i s h l i b r a r y

c o m / e n gl
vk.

www.fantamag.com
www.fantamag.com
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www.fantamag.com

WEAKER THAN YOU THINK
Exxon is sticking with an
out-of-date strategy as
its reserves shrink and its
competitors look to the future
l BW l PAGE 034
008 THE BUSINESS WEEK
008 NEWS YOU NEED TO KNOW
014 BUSINESS OUTLOOK Jim Cooper
says consumer spending will fall
even further
015 NUMBERS For businesses, the
benefits burden is easing
016 EDITOR’S MEMO
019 BTW Celebrity endorsers; more
FACETIME Maria Bartiromo talks to
(COVER AND TOP LEFT) DOUGLAS FRASER; (TOP RIGHT) THOMAS BROENING
021
Bill and Melinda Gates
024 NEWS
024 FALLING PRICES The world is awash
in goods—and government efforts
to spur spending won’t be enough
028 MANDEL ON ECONOMICS
Is Obama’s stand on CEO
compensation his Reagan moment?
029 EXECUTIVE PAY A different way to
reward top brass
030 THE BAILOUT Why some small banks
say “no thanks” to federal help
032 GM IN CHINA It’s losing share to
European and Japanese carmakers
034 IN DEPTH
034 EXXON: WEAKER THAN YOU THINK
042 THE FINANCIAL RESCUE Among
those set to ensure that home values
aren’t inflated are subprime players
who helped create the bubble
046 WHAT’S NEXT
046 THE INTERNET At businesses like
ThisNext, legions of people work
for recognition alone
050 TELECOM Clearwire needs billions
to keep its WiMAX effort on track
052 MANAGING Recession is bringing
out more office crooks
054 GREEN BIZ Fuel from trash; more
056 LEGAL AFFAIRS Accounting firms
could soon be more vulnerable
059 PERSONAL BUSINESS
059 MONEY REPORT Biotech bonanza;
IPOs for tough times; shippers
060 HOW TO PLAY IT Bank stocks are on
a wild ride, but several look solid
061 INVESTING: THE NEW 401(k)
www.fantamag.com
CONTENTS 007
Kristi Mitchem
is one of the key
players behind
Barclays’ hybrid
401(k)
CAN THIS 401(k) SAVE
YOUR RETIREMENT?
Why new hybrid saving
vehicles that combine annuities
and target-date funds look
so promising l BW l PAGE 061
INVESTING Sports announcer and
067
avid investor Al Michaels shares
his insights with Maria Bartiromo
068 INSIDE WALL STREET
069 OPINION
069 OUTSIDE SHOT Don’t bail out Putin,
says Garry Kasparov
071 OUTSIDE SHOT A nonpartisan
commission is needed to allocate
all those recovery funds
072 TECH & YOU Steve Wildstrom on
nifty content management systems
073
for homes and small businesses
MEDIA CENTRIC Jon Fine on media
ownership of sports teams
074 BOOKS Facella: Everything I Know
About Business I Learned at
McDonald’s
076 FEEDBACK Layoffs and visas at
078
Microsoft spark a heated debate
THE WELCH WAY Jack and Suzy
Welch on fast-acting stimulus
076 CORRECTIONS & CLARIFICATIONS
077 COMPANY INDEX
FE B R UARY 16, 2009 I BUSINESSWEEK
008 THE BUSINESS WEEK EDITED BY HARRY MAURER & CRISTINA LINDBLAD

FAST FINANCIAL FIXES?

THE GROWING ARMY OF THE UNEMPLOYED Even as Washington focused on $500,000
More than half a million jobs a month. That’s how the stimulus package and the
unraveling of key appointments, Compensation
many have vanished since September in the U.S., ceiling for
the White House and Congress executives at
and the toll is likely to stay that high for a few months were looking to the next frontier: U.S. companies
more. On Feb. 4 payroll giant Automatic Data remaking last fall’s financial- that receive
system bailout and revamping emergency aid
Processing said the private sector axed 522,000
regs to prevent a repeat. On
positions in January. Washington was scheduled to Feb. 4, President Barack Obama
release its payroll report, which includes government unveiled rules that limit execu-
tives at financial firms receiving
jobs, two days later. On Jan. 30 the Commerce Dept. future government emergency
reported that GDP fell in the fourth quarter at an aid—the kind that went to
annual rate of 3.8%, the worst since 1982. Believe it or Citigroup, AIG, and Bank of
America—to total compensation
not, that was better than economists had predicted, of no more than $500,000 plus
but only because inventories ballooned with unsold restricted stock. The Treasury
goods as consumers cut will propose that banks receiving
regular TARP funds be subject
AMERICAN THRIFT spending by 1%. The to the same cap, but if they
ANNUAL RATE IN PERCENT savings rate jumped allow shareholders a vote on
5
pay, they’ll be able to evade it.
to 3.6% in December
4 PERSONAL
Democrats promise quick action
SAVINGS RATE and could reach double on a new approach to stabilizing Looking for
work in Denver:
3
digits by yearend. GDP banks as soon as mid-February. The economy
~ PAGE 028 “CEO Pay: Obama’s continues to
2 seems likely to drop this Reagan Moment” hemorrhage jobs
1
quarter at a dizzying
rate of 5% to 6%.
0
JAN. 1, '07 DEC. 1, '08 ~ PAGE 024 “What Falling
Data: Bureau of Economic Analysis Prices Tell Us”

