From Academy Award nominated filmmaker, Charles Ferguson, comes “Inside Job,” the first film to expose the shocking truth behind the economic crisis of 2008. The global financial meltdown, at a cost of over $20 trillion, resulted in millions of people losing their homes and jobs. Through extensive research and interviews with major financial insiders, politicians and journalists, “Inside Job” traces the rise of a rogue financial industry and unveils the corrosive relationships which have corrupted politics, regulation and academia.
The Yes Men are a group who use any means necessary to agree their way into the fortified compounds of commerce, and then smuggle out the stories of their undercover escapades to provide a public glimpse at the behind-the-scenes world of big business. The stories are often both shocking and hilarious. They have been called “the Jonathan Swift of the Jackass generation” by author Naomi Klein. The Yes Men have impersonated World Trade Organization, Dow Chemical Corporation, and Bush administration spokesmen on TV and at business conferences around the world. They do this (a) in order to demonstrate some of the mechanisms that keep bad people and ideas in power, and (b) because it’s absurdly fun. Their main goal is to focus attention on the dangers of economic policies that place the rights of capital before the needs of people and the environment.
Andy Bichlbaum and Mike Bonanno are “The Yes Men” — two guys who combine political activism, performance art, and the love of a good prank in the name of demanding that the private sector take responsibility for the damage it has done to the world and its people. Bichlbaum and Bonanno specialize in setting up realistic-looking mock websites that claim to represent famous and powerful multinational corporations, and when they’re contacted to speak on behalf of the companies, they deliver absurd satirical presentations that sometimes fool their audiences into believing they’ve seen the real thing.
Yes Men: Fix the World follows the radical pranksters as they claim responsibility for a major environmental disaster in Bhopal on European television, demonstrate a new corporate rescue orb, “defend” corporate interests in the wake of Hurricane Katrina, and publish a mock edition of The New York Times that declares the end of the war in Iraq. The Yes Men Fix the World received its world premiere at the 2009 Sundance Film Festival. ~ Mark Deming, Rovi
As Corporate Director for the Heroic Imagination Project (HIP), Brooke helps boards, executives, and teams at all levels develop the skills to act with courage and ingenuity in the face of challenging situations. This fosters leadership credibility and candor, builds trust, engagement and reduces risk.
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What is Corporate Social Responsibility (CSR)? This video clip tries to give competent but also entertaining answers to this question. The video is part of series “in a little green bag” at the University of St.Gallen, Switzerland.
© University of St.Gallen (HSG), Text by Prof. Thomas Beschorner
Governments, activists, and the media have become adept at holding companies to account for the social consequences of their actions. In response, corporate social responsibility has emerged as an inescapable priority for business leaders in every country.
Frequently, though, CSR efforts are counterproductive, for two reasons. First, they pit business against society, when in reality the two are interdependent. Second, they pressure companies to think of corporate social responsibility in generic ways instead of in the way most appropriate to their individual strategies.
The fact is, the prevailing approaches to CSR are so disconnected from strategy as to obscure many great opportunities for companies to benefit society. What a terrible waste. If corporations were to analyze their opportunities for social responsibility using the same frameworks that guide their core business choices, they would discover, as Whole Foods Market, Toyota, and Volvo have done, that CSR can be much more than a cost, a constraint, or a charitable deed—it can be a potent source of innovation and competitive advantage.
In this article, Michael Porter and Mark Kramer propose a fundamentally new way to look at the relationship between business and society that does not treat corporate growth and social welfare as a zero-sum game. They introduce a framework that individual companies can use to identify the social consequences of their actions; to discover opportunities to benefit society and themselves by strengthening the competitive context in which they operate; to determine which CSR initiatives they should address; and to find the most effective ways of doing so. Perceiving social responsibility as an opportunity rather than as damage control or a PR campaign requires dramatically different thinking—a mind-set, the authors warn, that will become increasingly important to competitive success.
A pdf version of the article can be found HERE
Six reasons why international business remains dangerous to workers and the environment, even when its leaders genuinely want to do better
APR 21, 2014
Four years ago yesterday, the Deepwater Horizon oil rig exploded, killing 11 men and spilling thousands of barrels of oil into the Gulf. This Thursday is the first anniversary of the Rana Plaza collapse in Bangladesh, which killed more than 1,100 garment workers.
What has happened in the time since these disasters? BP was barred from drilling in U.S. deepwater—until last month. Western clothing brands are upgrading Bangladeshi factories, but the fundamentals of their business haven’t changed: Brands outsource production to factories serving multiple clients in low-wage, low-regulation countries (not just Bangladesh).
The lack of fundamental change in these industries—and others, such as financial services after the 2008 crisis—suggests disasters like these are bound to happen again.
Indeed, every corporate crisis evokes a sense of déjà vu. The Rana Plaza catastrophe bore echoes of the 1911 Triangle Shirtwaist Factory fire. The unfolding story of General Motors’ faulty ignition switches brings back 1970s memories of the Ford Pinto, whose infamously fire-prone fuel tanks went unfixed because upgrading them would have cost more than the $200,000 Ford set for a human life.
Why does the corporate world fail to learn from its tragic past? From 1999 to 2008, I worked for BP in Indonesia, China, and at the company’s London headquarters. It was my job to assess and mitigate the social and human rights risks to communities living near major BP projects, a role that existed because the executives I worked with understood that what was good for those communities was good for our business. I did innovative, progressive work bringing in experts and setting up partnerships and programs to benefit contract workers and neighbors of big BP projects in the developing world. But, obviously, I did not manage to prevent the Deepwater Horizon disaster, or the 2005 explosion of a BP refinery in Texas City that killed 15 people and injured many more.
I wanted an answer to that question, and I decided to write a book, reflecting on both my own experience and, also, documenting the experiences of my peers in other companies who similarly thought they were making progress mitigating risks to stakeholders, but then were faced with evidence to the contrary: supply chain managers in apparel companies who were sourcing at Rana Plaza; tech executives working to protect privacy but still seeing users persecuted with the data their companies collect.
Why, with this global invisible army of people working to prevent them do these disasters still happen? Why do they still happen when there are an unprecedented number of CEOs talking about corporate social responsibility (CSR)? More importantly, what does this “invisible army” need to succeed?
Here are some of the themes that emerged from my interviews and reflections:
1. People lie. More than one person I interviewed told me a story of touring a factory, doubling back on the pretense of forgetting something, and catching workers turning in their goggles or other protective gear. Factory owners will hide bad news if failing an audit means losing business. A few companies like H&M are said to have committed to multi-year contracts with suppliers, which are hoped to strengthen relationships between firms and suppliers, enabling them to address problems together, and remove incentives for suppliers to lie about conditions for fear of losing business. But in the meantime, as Jeremy Prepscius of BSR (Business for Social Responsibility), where I’m a human rights advisor, told me, “There’s always one good factory, and there’s always one that lies better than everybody else. So guess which one would have the cheaper price?”
2. People don’t talk to each other. Big organizations often operate in distinct, siloed divisions, and multi-disciplinary issues like human rights and sustainability often fall through the cracks. As director of corporate citizenship at Microsoft, Dan Bross oversees assessments that cut across multiple functions like legal and product development to identify potential risks to users. He told me, “I have a horizontal job in a vertical world.”
3. Safety and responsibility cost money—and no one gets rewarded for disasters averted. Even those companies not living explicitly by Ford’s 1970s model have to perform some sort of cost-benefit analysis. Since the work that I did for BP and that my peers do for their companies is preventative and complex, it can be hard to justify the expense of any one intervention.
“A big part of what you do is prevent bad things from happening. So being good at your job means that people start thinking, ‘Do we really need this?’”
In retrospect, I realize that I had so much support for community investment around the BP project I worked on in Indonesia because there were examples in the country of whopping price tags when things go wrong. Freeport-McMoran’s Grasberg copper and gold mine in the same province has seen decades of violence: People who live nearby resent the company for polluting and not employing enough local residents. Consequently, Freeport reportedly spent $28 million on its own security force there in 2010 alone. ExxonMobil’s gas plant in Aceh had to halt production for four months in 2001 because of the surrounding social unrest, which some accused the company of exacerbating; that shutdown was reported to have cost anywhere from $100 million to $350 million.
But many safety, ethics, and sustainability efforts require a leap of faith that the investment is worthwhile, much to the frustration of those who lead those efforts. One supply-chain head for a major multinational told me how angry she was when one of her company’s prestigious internal awards went to a colleague who managed a major safety disaster. “Really?” she marveled. “What about those of us who made sure we didn’t have any safety disasters?”
Ebele Okobi leads Yahoo!’s efforts to protect privacy and free expression on the internet. She told me: “A big part of what you do is prevent bad things from happening. So being good at your job means that people start thinking, ‘Do we really need this?’”
4. Few people bear witness. Sadly, if an executive doesn’t see problems firsthand, he or she is much less likely to commit resources to addressing them. Even the most numbers-driven executive can only be brought so far with a spreadsheet.
The people I interviewed see it as part of their job to bring stories of the communities their companies affect into the cocoon of corporate headquarters. Darryl Knudsen, senior advisor on business and human rights at Gap Inc., shared with me a wrenching account of his visit to a hospital in Bangladesh following a factory fire there to meet survivors and their families. “I need to be confident in representing the choices we’re making as a company, and I need to know I’m going to fight hard for the right choices,” he told me, and such encounters are how he does that. “If it gets too abstract you can get lost.”
Sean Ansett, who’s worked in supply-chain roles for numerous brands told me that he brought into a management meeting photographs of a factory in China where the company was sourcing, “and people were appalled.” He told me that the CEO and CFO followed up with him, asking for updates, and that he got a 15 percent budget increase the following year. “If this is presented in a monitoring report or a dashboard,” he said, “There’s no story behind that, no face behind the name of a factory in a province they’ve probably never been to in a town they have never been to. The image alone was enough to connect them.”
5. No one knows what corporate responsibility is. Right now we’re in a free-for-all in which “CSR” means whatever a company wants it to mean: From sending employees out in matching t-shirts to paint a wall for five hours a year, to recycling, to improving supply-chain conditions, to diversity and inclusion. This makes it difficult to have a proper conversation about what corporate responsibilities are and should be. In some respects, that’s okay: The breadth of the concept brings companies to the table to discuss their role in society. Then, as Aron Cramer, President and CEO of BSR told me, “The trick is to get them to the table, then move the table.”
In recent years human rights has emerged as a way to frame business’s responsibilities, which is a useful development: the 1948 Universal Declaration of Human Rights spells out the thirty rights and freedoms that “every organ of society” (in the language of its preamble), including governments and companies, must not violate. There is no Universal Declaration of Corporate Responsibility.
6. Consumers won’t pay more. One report showed that ensuring good working conditions would add less than one dollar to the price of a pair of blue jeans. But despite responding to surveys that they care about ethics, shoppers refuse to pay more. In one study, only half of customers chose a pair of socks marked “Good Working Conditions” even when they were the same price as an unmarked pair; only one quarter of customers paid for the socks when they cost 50 percent more.
Until the general public acknowledges the true cost of consumption, the people inside companies fighting for more responsible practices will be waging an uphill battle.
If we are to stop harm associated with business, we have to understand why people fighting the good fight inside companies fail, and what they need in order to succeed. We all have a role to play: The general public has to recognize the real costs of safety and sustainability, and define what corporate responsibility really means to us. Companies must bear witness to their impacts, improve internal communication, reduce incentives to lie, and reward prevention. The lives of workers and communities around the world—and of the planet itself—depend on it.
Editor’s note: The author holds BP shares that she was awarded during her time as an employee there.
Cory Booker, Chris Christie, and Mark Zuckerberg had a plan to reform Newark’s schools. They got an education.
