it goes with Minor, 43, who isn’t afraid to step on toes, no matter whose feet they happen to be attached to. Though Hirst and his manager declined to comment for this story, there’s no shortage of people eager to offer up a snide (and usually anonymous) remark or two about Minor, who 15 years ago founded the tech-news company CNET and who now runs Minor Ventures.

One former CNET board member calls Minor a “pathological” person who sees everything as “a zero-sum game.” Other acquaintances of Minor’s say that he has burned so many bridges over the years that even those who made a killing off CNET when it went public in 1996 refuse to speak to him now.

I ask Minor why so many people are intent on taking him down a notch. He shrugs. “Warren Buffett is not on Wall Street, and Bill Gates is not in Silicon Valley, and I don’t at all care what’s happening outside Minor Ventures.”

When I first meet Minor, it’s a sunny day at his sprawling estate in Charlottesville, Virginia. The Federal-style mansion is straight from the pages of Town & Country. It has high-ceilinged rooms in which pictures of foxhounds and horses hang above richly upholstered furniture and sprays of pink roses. Along its two-mile driveway are several horse stables.

At the door, I’m greeted by a nanny in a neatly pressed uniform, who holds Minor’s infant daughter. When Minor arrives 15 minutes later, dressed simply in a brown wool sweater, jeans, and expensive loafers, he sinks into a couch and offers a charming smile.

It fades soon enough.

Minor was a star after CNET became the first Web-content company to go public, just four years after its founding in 1992. He was regularly recognized as an entrepreneurial genius in the very magazines that he was intent on putting out of business. The attention was well-deserved. At CNET—which CBS recently purchased for $1.8 billion—Minor started several initiatives that made hundreds of millions of dollars for the company once they were spun off, including the Web portal Snap, the e-commerce site BuyDirect.com, and software firm Vignette. By the time Minor left CNET in early 2000, weeks before the dotcom crash, the company was valued at about $4 billion and his stake at well over $100 million. He was 35.

One of Minor’s next projects, a business incubator called 12 Entrepreneuring, was closely watched. He co-founded it with Benchmark Capital, a venture capital firm, and entrepreneur Eric Greenberg, who had already taken public two internet consultancies. Partly, the intrigue centered on Minor. But 12 Entrepreneuring also raised a stunning $137 million from some of the biggest names in Silicon Valley, including eBay’s Pierre Omidyar; serial entrepreneur Marc Andreessen; angel investor Ron Conway, one of Google’s first backers; and Ted Waitt, a friend of Minor’s who founded the PC maker Gateway.

What followed was a high-speed train wreck. Minor first clashed with Greenberg, who left the company after just six months. According to Minor, the next big problem was the “alpha male” board members like Andreessen and Omidyar, who didn’t like the way Minor was running things. “Every one of them thought I should do as they said,” he explains.

“Every one of them will tell you that I did a bad job. It was like filling a bucket with dynamite and putting a long fuse on it.”

The kicker was the market’s cannonball dive in 2000. Though 12 Entrepreneuring had funded just three companies, to the tune of $33 million, its investors were feeling the impact of the dot bomb all around them, and they wanted their money back. Conway was the ringleader.

“Ron literally called me at the airport and said, ‘I have nothing against you, but I’m going to make your life a living hell if you don’t give me my money back,’ ” Minor says. “And he did.” After some back-and-forth, Minor grudgingly returned Conway’s portion of what money was left. Just 18 months after the business was started, only $40 million remained out of the original $137 million. The spat alienated Minor from the power players who had once supported him. “Ted Waitt and I aren’t friends,” Minor says.

When I tell Minor something Conway recently said to me—that “no one is ever going to give Halsey another nickel”—he throws back his head and laughs forcefully. Twenty minutes later, in the middle of discussing another subject, he interrupts himself to say, “Why doesn’t Ron just go on with his life?”

It’s hard to fault Minor for the towering regard he has for his own instincts. When he first pitched CNET to venture capitalists, they passed, leaving him to live off credit cards and friends for nearly a year, until a $5 million investment from Microsoft co-founder Paul Allen saved the day.

Even those who bad-mouth him chalk up his successes to much more than good luck. “He’s very bright,” says a former CNET executive who no longer speaks to Minor, for reasons he wouldn’t discuss. “There’s no better guy in front of the whiteboard, in terms of being really smart and quick on his feet and being able to see what others don’t.” Another tech executive who worked closely with Minor for several years but now no longer wants his name associated with him adds, “He’s an easy guy to demonize. He’s kind of arrogant; he has an edge. But there’s no question that when he wants to, he gets things done.”

But perhaps this comes at the expense of having close, lasting relationships. When I ask Minor for names of business associates whom I might interview for this profile, he first recommends the agent who sold him Fierce Wind, one of his Thoroughbreds, and then suggests Mitch Fox, a former Condé Nast publishing director whom he met earlier this year and hired to run one of his startups. When I push for names of those who have known him longer, Minor suggests that I speak with Shelby Bonnie, his first employee at CNET, who later served as the company’s chief executive after Minor left. But Bonnie, now an entrepreneur in Sausalito, California, declined to discuss his former friend.

Acquaintances of Bonnie’s say he and Minor haven’t been on good terms for years.

Minor tells me that he was once close with Marc Benioff, the C.E.O. of Salesforce.com, and that he was Benioff’s silent partner during Salesforce’s earliest days—interviewing senior executives, finding the company’s first office in San Francisco, and reviewing every homepage and marketing campaign. But Benioff only offers me one bland quote through his assistant: “Halsey was an early investor in Salesforce.com. We are grateful for his early support and guidance.” Asked to confirm Minor’s other statements, Benioff’s assistant says her boss is too busy to help.

A former CNET executive who worked closely with Minor says of him, “You won’t find a guy in the world who’s more charming when he wants to be, but like a lot of entrepreneurs, he’s not very empathetic. He has a difficult time comprehending how he’d be perceived from someone else’s perspective.”