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
   





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www.fantamag.com

010 NEWS YOU NEED TO KNOW
TARP-backed funds on such
worthy efforts as loans to home
buyers, students, and busi-
nesses, new lines of credit, and
buying mortgage-backed paper.
One investment it may trim: the
new baseball stadium for the
New York Mets. The Wall Street
Journal said on Feb. 4 that the
bank is rethinking the terms of
its $400 million deal for naming
rights. Citi commented: “No
TARP capital will be used for
Citi Field.”
‘BAD BANKS’ IN EUROPE?
Many financial houses in Europe
remain in shaky shape, too, but
the European Central Bank,
after being lambasted for its
laggard response to the global
downturn, finally may be getting
its act together. On Feb. 2, The
Wall Street Journal said the ECB
is working on rules that would
allow governments to guarantee
toxic assets on banks’ books.
That follows similar plans un-
veiled by Britain’s central bank
and represents a move toward
“bad banks”—state-run institu-
tions that would manage the
Continent’s bad paper.
EARNINGS: THE GOOD...
Gloom has pervaded the earnings
season, but sunlight has shone
through here and there. Stand-
outs include some big pharma
outfits, such as Merck, which on
Motorola
phones in
New York: The
handset unit is
still struggling
BUSINESSWEEK I FE B R UARY 16, 2009
Feb. 3 said it made $1.6 billion in
the fourth quarter, and Scher-
ing-Plough, which showed
$442 million in black ink. Both
results surprised the Street and
stemmed from strenuous cost-
cutting: The two have chopped
10% and 13% of their workforc-
es, respectively. Another winner:
security systems maker Tyco
International, which on Feb. 3
wowed investors by ringing up
earnings of 61¢ a share, far above
the consensus estimate of 47¢.
...AND THE BAD
Leading the lineup of compa-
nies reporting lousy results was
Motorola, whose long-awaited
turnaround—well, you’re just
going to have to wait some more.
The company lost $3.6 billion,
mostly on one-time charges, as
handset sales continued to fizzle,
falling 51%. Dow Chemical lost
$1.55 billion, citing weak demand
that it expects to last for “several
quarters and possibly beyond.”
And Time Warner bled $16 bil-
lion after taking $24 billion in
writedowns.
‡ “Where Motorola Blew It”
businessweek.com/magazine
www.fantamag.com
THE BUSINESS WEEK
REELING RETAILERS In Chicago:
After a disastrous holiday Macy’s will chop
7,000 jobs, about
season, everyone knew it would 4% of its global
be a painful year for storekeep- workforce
ers. The latest example: Macy’s,
which on Feb. 2 joined Best Buy,
Home Depot, Neiman Marcus,
Saks, and Target on the list of
retailers making sweeping job
cuts. Macy’s said it would zap
7,000 jobs, or 4% of its work-
force, and terminate merit salary
increases. On the same day, jew-
elry and home furnishing pur-
veyor Fortunoff shut its flagship
Manhattan store, and Bloom-
berg reported that the jeweler is
(TOP) SCOTT OLSON/GETTY IMAGES; (BOTTOM) MARK LENNIHAN/AP PHOTO
in talks with liquidators.
CUTTING BACK IN AFRICA
Is China losing interest in
Africa? During the commodity
boom, Chinese companies gal-
loped all over the Sub-Saharan
region, with investments top-
ping $6 billion by early 2008.
But as prices for oil, copper,
cobalt, and other minerals
plummet, some are beating a
retreat. More than 100 small-
time Chinese operators have
quit mines in Zambia, and at
least 60 have exited Congo. And
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www.fantamag.com

012
A migrant worker
in Shanghai:
Some 20 million
have lost
their jobs
it’s doubtful whether Beijing
will make good on its 2007
pledge to invest $5 billion in
Congo to modernize infrastruc-
ture and mining.
‡China Brief, Jamestown
Foundation
I’D LIKE 400 PLANES, PLEASE
While other airlines struggle
to fill planes, Ryanair CEO
Michael O’Leary is taking ad-
vantage of the downturn to buy
them. Europe’s largest discount
airline, which operates a fleet
of 181 Boeing 737-800 aircraft,
Ryanair may
buy Airbus
jets for the
first time
BUSINESSWEEK I FE B R UARY 16, 2009
is talking to Boeing and its rival
Airbus about ordering as many
as 400 new planes in the next
18 months to two years. The
outspoken Irish CEO, who once
promised to help Boeing “kick
Airbus’ ass” in Europe, says the
carrier, with 58 million pas-
sengers, is now big enough to
break with the low-cost model
of running one type of fleet.
Ryanair lost $130 million in the
December quarter, its first loss
since going public in 1997.
‡“Ryanair Tastes Red Ink”
businessweek.com/magazine
OUT OF WORK IN CHINA
More than 20 million migrant
workers went home for the lunar
new year and stayed there—be-
cause they had lost their jobs.
So said Chen Xiwen, head of
the Communist Party’s office on
rural policy, on Feb. 2. Millions
more newly unemployed are
swelling east coast cities, where
thousands of factories have been
shuttered. With exports plung-
ing and the domestic economy
www.fantamag.com
THE BUSINESS WEEK
losing steam this year, jobless
ranks will swell to 25 million.
Beijing fears possible unrest
as the 20th anniversary of the
June 4 Tiananmen Square mas-
sacre approaches.
DESPERATE IN DETROIT
The weather in January was
cruel—but not half as cruel as
the month was for carmakers.
U.S. auto sales fell 40%, the
poorest start for a year since
(TOP) NIR ELIAS/REUTERS; (BOTTOM) CRISPIN RODWELL/BLOOMBERG NEWS
1963. Detroit’s Big Three fared
the worst, especially General
Motors and Chrysler, each with
sales declines in excess of 50%.
Ford sales dropped 40%, and
Toyota and Honda each posted
declines of about 30%. Mean-
while, GM lobbyists hit Capitol
Hill again, trying to get a poten-
tial tax liability waived. GM must
get bondholders to accept equity
for their debt, but the freed-up
cash would lead to a tax liability
as fat as $7 billion—enough to
put the company under.
~ PAGE 032 “GM Hits a Wall in
China, Too”
www.fantamag.com
 THE BUSINESS WEEK

014 BUSINESS OUTLOOK JAMES C. COOPER

CONSUMER SPENDING HAS FURTHER TO FALL

With incomes pinched, access to credit tightened, and nest eggs dramatically shrunken,
Americans are poised to save more and spend less

Consumers ran squarely into the perfect storm last year, and the wreckage will be washing ashore for
some time. The three supports that prop up spending have been devastated: income growth, credit
availability, and wealth. Spending, adjusted for inflation, dropped for the second quarter in a row at
the end of last year, and another decline this winter is likely. Consumer buying has not fallen for three
consecutive quarters since record-keeping began in 1947. Households are in the middle of a
wrenching adjustment that will not fourth quarter, the highest in seven one-time needs. Now credit condi-
play out quickly—to the great detri- years (chart). Consumers received tions have turned sharply restric-
ment of economic growth at least two income windfalls in 2008, the tax tive. On balance, banks continued to
through the first half of the year. rebates in the second quarter and the tighten their lending standards in the
Consumers are struggling with boost to buying power from the plunge first quarter, according to the Federal
years of accumulated debt amid in energy prices last quarter. The cor- Reserve’s survey of senior loan officers.
dwindling resources, and they are responding spikes in the savings rate The net percentage of banks clamp-
now forced to begin saving a higher suggest they saved most of both. ing down on prime mortgages and
percentage of their income, leaving The problem right now is that consumer loans declined from the pre-
less for spending. From the end of households are trying to save a larger vious quarter, but it remained histori-
the 2001 recession to the beginning share of their income, even as huge cally high, and lenders said consumer
of the current downturn, the funds losses in jobs and hours worked are loan demand was weak.
required to service overall household squeezing the life out of pay growth. The savings rate has further to rise,
debt—everything from mortgages to This effort to save tightens the vice which will put more downward pres-
car payments to credit-card balanc- on spending even more. During 2008, sure on spending. All the factors that
es—increased by 53%, while aftertax inflation-adjusted personal income, affect saving behavior are pushing it
income rose only 38%. During that excluding government handouts, fell upward: The drop in wealth relative to
time, savings as a share of income fell 0.9%, after growing 2.1% in 2007. income has further to go amid falling
from about 3% to zero. Making matters worse, households home values and moribund stock
The savings rate is already heading depend more than ever on income prices. Credit conditions will not turn
up, reaching 2.9% of income in the growth as a source of saving and favorable soon. And households will
spending. Up to now, consumers had likely save a big chunk of the tax cuts
no great imperative to save more of in the new stimulus package. Based on
HOUSEHOLDS SHIFT FROM their income. Increases in wealth, historical patterns, many economists
SPENDING TO SAVING mainly reflecting capital gains in home expect the savings rate to settle in
3
PERCENT values and stock portfolios, averaged the 5%-to-6% range last seen in the
SAVINGS AS A roughly $4 trillion annually from 2001 mid-1990s.
PERCENT OF
AFTERTAX INCOME to 2007. Households felt they were One key to when consumers get
2
saving in other ways, so they spent back on their feet is how fast the sav-
BRAD TRENT; CHART BY JOE RHAMES/BW