BY DALE RUSSAKOFF
I. THE PACT
Late one night in December, 2009, a black Chevy Tahoe in a caravan of cops and residents moved slowly through some of the most dangerous neighborhoods of Newark. In the back sat the Democratic mayor, Cory Booker, and the Republican governor-elect of New Jersey, Chris Christie. They had become friendly almost a decade earlier, during Christie’s years as United States Attorney in Newark, and Booker had invited him to join one of his periodic patrols of the city’s busiest drug corridors.
The ostensible purpose of the tour was to show Christie one of Booker’s methods of combatting crime. But Booker had another agenda that night. Christie, during his campaign, had made an issue of urban schools. “We’re paying caviar prices for failure,” he’d said, referring to the billion-dollar annual budget of the Newark public schools, three-quarters of which came from the state. “We have to grab this system by the roots and yank it out and start over. It’s outrageous.”
Booker had been a champion of vouchers and charter schools for Newark since he was elected to the city council, in 1998, and now he wanted to overhaul the school district. He would need Christie’s help. The Newark schools had been run by the state since 1995, when a judge ended local control, citing corruption and neglect. A state investigation had concluded, “Evidence shows that the longer children remain in the Newark public schools, the less likely they are to succeed academically.” Fifteen years later, the state had its own record of mismanagement, and student achievement had barely budged.
Christie often talked of having been born in Newark, and Booker asked his driver to take a detour to Christie’s old neighborhood. The Tahoe pulled to a stop along a desolate stretch of South Orange Avenue, where Christie said he used to take walks with his mother and baby brother. His family had moved to the suburbs in 1967, when he was four, weeks before the cataclysmic Newark riots. An abandoned three-story building, with gang graffiti sprayed across boarded-up windows, stood before them on a weedy, garbage-strewn lot. Dilapidated West Side High School loomed across the street. About ninety per cent of its students qualified for free or reduced-price lunches, and barely half of the freshmen made it to graduation. Three West Side seniors had been shot and killed by gangs the previous school year, and the year before that, on a warm summer night, local members of a Central American gang known as MS-13, wielding guns, a machete, and a steak knife, had murdered three college-bound Newark youths, two of them from West Side. Another West Side graduate had been badly maimed.
In the back seat of the S.U.V., Booker proposed that he and Christie work together to transform education in Newark. They later recalled sharing a laugh at the prospect of confounding the political establishment with an alliance between a white suburban Republican and a black urban Democrat. Booker warned that they would face a brutal battle with unions and machine politicians. With seven thousand people on the payroll, the school district was the biggest public employer in a city of roughly two hundred and seventy thousand. As if spoiling for the fight, Christie replied, “Heck, I got maybe six votes in Newark. Why not do the right thing?”
So began one of the nation’s most audacious exercises in education reform. The goal was not just to fix the Newark schools but to create a national model for how to turn around an entire school district.
The abysmal performance of schools in the poorest communities has been an escalating national concern for thirty years, with universities, governments, and businesses devoting enormous resources to the problem. In the past decade, a reform movement financed by some of the nation’s wealthiest philanthropists has put forward entrepreneurial approaches: charter schools, business-style accountability for teachers and principals, and merit bonuses for top performers. President Obama and Secretary of Education Arne Duncan created Race to the Top, a $4.3-billion initiative to induce states to approve more charter schools and to rate teachers based on student performance.
Christie’s response to Booker—“Why not do the right thing?”—reflected the moral tone of the movement. Reformers compared their cause to the civil-rights movement, aware that many of their key opponents were descendants of the old civil-rights establishment: unions and urban politicians determined to protect thousands of public jobs in cities where secure employment was rare. Decades of research have shown that experiences at home and in neighborhoods have far more influence on children’s academic achievement than classroom instruction. But reformers argued that well-run schools with the flexibility to recruit the best teachers could overcome many of the effects of poverty, broken homes, and exposure to violence. That usually meant charter schools, which operated free of the district schools’ large bureaucracies and union rules. “We know what works,” Booker and other reformers often said. They blamed vested interests for using poverty as an excuse for failure, and dismissed competing approaches as incrementalism. Education needed “transformational change.” Mark Zuckerberg, the twenty-six-year-old head of Facebook, agreed, and he pledged a hundred million dollars to Booker and Christie’s cause.
Almost four years later, Newark has fifty new principals, four new public high schools, a new teachers’ contract that ties pay to performance, and an agreement by most charter schools to serve their share of the neediest students. But residents only recently learned that the overhaul would require thousands of students to move to other schools, and a thousand teachers and more than eight hundred support staff to be laid off within three years. In mid-April, seventy-seven members of the clergy signed a letter to Christie requesting a moratorium on the plan, citing “venomous” public anger and “the moral imperative” that people have power over their own destiny. Booker, now a U.S. senator, said in a recent interview that he understood families’ fear and anger: “My mom—she would’ve been fit to be tied with some of what happened.” But he characterized the rancor as “a sort of nadir,” and predicted that in two or three years Newark could be a national model of urban education. “That’s pretty monumental in terms of the accomplishment that will be.”
Booker was part of the first generation of black leaders born after the civil-rights movement. His parents had risen into management at I.B.M., and he grew up in the affluent, almost all-white suburb of Harrington Park, about twenty miles from Newark. Six feet three, gregarious, and charismatic, Booker was an honors student and a football star. He graduated from Stanford and went on to Oxford as a Rhodes Scholar and then to Yale Law School. Ed Nicoll, a forty-year-old self-made millionaire who was studying law at Yale, became one of his close friends. He recalled Booker telling inspirational stories about his family during abstract class discussions, invariably ending with a point about social justice. “He got away with it and he enchanted everyone from left to right,” Nicoll said. “In a class where everybody secretly believed they’d be the next senator or the next President of the United States, it was absolutely clear that Cory had leadership written all over him.”
Instead of pursuing lucrative job prospects, Booker worked as a lawyer for Newark tenants; he was paid by a Skadden fellowship in 1997. He lived in low-income housing in an area of the Central Ward that was riddled with drugs and crime, and he got to know community activists and members of the national media. Later, CBS News and Time featured him staging hunger strikes to demand more cops in drug corridors. He ran for city council with enthusiastic support from public-housing tenants. Nicoll took time off before going back to finance to help Booker raise money. His advice was simple: tell wealthy donors your own story. Over lunch at Andros Diner, Booker told me that Nicoll taught him an invaluable lesson: “Investors bet on people, not on business plans, because they know successful people will find a way to be successful.”
Booker raised more than a hundred and forty thousand dollars, an unheard-of sum for a Newark council race. A Democratic operative said of enthusiasts on Wall Street, “They let Cory into their boardrooms and offices, introduced him to people they worked with in hedge funds. As young finance people, they looked at a guy like Cory at this stage as if they were buying Google at seventy-five dollars a share. They were talking about him being the first black President before he even got elected to the city council, and they all wanted to be a part of that ride.” In the spring of 1998, Booker, at the age of twenty-nine, edged out the four-term councilman George Branch.
The school-reform movement, then dominated by conservative white Republicans, saw Booker as a valuable asset. In 2000, he was invited to speak at the Manhattan Institute, in New York. He was an electrifying speaker, depicting impoverished Newark residents as captives of nepotistic politicians, their children trapped in a “repugnant” school system. “I define public education not as a publicly guaranteed space and a publicly run, publicly funded building where our children are sent based on their Zip Code,” he said. “Public education is the use of public dollars to educate our children at the schools that are best equipped to do so—public schools, magnet schools, charter schools, Baptist schools, Jewish schools.”
Booker told me that the speech launched his national reputation: “I became a pariah in Democratic circles for taking on the Party orthodoxy on education.” But he gained “all these Republican donors and donors from outside Newark, many of them motivated because we have an African-American urban Democrat telling the truth about education.” He became a sought-after speaker at fund-raisers for charter and voucher organizations, including a group of hedge-fund managers who ultimately formed Democrats for Education Reform. They supported Democrats who backed reforms opposed by teachers’ unions, including the 2004 U.S. Senate candidate from Illinois, Barack Obama.
There was no question that the Newark school district needed reform. For generations, it had been a source of patronage jobs and sweetheart deals for the connected and the lucky. As Ross Danis, of the nonprofit Newark Trust for Education, put it, in 2010, “The Newark schools are like a candy store that’s a front for a gambling operation. When a threat materializes, everyone takes his position and sells candy. When it recedes, they go back to gambling.”
The ratio of administrators to students—one to six—was almost twice the state average. Clerks made up thirty per cent of the central bureaucracy—about four times the ratio in comparable cities. Even some clerks had clerks, yet payroll checks and student data were habitually late and inaccurate. Most school buildings were more than eighty years old, and some were falling to pieces. Two nights before First Lady Michelle Obama came to Maple Avenue School, in November, 2010, to publicize her Let’s Move! campaign against obesity—appearing alongside Booker, a national co-chair—a massive brick lintel fell onto the front walkway. Because the state fixed only a fraction of what was needed, the school district spent ten to fifteen million dollars a year on structural repairs—money that was supposed to be used to educate children.
What happened inside many buildings was even worse. In a third of the district’s seventy-five schools, fewer than thirty per cent of children from the third through the eighth grade were reading at grade level. The high-school graduation rate was fifty-four per cent, and more than ninety per cent of graduates who attended the local community college required remedial classes. Booker was elected mayor in 2006, and, with no power over district schools, he set out to recruit charter schools. He raised twenty million dollars for a Newark Charter School Fund from several Newark philanthropies; from the Gates, Walton, Robertson, and Fisher foundations; and from Laurene Powell Jobs. With his encouragement, Newark spawned some of the top charter schools in the country, including fifteen run by Uncommon Schools and KIPP. Parents increasingly enrolled children in charters—particularly in wards with the highest concentrations of low-income and black residents, which had the worst public schools. Many district schools were left with a preponderance of the students who most needed help.
It wasn’t always this way. The Newark public schools had a reputation for excellence well into the nineteen-fifties, when Philip Roth graduated from the predominantly Jewish Weequahic High School and Amiri Baraka (then LeRoi Jones), the late African-American poet, playwright, and revolutionary, attended the predominantly Italian-American Barringer High School. But Newark’s industrial base had been declining since the Depression, and it collapsed in the sixties, just as the migration of mostly poor African-Americans from the rural South reached its peak. Urban renewal, which was supposed to revive inner cities, displaced a higher percentage of poor residents in Newark than in any other city. As slums and dilapidated buildings were bulldozed to make way for office towers and civic plazas, displaced families were concentrated in five large housing projects in the city’s Central Ward. The program became known, there and elsewhere, as “Negro removal.”
Middle-class whites fled the city. Interstate 280, which linked downtown to the western suburbs and had an exit for Livingston, where the Christies moved, decimated stable Newark neighborhoods. Within a decade, the city’s population shifted from two-thirds white to two-thirds black. According to Robert Curvin, the author of the forthcoming book “Inside Newark,” it was the fastest and most tumultuous turnover of any American city except Detroit and Gary, Indiana. Remaining white students transferred out of largely African-American schools, where substitutes taught up to a quarter of the classes. “In schools with high Negro enrollments,” the N.A.A.C.P. reported, “textbooks were either not available or so outmoded and in such poor condition as to be of no value.” Some classrooms contained nothing but comic books.
Many in Newark still refer to the 1967 riots as “the rebellion.” A flagrantly corrupt and racist Italian-American political machine controlled City Hall and the school district. The mayor, Hugh Addonizio, previously a U.S. representative, said, when he returned, “There’s no money in Washington, but you can make a million bucks as the mayor of Newark.” In 1970, he was convicted, with four others, of having extorted $1.4 million from city contractors. The next two mayors, Kenneth Gibson and Sharpe James, both African-American, also became convicted felons. Booker is the first Newark mayor in fifty years not to be indicted.
In 1967, Governor Richard Hughes appointed a committee to investigate the causes of the riots. The report concluded of urban renewal, “In the scramble for money, the poor, who were to be the chief beneficiaries of the programs, tended to be overlooked.” And, because of “ghetto schools,” most poor and black children “have no hope in the present situation. A few may succeed in spite of the barriers. The majority will not. Society cannot afford to have such human potential go to waste.”