I ask Minor why he is so often characterized as arrogant. “People take the fact that I’m passionate for being arrogant, because they look the same,” he says. “If I’m arrogant, I’m not going to listen to you, and if I’m passionate, I’m just going to believe differently. But I don’t really see myself as being an arrogant person. What does arrogant mean, that you think you’re better than someone else? No, that’s not me.”
Minor doesn’t appear to have grown any more adept at comprehending the feelings of those who inhabit his world. He takes a lot of credit for 8020 Publishing, which is owned by Minor Ventures and currently produces JPG and Everywhere, two glossy, user-generated magazines. (Everywhere, 8020 recently announced, is suspending publication.) But the concept for these came from Derek Powazek, a Web designer who began publishing JPG two years before being invited to meet Minor. When I ask about Powazek—who was pressured to leave 8020 within months of its being funded—Minor trivializes his contribution: “He had a little pamphlet of photos collected over the internet.”

Meanwhile, Powazek says of 8020, “That was my life’s work.”

On the day I arrive at Minor Ventures, which houses six startups that share human-resources and accounting staff, everyone looks conspicuously fresh-faced. Asked if youth is a prerequisite for receiving funding, Ron Palmeri, a former tech executive who runs Minor Ventures’ day-to-day operations, suggests that it often is. “People at the beginning of their career don’t have a lot of baggage,” he says. “We tend to like people who are early in their careers, because they haven’t developed bad habits.”

Minor’s firm operates like this: It brings the kernel of an idea to a potential company founder and offers a funding commitment of nine months to a year—about $1.5 million to $3 million. Then, three months later, Minor Ventures starts talking about the second round of funding, offering an “expediency premium” to stay with him instead of seeking outside money. This proposal expires after one week. Five of Minor’s seven startups have sought outside funding; only one received a better offer from another V.C. firm, which Minor successfully countered. Says Minor, “I tell them, you can take this deal right now, or you can go out, see all the V.C.’s on Sand Hill Road, get their best deal, whatever. But when you come back to me, I’m going to pay market. And they go out and talk to the V.C.’s, and they get a price, and it’s lower than what we’ve offered them. And we take more of their company.”

Craig Walker of GrandCentral, one of the companies in Minor Ventures’ stable, is among those who sought outside funding but says Minor’s contributions were crucial. Minor sent the startup back to the drawing board twice before allowing it to release its first product. “Other V.C.’s focus on five-year financial projections,” Walker says. “Halsey is more, ‘Hey, run the business, but when it comes to the product, let me get involved. I’m going to tell you what I think.’ And Halsey knows consumer services on the internet better than anyone.” In 2007, Google bought GrandCentral for $50 million.

Back at his Virginia estate, Minor speaks excitedly about a venture that risks no backtalk: his racehorses. Last year, he spent $3.3 million on a filly named Dream Rush; more recently, he paid $3 million for Fierce Wind, a “puny” horse that, he says, everyone, including his mother, told him not to buy. He bought the Thoroughbred anyway, seeing in the animal “a rare desire to win that allows him to rise above and exceed his physical capabilities.”

Minor is so confident of Fierce Wind’s potential that he urges me to watch the Florida Derby, calling it “a chance to see the product of my style in action, for better or worse.” On race day, Fierce Wind suffers an injury and is outrun after the first turn by the winner, Big Brown, the horse that would go on to win the Kentucky Derby and the Preakness.

Minor’s family has deep roots in Charlottesville. His great-grandfather Colston Minor and his great-great-grandfather John Barbee Minor were both law professors at the University of Virginia, and there’s a Halsey Hall at the school, named for his mother’s family.

When Minor was young, he found Charlottesville a little too quaint for his tastes. “Halsey was part of a group of us who were kind of jocks and the wild crowd, and sort of ran our sequestered school,” says Kellam Ames, one of Minor’s boarding-school friends. He and Minor had to spend the week before graduation tearing down a school barn to work off demerits. “That involved bringing a cow upstairs into the main building,” Minor says.

Though CNET brought Minor to the West Coast, where he still owns homes, his love for Virginia remains so strong that in 2007, he told a local paper that he was interested in becoming governor. Asked about it again, he nods. “I’ve been saying that for a long time, and I get more serious every time. I always have plenty of things I want to see, do, change.”

Minor—a Republican who admits to voting twice for George W. Bush—is surprisingly humble about his chances of winning. “I don’t spend enough time right now in Virginia to understand the complexity of the issues,” he says. “And I think I’m too blunt, ultimately.”

A moment later, humility goes out the window. “Why I think I’d be good, even though I’d be blunt, is that I think I’m very creative. I think I’m a good problem solver. And, you know, I have faith in my own decisionmaking process.” He adds, “Thomas Jefferson had James Madison to kind of make things happen. And maybe I’ll find a James Madison, and he can take my idealistic visions and get them implemented. ”

No one doubts that Minor would spend what it takes to get into office, though there is some speculation about how much money he has left to blow. While he made $300 million from Salesforce.com, he says he had to split his assets with his ex-wife, Deborah, after they divorced. Deborah and their three children still live in the home she and Minor bought 10 years ago, he tells me, a Mediterranean-style mansion in San Francisco’s ritzy Sea Cliff neighborhood that’s now worth $20 million.

Minor’s spending has remained in high gear since the split. For his 40th birthday, he leased a 727 jet to fly 30 people from New York to Los Cabos, Mexico, for a two-day, all-expenses-paid vacation at the Palmilla Resort, where oceanfront rooms range from $600 to $2,600 a night. “I was newly separated,” he says. “It was people I was just getting to know. The jet did have a bar. And I flew out a really great D.J. from L.A. But it’s not like it would go in the storybooks as one of the most expensive parties of all time. It was under $250,000.”

After his divorce, Minor also rented an expensive house in L.A. “I used to sit with friends at a certain table for eight at Koi every Friday night,” he says. His current wife, Shannon, met him there after being shown a photo by a mutual friend. “I knew immediately I’d met the woman I was going to marry,” Minor says of that evening. The feeling was mutual. At the time, Shannon was recently separated from Hollywood producer Marc Gurvitz, with whom she has a son. She quickly filed for divorce. Late last year, she and Minor welcomed a baby girl.