more of their income. Now, through ings rate stabilizes. Compared with the
1 the fourth quarter, household wealth last two recessions, the rise has been
appears to have shrunk by some $10 fast, but the stress from lost wealth
0 trillion, dramatically reducing the size and tight credit is greater, and it will
of many nest eggs. persist for some time. Even with the
Also, when credit was flowing benefit of fiscal stimulus, it will be a
—1
'02 '03 '04 '05 '06 '07 '08 freely, households had less need for while before consumers are ready to
Data: Bureau of Economic Analysis, liquid savings, since they could readily provide the economy with the oomph
IHS Global Insight
borrow to meet emergencies or other businesses have come to expect. ^

BUSINESSWEEK I FEBRUARY 16, 2009

www.fantamag.com
 THE BUSINESS WEEK

015
NUMBERS
BENEFITS: FOR COMPANIES, THE
RUNAWAY TRAIN IS SLOWING DOWN
By Tara Kalwarski/Charts by David Foster
52%
Share of U.S. employers
likely to require higher
Businesses struggled for years to control the soaring cost of benefits. But employee contributions for
health coverage in 2009.
the latest data show cost increases for U.S. employers slowing, thanks to
Data: Mercer
lower health-care inflation and less generous benefits for workers.

Health Tab: Employer insurance paid for Yearly Hikes: Over the past three years, the cost to employers of
36% of U.S. health spending in 2007. paying benefits has risen more slowly than the cost of workers’ pay.

BREAKDOWN OF EVERY PERCENT

$1 SPENT ON U.S. 8
HEALTH CARE
INCREASE IN PRIVATE
15¢ 11¢ INDUSTRY COMPENSATION
MEDICAID* OTHER COSTS OVER PREVIOUS YEAR*
PUBLIC 6
BENEFITS
12¢ WAGES AND SALARIES
CONSUMER
19¢ OUT OF
POCKET
MEDICARE 4

36¢
PRIVATE 2
7¢ EMPLOYER-PROVIDED
INSURANCE
OTHER
PRIVATE
0
'03 '04 '05 '06 '07 '08
* Includes State Children's Health Insurance Program
Data: Centers for Medicare & Medicare Services Data: Bureau of Labor Statistics *Seasonally adjusted

THE DECLINING BENEFITS BURDEN

Employee benefits—including employer contributions to Social Security, pensions, and
health insurance—peaked at 19.3% of total worker compensation in 2005.
PERCENT
20

BENEFITS AS A SHARE OF TOTAL COMPENSATION*

19

18

17

16

0
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08

* Benefits include employer contributions for Social Security, Medicare, employee pension funds, and health and life insurance funds
Data: Bureau of Economic Analysis

FEBRUARY 16, 2009 l BUSINESSWEEK

www.fantamag.com
016
EDITOR’S MEMO
BEWARE GROUPTHINK
ON THE ECONOMY
Davos can deliver insights it doesn’t necessarily intend. The key messages
that seemed to flow from four days of speeches, panels, “bilaterals” (i.e.,
chatting with someone), cocktail parties, and press briefings were these:
1. Everyone stupidly failed to see the financial calam-
ity coming except roughly four economists who now
must be heeded in everything they say and all they
predict.
2. The private sector has ruined the global economy
and can no longer be trusted.
3. Government is ascen-
dant, with regulation closest to
Godliness.
4. These conclusions are cor-
rect and will stand the test of
time.
What I took away instead was
this: Beware conventional wis-
dom and groupthink. Be skepti-
cal of tidy explanations of complex past events. Be even
more skeptical of confident predictions of future human
behavior. Don’t fight the last war.
It’s true that collectively we failed to predict the
horror of the financial crisis the world now faces. Many
journalists, including ours, did write presciently about
toxic mortgages, housing meltdowns, and overleverag-
ing of the financial system. And a number of econo-
mists and business leaders did recognize that we were
living in a bubble and that it would eventually burst.
But so many variables were interacting with so much
complexity—including the ever-mysterious x-factor
of human psychology and behavior—that you’d have to
be lucky as well as brilliant (or just really lucky) to have
bet right on the precise timing and the exact form the
collapse would take.
We understand some of the factors that contributed
to the mess we’re now in, but I suspect that—in part to
comfort ourselves and to choose villains and possibly a
few heroes—we are oversimplifying the story line and
assuming we know more than we do. There’s still much
more to be learned, and the exploration of something
so complicated requires a good deal of skepticism and
humility.
BUSINESSWEEK I FE B R UARY 16, 2009
www.fantamag.com
It’s true that many business leaders triggered, or at
least helped facilitate, the wild risk-taking that pre-
ceded the collapse, and many should be faulted for that.
And it’s true that regulators and regulations failed to
protect the public, and they should be faulted for that.
However, it doesn’t follow that we should entirely
disregard the experience, creativity, and even good will
within the private sector and substitute professionals’
business judgments with those of Congress and govern-
ment employees. The fact that smart people were wrong
doesn’t mean there’s no value to business brainpower
and accumulated knowledge, not to mention innova-
tion. Of course, smarter, more effective regulation is
needed, but we may be fighting the last war—and re-
verting to old, unsuccessful models—if we conclude that
because business hasn’t behaved wisely, government
necessarily will. We need to be as skeptical of one as of
the other, and open to meaningful, practical solutions
from either sector.
The conventional wisdom at Davos in 2007 was that
private-equity and hedge-fund managers were the new
power players and therefore knew more than everyone
else. The conventional wisdom in 2008 was that sover-
eign wealth funds were ascendant and would be exerting
enormous influence over global businesses. Are this
year’s collective certainties any more reliable?
I don’t know what’s going to happen next month
or next year. Those who predicted collapse are now
doubling down and predicting deeper collapse. Their
reasoning turned out to be right in 2008. But investing
and team sports remind us that last year’s winners are
often this year’s losers. Just ask commodities investors
or New York Giants fans.
BRAD TRENT
EDITOR-IN-CHIEF
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www.fantamag.com