The legislature rejected a bid by Hughes to take over the schools, and the cycle of neglect and corruption continued. In 1994, Department of Education investigators found that the district was renting an elementary school infested with rats and containing asbestos and high levels of lead paint. The school board was negotiating to buy the building, worth about a hundred and twenty thousand dollars, for $2.7 million. It turned out to be owned, through a sham company, by two school principals prominent in Italian-American politics. (They were indicted on multiple charges and acquitted.) In a series of rulings in the nineties, the state Supreme Court found that funding disparities among school districts violated the constitutional right to an education for children in the poorest communities. The legislature was instructed to spend billions of dollars to equalize funding. In 1995, the state seized control of the Newark district. Christie, though, has allocated less than is required for low-income districts, pleading financial constraints.
Decades after the Hughes report, Newark’s education system was still dominated by “ghetto schools.” Forty per cent of babies born in Newark in 2010 received inadequate prenatal care or none at all—disadvantaged before drawing their first breath. Forty-four per cent of children lived below the poverty line—about twice the national rate—and many were traumatized by violence. Ninety-five per cent of students in the school district were black or Latino.
The history of abandonment and failed promises sowed a deep sense of isolation and a wariness of outsiders. “Newark suffers from extreme xenophobia,” Ronald C. Rice, a city councilman, said. “There’s a feeling that whites abandoned the city after the rebellion but there will come a time they will come back and take it away from us.”
Early in the summer of 2010, Booker presented Christie with a proposal, stamped “Confidential Draft,” titled “Newark Public Schools—A Reform Plan.” It called for imposing reform from the top down; a more open political process could be taken captive by unions and machine politicians. “Real change has casualties and those who prospered under the pre-existing order will fight loudly and viciously,” the proposal said. Seeking consensus would undercut real reform. One of the goals was to “make Newark the charter school capital of the nation.” The plan called for an “infusion of philanthropic support” to recruit teachers and principals through national school-reform organizations; build sophisticated data and accountability systems; expand charters; and weaken tenure and seniority protections. Philanthropy, unlike government funding, required no public review of priorities or spending. Christie approved the plan, and Booker began pitching it to major donors.
In the previous decade, the foundations of Microsoft’s Bill Gates, the California real-estate and insurance magnate Eli Broad, the Walton family (of the Walmart fortune), and other billionaires from Wall Street to Silicon Valley had come to dominate charitable funding to education. Dubbed “venture philanthropists,” they called themselves investors rather than donors and sought returns in the form of sweeping changes to public schooling. In addition to financing the expansion of charter schools, they helped finance Teach for America and the development of the Common Core State Standards to increase the rigor of instruction.
At the start of Booker’s career, Ed Nicoll had introduced him to a Silicon Valley venture capitalist named Marc Bodnick, who became an admirer. Bodnick was an early investor in Facebook, and he married the sister of Sheryl Sandberg, who later became the company’s chief operating officer. In June, 2010, Bodnick tipped off Booker that Mark Zuckerberg was planning “something big” in education. Bodnick also told him that in July Sandberg and Zuckerberg would be attending a media conference in Sun Valley, Idaho, where Booker was scheduled to speak. Booker said Bodnick told him to be sure to seek out Sandberg, who would connect him to Zuckerberg.
Booker by then was a national celebrity. Since his election as mayor of Newark, he had won widespread attention for presiding over a major decline in homicides—from a hundred and five in 2006 to sixty-seven in 2008. That year, for the first time in almost half a century, there were forty-three days without a single murder. Developers were negotiating deals to build the first downtown hotels in forty years, the first supermarkets in more than twenty. Philanthropists were paying to redevelop parks. A popular cable-TV series—“Brick City,” a reality show about Booker’s battle against crime—was about to begin its second season. Booker spoke at college commencements and charity dinners and appeared on late-night talk shows. His Twitter following, which was more than a million, outnumbered Newark residents almost four to one. Oprah Winfrey, a friend since the early two-thousands, pronounced him the “rock-star mayor of Newark.”
Booker met Zuckerberg over dinner on the deck of the Sun Valley retreat of Herbert Allen, the New York investment banker who hosted the conference. Zuckerberg invited Booker to go for a walk. He said that he was looking for a city that was ready to revolutionize urban education. Booker remembered responding, “The question facing cities is not ‘Can we deal with our most difficult problems—recidivism, health care, education?’ The real question is ‘Do we have the will?’ ” He asked, Why not take the best models in the country for success in education and bring them to Newark? You could flip a whole city! Zuckerberg told reporters, “This is the guy I want to invest in. This is a person who can create change.”
Zuckerberg was disarmingly open regarding how little he knew about urban education or philanthropy. Six years earlier, as a sophomore at Harvard, he had dropped out to work on Facebook. He had recently joined Gates and Warren Buffett in pledging to give half his wealth to charity. He’d never visited Newark, but he said he planned to learn from the experience and become a better philanthropist in the process.
Zuckerberg and his wife, Priscilla Chan, whom he met at Harvard, embarked on education philanthropy as a couple, but they brought different perspectives. Chan grew up in what she has described as a disadvantaged family in Quincy, Massachusetts. Her Chinese-Vietnamese immigrant parents worked eighteen hours a day, and her grandparents took care of her. Chan was the first in her immediate family to go to college, and credited public-school teachers with encouraging her to reach for Harvard. While there, she volunteered five days a week at two housing projects in Dorchester, helping children with academic and social challenges. She had since become a pediatrician, caring for underserved children. She came to see their challenges at school as inseparable from their experience with poverty, difficulties at home, and related health issues, both physical and emotional.
Zuckerberg told me that he had been more influenced by a year, after college, that Chan spent teaching science at an affluent private school in San Jose. People that he and Chan met socially often “acted like she was going to do charity,” he said. “My own view was: you’re going to have more of an impact than a lot of these other people who are going into jobs that are paying a lot more. And that’s kind of a basic economic inefficiency. Society should value these roles more.” Zuckerberg had come to see teaching in urban schools as one of the most important jobs in the country, and he wanted to make it as attractive to talented college graduates as working at Facebook. He couldn’t succeed in business without having his pick of the best people—why should public schools not have the same?
Zuckerberg attracted young employees to Facebook with signing bonuses far exceeding the annual salary of experienced Newark teachers. The company’s workspace had Ping-Pong tables, coolers stocked with Naked juice, and red-lettered motivational signs: “STAY FOCUSED AND KEEP SHIPPING”; “MOVE FAST AND BREAK THINGS”; “WHAT WOULD YOU DO IF YOU WEREN’T AFRAID?” In the Newark schools, nothing moved fast, and plenty of people were afraid. Like almost every public-school district, Newark paid teachers based on seniority and on how many graduate degrees they had earned, although neither qualification guaranteed effectiveness. Teachers who changed students’ lives were paid on the same scale as the deadwood. “Who would want to work in a system like that?” Zuckerberg wanted to know.
A month after their walk in Sun Valley, Booker gave Zuckerberg a six-point reform agenda. Its top priority was a new labor contract that would significantly reward Newark teachers who improved student performance. “Over the long term, that’s the only way they’re going to get the very best people, a lot of the very best people,” Zuckerberg told me. He proposed that the best teachers receive bonuses of up to fifty per cent of their salary, a common incentive in Silicon Valley but impossible in Newark. The district couldn’t have sustained it once Zuckerberg’s largesse ran out.
Booker asked Zuckerberg for a hundred million dollars over five years. “We knew it had to be big—we both thought it had to be bold, eye-catching,” he said. Zuckerberg stipulated that Booker would have to raise a second hundred million dollars, and that he would release his money only as matching dollars came in. Booker also promised that the current superintendent would be replaced by a “transformational leader.” Christie recounted his call from Booker afterward: “He said, ‘Governor, I believe I can close this deal. I really do. I need you, though.’ ” Christie did not grant Booker’s request for mayoral control of the schools but made him an unofficial partner in all decisions, beginning with the selection of a superintendent.
Zuckerberg and Chan flew to Newark Liberty Airport and met Booker and Christie in the Continental Airlines Presidents Club. Booker got Zuckerberg to agree to announce the gift on “The Oprah Winfrey Show,” timed to coincide with the début of the documentary “Waiting for ‘Superman,’ ” and its major marketing campaign. The film chronicled families’ desperate efforts to get children out of failing traditional public schools and into charters, and blamed the crisis largely on teachers’ unions.
Sheryl Sandberg, who vetted the agreement for Zuckerberg, e-mailed updates to Booker’s chief fund-raiser, Bari Mattes: “Mark is following up with Gates this week. I will call David Einhorn”—a hedge-fund manager—“this week (my cousin). Mark is scheduling dinner with Broad. . . . AMAZING if Oprah will donate herself? Will she? I am following up with John Doerr/NewSchools Venture Fund.” Doerr is a venture capitalist.
Ray Chambers, a Newark native who made a fortune in private equity and for decades had donated generously to education, learned of the deal and offered to coördinate a million-dollar gift from local philanthropies as a show of community support. But Mattes wrote to Booker in an e-mail, “I wouldn’t bother. $1 M as a collective gift over 5 years is just too insignificant for this group.” The e-mails were obtained by the A.C.L.U. of New Jersey.
On September 24, 2010, the team described their plan for Newark on “Oprah.” “So, Mr. Zuckerberg,” Oprah asked, “what role are you playing in all of this?” He replied, “I’ve committed to starting the Startup:Education Foundation, whose first project will be a one-hundred-million-dollar challenge grant.” Winfrey interrupted: “One. Hundred. Million. Dollars?” The audience delivered a standing ovation. When Winfrey asked Zuckerberg why he’d chosen Newark, he gestured toward Booker and Christie and said, “Newark is really just because I believe in these guys. . . . We’re setting up a one-hundred-million-dollar challenge grant so that Mayor Booker and Governor Christie can have the flexibility they need to . . . turn Newark into a symbol of educational excellence for the whole nation.” This was the first that Newark parents and teachers had heard about the revolution coming to their schools.
Zuckerberg knew that there had been resistance to education reform in other cities, particularly in Washington, D.C., where voters had rebelled against the schools chancellor Michelle Rhee’s autocratic leadership and driven Mayor Adrian Fenty from office. But he was confident that Booker, twice elected by wide margins, had the city behind him. On the day of the “Oprah” announcement, Zuckerberg posted a note on his Facebook page saying that Booker would focus as single-mindedly on education in his second term as he had on crime in his first.
A very different picture of Newark appeared, however, in the daily reports of the Star-Ledger. The city was experiencing its bloodiest summer in twenty years. As Booker negotiated the Zuckerberg gift, he was facing a potentially ruinous deficit, aggravated by the recession. He was laying off a quarter of the city’s workforce, including a hundred and sixty-seven police officers—almost every new recruit hired in his first term. The city council was in revolt over Booker’s bid to borrow heavily from the bond market to repair a failing water system. Meanwhile, he was managing a busy speaking schedule, which frequently took him out of the city. Disclosure forms show $1,327,190 in revenue for ninety-six speeches given between 2008 and May, 2013. “There’s no such thing as a rock-star mayor,” the historian Clement Price, of Rutgers University, told me. “You can be a rock star or you can be a mayor. You can’t be both.”
Three days after “Oprah,” Booker appeared on MSNBC’s “Morning Joe” with Christie and Arne Duncan, and vowed, “We have to let Newark lead and not let people drop in from outside and point the way.” But Newark wasn’t leading. As matching dollars were pledged, Zuckerberg’s gift moved from his foundation, in Palo Alto, into the new Foundation for Newark’s Future, in Newark. F.N.F.’s board included the Mayor and those donors who contributed ten million dollars or more. (The figure was later reduced to five million, still far beyond the budget of local foundations.) F.N.F. agreed to appoint a community advisory board, but it wasn’t named for another two years, and by then most of the money was committed—primarily to new labor contracts and to the expansion and support of charter schools. In one of the foundation’s first expenditures, it paid Tusk Strategies, in New York, $1.3 million to manage the community-engagement campaign. Its centerpiece was ten public forums in which residents were invited to make suggestions to improve the schools. Bradley Tusk had managed Michael Bloomberg’s 2009 reëlection campaign and was a consultant to charter schools in New York.