Minor’s Charlottesville estate is the most modest property he owns. Last December, he paid $15.3 million for Carter’s Grove, an even more exquisite Georgian-style mansion 120 miles away, in Williamsburg, Virginia. It sits on 476 acres and was built in 1755 for the grandson of Robert “King” Carter, the richest and most powerful Virginian of the mid-18th century. In California, Minor owns two homes that he bought in the past two years, one a sleek $20 million glass-lined house in Bel Air, which is currently on the market, and the other a $22 million manor in San Francisco modeled on Madame de Pompadour’s Petit Trianon château, replete with lush gardens, a ballroom, rotundas, and an interior courtyard. He is also sinking more than $30 million into a nine-story, 100-room luxury hotel that is slated to open in downtown Charlottesville in July 2009. He says that he insisted on being the sole investor: “I don’t like squabbling.”

Minor, who flies back and forth between properties on his own Challenger 603 jet, is sparing no expense on any of them. He’s already planning a $15 million makeover of the San Francisco property, which he finds “kind of offensive and ugly.” The mansion, which sits on one of the biggest lots in the city (rumored to be second only to the one owned by novelist Danielle Steel), “needs a lot of work to go from this grandiose monstrosity to a real house,” Minor says. Meanwhile, he’s hired British landscape artist Arne Maynard—one of the most sought-after experts on English gardens—to tackle Carter’s Grove’s vast expanse of terraced lawn, which stretches to the banks of the James River. He’s also put Los Angeles decorator Michael Smith on the payroll. Smith, whose client list includes Steven Spielberg, Sir Evelyn and Lady de Rothschild, and Wendi and Rupert Murdoch, is designing the interiors of Carter’s Grove, Minor’s San Francisco home, and his new hotel. In addition, Minor is in negotiations to buy and renovate the historic Hialeah Park Racetrack, in Florida.

Minor lives grandly—in short, like any wealthy businessman with gubernatorial aspirations. Whether it’s foreshadowing or wishful thinking, the former CNET board member who calls Minor pathological says that he’d be very supportive of Minor’s move into the Virginia governor’s mansion: “I assume he’d like nothing more than to be King of Silicon Valley, but I’ll be happy if he decides to live in Virginia, because I don’t do anything in Virginia.”

Minor gives the impression that it has been smooth sailing since his promising start. But when I email him to ask what he makes of CBS’s acquisition of CNET, he gives a response that’s both funny and poignant: “If I had to say my company was bought, the Tiffany Network sounds as good as any ending.” He adds, “Sumner Redstone and Mel Karmazin”—CBS’s former president—“walked right past me after dinner at the Bel-Air Hotel and didn’t know who I was, just three days after the deal was announced. What is it they say about the sands of time?”

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The Bargain Hunter

Talking to Chuck

Thu, 18 Sep 2008 12:00:00 GMT

At age 71, Charles Schwab has seen his share of stock market slumps. In 2003, he stepped down as C.E.O. of the Charles Schwab Corp., the San Francisco-based brokerage house he’d founded in 1973, but returned to his role in 2004, when the company was getting pounded during a down cycle. Since then, not only has the company gotten back on track but its bottom line seems to be benefiting from the current turmoil as well. Schwab himself is almost evangelical about the importance of investing—despite an economic slump he says will still take months to run its course.

Where are we in this down cycle?
The market probably hasn’t reached the bottom yet. I would expect that to happen between now and just past the election. The overall economic slowdown probably won’t subside until sometime in 2009. But that’s okay. Markets move in anticipation of economic moves. You can see the market beginning to reach its bottom—it’s going past the threshold. There’s still more ugly news coming out, I’m sure.

How will we know when we’ve hit the bottom?
That’s the challenge. You don’t know until you see it in the rearview mirror. There’s no way to know even when it’s arrived. That’s all the more reason successful investors have the confidence to stick to their plan and ride through the ups and downs—and even to invest when there is the possibility of a drop in the short term. It’s the long-term trend they’re after.

What do you expect will be the lag time between when the market turns and when the economy responds?
I expect it’s probably about six months. That would be consistent with other periods in the past.

Your company talks to thousands of investors every day. How scared are they?
They sound scared every time we have a market that’s going nowhere. It’s not pretty. Most people you meet live for today. Thinking and planning for tomorrow is almost impossible. Investing is such an abstract notion that most people really have a tough time grasping it until they’re way
far gone: “My God, I’ve got to save for my future—what in the world am I going to do?”

So you advise people to invest in a market like this one?
This is a fantastic time, frankly, for people who are just starting to invest. Prices are low.
In investing, you’ve got to have some confidence that stock market cycles will be no different in the future than they have been in the past. The market will recover.

Yet investors are reluctant.
We want to enjoy everything we see advertised, and there’s nothing about saving or investing that gets our juices going. Investing is a very abstruse, intangible concept. It’s what economists talk about. How many people have taken a class in economics? The literacy around this concept is woefully low, but it’s amazing how essential this boring concept is. We say the same thing about good health: You don’t really become aware of it until you’re sick. Then you realize there really is some limitation on the strength of your body. Being a saver always means the same thing: spending less than you earn. That never changes.

How did we end up here—with saving and investing being such a low national priority?
When I was a kid, we were coming out of the Great Depression and World War II. All you talked about in families was the lack of money and the desire to save and make life better. The past 20 years have been bountiful, but we’re moving through a big crack now, from the subprime thing to everything else. I’d be willing to bet in five years’ time, maybe 10 years, the pendulum will swing back to a much more conscientious rate of personal savings. What we’re going through now is cathartic, but it’s very painful. One of the key things to understand in a free society, which I wish we didn’t have to face, is that there are cycles. It never goes in a straight line. It’s a fundamental fact that market systems go up and down. Life goes up and down. And that’s okay.

I’ve heard you call for a national effort to boost the savings and investment rate. Why is that?
We have a huge national problem. Our savings rate is zero or below zero. It’s a disgrace.

We have to have a national program to launch the savings rate to 10 percent. It almost has to be as important as going to the moon.

You’ve contributed money to John McCain. Does he support such an effort?
This isn’t a political thing. We’ve just got to get some shock component to this. I haven’t found a good way to awaken people at an earlier age to the fact that they have to save and invest.

What percentage of the population does what you suggest?
Between 2 and 5 percent of the population invests as it should. It’s shocking to meet people who simply haven’t put aside anything for the future, and they’re now approaching 50. You tell them it’s never too late to start, but, man, deep in your soul, you say, “What has this person been doing?”