THE BUSINESS WEEK
ENDORSERS
(TOP TO BOTTOM) PHOTOGRAPHS BY THE ORANGE COUNTY REGISTER/ZUMA
WORK HARDER
FOR THE MONEY
PRESS; CHARLEY GALLAY/WIREIMAGE/GETTY IMAGES
With marketers trying to squeeze more
out of every dollar, celebrity endors-
ers are being asked to do more than
just pose beside a product. Just ask
Grammy Award-winner Alicia Keys,
who recently worked her first trade
show. The Yamaha piano brand she
endorses is asking more of its celebrity
roster, which also includes Elton John,
as times get tough. Keys, for instance,
now gives the company logo screen
BTW
EDITED BY DEBORAH STEAD
time in her music videos and appears
at such industry events as a National
Association of Recording Merchandis-
ers show, where on Jan. 18 she sang
four songs from a cramped booth
under fluorescent lights.
Companies now “want the world”
from endorsers, says Chris Lighty,
who manages rappers 50 Cent, Missy
Elliott, and others. “It’s ‘What are you
doing for us on the Web? How can we
intertwine with the album release?’”
Even A-listers aren’t spared. Actor
Sean Connery appears in three online
videos for part of his deal as the face of
luggage maker Louis Vuitton.
Up against declines in their own
industries, celebrities aren’t in a posi-
tion to say no. “If you’re not going to
work harder, there are five people right
behind you who will,” says Ryan Schin-
man, who negotiates endorsements for
Pepsi, Coors, and AT&T Wireless.
As agreements evolve toward part-
nerships, Keys for one says she’s happy
to do more for Yamaha. “They’re my
team,” she says. Keys and Yamaha are
www.fantamag.com
019
As part of her sharing revenues
Yamaha deal, from software she
Alicia Keys
plays an
developed to help
industry-only gig keyboard players
emulate her signature
piano sound. Elton John has collected
royalties from Yamaha’s sales of the
Elton John Limited Edition Signature
Series Red Pianos that fetched $70,000
to $150,000 apiece. And to promote
its teen-oriented TAG body spray,
Procter & Gamble has its spokesman,
rapper Jermaine Dupri, running a new,
branded music label: TAG Records. His
job is to find young talent. So far, the
label has cut a single for a Brooklyn-
based rapper. Look for Q Da Kid in a
future TAG body spray ad.
–Burt Helm and Ronald Grover
Jermaine
Dupri runs a
music label
to sell a P&G
body spray
FE B R UARY 16, 2009 I BUSINESSWEEK
 THE BUSINESS WEEK

020 BTW

NURSE, MORE CAVIAR

What do consumers look for in hospitals?
New research suggests that plush accom-
modations may be more of a draw than
high-quality care. RAND economists
Dana Goldman and John Romley studied
the hospital choices of 8,721 Medicare
pneumonia patients. They then cor-
related each facility’s popularity among
these patients with its mortality rate—a
proxy for clinical quality—and the rank its
“amenities” scored in a marketing survey.
TRYING TO BURY THE ‘GOLDEN COFFIN’ A high amenities score, they found, pre-
dicted keen demand much more than a
Wall Street bonuses may grab headlines, but activist shareholders
are going after what they see as another kind of overcompensation: low pneumonia mortality rate did. Why?
the “golden coffin.” That’s the irreverent name for payouts made to Goldman says while flat-screen TVs and
families of top executives if they die in office. Roughly 17% of megacap
companies offer some form of this deal. So far, footnoted.org, which
tracks SEC≠ filings, says proposals opposing the practice are in the cur-
rent proxies of Walt Disney, auto supplier Johnson Controls, and Shaw
Group, which offers industrial services. Companies with the perk say it
helps them attract and retain top-quality executives. But investors with
labor ties, who are filing a total of 15 proposals against it, are unmoved.
“This is pay for being dead,” says Vineeta Anand, chief research
analyst at the AFL-CIO’s investment arm, which filed objections
with Comcast and Charles Schwab. The Disney vote has yet to take
place. The proposal aimed at Johnson Controls was defeated, with
42% of the vote. But the one filed at Shaw Group passed, with 67%.
The issue “will be a serious consideration for our board,” says a
Shaw spokesperson. Says Carol Bowie, head of risk governance at
analytics group RiskMetrics: “Golden coffins are bizarre in the con-
text of the financial crisis. These proposals resonated with share-
holders this year.” –Ben Levisohn

A luxury suite
Corner-Office Death Benefits gourmet meals stand out, at Medical
public quality-of-care City Hospital
Walt Disney In the event of CEO Robert Iger’s death, his family in Dallas
receives all of his $2 million base salary in the first year, 75% in the data in most states is
second, and 50% in the third. Disney says it does not offer the benefit scant. Also, patients may
to new hires, but prefers it to remain available when renewing contracts.
PHOTOGRAPH BY RON HEFLIN/AP PHOTO

assume that fancy facilities signal supe-

ILLUSTRATION BY WESLEY BEDROSIAN;

Shaw Group CEO James Bernhard’s estate would get about

$18 million based on a noncompete agreement that pays off even in
the event of his death. The estate would also receive a year’s salary and
bonus (a total of $1.7 million in 2008).
Johnson Controls Beneficiaries of former CEO John Barth would have
received 10 times his base salary at his death. Under revised rules, CEO
Stephen Roell’s beneficiaries receive twice his base salary of $1.3 million.
Data: Company proxy statements
rior care. As they market themselves in
the race to fill beds, hospitals may decide
“it’s not about attracting the best doctor,”
Goldman says. “It may be about treat-
ing patients a little better. Oh, and giving
them wireless Internet.” –Ellen Gibson