Hundreds of residents came to the first few forums and demanded to be informed and involved. People volunteered to serve as mentors for children who lacked adult support. Shareef Austin, a recreation director at Newark’s West Side Park, said, “I have kids every day in my program, their homes are broken by crack. Tears come out of my eyes at night worrying about them. If you haven’t been here and grown up through this, you can’t help the way we can.” Calvin Souder, a lawyer who taught for five years at Barringer High while he was in law school, said that some of his most challenging students were the children of former classmates who had dropped out of school and joined gangs.
Austin said that he and others who volunteered to help were never contacted: “I guess those ideas look little to the people at the top, but they’re big to us, because we know what it can mean to the kids.”
Booker participated in several of the meetings. He was excited to hear principals asking for more autonomy—one of his goals. He told one crowd, “It’s destiny that we become the first city in America that makes its whole district a system of excellence. We want to go from islands of excellence to a hemisphere of hope.”
Meanwhile, teachers worried about their students’ bleak horizons. David Ganz devised a poetry exercise for his all-boys freshman literacy class at Central High School. He put the word “hope” on the board and gave students a few minutes to write. Fourteen-year-old Tyler read his poem to the class:
We hope to live,
Live long enough to have kids
We hope to make it home every day
We hope we’re not the next target to get sprayed. . . .
We hope never to end up in Newark’s dead pool
I hope, you hope, we all hope.
Another student, Mark, wrote, “My mother has hope that I won’t fall victim to the streets. / I hope that hope finds me.” And Tariq wrote, “Hope—that’s one thing I don’t have.”
Booker asked Christopher Cerf, his longtime unofficial education adviser, to plan the overhaul. Cerf, then fifty-six, had become a central switching station for the education-reform movement. Until 2005, he led Edison Schools, a for-profit manager of public schools. He attended Eli Broad’s management training program for public-school leaders. In 2006, he became chief deputy to the New York schools chancellor, Joel Klein, sometimes called the “granddaddy of reform.” For the Newark project, Cerf created a consulting firm, Global Education Advisers. Booker solicited grants from the Broad Foundation and Goldman Sachs, to begin paying the firm.
Cerf set out to develop a “fact base” of Newark’s financial, staffing, and accountability systems so that a new superintendent could move swiftly to make changes. He explained to me, “My specialty is system reform—micro-politics, selfishness, corruption, old customs unmoored from any clear objectives.” Ultimately, Zuckerberg and matching donors paid the firm and its consultants $2.8 million, although Cerf emphasized that he personally accepted no pay, and he left the firm in December, 2010. That month, Christie chose Cerf to be New Jersey’s education commissioner, which meant that the district’s chief consultant went on to become its chief overseer.
Speaking to representatives of Newark’s venture philanthropists, Cerf said, “I’m very firmly of the view that when a system is as broken as this one you cannot fix it by doing the same things you’ve always done, only better.” It was time for “whole district reform.” Newark presented a unique opportunity. The district, Cerf said, “is manageable in size, it’s led by an extraordinary mayor, and it’s managed by the state. We still control all the levers.” With no superintendent in place, Cerf’s office effectively ran the schools, with the consultants providing technical support.
During the next two years, more than twenty million dollars of Zuckerberg’s gift and matching donations went to consulting firms with various specialties: public relations, human resources, communications, data analysis, teacher evaluation. Many of the consultants had worked for Joel Klein, Teach for America, and other programs in the tight-knit reform movement, and a number of them had contracts with several school systems financed by Race to the Top grants and venture philanthropy. The going rate for individual consultants in Newark was a thousand dollars a day. Vivian Cox Fraser, the president of the Urban League of Essex County, observed, “Everybody’s getting paid, but Raheem still can’t read.”
II. THE OPPOSITION
In February, 2011, the Star-Ledger obtained a confidential draft of recommendations by Global Education Advisers that contained a scenario to close or consolidate eleven of the lowest-performing district schools, and to make way for charters and five themed public high schools, to be funded by the Foundation for Newark’s Future. The newspaper ran a front-page article listing the schools likely to be affected and disclosed that Cerf, the state commissioner, had founded the consulting firm.
Newark’s school advisory board happened to be meeting the night the article was published. The board has no real power, since it’s under state control, and meetings were normally sleepy and sparsely attended. Teachers’ union leaders had been poised to attack the reform effort, and that evening more than six hundred parents and union activists showed up. One mother shouted, “We not having no wealthy white people coming in here destroying our kids!” From aisles and balconies, people yelled, “Where’s Christie!” “Where’s Mayor Hollywood!” The main item on the agenda—a report by the Newark schools’ facilities director on a hundred and forty million dollars spent in state construction funds, with little to show for it—reinforced people’s conviction that someone was making a killing at their children’s expense. “Where’d the money go? Where’d the money go?” the crowd chanted.
On a Saturday morning later that month, Booker and Cerf met privately on the Rutgers-Newark campus with twenty civic leaders who had hoped that the Zuckerberg gift would unite the city in the goal of improving the schools. Now they had serious doubts. “It’s as if you guys are going out of your way to foment the most opposition possible,” Richard Cammarieri, a former school-board member who worked for a community-development organization, told them.
Booker acknowledged the missteps, but said that he had to move quickly. He and Christie could be out of office within three years. If a Democrat defeated Christie in 2013, he or she would have the backing of the teachers’ unions and might return the district to local control. “We want to do as much as possible right away,” Booker said. “Entrenched forces are very invested in resisting choices we’re making around a one-billion-dollar budget.” Participants in the meeting, who had worked for decades in Newark, were doubtful that reforms imposed over three years would be sustainable.
Cerf said his motives were altruistic: “Public education embodies the noble ideal of equal opportunity. I know equal opportunity was a massive lie. It’s a lie in Newark, in New York, in inner cities across the country. Call me a nut, but I am committing my life to try to fix that.” He and Booker pledged to engage Newark residents, and Booker asked the group of civic leaders for their public support. “If the purpose is right for kids, I’m willing to go down in a blaze of glory,” he said, leaning over the table with both fists clenched.
Ras Baraka, the principal of Central High School and a city councilman, emerged as the leading opponent of change. His father, Amiri Baraka, was the most prominent radical voice in recent Newark history. Ras Baraka delivered speeches in the style of a street preacher, rousing Newark’s dispossessed as forcefully as Booker inspired philanthropists. The Booker-Christie-Zuckerberg strategy was doomed, he said, since it included no systemic assault on poverty. He told his students that Christie needed them to fail so that he could close Central High and turn it over to charters. “Co-location is more like colonization,” he said of placing charters in unused space inside district schools. Powerful interests wanted the district’s billion dollars.
Many reformers saw Baraka as the symbol of all that ailed urban education. Like a number of New Jersey politicians, he held two public jobs, and he earned more than two hundred thousand dollars a year. His brother was on his city-council payroll. Central High had abysmal scores on the proficiency exam in 2010, Baraka’s first year as principal, and it was in danger of being closed under the federal No Child Left Behind law. But Baraka mounted an aggressive turnaround strategy, using some of the reformers’ techniques. “I stole ideas from everywhere,” he told me. With a federal school-improvement grant, he extended the school day, introduced small learning academies, greatly intensified test prep, and hired consultants to improve literacy instruction. He also summoned gang members who had roamed the halls with impunity for years and told them their battles had to stop at the school door. Students anointed him B-Rak.
Still, results were mixed. In 2011, Central’s proficiency scores rose dramatically, and Cerf spoke at an assembly to congratulate the students. But only five per cent of Central students qualified as “college ready” in reading, based on their A.C.T. scores.
In private, Baraka supported many of the reformers’ critiques of the status quo, including revoking tenure for teachers with the lowest evalutions. Although he publicly embraced the unions’ positions, he told me he opposed paying teachers based on seniority and degrees, as Newark did under its union contract. “We should make a base pay, and the only way to go up is based on student performance,” he said. He told me that many in Newark quietly agreed. But, he insisted, “this dictatorial bullying is a surefire way to get people to say, ‘No, get out of here.’ ” He laughed. “They talk about ‘Waiting for “Superman.” ’ Well, Superman is not real. Did you know that? And neither is his enemy.”
In 2011, Booker paid a visit to SPARK Academy, a charter elementary school run by Newark’s KIPP network. He was accompanied by Cari Tuna, the girlfriend (now the wife) of Facebook’s co-founder, the billionaire Dustin Moskovitz. Booker wanted her to witness the teachers’ intensive training program. Tuna and Moskovitz had started their own foundation, and Booker hoped they would help match Zuckerberg’s hundred million dollars. (They later pledged five million dollars.) SPARK had recently moved to George Washington Carver Elementary School, taking over the third floor. Carver was in one of the most violent neighborhoods in Newark. Joanna Belcher, the SPARK principal, asked the Mayor to give the teachers a talk on the “K” in SPARK, which stands for “keep going.” Booker invoked the Selma march for voting rights, in 1965, and thanked the SPARK teachers for advancing the cause—“freedom from the worst form of bondage in humanity, imprisonment in ignorance.” (My son later took a teaching job at a KIPP school in New York.)
Disagreements over school reform tended to center on resources shifting from traditional public schools to charter schools. When students moved to charters, public money went with them. The battle often intensified when spare classroom space in district schools was turned over to charters, with their extra resources and freedom to hire the best teachers. But Belcher and her staff developed a close working relationship with Carver’s principal, Winston Jackson. They were alarmed that Carver, whose students had among the lowest reading scores in the city, had for years been a dumping ground for weak teachers. Several SPARK teachers asked Booker what he planned to do for children who occupied the other floors of the building.
“I’ll be very frank,” Booker said. “I want you to expand as fast as you can. But, when schools are failing, I don’t think pouring new wine into old skins is the way. We need to close them and start new ones.”
Jackson had never got the police to respond adequately to his pleas for improved security. Gangs periodically held nighttime rites on school grounds, and Jackson reported them without result. One night, a month after SPARK settled into Carver, a security camera captured images of nine young men apparently mauling another. When Jackson and Belcher arrived the next morning, they found bloody handprints on the wall and blood on the walkway. His and Belcher’s calls to police and e-mails to the superintendent’s staff went unanswered. At Jackson’s request, Belcher e-mailed the Mayor, attaching three pictures of the bloody trail on “the steps our K-2 scholars use to enter the building.” Twenty minutes later, Booker responded: “Joanna, your email greatly concerned me. I have copied this email to the police director who will contact you as soon as possible. Cory.” The police director, Sam DeMaio, called, and the precinct captain and the anti-gang unit visited the school. Police presence was stepped up, and the gang moved on.
III. POT OF GOLD
Zuckerberg and Sandberg were increasingly concerned. Six months after the announcement on “Oprah,” Booker and Christie had no superintendent, no comprehensive reform plan, and no progress toward a new teachers’ contract. On Saturday, April 2, 2011, they met with Booker at Facebook’s headquarters, in Palo Alto. If these are the wrong metrics for measuring progress, they asked, what are the right ones? They were holding Booker accountable for performance, just as he intended to hold teachers and principals accountable. Booker was contrite. “Guilty as charged,” he replied.
Zuckerberg urged him to find a strong superintendent quickly, and after the meeting he sent him one of Facebook’s motivational posters: “DONE IS BETTER THAN PERFECT.” Booker, Christie, and Zuckerberg had tried to recruit John King, at that time the Deputy Commissioner of Education for New York State, who had led some of the most successful charter schools in Boston and New York City, but he had turned down the job. According to several of his friends, King worried that everyone involved was underestimating how long the work would take. One of them recalled him saying, “No one has achieved what they’re trying to achieve—build an urban school district serving high-poverty kids that gets uniformly strong outcomes.” He had questions about a five-year plan overseen by politicians who were likely to seek higher office.