Where should people begin if they’ve never invested before?
New investors should be assembling a diversified portfolio. An investor with a smartly diversified portfolio of stocks should expect something like a 10 to 11 percent return per annum. Your money should double every seven years.

All of a new investor’s money should go into stocks?
If you’re younger, it should all be stocks. If you’re over, say, 55, your portfolio should be more diversified—some international stocks, small-cap stocks, low-cost mutual funds, fixed-income investments, some money-market funds—and you should expect an annual return of 8 percent.

What’s an easy rule of thumb for how much to invest, as a percentage of income?
It depends on your age, how much you’ve already invested, and other factors. But a good rule of thumb, if you’re just starting out working, is to put aside 10 percent of your income each year and stick with that over your working life. If you wait until later in life, you’ll need to increase that considerably. At age 62, your life expectancy might be 30 more years.

How much should most investors be actively trading? How often should they rebalance their portfolios?
Certainly some investors trade very actively. There’s no formula for the right number of trades
in their case. But our average client trades only a few times a year. For most of us, the rebalancing is
the important part, and that should be looked at on an annual basis—but also if major changes
in the market occur or if your objectives change. With a portfolio of mutual funds, which is the best way to get diversification, the process is much simpler.

And you don’t advise going it alone.
No, you’ve got to get some professional help. No matter how much I have looked at this issue, I have to say with a great amount of discouragement that not more than 2 to 3 percent of our population wants to think about any of this. The rest of us need good, ethical, cost-effective assistance.

Why does your company do well when the market is down?
We’re a well-established, well-regarded company. People gravitate to us. At a time when people are very worried about the news on the front page and various economic crises, that tends to make them more fearful.

What’s the biggest misconception about investing?
Many people confuse investing with big short-term hits, “the next great thing.” That’s not investing; it’s gambling. Bad advice feeds on that, by trying to sell us the next great thing. It’s okay if investing is a little dull, as long as it’s doing what it’s supposed to be doing, which is to help you build financial independence.

What should people be investing in?
I don’t believe that sector investing—picking investments by industry—is a wise move for the average person. If you were smart enough to move into oil, will you be smart enough to move out? Nobody’s really that smart.

Look, I’m the biggest advocate of entrepreneurial people making speculative moves. But you don’t want to be making those moves with your investment.

So if I call one of your advisers and ask which companies to invest in, they won’t give me names?
They’d better not. They’ll encourage you to have five to 10 sectors in your portfolio. When you buy a great index fund, that happens anyway.

You’ve been consistent about the need to stay the course, even in down cycles. In a market like this, should investors do anything different at all?
There’s no harm in taking the opportunity to think about whether your portfolio is structured the right way. If it is, and it doesn’t need rebalancing, it’s not a time to be making big changes. But again, down markets are an opportunity to invest at a discount. That’s hard for most of us to do, because the chances are good that we could go further downward. And that’s a tough emotional ride.

What’s the best piece of investing advice you ever got?
Start saving today and start investing tomorrow.

And the worst?
You should get out of the markets now.

Stocks, real estate, gas prices—got a question for Condé Nast Portfolio’s overqualified
advisers? Email experts@portfolio.com.

Running on Empty

Thu, 18 Sep 2008 12:00:00 GMT

We’re weeks away from knowing who our next president will be, but there’s one thing I already know with dead certainty. The president—whether he has an R or a D next to his name—must lead our energy revolution. It’s time to forge our energy independence once and for all. In fact, it’s way past time. Our security, our environment, and our economy are crying out for us to end our reliance on foreign oil.

This shouldn’t sound like news to anybody. We’ve known since 1973 that we are dangerously dependent on unstable and unfriendly regimes for our energy needs. Presidents since Jimmy Carter have called for “energy independence.” Sadly, we tend to change course whenever gas prices drop.

We cannot allow our energy policy to be dictated by the price of oil. But that’s exactly what America has done. We changed course. We wavered. We’re 96 percent dependent on oil for transportation fuels; a meager 8 percent of our national grid is powered by clean and renewable sources. That’s shameful. It’s unacceptable. To remain the world’s leading economic power, we must strive to be the leading energy power.

Denmark gets close to 20 percent of its power from wind. The Danes set a goal and stuck with it for more than 20 years, even when it wasn’t popular and even when oil prices were low. The same thing is true of Germany, with solar energy. And of Brazil, with ethanol. France leads the way in nuclear power—they use it for 78 percent of their needs. We’re falling far behind.

Luckily, our mind-set is changing. We used to make fun of environmentalists, dismissing them as a fringe group of tree huggers who wanted everyone to live like Buddhist monks. But no longer. We are at a tipping point. Today, corporate America is realizing that it’s sexy to go green and that it can protect its bottom line by doing so. There’s no industry more promising than alternative energy.

So let’s be green already. So far, the national conversation about our energy policy has been too much about words and not enough about action—especially not action on the scale we need. We should not be discussing whether to increase the amount of drilling off our shores or whether to tax the profits of oil companies. That’s all marginal stuff. We should be setting national goals and stimulating the demand for, and domestic production of, clean and reliable sources of energy.

In just five years, California has implemented significant energy policies that America must now embrace. We’ve decided to increase the amount of renewable resources we rely on for our energy, to encourage the growth of green business, to establish a first-of-its-kind low-carbon-fuel standard, and to reduce our greenhouse-gas emissions. These measures are ambitious but essential. And we are proving that we can boost the economy at the same time.

By 2020, a third of America’s energy must come from renewable resources. That’s the goal we are working toward in California, and I don’t see why other states should settle for less. Three years ago, when I urged California to increase its reliance on clean energy, some critics said my approach could harm the economy. Back then, oil was trading at $50 a barrel. Those days are over. The question now isn’t whether we can afford the leap but whether we can afford to put off our transition any longer.

America needs to encourage innovation and new technologies with a national policy, modeled on California’s Global Warming Solutions Act, that would create a market for greentech and clean-tech companies. The U.S. should also adopt California’s low-carbon-fuel standards, which will put 7 million electric cars and hybrids on our roads by 2020.