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com

FACETIME MARIA BARTIROMO
Last July, Bill Gates officially
MELINDA AND stepped away from Microsoft,
BILL GATES the startup that made him one
of the three richest men on the
ON MAKING planet (along with Warren
A DIFFERENCE Buffett and Carlos Slim). His
new business is putting a lot of
that money to work eliminating disease, fighting poverty,
and improving education as co-chair and trustee, along
(TOP) BRAD TRENT; (BOTTOM) JOHN RITTER
with his wife, of the Bill & Melinda Gates Foundation. As of
last October its resources amounted to $35.1 billion. That’s
down from $38.7 billion in December 2007, but still a
staggering number—pumped up by Buffett’s pledge in
2006 to give the bulk of his fortune to the foundation. Bill
Gates’ first annual letter on the foundation’s Web site talks
warmly of Buffett and a shared belief that their wealth
stems in part from being born in America, “where innova-
tion and risk-taking are rewarded.” On Jan. 30 at the World
www.fantamag.com
THE BUSINESS WEEK
021
Economic Forum in Davos, I talked with Bill and Melinda
about their important work.
MARIA BARTIROMO
How is the transition going?
BILL GATES
It’s been great to get more time with the scientists, more
time out in the field. These are intense, complex issues.
And as I say in a letter on the foundation Web site, it’s really
drawn me in. And I find the same magic elements that made
me love my work at Microsoft.
You mention in the letter that you’re still working on
breakthroughs but in a different capacity.
BILL GATES
That’s right. I get to learn new things. But bringing top
people together, taking risks, feeling like something very
FE B R UARY 16, 2009 I BUSINESSWEEK
 THE BUSINESS WEEK

022
dramatic can come out of it—that’s
something that the previous work and
“THE FOUNDATION’S ASSETS WERE OFF 20% LAST YEAR
the work now have in common.
AFTER YEARS OF VERY GOOD GAINS.... IT FORCES YOU
Melinda, can you tell us a little about
the priorities of the foundation? TO STEP BACK, PRIORITIZE, BE MORE CREATIVE”
MELINDA GATES
We’re involved in three different areas:
global health, global development, and the U.S. program, if this [recession] lasts over the next several years, we’re
which is primarily focused on education. In global health, concerned that aid will be cut and that people who face not
we’re really focused on top diseases that affect the poor. having enough food to eat won’t be the priority they should
Malaria, HIV-AIDS, and tuberculosis are the big ones, but be. But these issues have more visibility, more young people
also some things like maternal health and newborn death. caring about them and speaking out. France was consider-
So many newborns die in the first 28 days of life. In global ing some cuts, and there was a strong response.
development, we’re really trying to see how you can help the
poor lift themselves up in the developing world. So we work Has the financial crisis had any impact on the
on agriculture and financial services. foundation?
BILL GATES
What kind of progress have you seen since you started The foundation’s assets were off 20% last year after years of
the foundation? very good gains, though we will actually increase the payout
MELINDA GATES amount in 2009 [to $3.8 billion]. And then a lot of founda-
Malaria, I think, is a great example. There are a number of tions we partner with are looking at their strategies because
countries—Rwanda, Zanzibar, Zambia, Ethiopia—where almost every foundation has had an asset reduction, and
the malaria rates are down over 50% because the world is that makes things tougher. It all forces you to step back,
prioritize, be more creative.

What has it been like working together?

BILL GATES
We get to share what we’ve seen on a trip,
or one of us reads something more in depth
than the other and summarizes why maybe it
should be a priority for us. We weren’t peers at
Microsoft, and now at the foundation we are.
MELINDA GATES
We have offices next to one another with a
door between them. So you can just pop in and
say: “Did you read this? Did you see this? Are
you thinking about this team in this way?”

Bed nets have Tell me about working with Warren Buffett.

helped cut
malaria rates in
How wonderful that his gift dramatically
parts of Africa increased the resources of the foundation.
by over 50% MELINDA GATES
It’s incredible. It’s allowed us to scale some
now paying attention to malaria. And so insecticide-treated things up a lot faster and be more ambitious. And it’s be-
bed nets are getting out there. For instance, 60 million nets cause he sees the same inequalities that we see in the world.
have been distributed by the Global Fund [a public-private
partnership]. That’s not going to solve the problem. What’s Does he take an active part in the foundation?
ultimately going to solve the problem is a vaccine. But even BILL GATES
that much progress was unheard of two years ago. Actually, it was Warren’s idea that I do an annual letter. I ran
a few drafts by him. He is very excited about the work. He’s a
Is foreign aid not flowing as freely because of this trustee, and his advice is very helpful. I’m on the phone with
economic slowdown? him a lot. Partly he’s explaining to me how these financial
BILL GATES markets are working, and he’s one of the few people whose
So far, the rich world governments have continued to in- opinion really is meaningful at this point. But he loves his
crease their aid. The one exception to that, which I call out in full-time job. ~
my letter, is Italy. It’s proposing a pretty dramatic cut from a
fairly low level. Hopefully, that will be turned around. Now Maria Bartiromo is the anchor of CNBC’s Closing Bell.

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
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www.fantamag.com
024 NEWS
028 Obama’s Reagan moment
029 A better way to reward execs
030 Banks that say no to a handout
032 GM has it rough in China, too

WHAT FALLING
PRICES TELL US
The world is awash in goods—and government
programs to spur spending won’t be enough

By Peter Coy hospitals and legal services. Even fees

Consumer prices in the U.S. fell at a
breathtaking annual rate of nearly 13%
in the last three months of 2008. Prices
plummeted for all sorts of goods, rang-
ing from clothing to TVs to furniture,
as retailers advertised sale after sale.
But deflation missed big chunks of
the economy. For all of 2008, college
tuition and fees increased by 5.8%,
followed closely by price increases for
for preparing tax returns are going up.
This inconsistency in prices casts
doubt on the usual explanation for the
recession, which is that it’s mainly due
to the credit crunch and the result-
ing squeeze on demand. It also hints
at why government efforts to fight the
downturn have been ineffective so far.
Here’s the big idea: If the lack of
demand that the Obama Administra-

UNEVEN DEFLATION
Percentage price changes, Dec. 2007 to Dec. 2008 tion is fighting were the only problem,
you’d expect prices to fall across the
Gasoline
-43.1% Commodities excluding
food and energy -0.6% board. Instead, it appears that sup-
ply—that is, oversupply—is at least
Televisions
-19.4 Furniture and bedding
-0.1 as important a factor. The sectors
in which prices are falling are those
Homes*
-18.2 Management and technical
consulting services** 1.7 plagued by an excess of factories and
ways to get goods to consumers, often
Toys
-6.8 Legal services**
5.2 because of huge investment in plants
ILLUSTRATION BY ACME ILLUSTRATION

in China and other developing nations.