After Booker returned from California, Cami Anderson emerged as the leading candidate. Thirty-nine years old, she was the daughter of a child-welfare advocate and the community-development director for the Los Angeles mayor Tom Bradley. She had spent her entire career in reform circles. She’d taught in Wendy Kopp’s Teach for America, then joined her executive team in New York. Anderson later worked at New Leaders for New Schools, which trained principals as reform leaders. One of its founders, Jon Schnur, became an architect of Race to the Top. She’d been a senior strategist for Booker’s 2002 mayoral campaign and had been superintendent of alternative high schools under Joel Klein, in New York.
Anderson had two apparent marks against her: she was white and she was known for an uncompromising management style. Since 1973, Newark had had only African-American superintendents. But Anderson had an interesting backstory. She often mentioned that she had grown up with nine adopted siblings who were black and brown. Her partner, Jared Robinson, is African-American, and their son is named after Frederick Douglass. As for her methods, her friend Rebecca Donner, a novelist, said, “She has her own vision and she won’t stop at anything to realize it. If you’re faint of heart, if you’re easily cowed, if you disagree with her, you’re going to feel intimidated.” Cerf and Booker came to see that as a virtue. As Cerf put it, “Nobody gets anywhere in this business unless you’re willing to get the shit absolutely kicked out of you and keep going. That’s Cami.”
Christie appointed Anderson in May, 2011. It quickly emerged that she differed with her bosses about the role of charter schools in urban districts. She pointed out that, with rare exceptions, charters served a smaller proportion than the district schools of children who lived in extreme poverty, had learning disabilities, or struggled to speak English. Moreover, charter lotteries disproportionately attracted the “choosers”—parents with the time to navigate the process. Charters in Newark were expected to enroll forty per cent of the city’s children by 2016. That would leave the neediest sixty per cent in district schools. Booker, Christie, and Zuckerberg expected Anderson to revive the district, yet as children and revenue were siphoned off she would have to close schools and dismiss teachers. Because of the state’s seniority rules, the most junior teachers would go first. Anderson called this “the lifeboat theory of education reform,” arguing that it could leave a majority of children to sink as if on the Titanic. “Your theories of change are on a collision course,” she told Cerf and Booker. As Anderson put it to me, “I told the Governor . . . I did not come here to phase the district out.”
Anderson acknowledged the successes of the top charter schools, but Newark faced the conundrum common to almost every urban school system: how to expand charters without destabilizing traditional public schools. Christie and Booker agreed to her request for time to work on a solution, even though Zuckerberg and other donors had already committed tens of millions of dollars to expand charters.
Anderson turned her immediate attention to the district’s schools. She gave principals more flexibility and introduced new curricula aligned to the Common Core standards. Using $1.8 million from the Foundation for Newark’s Future, she hired the nonprofit consulting group TNTP, in part to develop more rigorous evaluation systems. In her first year, the foundation gave her a four-million-dollar grant to hire consultants at her own discretion.
One of her prime initiatives in her first two years was to close and consolidate the twelve lowest-performing kindergarten-through-eighth-grade schools into eight “renew schools.” Each was assigned a principal who, borrowing from the charter model, would choose his or her own teaching staff. The schools also got math and literacy coaches and smart boards, along with the new curricula. Teachers worked an extended day and two extra weeks in the summer. Anderson intended to create “proof points” that would show how to turn around failing district schools.
The eight consolidated schools opened in the fall of 2012, and most won strong support from parents. At the hundred-year-old Peshine Avenue School, in the South Ward, Chaleeta Barnes, the new principal, and Tameshone Lewis, the vice-principal, both had deep Newark roots, and parents, teachers, and children responded well to their insistence on higher standards. They replaced more than half the previous year’s teachers, and the new staff coördinated efforts to improve instruction and address individual students’ academic and discipline issues.
Teachers worked closely with children who couldn’t keep up, and many of them saw improvement, but the effects of children’s traumas outside school posed bigger problems. The father of a student in Shakel Nelson’s fifth-grade math class had been murdered early in the school year. When Nelson sat beside his desk and encouraged him, he sometimes solved problems, but as she moved on he put his head down and dropped his pencil. A girl who was excelling early in the year stopped trying when her estranged, emotionally disturbed parents resumed contact and began fighting.
The quality of teaching and the morale in most of the renew schools improved, but only Peshine made modest gains in both math and literacy on state tests. Six others declined in one subject or both, and the seventh remained unchanged in one and increased in one. This wasn’t surprising. It takes more than a year for reforms to take hold and show up in test scores. Across the district, in Anderson’s first two years, the percentage of students passing the state’s standardized tests declined in all but two of the tested grades. She questioned the validity of the tests, saying that they had become harder and the students needier, although she used them to determine which schools were failing and required overhaul. After her first year, she announced a ten-per-cent gain in the high-school graduation rate, but A.C.T. scores indicated that only two per cent of juniors were prepared for college.
Anderson recognized that the schools needed more social and emotional support, but pointed out that Newark already spent more money per student than almost every other district in the country. She urged principals to shift their existing budgets accordingly. “There’s no pot of gold,” she said.
In fact, there was a pot of gold, but much of it wasn’t reaching students. That was the reformers’ main argument against the wasteful administrations of urban schools. More than half of the Newark district’s annual budget paid for services other than instruction—often at inordinate prices. Charter schools received less public money per pupil, but, with leaner bureaucracies, more dollars reached the classroom. SPARK’s five hundred and twenty students were needier than those in most Newark charters. To support them, the principal, Joanna Belcher, placed two teachers in each kindergarten class and in each math and literacy class in grades one through three. Peshine could afford only one in each. SPARK also had more tutors and twice as many social workers, who provided weekly counselling for sixty-five children. Last year, SPARK’s inaugural class took New Jersey’s third-grade standardized tests. Eighty-three per cent passed in language arts and eighty-seven per cent in math, outscoring the district by almost forty points in each.
Reformers also argued that teachers must be paid according to competency. “Abolish seniority as a factor in all personnel decisions,” Zuckerberg wrote in September, 2010, in a summary of his agreement with Booker. Tenure and seniority protections were written into state law, so the negotiations took place both in the legislature and at the bargaining table. After arduous talks with the state teachers’ union—the biggest contributor to New Jersey politicians—a major reform measure was passed that made tenure harder to achieve and much easier to revoke. But, in return for union support, the legislature left seniority protections untouched.
Soon afterward, in November, 2012, the Newark Teachers Union agreed to a new contract that, for the first time, awarded raises only to teachers rated effective or better under the district’s rigorous new evaluation system. Those who got the top rating would receive merit bonuses of between five thousand and twelve thousand five hundred dollars.
All of this came at a steep price. The union demanded thirty-one million dollars in back pay for the two years that teachers had worked without raises—more than five times what top teachers would receive in merit bonuses under the three-year contract. Zuckerberg covered the expense, knowing that other investors would find the concession unpalatable. The total cost of the contract was about fifty million dollars. The Foundation for Newark’s Future also agreed to Anderson’s request to set aside another forty million dollars for a principals’ contract and other labor expenses. Zuckerberg had hoped that promising new teachers would move quickly up the pay scale, but the district couldn’t afford that along with the salaries of veteran teachers, of whom five hundred and sixty earned more than ninety-two thousand dollars a year. A new teacher consistently rated effective would have to work nine years before making sixty thousand dollars.
The seniority protections proved even more costly. School closings and other personnel moves had left the district with three hundred and fifty teachers that the renew principals hadn’t selected. If Anderson simply laid them off, those with seniority could “bump” junior colleagues. She said this would have a “catastrophic effect” on student achievement: “Kids have only one year in third grade.” She kept them all on at full pay, at more than fifty million dollars over two years, according to testimony at the 2013 budget hearing, assigning them support duties in schools. Principals with younger staffs were grateful. Far fewer of the teachers left than Anderson had anticipated. She hoped Christie would grant her a waiver from the seniority law, allowing her to lay off the lowest-rated teachers, a move that both the legislature and the national teachers’ union promised to fight.
Improbably, a district with a billion dollars in revenue and two hundred million dollars in philanthropy was going broke. Anderson announced a fifty-seven-million-dollar budget gap in March, 2013, attributing it mostly to the charter exodus. She cut more than eighteen million dollars from school budgets and laid off more than two hundred attendance counsellors, clerical workers, and janitors, most of them Newark residents with few comparable job prospects. “We’re raising the poverty level in Newark in the name of school reform,” she lamented to a group of funders. “It’s a hard thing to wrestle with.”
School employees’ unions, community leaders, and parents decried the budget cuts, the layoffs, and the announcement of more school closings. Anderson’s management style didn’t help. At the annual budget hearing, when the school advisory board pressed for details about which positions and services were being eliminated in schools, her representatives said the information wasn’t available. Anderson’s budget underestimated the cost of the redundant teachers by half.
The board voted down her budget and soon afterward gave a vote of no confidence—unanimously, in both cases, but without effect, given their advisory status. At about the same time, Ras Baraka declared his candidacy for mayor, vowing to “take back Newark” from the control of outsiders. He made Anderson a prime target. “We are witnessing a school-reform process that is not about reforming schools,” he told a packed auditorium in his South Ward district. He gave no hint that although he detested the reformers’ tactics, he shared a number of their goals.
In May, with Baraka leading the charge, the city council unanimously passed a resolution calling for a moratorium on all Anderson’s initiatives until she produced evidence that they raised student achievement. Later that month, Anderson sent a deputy to ask Baraka to take a leave of absence as principal of Central High. She argued that he had a conflict of interest: as a mayoral candidate, he was opposing initiatives that he was obliged to carry out as a principal. He refused, and a video of his defiant account of the incident was e-mailed to supporters with the question “Are we all going to stand by like chumps, and allow this ‘Interloping Outsider’ to harass one of our own?”
Hundreds of Baraka’s supporters, including union leaders and activists, attended a school-board meeting that month, to defend him and to denounce Anderson. Her assistant superintendent asked renew-school leaders and parents to testify at the meeting. As Peshine parents and teachers spoke, Anderson’s opponents held aloft signs saying “Paid for by Cami Anderson.” A Peshine teacher confronted Donna Jackson, an activist and perennial detractor of Booker and Anderson, asking why she would deride Newark teachers who were helping children. “I’m sick of hearing these good things about Peshine,” she said. “That just gives Cami an excuse to close more schools.”
On September 4, 2013, Christie said he planned to reappoint Anderson when her term expired, at the end of the school year: “I don’t care about the community criticism. We run the school district in Newark, not them.” But Anderson was increasingly on her own. Christie was campaigning for reëlection and laying the groundwork for a Presidential campaign. Booker was running for the Senate in a special election to replace the late Frank Lautenberg. Six weeks later, he won, and left for Washington.
Many reformers were unhappy with Anderson, too. They objected to her postponement of the dramatic expansion of charter schools that Booker had promised, saying she was denying children the chance for a better education.
IV. ONE NEWARK
Anderson spent much of the fall working with data analysts from the Parthenon Group, an international consulting firm that received roughly three million dollars over two years from Newark philanthropy. She wanted to come up with a plan that would resolve the overlapping complexities of urban schooling. How could she insure that charters, as they expanded, enrolled a representative share of Newark’s neediest children? How could district schools be improved fast enough to persuade families to stick with them? How could she close schools without devastating effects on the neighborhoods? How could she retain the best teachers, given that, by her estimate, she would have to lay off a thousand teachers in the next three years? “This is sixteen-dimensional chess,” she said.