And the next president and Congress need to commit, as California has, to cutting our greenhouse emissions 25 percent by 2025, and then an additional 80 percent by 2050. Right now, worrying about emissions is like worrying about your weight when you haven’t been on a scale in a long time. You can’t manage what you don’t monitor. We need a reliable system of measuring greenhouse gases, and we need to establish a hard cap on emissions.

I want America to stay No. 1. I want us to be the world leader when it comes to biofuel and wind, solar, and hydroelectric power. I want Detroit to be the leader in building the world’s cars. Last year, a billboard in Michigan was part of a campaign accusing California’s emissions standards of costing the car industry $85 billion. It read, ARNOLD TO MICHIGAN: DROP DEAD. But it really should have read, ARNOLD TO MICHIGAN: GET OFF YOUR BUTT.

I can’t state this any more urgently: Washington must follow California’s lead. The challenge of making the U.S. more reliant on clean energy should not sound daunting. It’s simple—it just takes action. I am confident that our next president will take action to ensure we move forward on being energy independent and toward being an alternative-energy beacon to the world.

Master Over Builder

Thu, 18 Sep 2008 12:00:00 GMT

On a bright morning in late July, the corporate headquarters of Toll Brothers, the luxury homebuilder that profited mightily from the latest housing boom, are uncannily silent. Outside chief executive Bob Toll’s office, swaths of cubicles sit vacant and bare, depopulated by deep layoffs. Inside, a Bloomberg terminal scrolls dismal updates: A new report says home prices are plummeting by record margins; in markets like Las Vegas and Miami, they’re off almost 30 percent. Toll Brothers’ stock is trading at about $20, down two-thirds from its 2005 high.

Toll, compact and unassuming in a moss-colored suit, sits behind his desk in surroundings that seem incongruously modest for the man who stoked America’s demand for cathedral ceilings, Roman tubs, and four-car garages. We’re in a plain room overlooking a parking lot in an unremarkable suburban-Philadelphia office park. The only signs of excess are a helipad in the lot that the company laid down at the height of the boom to accommodate corporate choppers and the framed press clippings from those high-flying times that adorn the office’s walls. One headline reads BETTING AGAINST A HOUSING BUST. (View a pop-up graphic showing how Toll Brothers' models have grown more deluxe.)

Toll, never one to mince words, is merciless as he dissects how his wagers went wrong. “These are bad times if there ever were,” he tells me.

Perhaps no company better symbolizes the engorged consumption of the last real estate spree than Toll Brothers, which Bob founded with his brother, Bruce, in a one-room office four decades ago. During the height of the housing bubble, from 2004 to 2006, Toll Brothers reported nearly $16 billion in revenue, putting it in the top ranks of the industry. Its carefully cultivated brand—large, high-end suburban homes with all the latest must-have appliances—was among the most enviable in the business and catered to the yearning for bigger and better that the era’s easy credit allowed. Although Toll Brothers once had uncanny judgment, it has hit tough ground in the bust. Through the first nine months of 2008, Toll Brothers’ new sales contracts were down 49 percent from 2007, and 76 percent from 2005. The company reported a series of huge losses and has been forced to take massive write-downs—about $1.5 billion to date—on the value of its assets and landholdings. To mitigate the damage, Toll has laid off several thousand employees, nearly half his workforce, and walked away from numerous projects.

Toll offers me no excuses and freely concedes that he made some foolish deals. “We boatloaded a bunch of real estate in ’04 and ’05 that is underwater today,” he says ruefully. Though Toll once prided himself on his ability to see a downturn coming, he admits to having been blindsided by this one’s startling swiftness and severity. Some have wondered whether the instincts that served him so well in the past were dulled during a long period of plenty. “His timing before this was always impeccable,” says Jeffrey Orleans, a Philadelphia-area homebuilder who has known Toll since childhood and admires him. “This recession, he’s getting a bit beat up like the rest of us.”

Still, as many other real estate executives have headed for cover—or unemployment—Toll is reveling in the self-appointed role of cantankerous spokesman for his beleaguered industry. Earlier this summer he roiled financial markets when he told a conference of bankers that the housing market was in the throes of a “depression.” He lobbied Congress (unsuccessfully) for an emergency $15,000 tax break for home buyers. He’s been an outspoken supporter of Barack Obama’s presidential campaign. He’s turned his company’s regular conference calls into candid fireside chats in which he gives his unvarnished assessment of regional housing markets by issuing grades—an exercise so replete with failing scores that his chagrined junior executives have taken to calling it “the F report.” In our conversation, he spreads the blame liberally, even pointing to customers, saying it wasn’t the builders’ fault that banks made foolish loans and people took them, knowing full well what their incomes were:

“What cracked the market was not just our greed but the greed of our buyers.”

At 67, Toll is old enough to step aside and let others handle unpleasant times, but instead he approaches the wreckage with grim cheer. “It’s five times I’ve seen this movie,” he says. And the plot is always the same: Market drops, market recovers, home values rise again. Toll, having snapped up property at bargain-basement prices from wiped-out competitors, comes out stronger, richer, and better positioned. His plan is to do that again—and he thinks he has amassed the cash reserves to accomplish it. If all of Toll’s previous experience has offered a single lesson, it’s that the truly big money is made at the bottom, when other people are scared to buy. If he bets right again this time, he could lead his industry out of the doldrums. If he doesn’t, it augurs poorly for the entire sector—and perhaps indicates that the housing situation is even more dire than Toll imagined.

Homebuilding is an industry prone to spectacular cataclysms. Bob Toll became one of its patriarchs the same way Noah did—by staying afloat through the floods. “I think he loves being the grandfather of the business,” says Michael Greenberg, a former senior executive at Toll Brothers. In the early years, Bob was notoriously prickly and irascible—Bruce was the company diplomat—but age has smoothed his persona, turning sharp edges into charm and bluntness into wisdom. Toll’s conversational style resembles the layout of one of his developments, full of meandering byways and digressive culs-de-sac. He has a broad Philadelphia accent and cultivates an air of disarming schlumpiness. He’s been known to show up to industry conferences in sandals. Around the office, he wears a name tag, as do most Toll Brothers employees. Toll explained the policy to me by telling an intricate story, the gist of which was that he kept forgetting the secretaries’ names. Toll has been married for 33 years and has five children and trying to talk to him during the summer, when he vacations in Maine, is like conducting a conversation across a highway trafficked by grandkids and tennis partners.