Women’s and girls’ apparel
-3.6 Computer training
services** 5.3 Most services, in contrast, are not in
severe oversupply and have domestic
New vehicles
-3.2 Hospitals and related
services 5.4 labor as their main ingredient. Con-
sider this: Prices of goods fell 4.1% last
Men’s and boys’ apparel
-1.1 College tuition and fees
5.8 year; prices of services rose 3%.
*From Standard & Poor’s/Case-Shiller 20-City Composite Home Price Index, 12 months through November **From producer price
The government’s deflation-fight-
index. All others from consumer price index. Data: Bureau of Labor Statistics, Standard & Poor’s ing weapons—low interest rates,

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com

financial bailouts, and spending pack-
ages—can boost demand but do little
to deal with oversupply. As Microsoft
CEO Steven A. Ballmer and General
Electric CEO Jeffrey R. Immelt have
observed, long-term demand growth
has been “reset” downward. The
world’s productive capacity is simply
too big. That means prices need to
fall farther, or more factories need to
close in the U.S. and abroad, or some
combination of the two.
That’s not to say the Obama Admin-
istration is on the wrong track with
its nearly $900 billion-plus stimu-
lus plan. But it’s important to have
realistic expectations. The stimulus
can ameliorate the downturn, but not
prevent continued contractions in the
sectors of the economy where global
overcapacity is the most extreme.
Examples? The world is able to make
90 million vehicles a year, but at the
current rate of production, it’s mak-
ing only about 66 million, according
to estimates from market researcher
CSM Worldwide. Global production
of semiconductor wafers is running at
only about 62% of capacity, estimates
market researcher iSuppli.
Such overhangs hurt not only manu-
facturers, but retailers who sell goods
and the truckers who distribute them,
not to mention the financial wizards
www.fantamag.com
NEWS
025
around the globe who abetted the
buildup of overcapacity through fool-
ish lending and financial inventions.
(Finance is one service sector where
prices are falling, in part because banks
lent so heavily in housing.)
“VICIOUS CIRCLE”
For the U.S., global overcapacity will
mean bargain prices for consumers in
2009 but tougher-than-ever competi-
tion for domestic producers that com-
pete with imports, such as carmakers
and steel producers. “Pricing power
is now deteriorating,” Morgan Stanley
economist Richard Berner wrote on
Feb. 3, describing a “vicious circle” of
declining output, prices, and profits.
In the North American steel industry,
16 of 29 blast furnaces are temporar-
ily shut down, says Michael Wessel, a
member of the U.S.-China Economic
& Security Review Commission. At
the end of 2008, North American
auto plants were running at just 70%
of capacity even after massive shut-
FE B R UARY 16, 2009 I BUSINESSWEEK

026
GLOBAL OVERCAPACITY
AUTOS
When December 2008
Rate of 66 million
production vehicles per year
Production 90 million
capacity vehicles per year
Data: CSM Worldwide estimate (autos), iSuppli estimate (semiconductors), Energy Information Administration forecast (oil)
downs. “It’s going to get worse,” says
IHS Global Insight economist Michael
Montgomery, because inventories of
manufactured goods piled up before
producers realized how badly demand
had fallen. Says Montgomery: “My first
boss in the steel industry told me, no-
body thinks there’s any inventory until
they look out the window and say, ‘Oh
my God, what’s all that stuff?’ ”
The picture is dramatically better
in education and health care, to name
two robust service sectors. Enrollment
is rising at many community colleges.
Hospitals are still adding workers.
TRANSNATIONAL CRISIS
For economists, overcapacity is a
tricky concept. Human wants are
unlimited, so how could the world ever
produce too much of a good thing? The
key is what people can pay: In many
goods sectors, prices still aren’t low
enough to bring forth enough buyers.
There will have to be some combina-
tion of falling prices and destruction of
productive capacity before supply and
demand come back into balance.
The question is how that balance
will be achieved. Global overcapacity
BUSINESSWEEK I FE B R UARY 16, 2009
U.S. carmakers
like Ford will
see competition
stiffen further
SEMICONDUCTORS OIL
First quarter of 2009 Second quarter of 2009
9,260 wafers 83.8 million
per month* barrels a day
14,930 wafers 89 million
per month* barrels a day*
*BusinessWeek estimate
in major industries will provide a criti-
cal test of the statesmanship of G-20
world leaders, who next meet on Apr. 2
in London. The economic crisis is
transnational, says Paul A. Laudicina,
a vice-president for consultant A.T.
Kearney. “The conundrum is that we
[tend to] make decisions nationally.”
China is under pressure to help soak
up its overcapacity by switching from
investment to domestic consumption.
Trouble is, its economy isn’t geared
that way. Toy manufacturing in China
is a “disaster area” because export
orders are drying up and factories can’t
crack their own home market, says
David Wong, vice-president of the
Chinese Manufacturers Assn. in Hong
Kong. “There are so many obstacles to
selling domestically,” he says. “Even we
from Hong Kong are outsiders.”
In any case, China is far less influen-
tial as a consumer than as a producer.
At the World Economic Forum in
Davos, Switzerland, in January, Bank of
China Group Executive Vice-President
Zhu Min told BusinessWeek Editor-
in-Chief Stephen J. Adler in a panel
discussion that even rapid growth in
Chinese consumption can’t make up
www.fantamag.com
NEWS
for weaker spending in the U.S., the
world’s No. 1 shopper.
What can companies in overca-
pacity-plagued sectors do? For one
thing, the strongest producers among
them will be able to buy the weakest.
“Deflation will be an opportunity for
companies to be able to buy assets 10%
to 20% below their replacement value,”
says Nicholas Heymann of brokerage
Sterne Agee & Leach. Companies can
also benefit from the increased buying
power of people who still have jobs.
Wages and salaries outpaced inflation
by 2.6% in 2008, the biggest gain for
workers since at least the early 1980s.
Some American companies that buy
low-priced merchandise from China
are not squeezing suppliers on price
but instead are trading up to a better
class of supplier by offering to pay in as
little as 10 days instead of 60, says Pe-
ter Brown, a retail strategist and vice-
chairman at Kurt Salmon Associates,
a global consulting firm. Says Brown:
“The savvy buyers are saying, ‘I know
I can get some reductions, but I also
know it doesn’t help me if the supplier
is not there to ship in six months.’ ”
Deflation is a signal that all is not
right. For businesses and policymak-
ers, the key is to diagnose the malady
correctly. ^
–With Frederik Balfour in Hong Kong
and David Bogoslaw in New York
Business Exchange
Read, save, and add content on BW’s
new Web 2.0 topic network
Buy American?
Protectionism may be the
second-best choice for coping
with the recession, economist
Paul Krugman wrote on Feb. 1 in
his New York Times blog. The
best choice, he wrote, would be
for all countries to stimulate their
economies, no strings attached.
But temporary local-sourcing rules
could get governments to stimulate
REBECCA COOK/REUTERS
further, knowing their spending
won’t leak overseas.
To read Krugman’s post, go to
http://bx.businessweek.com/
obamas-stimulus-plan/blogs/
www.fantamag.com
028
CEO PAY: OBAMA’S
REAGAN MOMENT
His attack on executive salaries recalls Reagan’s
hard line on striking air-traffic controllers
By Michael Mandel
On Feb. 4, President
Barack Obama pro-
posed capping execu-
tive pay at companies
receiving future gov-
MANDEL ON ernment bailout funds,
ECONOMICS
calling this year’s Wall
Street bonuses “shameful” and “the
height of irresponsibility.” Could his
public attack on sky-high pay in the fi-
nancial sector help bring down execu-
tive compensation in other industries?
If history is any guide, the answer is
yes. A President, by picking the right
moment, can greatly influence public
attitudes. In his remarks, Obama iden-
tified excessive executive compensa-
tion as causing “havoc in our financial
system.” By legitimizing long-standing
criticisms of executive pay, he could
encourage shareholders and directors
across Corporate America to challenge
multimillion-dollar pay packages.
For the best parallel to today’s situ-
BUSINESSWEEK I FE B R UARY 16, 2009
ation, look back to August 1981 and
Ronald Reagan’s actions against the
air-traffic controllers. At the time, the
unemployment rate was 7.4%—and
rising—as the economy moved into the
deepest recession since World War II.
Sound familiar?
The controllers’ union, the Profes-
THE POWER OF
A PRESIDENT
In 1981, President Ronald Reagan
broke the air controller union,
PATCO. His aggressive stance made
it much harder for unions to strike.
ANNUAL AVERAGE WORK STOPPAGES*
Before PATCO strike 269
After PATCO strike 58
*10-year averages, 1971-1980 and 1982-1991
Data: Bureau of Labor Statistics
www.fantamag.com
Obama and
Reagan:
Strong stands
early in their
Presidencies
sional Air Traffic Controllers Organi-
zation, better known as PATCO, made
the mistake of calling a strike for more
money and better working conditions
at a time when real wages were falling
and most workers feared losing their
jobs. Reagan reacted by firing most of
the controllers. He then hired perma-
nent replacements for the strikers, a
step that had been legal but socially
taboo for almost 50 years.
(CLOCKWISE FROM TOP LEFT) PHOTOGRAPHS BY LOUIE PALU/ZUMA PRESS; DAVID HUME KENNERLY/GETTY IMAGES; BRAD TRENT
WEAKER UNIONS
Once Reagan broke the “replacement
worker” barrier, private-sector com-
panies such as Phelps Dodge, Boise
Cascade, and Continental Airlines
followed similar strategies. The result:
Unions became much more reluctant
to strike. The number of major new
work stoppages fell from 269 per year
in the decade before the PATCO strike
to 58 per year in the decade after.
Moreover, union pay increases slowed.
The reduction in unions’ power had
many causes, including globalization
and a decline in U.S. manufacturing.
But the attack on PATCO “had great
impact,” says Joseph A. McCartin, a
Georgetown University historian who
has written extensively on the strike.
“Reagan made strikebreaking more
patriotic and striking less patriotic.”
Fast-forward to today. For years
compensation for top corporate execu-
tives has been climbing far faster than
overall wage levels. Repeated efforts by
shareholder activists and politicians to
rein in executive pay have fallen short.
But new research suggests that