She called her plan One Newark. Rather than students being assigned to neighborhood schools, families would choose among fifty-five district schools and sixteen charter schools. An algorithm would give preference to students from the lowest-income families and those with special needs. In a major accomplishment for Anderson, sixteen of twenty-one charter organizations had agreed to participate, in the name of reducing selection bias. Of the four neighborhood elementary schools in the South Ward slated to close, three were to be taken over by charters, and the fourth would become an early-childhood center. In all, more than a third of Newark’s schools would be closed, renewed, relocated, phased out, repurposed, or redesigned. Beginning in early January, thousands of students would need to apply to go elsewhere. Anderson said that the entire plan had to be enacted; removing any piece of it would jeopardize the whole, and hurt children.
In the fall, she held dozens of meetings explaining the rationale for One Newark to charter-school leaders, business executives, officials of local foundations, elected officials, clergy, and civic leaders. But participants said she didn’t present the specific solutions, because they weren’t yet available. Similarly, parents learned in the fall that their schools might be closed or renewed, but they would not get details until December. During the week before the Christmas vacation, Anderson sent her deputies to hastily scheduled school meetings to release the full plan to parents. She anticipated an uproar—“December-palooza,” she called it to her staff—which she hoped would diminish by January.
Instead, parents demanded answers and didn’t get them. Anderson said that students with learning disabilities would be accommodated at all district schools, but the programs hadn’t yet been developed. Families without cars asked how their children would get to better schools across town, since the plan didn’t provide transportation. Although Anderson initially announced that charters would take over a number of K-8 schools, it turned out that the charters agreed to serve only K-4; children in grades five through eight would have to go elsewhere.
The biggest concern was children’s safety, particularly in the South Ward, where murders had risen by seventy per cent in the past four years. The closest alternative to Hawthorne Avenue School, which was losing its fifth through eighth grades, was George Washington Carver, half a mile to the south. Jacqueline Edward and Denise Perry-Miller, who have children at Hawthorne, knew the dangers well. Gangs had tried to take over their homes, tearing out pipes, sinks, and boilers, and stealing their belongings, forcing both families temporarily into homeless shelters. Edward and Perry-Miller took me on a walk along the route to Carver. We crossed a busy thoroughfare over I-78, then turned onto Wolcott Terrace, a street with several boarded-up houses used by drug dealers.
Edward said, “I will not allow my daughter to make this walk. My twenty-eight-year-old started off in a gang, and we fought to get him out. My twenty-two-year-old has a lot of anger issues because Daddy wasn’t there. I just refuse to see another generation go that way.” Then, as if addressing Anderson, she asked, “Can you guarantee me my daughter’s safety? . . . Did you think this through with our children in mind or did you just do this to try to force us to leave because big business wants us out of here?” Anderson told me that she will address all safety issues, either with school buses or by accommodating middle-schoolers in their neighborhoods. Hawthorne parents said they had not heard this.
Shavar Jeffries, Baraka’s thirty-nine-year-old opponent in the mayoral election, to be held May 13th, could have been a key ally for Anderson. He was a member of the school advisory board when she arrived, and supported most of her agenda, including the expansion of charter schools and reforms in district schools. But he was also a strong opponent of state control, and he challenged her publicly a number of times, saying she had not shared enough information with the board. He was among those who voted against her 2013 budget. Afterward, according to former aides to Anderson, she told potential donors to his campaign that he was not a real reformer, citing his vote against her budget. (Anderson denied saying this.)
He believed that public schools and charter schools could work in tandem and that education reform could take hold in Newark, but only if residents’ voices were heard and respected. “Our superintendent, unfortunately, has in recent times run roughshod over our community’s fundamental interests,” he said in a campaign speech on education. “I say this as a father of two: no one is ever going to do anything that’s going to affect my babies without coming to talk to me.”
The day after the release of One Newark, Ras Baraka held a press conference in front of Weequahic High School, denouncing the plan as “a dismantling of public education.… It needs to be halted.” Enrollment at Weequahic was plummeting, and Anderson intended to phase it out over three years, moving a new all-girls and an all-boys academy into the building. Weequahic was the alma mater of the long-decamped Jewish community and of thousands of Newark community leaders, politicians, athletes, and teachers, who were protesting vociferously. Photos and video footage of Baraka in front of the building, which has a famous W.P.A. mural—the “Enlightenment of Man”—appeared in newspapers, on television, and on blogs and Web sites. “You could feel a shift in the momentum on that day,” Bruno Tedeschi, a political strategist, told me. “I said to myself, ‘He’s trying to turn the election into a referendum on her. From this point on, it doesn’t matter what she does.’ She’s a symbol of Christie and the power structure that refuses to give Newark what it feels rightly entitled to.” Civic leaders and clergy, whom she expected to endorse the plan, backed off. Several weeks later, Anderson agreed to keep Weequahic intact for at least two years.
Christie met with Anderson in Trenton in late December and promised to support her no matter how vocal the opposition. But two weeks later the Bridgegate scandal broke, and Christie had his own career to consider. Anderson moved out of Newark, telling friends she feared for her family’s safety.
On January 15th, at the Hopewell Baptist Church, Baraka held a rally for people affected by One Newark. Four principals of elementary schools in the South Ward argued that deep staff cuts over four years had made failure inevitable. Anderson suspended them, and instructed her personnel staff to investigate whether the principals were thwarting enrollment in One Newark. The move set off such a furor that Joe Carter, the pastor of the New Hope Baptist Church, told Christie he feared civil unrest. Christie told Cerf to get a handle on the matter, and within a week Anderson lifted the suspensions. The principals have since filed a federal civil-rights case alleging violation of their freedom of speech.
In late January, Randi Weingarten, the president of the American Federation of Teachers, spoke at a school-board meeting at First Avenue School in Newark. Five hundred people filled the auditorium; another three hundred and fifty listened in the cafeteria, and more than a hundred stood outside, demanding entry. Weingarten pledged the A.F.T.’s support “until this community gets its schools back,” and declared, “The nation is watching Newark.” Baraka demanded Anderson’s immediate removal, prompting the crowd to cheer and chant “Cami’s gotta go!” as they hurled invective and waved signs reading “Cami, Christie, stop the bullying!”
Then the mother of an honor-roll student at Newark Vocational High School, which Anderson planned to close, stood up and demanded of her, “Do you not want for your brown babies what we want for ours?” She said that Anderson “had to get off East Kinney because too many of us knew where you were going.” Anderson reddened, shook her head, and said again and again, “Not my family!” Moments later, she gathered her papers and left. She has not attended a school-board meeting since. “The dysfunction displayed within this forum sets a bad example for our children,” she wrote in a statement distributed by the district. Antoinette Baskerville-Richardson, who was the board president at the time, responded, “You own this situation. For the third year in a row, you have forced your plans on the Newark community, without the measure of stakeholder input that anyone, lay or professional, would consider adequate or respectful.”
“This is the post-Booker era,” Ras Baraka said recently at the New Jersey Performing Arts Center, in downtown Newark. “The stage has been set, the lights are on, people are in the theatre—it’s time for us to perform.” He was speaking about this week’s mayoral election, which he was favored to win, but he could have been describing the city’s battle over education. Baraka is heavily backed by education workers’ unions, and Jeffries by the school-reform movement. Booker has maintained a public silence about the Newark schools since being sworn in as a senator. Christie has been trying to salvage his Presidential prospects. Almost all of Zuckerberg’s hundred million dollars has been spent or committed. He and Chan gave almost a billion dollars to a Silicon Valley foundation to go toward unspecified future gifts, but they have not proceeded with reforms in other school districts, as originally planned. Cerf left his job as New Jersey’s education commissioner in March to join Joel Klein, who, in 2010, had resigned as New York schools chancellor to run Rupert Murdoch’s new education-technology division at News Corp. Anderson declined to say whether she had signed a new three-year contract. She said that she could have done more to engage the community, but she’d worried that the process would be coöpted by “political forces whose objective is to create disruption.” Nor could she vet the plan as it evolved with individual families. “That is the nature of sixteen-dimensional chess,” she said. “You can’t create concessions in one place that then create problems in another.”
Across the country, the conversation about reform is beginning to change. On April 30th, the NewSchools Venture Fund, a nonprofit venture-philanthropy firm, which donated ten million dollars to the Newark effort, held its annual summit for the education-reform movement. “The people we serve have to be a part of their own liberation,” Kaya Henderson, the successor to Michelle Rhee, in Washington, D.C., said. James Shelton, Arne Duncan’s deputy at the Department of Education, acknowledged the need for more racial diversity among those making the decisions. “Who in here has heard the phrase that education is the civil-rights movement of our age?” he asked. “If we believe that, then we have to believe that the rest of the movement has to come with it.”
In Newark, the solutions may be closer than either side acknowledges. They begin with getting public-education revenue to the children who need it most, so that district teachers can provide the same level of support that SPARK does. And charter schools, given their rapid expansion, need to serve all students equally. Anderson understood this, but she, Cerf, Booker, and the venture philanthropists—despite millions of dollars spent on community engagement—have yet to hold tough, open conversations with the people of Newark about exactly how much money the district has, where it is going, and what students aren’t getting as a result. Nor have they acknowledged how much of the philanthropy went to consultants who came from the inner circle of the education-reform movement.
Shavar Jeffries believes that the Newark backlash could have been avoided. Too often, he said, “education reform . . . comes across as colonial to people who’ve been here for decades. It’s very missionary, imposed, done to people rather than in coöperation with people.” Some reformers have told him that unions and machine politicians will always dominate turnout in school-board elections and thus control the public schools. He disagrees: “This is a democracy. A majority of people support these ideas. You have to build coalitions and educate and advocate.” As he put it to me at the outset of the reform initiative, “This remains the United States. At some time, you have to persuade people.” ♦
From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression — and they’re about to do it again
April 5, 2010
The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.
But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.
The bank’s unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you’re losing, it’s going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it’s going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.
They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s — and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.
If you want to understand how we got into this financial crisis, you have to first understand where all the money went — and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long — including last year’s strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn’t one of them.
BUBBLE #1 The Great Depression
Goldman wasn’t always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids —just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to smalltime vendors in downtown Manhattan.
You can probably guess the basic plotline of Goldman’s first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there’s really only one episode that bears scrutiny now, in light of more recent events: Goldman’s disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s.
This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an “investment trust.” Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game.
Beginning a pattern that would repeat itself over and over again, Goldman got into the investmenttrust game late, then jumped in with both feet and went hogwild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund — which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah — which, of course, was in large part owned by Goldman Trading.
The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line. The basic idea isn’t hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred.
In a chapter from The Great Crash, 1929 titled “In Goldman Sachs We Trust,” the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leveragebased investment. The trusts, he wrote, were a major cause of the market’s historic crash; in today’s dollars, the losses the bank suffered totaled $475 billion. “It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity,” Galbraith observed, sounding like Keith Olbermann in an ascot. “If there must be madness, something may be said for having it on a heroic scale.”
BUBBLE #2 Tech Stocks
Fast-forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the country’s wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who rose from the rank of janitor’s assistant to head the firm, Goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet-eating Death Star of political influence it is today, but it was a top-drawer firm that had a reputation for attracting the very smartest talent on the Street.
It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm’s mantra, “long-term greedy.” One former Goldman banker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. “We gave back money to ‘grownup’ corporate clients who had made bad deals with us,” he says. “Everything we did was legal and fair — but ‘long-term greedy’ said we didn’t want to make such a profit at the clients’ collective expense that we spoiled the marketplace.”
But then, something happened. It’s hard to say what it was exactly; it might have been the fact that Goldman’s cochairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein, Mozart and Kant running far behind.
Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national clichè that whatever Rubin thought was best for the economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline The Committee To Save The World. And “what Rubin thought,” mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House made a series of moves that would have drastic consequences for the global economy — beginning with Rubin’s complete and total failure to regulate his
old firm during its first mad dash for obscene short-term profits.
The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than potfueled ideas scrawled on napkins by uptoolate bongsmokers were taken public via IPOs, hyped in the media and sold to the public for mega-millions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.