The avuncular routine halts, however, at the first whiff of competition. When he was younger, Toll was an avid sailboat racer. Now he plays tennis with Stephen Solms, a retired Philadelphia developer whom he’s known since summer camp. “He doesn’t like to patshke the ball—he likes to really smash it,” says Solms.

Toll’s business demeanor isn’t that different. His father, also a real estate man, initially tried to prevent him from becoming a builder. Albert Toll had made a fortune as a young man and lost it during the Great Depression, and he never stopped regarding the business as perilous. In the mid-1960s, Albert happened upon a piece of ground in rural Chester County, Pennsylvania—its original owner had gone bust—and Bob, then just out of law school, begged his father to let him to develop the property. “You stick with the law,” Albert ordered, though he eventually gave in. Through all of Toll Brothers’ success during the ensuing years, Albert, who died in 1995, never stopped warning his sons, “Don’t try to do too large of a deal, because it only takes one deal to bankrupt you.”

Bob continues to wrestle with the conflict between caution and daring, fighting the same battle he fought with his father on his very first project. He is attached to numbers and formulas, a latticework of rationality he’s erected around what is, at its foundation, a hunch-based business. Toll’s method for assessing risk is a complex equation he calls the model: in the old days, a formula crunched by calculators; these days, a sophisticated array of indicators parsed by computer software. Company executives speak of the model reverently, and Toll boasts that he devised it himself. “Speculating,” he told me, “is different than putting land in the model.” The model weighs the prices that homes on a prospective piece of land should fetch against projected costs, given certain assumptions about development expenses and interest rates. Toll builds a 10 percent cushion into all his estimated costs and presumes a conservative pace of sales. Unlike other builders, Toll says, he never forecasts that prices will increase during the interval it takes to get houses built.

The model protected Toll Brothers during previous downturns, telling it, for instance, to scale back at the end of the 1980s, ensuring the company’s survival during the savings-and-loan crisis. After that downturn, Toll went on a shopping spree, snapping up prime properties at cut rates. But this time, the model betrayed him. Toll says he now realizes it wasn’t designed to account for such a sustained frenzy and precipitous collapse. As the mortgage crunch set in and newspapers became filled with gloomy headlines, many buyers chose—irrationally, in Toll’s view—to walk away from substantial deposits. (Embarrassingly, one of them was Bruce Toll’s daughter.) Developments planned during the good times glutted the market just as demand evaporated. In 2004, Toll Brothers was selling units in about 220 developments; last year, the number was 315.

When I ask Toll if the worst is over for his company, he replies bluntly, “I don’t know.” Evaluating the true extent of Toll Brothers’ losses is difficult, because it all depends on the value of the land that the company acquired at the peak of the market. Homebuilding is a treacherous business because land, its essential raw material, can become a ruinous burden when the market takes a turn for the worse. Before selling a single house on their land, builders must secure zoning approvals, fight lawsuits, pave roads, and prepare for construction. Only at the end of that process, and at enormous expense, can their companies recoup a profit. The timetable places builders at the mercy of economic conditions five or 10 years in the future. Toll Brothers, like all of its competitors, tries to limit its risk by entering into option agreements when it acquires land, only closing the sale when the project is ready to go. In boom times, however, land prices rise and sellers have more power to demand an outright purchase. Builders then face a dilemma: They can keep buying land on unfavorable terms, or they can stop and amass cash, in which case they risk running out of ground to build on.

In 2006, when the market began to implode, Toll Brothers owned or had purchase options on more than 91,000 home lots—the most it had ever held and, by a low estimate, acreage equal to a city the size of Boston. The company has since tried to divest itself of as much of that land as possible, but it’s stuck with some of it. At the time of its last annual report, Toll Brothers stated that it controlled nearly 60,000 lots, including more than 31,000 that were not currently under development. Roughly half of the undeveloped parcels were concentrated in the hard-hit South and West, regions where Toll Brothers’ sales are off 29 and 66 percent this year, respectively. As of the quarter ended April 30, the company reported, the aggregate price of its outstanding land purchase agreements, some of which were only option deals, amounted to $1.8 billion. More than half of that figure was tied up in murky joint-venture agreements, about which Toll Brothers has issued vague warnings of potentially “significant” losses.

“Hi, I’m Bob Toll,” says the man on the 42-inch plasma-screen television. Inside a model home at Newtown Walk, a new Toll Brothers development in a Philadelphia suburb in Bucks County, a DVD presentation featuring the boss plays on a constant loop. The Tolls didn’t invent luxury housing, but they discovered how to mass-produce it. The basic approach was to take a few standard home styles—Georgian, Colonial, Tudor—and pump them up to steroidal proportions. Critics have labeled the products McMansions, a name that’s an insult to aesthetics and a compliment to marketing. “There’s a certain American spirit about bigger, better, more,” says Kira McCarron, Toll Brothers’ chief marketing officer, and the company came onto the scene at precisely the right historical moment to profit from that ethic.

Between 1980 and 2006, Toll Brothers executives point out, the number of U.S. households earning more than $100,000 grew at a rate five times faster than that of the general population. The newly prosperous demanded spiral staircases and basement barrooms. And they were willing to “drive till they qualified,” as the saying goes, accepting long commutes fueled by cheap gas in return for the grandest house the bank said they could afford.

Building an expensive house doesn’t cost that much more than building a cheap one. In terms of sales volume, Toll Brothers was the country’s 13th-largest homebuilder last year, with just one-sixth as many closings as the industry leader, D.R. Horton—a feat it was able to accomplish because its markups on houses were so high. Such margins propelled a national expansion. Concentrated in Pennsylvania and New Jersey at the time it went public in 1986, Toll Brothers quickly opened shop up and down the Eastern Seaboard, and then across the South, the Midwest, and the Pacific Coast, to 22 states in total.