executive pay is responsive to public
pressure. According to Camelia M.
Kuhnen, an economist at Northwest-
ern University, and Alexandra Niessen
of the University of Cologne, a flurry
of negative articles in the press tends
to push down executive compensation
at least temporarily. “Public attitudes
seem to matter,” says Kuhnen.
The question is whether Obama will
take advantage of the crisis to paint
excessive executive pay as “unpa-
triotic,” even outside the financial
sector. “Every corporation has to take
this very seriously,” says William W.
George, former CEO of Medtronic, the
medical device giant. George chairs the
board of direc-
tors’ compensa-
tion committee at
ExxonMobil and
is on the compen-
sation commit-
tee at Goldman
Sachs. “It’s best
for companies
to step up to the
Obama challenge,”
he says. “We have
some time to act
now, before we get
into the spot of the
government set-
August 1981: ting pay.”
A striking PATCO Obama’s pro-
member at
posed pay cap of
Chicago’s
O’Hare Airport $500,000 does
have loopholes. For
one, it applies only to companies re-
ceiving “extraordinary help” from the
government. Moreover, the executives
PHOTOGRAPH BY BOURDIER/AP PHOTO; ILLUSTRATION BY GEORGE BATES
can get additional stock, which could
pay off if and when the bailout funds
are repaid.
Still, the thought of Obama emulat-
ing the conservative icon Reagan is
fascinating. Reagan, by portraying the
air controllers as looking out only for
themselves in a crisis, helped change
the public attitude toward unions.
Obama, if he chooses, could make this
his own PATCO moment. ~
–With Nanette Byrnes in Chapel Hill,
N.C.
Mandel’s textbook, Economics: The
Basics, was just published by
McGraw-Hill /Irwin.
A BETTER WAY TO
REWARD EXECUTIVES?
Deferring bonuses would help shift management’s
focus to long-term results, but getting it right is tricky
By Nanette Byrnes
Some companies, aware of the direc-
tion the regulatory winds are blowing
in Washington and other capitals, are
making preemptive moves to overhaul
the schemes they use to reward top
brass. One concept that’s gaining
traction is that of the “bonus bank.”
UBS launched a bonus bank late last
year after the Swiss government tossed
the institution a $60 billion lifeline.
Investors are pushing for E*Trade
Financial, Charles Schwab, and
JPMorgan Chase to adopt similar plans.
Here’s how the bonus bank works
at UBS: One-third of a top manager’s
annual bonus will be paid out and the
rest will be deposited into an account.
The money can be drawn down over
three years, provided the bank meets
or exceeds predetermined operating
www.fantamag.com
NEWS
029
targets and other benchmarks. If not,
the manager stands to lose some or all
of the funds in the account. The beauty
of the idea, in the eyes of compensa-
tion specialists, is that it discourages
employees from goosing results one
year at the expense of the next. “For a
bank, this is an opportunity to move
to a system that’s far more defensible,”
says University of Chicago’s Booth
School of Business Professor Ra-
ghuram G. Rajan.
While straightforward in principle,
the bonus bank can be difficult to make
work in practice. Briggs & Stratton in
Milwaukee, which has more than $2
billion in annual sales of engines for
equipment such as lawn mowers, set
up a bonus bank in the early 1990s. It
worked pretty well, too, until 2005,
when a spell of dry weather drove down
demand for the company’s products. So
even as Briggs & Stratton outperformed
rivals, it wasn’t hitting return-on-
capital targets, a key metric under its
plan. By 2008, bonus accounts had
moved into negative territory,
meaning executives would have
to relinquish a portion of their
future payouts. The bonus plan
had become a “disincentive”
for managers to stick around,
says CEO John S. Shiely. So
the board decided to cap
bonus bank losses, and put
a temporary, supplemen-
tal bonus plan in place.
Says William F. Achtmeyer, a
member of Briggs & Stratton’s
compensation committee and
CEO of strategy consultant Par-
thenon Group: “It’s a model that
is theoretically outstanding, but
from an implementation perspec-
tive has its limits, too.” ~
FE B R UARY 16, 2009 I BUSINESSWEEK