It sounds obvious now, but what the average investor didn’t know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system — one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry’s standards of quality control.
“Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public,” says one prominent hedge-fund manager. “The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash.” Goldman completed the snow job by pumping up the sham stocks: “Their analysts were out there saying Bullshit.com is worth $100 a share.”
The problem was, nobody told investors that the rules had changed. “Everyone on the inside knew,” the manager says. “Bob Rubin sure as hell knew what the underwriting standards were. They’d been intact since the 1930s.”
Jay Ritter, a professor of finance at the University of Florida who specializes in IPOs, says banks like Goldman knew full well that many of the public offerings they were touting would never make a dime. “In the early Eighties, the major underwriters insisted on three years of profitability. Then it was one year, then it was a quarter. By the time of the Internet bubble, they were not even requiring profitability in the foreseeable future.”
Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a little-known company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, Goldman provided profits far more volatile than those of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent.
How did Goldman achieve such extraordinary results? One answer is that they used a practice called “laddering,” which is just a fancy way of saying they manipulated the share price of new offerings. Here’s how it works: Say you’re Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual terms: You’ll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a “road show” to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price — let’s say Bullshit.com’s starting share price is $15 — in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO’s future, knowledge that wasn’t disclosed to the day trader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company’s price, which of course was to the bank’s benefit — a six percent fee of a $500 million IPO is serious money.
Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the attention of Nicholas Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television asshole Jim Cramer, himself a Goldman alum. Maier told the SEC that while working for Cramer between 1996 and 1998, he was repeatedly forced to engage in laddering practices during IPO deals with Goldman.
“Goldman, from what I witnessed, they were the worst perpetrator,” Maier said. “They totally fueled the bubble. And it’s specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation — manipulated up — and ultimately, it really was the small person who ended up buying in.” In 2005, Goldman agreed to pay $40 million for its laddering violations — a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it has settled, refused to respond to questions for this story.)
Another practice Goldman engaged in during the Internet boom was “spinning,” better known as bribery. Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price — ensuring that those “hot” opening-price shares it had handed out to insiders would be more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So instead of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO and offer him a million shares of his own company at $18 in exchange for future business — effectively robbing all of Bullshit’s new shareholders by diverting cash that should have gone to the company’s bottom line into the private bank account of the company’s CEO.
In one case, Goldman allegedly gave a multimillion-dollar special offering to eBay CEO Meg Whitman, who later joined Goldman’s board, in exchange for future i-banking business. According to a report by the House Financial Services Committee in 2002, Goldman gave special stock offerings to executives in 21 companies that it took public, including Yahoo! cofounder Jerry Yang and two of the great slithering villains of the financial-scandal age — Tyco’s Dennis Kozlowski and Enron’s Ken Lay. Goldman angrily denounced the report as “an egregious distortion of the facts” — shortly before paying $110 million to settle an investigation into spinning and other manipulations launched by New York state regulators. “The spinning of hot IPO shares was not a harmless corporate perk,” then-attorney general Eliot Spitzer said at the time. “Instead, it was an integral part of a fraudulent scheme to win new investment-banking business.”
Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone. But the real problem wasn’t the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital and publicly owned financial companies, bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and the irrationality are greater.
Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5 billion in compensation and benefits — an average of roughly $350,000 a year per employee. Those numbers are important because the key legacy of the Internet boom is that the economy is now driven in large part by the pursuit of the enormous salaries and bonuses that such bubbles make possible. Goldman’s mantra of “long-term greedy” vanished into thin air as the game became about getting your check before the melon hit the pavement.
The market was no longer a rationally managed place to grow real, profitable businesses: It was a huge ocean of Someone Else’s Money where bankers hauled in vast sums through whatever means necessary and tried to convert that money into bonuses and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went bust within a year, so what? By the time the Securities and Exchange Commission got around to fining your firm $110 million, the yacht you bought with your IPO bonuses was already six years old. Besides, you were probably out of Goldman by then, running the U.S. Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America’s recent financial collapse came when Gov. Jon Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened stock, insisted in 2002 that “I’ve never even heard the term ‘laddering’ before.”)
For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent —they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate. As it turns out, it had one ready, thanks in large part to Rubin.
BUBBLE #3 The Housing Craze
Goldman’s role in the sweeping global disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that shit out the window and started writing mortgages on the backs of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.
None of that would have been possible without investment bankers like Goldman, who created vehicles to package those shitty mortgages and sell them en masse to unsuspecting insurance companies and pension funds. This created a mass market for toxic debt that would never have existed before; in the old days, no bank would have wanted to keep some addict ex-con’s mortgage on its books, knowing how likely it was to fail. You can’t write these mortgages, in other words, unless you can sell them to someone who doesn’t know what they are.
Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the shitty ones: The CDO, as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance — known as credit default swaps — on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won’t.
There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated — and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.
More regulation wasn’t exactly what Goldman had in mind. “The banks go crazy — they want it stopped,” says Michael Greenberger, who worked for Born as director of trading and markets at the CFTC and is now a law professor at the University of Maryland. “Greenspan, Summers, Rubin and [SEC chief Arthur] Levitt want it stopped.”
Clinton’s reigning economic foursome — “especially Rubin,” according to Greenberger — called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 11,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity.
But the story didn’t end there. AIG, a major purveyor of default swaps, approached the New York State Insurance Department in 2000 and asked whether default swaps would be regulated as insurance. At the time, the office was run by one Neil Levin, a former Goldman vice president, who decided against regulating the swaps. Now freed to underwrite as many housing-based securities and buy as much credit-default protection as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities — a third of which were sub-prime — much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap.
Take one $494 million issue that year, GSAMP Trust 2006S3. Many of the mortgages belonged to second-mortgage borrowers, and the average equity they had in their homes was 0.71 percent. Moreover, 58 percent of the loans included little or no documentation — no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody’s and Standard & Poor’s, rated 93 percent of the issue as investment grade. Moody’s projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months.
Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners — old people, for God’s sake — pretending the whole time that it wasn’t grade D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions … However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.
“That’s how audacious these assholes are,” says one hedge fund manager. “At least with other banks, you could say that they were just dumb — they believed what they were selling, and it blew them up. Goldman knew what it was doing.”
I ask the manager how it could be that selling something to customers that you’re actually betting against — particularly when you know more about the weaknesses of those products than the customer — doesn’t amount to securities fraud.
“It’s exactly securities fraud,” he says. “It’s the heart of securities fraud.”
Eventually, lots of aggrieved investors agreed. In a virtual repeat of the Internet IPO craze, Goldman was hit with a wave of lawsuits after the collapse of the housing bubble, many of which accused the bank of withholding pertinent information about the quality of the mortgages it issued. New York state regulators are suing Goldman and 25 other underwriters for selling bundles of crappy Countrywide mortgages to city and state pension funds, which lost as much as $100 million in the investments. Massachusetts also investigated Goldman for similar misdeeds, acting on behalf of 714 mortgage holders who got stuck holding predatory loans. But once again, Goldman got off virtually scot-free, staving off prosecution by agreeing to pay a paltry $60 million — about what the bank’s CDO division made in a day and a half during the real estate boom.
The effects of the housing bubble are well known — it led more or less directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps was in significant part composed of the insurance that banks like Goldman bought against their own housing portfolios. In fact, at least $13 billion of the taxpayer money given to AIG in the bailout ultimately went to Goldman, meaning that the bank made out on the housing bubble twice: It fucked the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and fucked the taxpayer by making him pay off those same bets.
And once again, while the world was crashing down all around the bank, Goldman made sure it was doing just fine in the compensation department. In 2006, the firm’s payroll jumped to $16.5 billion — an average of $622,000 per employee. As a Goldman spokesman explained, “We work very hard here.”
But the best was yet to come. While the collapse of the housing bubble sent most of the financial world fleeing for the exits, or to jail, Goldman boldly doubled down — and almost single-handedly created yet another bubble, one the world still barely knows the firm had anything to do with.
BUBBLE #4 $4 a Gallon
By the beginning of 2008, the financial world was in turmoil. Wall Street had spent the past two and a half decades producing one scandal after another, which didn’t leave much to sell that wasn’t tainted. The terms junk bond, IPO, sub-prime mortgage and other once-hot financial fare were now firmly associated in the public’s mind with scams; the terms credit swaps and CDOs were about to join them. The credit markets were in crisis, and the mantra that had sustained the fantasy economy throughout the Bush years — the notion that housing prices never go down — was now a fully exploded myth, leaving the Street clamoring for a new bullshit paradigm to sling.
Where to go? With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market — stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a “flight to commodities.” Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008.
That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. In a classic example of how Republicans and Democrats respond to crises by engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending the moratorium on offshore drilling would be “very helpful in the short term,” while Barack Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars was the way out.
But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the demand for it was falling — which, in classic economic terms, should have brought prices at the pump down.
So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.
As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing. The commodities market was designed in large part to help farmers: A grower concerned about future price drops could enter into a contract to sell his corn at a certain price for delivery later on, which made him worry less about building up stores of his crop. When no one was buying corn, the farmer could sell to a middleman known as a “traditional speculator,” who would store the grain and sell it later, when demand returned. That way, someone was always there to buy from the farmer, even when the market temporarily had no need for his crops.
In 1936, however, Congress recognized that there should never be more speculators in the market than real producers and consumers. If that happened, prices would be affected by something other than supply and demand, and price manipulations would ensue. A new law empowered the Commodity Futures Trading Commission — the very same body that would later try and fail to regulate credit swaps — to place limits on speculative trades in commodities. As a result of the CFTC’s oversight, peace and harmony reigned in the commodities markets for more than 50 years.
All that changed in 1991 when, unbeknownst to almost everyone in the world, a Goldman-owned commodities-trading subsidiary called J. Aron wrote to the CFTC and made an unusual argument. Farmers with big stores of corn, Goldman argued, weren’t the only ones who needed to hedge their risk against future price drops — Wall Street dealers who made big bets on oil prices also needed to hedge their risk, because, well, they stood to lose a lot too.
This was complete and utter crap — the 1936 law, remember, was specifically designed to maintain distinctions between people who were buying and selling real tangible stuff and people who were trading in paper alone. But the CFTC, amazingly, bought Goldman’s argument. It issued the bank a free pass, called the “Bona Fide Hedging” exemption, allowing Goldman’s subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies.
Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That 1991 letter from Goldman more or less directly led to the oil bubble in 2008, when the number of speculators in the market — driven there by fear of the falling dollar and the housing crash — finally overwhelmed the real physical suppliers and consumers. By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers — and that’s likely a conservative estimate. By the middle of last summer, despite rising supply and a drop in demand, we were paying $4 a gallon every time we pulled up to the pump.
What is even more amazing is that the letter to Goldman, along with most of the other trading exemptions, was handed out more or less in secret. “I was the head of the division of trading and markets, and Brooksley Born was the chair of the CFTC,” says Greenberger, “and neither of us knew this letter was out there.” In fact, the letters only came to light by accident. Last year, a staffer for the House Energy and Commerce Committee just happened to be at a briefing when officials from the CFTC made an offhand reference to the exemptions.
“I had been invited to a briefing the commission was holding on energy,” the staffer recounts. “And suddenly in the middle of it, they start saying, ‘Yeah, we’ve been issuing these letters for years now.’ I raised my hand and said, ‘Really? You issued a letter? Can I see it?’ And they were like, ‘Duh, duh.’ So we went back and forth, and finally they said, ‘We have to clear it with Goldman Sachs.’ I’m like, ‘What do you mean, you have to clear it with Goldman Sachs?'”
The CFTC cited a rule that prohibited it from releasing any information about a company’s current position in the market. But the staffer’s request was about a letter that had been issued 17 years earlier. It no longer had anything to do with Goldman’s current position. What’s more, Section 7 of the 1936 commodities law gives Congress the right to any information it wants from the commission. Still, in a classic example of how complete Goldman’s capture of government is, the CFTC waited until it got clearance from the bank before it turned the letter over.