In recent years, as its core clientele has aged, Toll Brothers has diversified, building “active-adult” communities. (Apparently, baby boomers don’t retire; they play.) The company’s also trying to appeal to a new affluent generation by building urban high-rises, including several in New York City. At One Northside Piers, a residential tower on the Brooklyn waterfront with 180 units, prices run from $450,000 to $2 million. A model unit offers stunning views of Manhattan, along with insight into the lifestyle that Toll Brothers thinks might characterize potential buyers. There are books everywhere, and a wall calendar is crammed with imaginary engagements: “MOMA opening,” “cocktail party,” “yoga class.”

A development I visit, just outside the quaint borough of Newtown, Pennsylvania, is a community of Federal-style townhouses (though in the world of Toll Brothers a townhouse comfortably fits a grand piano) that opened in April 2007. “We’ve seen a dip” in sales, admits Gregory LaGreca, the Toll Brothers vice president in charge of the project, “but not the major dip you’ve seen in other parts of the country.” In the development’s sales office, LaGreca stands in front of a glass-covered tabletop map that indicates 14 of 35 homes have closed sales—not bad. Then I notice another map illustrated with 102 home lots. LaGreca, momentarily embarrassed, tells me that was the original plan, which they intend to phase in.

“We don’t want to have too much for sale at one time,” he says. “It allows us to hang on to what we consider to be prime lots.”

Bob Toll’s personal beliefs have always been somewhat at odds with his brand identity. His primary residence is a 19th-century farmhouse in Bucks County. He’s owned the same apartment on Manhattan’s Upper East Side for 20 years. He is given to fulminating against the growing gap between most Americans and the vulgar rich—what he calls the “me-first aspect of society.” To many people who share Toll’s political views, “me first” might be perfectly symbolized by an enormous, energy-guzzling McMansion set far from a city. Toll recognizes the irony but doesn’t let it bother him.

“I don’t believe we’re building houses to make politics,” he says. “I believe in building houses to fulfill a market’s desires.”

In August, Toll attended the Democratic National Convention in Denver. One morning, he comes bounding out of an elevator at the Marriott where the Pennsylvania delegation is staying, wearing a dark-blue suit and a red tie with a nautical theme. Toll’s wife, Jane, is an Obama delegate; he’s just along for the ride with his “honey,” he tells me. Of course, as a big donor, Toll is no mere sidekick. The night before, he’d seen Howard Dean speak to a group of fundraisers. (“We’ve met several times,” Toll says.) As we have a cup of coffee, former Philadelphia mayor John Street ambles by. “How’s our project coming?” he asks Toll, referring to Naval Square, a historic hospital that Toll Brothers is converting into 636 townhouses and condominiums. Toll claps Street on the back and says, “Why don’t you stop in and buy something?”

“It’s never been politically comfortable to be in the homebuilding business,” Toll tells me when he sits back down. It’s particularly hard to be a Democrat—he gets a lot of flak from his fellow homebuilders, who are mostly Republicans. But Toll unabashedly dishes the liberal Democrat line when he says he doesn’t mind paying higher taxes. “When we all get better, we’ll all get better,” he says.

Toll speaks in aphorisms and parables, and when he finds one he likes, he repeats it again and again. He used to tell a tale about financial cycles—the story from Genesis about the Pharaoh and Joseph, who prophesied that seven fat years would be followed by famine. “I would go to meetings and I would say, ‘Guys, you’ve had seven good years. It can’t go on,’ ” he says. “Well it did, and it did, and it did.”

Between 2004 and 2006, the cost of land was skyrocketing, but so were home prices, so Toll’s model seemed to work. He gave interviews in which he predicted that an ever-constricting land supply would force future generations to live with their parents into middle age. His company purchased ground in unlikely places like West Virginia and the Poconos on similar assumptions, thinking buyers would endure hours-long commutes to Washington and New York. It entered into joint-venture agreements with other homebuilders to develop enormous projects in hyperventilating markets like Las Vegas, which has fallen harder than perhaps any other locale—69 percent of all homes sold there last quarter went for a loss.

Toll Brothers executives say they glimpsed the first signs of a downturn in mid-2005. Analysts started wondering about the company’s position months before that, however, when Toll Brothers insiders began selling off stock. Over a sustained period between December 2004 and September 2005, Bob Toll made $323 million from these transactions, Bruce Toll made $206 million, and other company executives took home smaller amounts. At the time, the sales were explained as diversification and estate-planning measures, and Bob Toll continued to call his company “a tremendous buy.” The sales are now the subject of a federal shareholder lawsuit, about which Toll would not comment.

“It’s easy to sit and judge with hindsight,” Toll says, referring to his company’s strategic missteps. “Look, if I had followed the biblical pattern and stopped expanding after seven good years—I had seven years of expansion from ’91 to ’98—I would have missed ’98 to ’05. So you just can’t say to yourself, ‘I’m going to knock it off now because this is good enough.’ ”

At what point, though, will Toll decide he’s had enough?

He admits that he gives frequent thought to retiring, a prospect that alarms his board members. “No one in this world is irreplaceable, but I think he’s as close as it gets,” says board member Robert Blank, also a longtime friend. Earlier this year, Toll’s board rejiggered his pay package to ensure that he would continue to receive bonuses during the downturn. But many shareholders balked, and the measure—and Toll’s renomination to the board—encountered significant opposition. “I think that’s a clear signal that shareholders of Toll Brothers are not happy with his leadership,” says Jennifer O’Dell, spokeswoman for the Laborers’ International Union of North America, which has pension money invested in Toll Brothers and has agitated against the bonus plan.

Bruce Toll scaled back his involvement in the company a decade ago and has since devoted himself to various other pursuits, such as financing movies and buying a stake in the Philadelphia Inquirer. But Bob Toll has never cared for any business except building, and he says he feels a responsibility to right his company. Friends say that this challenge has invigorated him.

“Bob would probably call it a well-disguised blessing,” says Richard Thaler, a retired investment banker who has known Toll for about 20 years. “He’s not happy where he is, but he’s in a good position relative to some of the other builders.”

In fact, stock analysts say that Toll Brothers could end up profiting over the long term from widespread misery. With a relatively low debt load and one of the largest cash reserves in the industry—roughly $1.5 billion, twice as much as its competitors’ on average—Toll Brothers seems to hold a decent position compared with others in its field. (In comparison, rival Hovnanian, ranked sixth in closings, has $119.9 million in cash, and Meritage, ranked 12th in closings, has $115 million.) While Toll has downsized some company divisions, he has kept his land-acquisition teams intact. “In the up markets, there are great opportunities to cash in your chips. In down markets, there’s great opportunity to build your chips,” he explains.