Armed with the semi-secret government exemption, Goldman had become the chief designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index — which tracks the prices of 24 major commodities but is overwhelmingly weighted toward oil — became the place where pension funds and insurance companies and other institutional investors could make massive long-term bets on commodity prices. Which was all well and good, except for a couple of things. One was that index speculators are mostly “long only” bettors, who seldom if ever take short positions — meaning they only bet on prices to rise. While this kind of behavior is good for a stock market, it’s terrible for commodities, because it continually forces prices upward. “If index speculators took short positions as well as long ones, you’d see them pushing prices both up and down,” says Michael Masters, a hedge fund manager who has helped expose the role of investment banks in the manipulation of oil prices. “But they only push prices in one direction: up.”
Complicating matters even further was the fact that Goldman itself was cheerleading with all its might for an increase in oil prices. In the beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an “oracle of oil” by The New York Times, predicted a “super spike” in oil prices, forecasting a rise to $200 a barrel. At the time Goldman was heavily invested in oil through its commodities trading subsidiary, J. Aron; it also owned a stake in a major oil refinery in Kansas, where it warehoused the crude it bought and sold. Even though the supply of oil was keeping pace with demand, Murti continually warned of disruptions to the world oil supply, going so far as to broadcast the fact that he owned two hybrid cars. High prices, the bank insisted, were somehow the fault of the piggish American consumer; in 2005, Goldman analysts insisted that we wouldn’t know when oil prices would fall until we knew “when American consumers will stop buying gas-guzzling sport utility vehicles and instead seek fuel-efficient alternatives.”
But it wasn’t the consumption of real oil that was driving up prices — it was the trade in paper oil. By the summer of 2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country’s commercial storage tanks and the Strategic Petroleum Reserve combined. It was a repeat of both the Internet craze and the housing bubble, when Wall Street jacked up present-day profits by selling suckers shares of a fictional fantasy future of endlessly rising prices.
In what was by now a painfully familiar pattern, the oil-commodities melon hit the pavement hard in the summer of 2008, causing a massive loss of wealth; crude prices plunged from $147 to $33. Once again the big losers were ordinary people. The pensioners whose funds invested in this crap got massacred: CalPERS, the California Public Employees’ Retirement System, had $1.1 billion in commodities when the crash came. And the damage didn’t just come from oil. Soaring food prices driven by the commodities bubble led to catastrophes across the planet, forcing an estimated 100 million people into hunger and sparking food riots throughout the Third World.
Now oil prices are rising again: They shot up 20 percent in the month of May and have nearly doubled so far this year. Once again, the problem is not supply or demand. “The highest supply of oil in the last 20 years is now,” says Rep. Bart Stupak, a Democrat from Michigan who serves on the House energy committee. “Demand is at a 10-year low. And yet prices are up.”
Asked why politicians continue to harp on things like drilling or hybrid cars, when supply and demand have nothing to do with the high prices, Stupak shakes his head. “I think they just don’t understand the problem very well,” he says. “You can’t explain it in 30 seconds, so politicians ignore it.”
BUBBLE #5 Rigging the Bailout
After the oil bubble collapsed last fall, there was no new bubble to keep things humming — this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.
It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman’s last real competitors — collapse without intervention. (“Goldman’s superhero status was left intact,” says market analyst Eric Salzman, “and an investment banking competitor, Lehman, goes away.”) The very next day, Paulson green-lighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.
Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bank holding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding — most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs — and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.
Converting to a bank-holding company has other benefits as well: Goldman’s primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflict of interest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bank holding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman — New York Fed president William Dudley — is yet another former Goldmanite.
The collective message of all this — the AIG bailout, the swift approval for its bank holding conversion, the TARP funds — is that when it comes to Goldman Sachs, there isn’t a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. “In the past it was an implicit advantage,” says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. “Now it’s more of an explicit advantage.”
Once the bailouts were in place, Goldman went right back to business as usual, dreaming up impossibly convoluted schemes to pick the American carcass clean of its loose capital. One of its first moves in the post-bailout era was to quietly push forward the calendar it uses to report its earnings, essentially wiping December 2008 — with its $1.3 billion in pretax losses — off the books. At the same time, the bank announced a highly suspicious $1.8 billion profit for the first quarter of 2009 — which apparently included a large chunk of money funneled to it by taxpayers via the AIG bailout. “They cooked those first quarter results six ways from Sunday,” says one hedge fund manager. “They hid the losses in the orphan month and called the bailout money profit.”
Two more numbers stand out from that stunning first-quarter turnaround. The bank paid out an astonishing $4.7 billion in bonuses and compensation in the first three months of this year, an 18 percent increase over the first quarter of 2008. It also raised $5 billion by issuing new shares almost immediately after releasing its first quarter results. Taken together, the numbers show that Goldman essentially borrowed a $5 billion salary payout for its executives in the middle of the global economic crisis it helped cause, using half-baked accounting to reel in investors, just months after receiving billions in a taxpayer bailout.
Even more amazing, Goldman did it all right before the government announced the results of its new “stress test” for banks seeking to repay TARP money — suggesting that Goldman knew exactly what was coming. The government was trying to carefully orchestrate the repayments in an effort to prevent further trouble at banks that couldn’t pay back the money right away. But Goldman blew off those concerns, brazenly flaunting its insider status. “They seemed to know everything that they needed to do before the stress test came out, unlike everyone else, who had to wait until after,” says Michael Hecht, a managing director of JMP Securities. “The government came out and said, ‘To pay back TARP, you have to issue debt of at least five years that is not insured by FDIC — which Goldman Sachs had already done, a week or two before.”
And here’s the real punch line. After playing an intimate role in four historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive the price of gas up to $4 a gallon and to push 100 million people around the world into hunger, after securing tens of billions of taxpayer dollars through a series of bailouts overseen by its former CEO, what did Goldman Sachs give back to the people of the United States in 2008?
Fourteen million dollars.
That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it, one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion — yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year.
How is this possible? According to Goldman’s annual report, the low taxes are due in large part to changes in the bank’s “geographic earnings mix.” In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely fucked corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations operating in the U.S. paid no taxes at all.
This should be a pitchfork-level outrage — but somehow, when Goldman released its post-bailout tax profile, hardly anyone said a word. One of the few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas who serves on the House Ways and Means Committee. “With the right hand out begging for bailout money,” he said, “the left is hiding it offshore.”
BUBBLE #6 Global Warming
Fast-forward to today. It’s early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs — its employees paid some $981,000 to his campaign — sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.
Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm’s co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade.
The new carbon credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.
Here’s how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy “allocations” or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.
The feature of this plan that has special appeal to speculators is that the “cap” on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of all electricity suppliers in the U.S. total $320 billion.
Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they’re the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank’s environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson’s report argued that “voluntary action alone cannot solve the climate change problem.” A few years later, the bank’s carbon chief, Ken Newcombe, insisted that cap-and-trade alone won’t be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, “We’re not making those investments to lose money.”
The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets. There’s also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech … the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy futures market?
“Oh, it’ll dwarf it,” says a former staffer on the House energy committee.
Well, you might say, who cares? If cap-and-trade succeeds, won’t we all be saved from the catastrophe of global warming? Maybe — but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and-trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it’s even collected.
“If it’s going to be a tax, I would prefer that Washington set the tax and collect it,” says Michael Masters, the hedge fund director who spoke out against oil futures speculation. “But we’re saying that Wall Street can set the tax, and Wall Street can collect the tax. That’s the last thing in the world I want. It’s just asinine.”
Cap-and-trade is going to happen. Or, if it doesn’t, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees — while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.
It’s not always easy to accept the reality of what we now routinely allow these people to get away with; there’s a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can’t really register the fact that you’re no longer a citizen of a thriving first-world democracy, that you’re no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.
But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can’t stop it, but we should at least know where it’s all going.
This article originally appeared in the July 9-23, 2009 of Rolling Stone.
Invasion of the Home Snatchers, by Matt Taibbi (2010)
The Feds vs. Goldman, By Matt Taibbi (2010)
Wall Street’s Big Win, by Matt Taibai (2010)
Apocalypse, New Jersey: A Dispatch from America’s Most desperate Town, by Matt Taibbi (2013)
Taibblog: Commentary on Politics and the Economy by Matt Taibbi
A federal grand jury in Philadelphia is investigating millions of dollars of politically connected “economic-development” spending by the Delaware River Port Authority, The Inquirer has learned.
The DRPA’s chief attorney and inspector general sent a memo to DRPA employees last Thursday warning them to preserve all documents related to the agency’s economic-development projects.
DRPA chief executive John Matheussen said Wednesday, “I can confirm that we have been served with a subpoena by the U.S. Attorney’s office.”
He declined to discuss the timing or the scope of the subpoena issued last week by the office of eastern Pennsylvania U.S. Attorney Zane David Memeger.
DRPA spokesman Tim Ireland said that the DRPA “will cooperate fully” and that “we will make certain our compliance with this subpoena demonstrates a renewed commitment to transparency” by the agency.
The DRPA, which operates four toll bridges and the PATCO commuter rail line between Philadelphia and South Jersey, spent nearly $500 million over 15 years to underwrite museums, sports stadiums, a concert hall, a cancer center, the Army-Navy football game, and other non-transportation projects.
Much of the money went to politically influential recipients, as the Pennsylvania and New Jersey delegations on the DRPA board got equal amounts to spend. Fourteen of the 16 board members are appointed by the governors of New Jersey and Pennsylvania (two Pennsylvania members, the state treasurer and state auditor general, are on the board by virtue of their elected offices).
Last year, New Jersey state comptroller Matthew Boxer issued a report critical of political cronyism and mismanagement at the DRPA, saying that “in nearly every area we looked at, we found people who treated the DRPA like a personal ATM, from DRPA commissioners to private vendors to community organizations. People with connections at the DRPA were quick to put their hand out when dealing with the agency, and they generally were not disappointed when they did.”
A spokeswoman for Memeger declined to comment on the grand jury investigation.
Sources close to the probe, however, said it appeared to focus on economic development spending in Pennsylvania.
The federal investigators were said to be particularly interested in spending that was funneled through the Philadelphia Industrial Development Corp., a development lender created by the city and the Greater Philadelphia Chamber of Commerce.
The PIDC, which is governed by a board appointed by the mayor and the president of the chamber, received more than $13 million from the DRPA in 2010, ostensibly to help “small, emerging and new businesses.”
In fact, most of the money was directed by DRPA officials to well-established tourism groups or nonprofits, some with close ties to DRPA board members. In one case, $500,000 was given to a multibillion-dollar commercial real estate developer.
The Philadelphia Orchestra, the National Constitution Center, public broadcaster WHYY, the Pro Cycling Tour, the Variety Club, the Independence Visitor Center, and other organizations collected $13.3 million in DRPA funds in 2010.
John Grady, president of the PIDC, said Wednesday that he could not comment other than to say that the PIDC “cooperates with all investigations” by law enforcement agencies.
He said the PIDC’s role as agent for the DRPA’s economic-development funding ended at the end of 2011, when the money ran out.
Economic-development spending by the DRPA has long been controversial, as it contributed to a $1 billion debt that now consumes more than 40 percent of the agency’s revenue. Motorists and some board members complained that the DRPA should not spend money on non-transportation projects, while borrowing hundreds of millions to maintain its bridges and rail line.
The DRPA allocated the last of its economic-development money in December 2011. Its then-chairman, Gov. Corbett, said the DRPA would no longer be involved in economic-development spending.
The scope and duration of the federal investigation was not clear Wednesday.
However, sources close to the investigation said DRPA general counsel Danielle McNichol and inspector general Thomas Raftery issued a memo late Thursday, just before the three-day weekend, telling employees not to destroy documents related to DRPA economic-development spending.
Contact Paul Nussbaum at 215-854-4587 or firstname.lastname@example.org