He’s waiting till the market hits bottom and then he’ll begin buying again. “We’re saving our powder for when blood runs in the streets,” Toll said in a conference call in December. “We hope it doesn’t happen, but if it does, we’ll put on the eye patch and get out the sword and run up the Jolly Roger and we’ll be out there.”

What remains to be seen, however, is what kind of company Toll Brothers will be when the crisis ends. Its luxury specialization, its great advantage during the long boom, may work against it during a recovery. The company refuses to lower its prices too much for fear of compromising its brand, which means it must accept the costs of carrying considerable inventory until demand returns. What happens, though, if the market for cheaper housing comes back before the luxury sector does? Or if buyers are more cautious about what they can afford next time? Then there’s a broader question: If the price of gas never returns to $2 a gallon, and people start considering the money—and carbon emissions—required to heat and air-condition a 16-room house, what becomes of the Toll Brothers ethic? The company’s executives say Toll Brothers is catering to universal appetites and has no plans to scale back its trademark homes.

Still, Bob Toll recognizes the dangers of stasis. “We’ve already started to change our patterns to some extent,” he tells me, pointing to his New York projects. He’s still not sure whether the high-rises are an experiment or a permanent departure. He’s wary of skyscrapers, because once you start building one, you can’t scale it back, and urban development is expensive. Still, he can read a price tag, and he can sense that times are changing.

On the other hand, daring got him into this mess, and daring will be what gets him out. Prices are down; interest rates are decent. All that’s required, he says, is for buyers to come back, to conquer their fears. “Nobody wants to be called a dope,” Toll tells me the morning I meet him at his office.

“The only thing we fear more than missing a good buy is being made to look like a fool.”

Toll’s telephone emits a loud beep, and his assistant’s voice pipes through a speaker.

“Joel,” she says, referring to Joel Rassman, the company’s chief financial officer, “wants to speak to you about WCI.”

Earlier in the morning, WCI Communities, another publicly traded luxury homebuilder, had issued a warning that it couldn’t cover its debts.

There is a pregnant pause: the prospect of a competitor going down; lots of potential ground. Toll’s eyes widen, as if glimpsing a wisp of future fortune.

“Okay,” he says to me, flashing a grin, “let’s wrap this up!”

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You Don't Mess with the Patrón

Thu, 04 Sep 2008 13:00:00 GMT

Reporting from Train Car No. 50: John Paul DeJoria, the billionaire co-founder of Paul Mitchell hair products, has some advice for John McCain.

"The only thing that would make [McCain] look better is long hair pulled back in a ponytail. My God, that would be cool," says the 64-year-old billionaire who's famous for his own signature ponytail.

Though DeJoria is mostly known for Paul Mitchell, he's also the founding owner of Patrón Tequila, one of the first high-end tequilas to hit the top shelf. His hair-care line rakes in a reported $800 million annually, but, according to DeJoria, it's Patron that makes him the big bucks. That's why he's further expanding into liquor—he also owns the premium rum Pyrat—with the recent purchase of Polish vodka Ultimat. Since July, he's been slowly introducing Pyrat into the U.S. market.

Besides hair and high-end spirits, DeJoria is into politics. A week after he hit Denver for the Democratic National Convention, he's in St. Paul for the Republican confab. His ride—a renovated and redesigned 1927 train car that once carried Presidents Franklin Roosevelt and Harry Truman, who gave "whistle-stop" speeches off the back. Other regular passengers in the old days were "The Kingfish"—Louisiana Senator Huey Long—and actor Clark Gable.

This week, guests coming aboard Car No. 50 include Mike Huckabee, the former Arkansas governor who ran against John McCain in the primaries; Minnesota Governor Tim Pawlenty, whom McCain considered to be his running mate; and Senator Norm Coleman, who is running for a second term representing Minnesota against comedian Al Franken.

DeJoria first got his hands on Car No. 50 from Isaac Tigrett, his friend and business partner, who made him an early investor in the House of Blues and Hard Rock Café. In 1993, DeJoria and his 51-year-old wife Eloise used it to ride across the country for their honeymoon. When Tigrett couldn't keep it up anymore, DeJoria took No. 50 off his hands.

Now, running on biodiesel, the car is decked out with 17th-century paintings, Gothic Scottish woodwork in the dining room, 400-year-old woodcarvings from India in the parlor and other antique opulence throughout. DeJoria reincarnated Car No. 50 as the Patrón Express.

The stainless steel cabinets in the train car's kitchen are packed with thick, blue Ultimat bottles and lots of varieties of Patrón. The "First Parents" had planned on stopping by the Patrón Express today, since George H.W. Bush, a fishing friend of DeJoria's, had never seen his "wheels" before. And DeJoria says Barbara Bush is a big fan of his tequila. They instead returned to Washington after appearing at the convention on Tuesday night.

DeJoria, the face of Paul Mitchell who played himself in the Adam Sandler movie You Don't Mess With the Zohan, says he's an independent. He voted for Republican Ron Paul, but would have chosen Dennis Kucinich if he'd stayed in the Democratic primary. In Denver, he hosted a slew of politicians, including New Mexico Governor Bill Richardson. And he's been attending parties in both convention cities as a celebrity ambassador for the Creative Coalition—a non-profit that brings together artists and policymakers to increase awareness on health care, education, and other issues.

"This is really the best way to see the country. And to take an active role in this election," he says of his train-car convention tour.

As for this week's main news, DeJoria has some advice for Alaska governor Sarah Palin as she hits the national scene as McCain's running mate:

"For Alaska, she has the perfect hairstyle," he says. "She has a pretty face and should show it off by sculpting around her face. Not layers, just sculpt." He also thinks she should wear her hair down and shoulder length.

What about the Democrats? DeJoria has less to say.

"Biden's stuck in his ways," he says about Barack Obama's running mate, the senator from Delaware.

And the top of the ticket? "If Obama's hairstyle catches on, my business will drop by 50 percent! He doesn't have hair!"