030
SMALL BANKS
SAY ‘NO THANKS’
The federal bailout program has too many strings to
attract financial institutions that aren’t in trouble
By Mara Der Hovanesian
When Smithtown Bancorp applied
for money last year from the U.S.
Treasury’s $700 billion rescue pro-
gram, CEO Bradley E. Rock figured the
Hauppauge (N.Y.) bank could use the
cash to boost lending. Then politicians
started pushing for conditions on the
capital they were offering, and Rock
decided the money wasn’t worth it. In
late January he refused a $37.8 million
investment from the government. “I
would never agree to let Congress tell
us which loans we should and shouldn’t
make,” says Rock.
While many of the nation’s largest
banks are asking for second helpings
of aid, a growing number of small and
regional banks are refusing the govern-
ment’s help altogether. The concern
among the healthy lenders is that regu-
lators will dictate how they structure
dividends, compensate managers, or
make acquisitions. Worse, they worry
BUSINESSWEEK I FE B R UARY 16, 2009
that the government will impose lending
quotas or force them to make loans that
may not be in the banks’ best interests.
The fear is so pervasive that it could
hamper the government’s ability to
revive the economy. By injecting cash
BUSINESS AS USUAL
Many banks that aren’t accepting
federal aid have boosted lending
LENDING
BANK INCREASE*
New York Community 13.2%
Chemical Financial
Dime Community 12.6
Smithtown Bancorp
S.Y. Bancorp 13.7
Data: SNL Financial *Q3 2008 vs. Q3 2007
www.fantamag.com
NEWS
directly into banks, regulators are hop-
ing to jump-start the credit markets.
But the government probably didn’t
anticipate that some of the strongest
lenders—those most likely to fun-
nel federal funds directly into new
loans—would take a pass. Meanwhile
weaker banks, which need cash just to
stay afloat, can’t afford to plow all of
the fresh capital into loans.
The difference between the nation’s
largest banks and their smaller breth-
ren is stark. The big banks grabbing the
headlines have roughly $9 of capital for
every $100 of assets, says researcher
SNL Financial. Small and regional play-
ers have more than $13 in capital for ev-
ery $100 in assets. With a better capital
cushion and less exposure to risky debt,
those banks can use the
HOW TO
PLAY IT
060
cash to bolster lending. “If
we don’t fix Main Street
banks, it ain’t gonna make
a lot of difference on Wall
Street,” says Walter G. Moeling, a con-
sultant at law firm Bryan Cave.
It doesn’t help that healthy banks
are also concerned about the stigma of
seeking government assistance. Ever
since the rescue plan was announced
back in the fall, investors have been
thrashing the stocks of lenders that take
aid. “There were a number of banks that
were torn by whether to apply or not,”
says New York Superintendent of Banks
Richard H. Neiman, one of the regula-
tors overseeing the bailout program.
In all, more than 50 banks have de-
cided not to take money. Legacy Ban-
corp of Pittsfield, Mass., was approved
for $20 million last month, but said it
wouldn’t accept the money. Mechanics
Bank of Richmond, Calif., withdrew its
application for $60 million.
NewAlliance Bank CEO Peyton R.
Patterson didn’t even bother to fill
out the form. She didn’t want to risk
restrictions on the bank’s share repur-
chases and dividend payouts. The New
Haven bank, which maintained high
4.1 lending standards during the boom,
had the luxury of walking away. Un-
like peers dealing with historic losses,
57.4 NewAlliance’s earnings almost doubled
to $45.3 million last year, as lending
CALEF BROWN
increased 38.5%. Says Patterson: “We
quickly understood that the money
would not have any benefits to us.” ^
www.fantamag.com
 NEWS

032 Cadillac sales

contend with.
have slowed
as Chinese Increasingly,
buy Audis Dunne says,
and BMWs Chinese drivers
see Japanese
quality as best in class.
Meanwhile, GM’s problems
at home are starting to cast a
pall. Chinese consumers have
heard and read plenty about
GM’s near-bankruptcy experi-
ence and its pleas for a govern-
ment bailout. A mainland
automotive blog called China
Car Times praised the new
Buick Regal, but then asked:

GM HITS A WALL “Who wants to buy a high-

ticket item from a potentially
doomed company?”
That’s not the only thing Chinese

IN CHINA, TOO consumers are wising up to. For years,

GM has sold restyled Chevrolets as
Buicks at home. In China, Buick’s best
seller is a midsize sedan called the
Consumers, concerned about quality and about the Excelle. It is a Korean-made car sold in
other emerging markets as a Chevro-
carmaker’s future, are buying more Japanese models
let Lacetti. Dunne says some Chinese
buyers have caught on and don’t think
GM’s Korean-engineered cars are as
good as the American-designed mod-
By David Welch GM’s China sales, but the profit mar- els. Internal Hyundai Motor research
Even as General Motors loses gins are razor-thin, and the company shows that Chinese consumers con-
ground at home—U.S. sales owns only a third of Wuling. sider the Excelle a direct competitor to
plunged 49% in January— Some things GM can’t do much Hyundai’s Korean-built sedans. That
the company has been able to point to about. Toyota and Honda are expand- may help explain why GM sold 11%
strong performance in China. And it’s ing aggressively, and the fewer Excelles in 2008.
true that GM sold more cars there last Chinese are swallowing GM is badly weak-
year than ever. Now, though, Chinese their resentment of Japan ened and has limited
consumers are pulling back, and the
automaker is losing ground to its Japa-
nese rivals. “GM has lost momentum,”
says Michael J. Dunne, president of
Automotive Resources Asia, a division
and its wartime behavior.
Last year, Toyota sold
more passenger cars in
China than GM for the
first time, and Honda is
-16%
Change in Buick’s
China sales in 2008,
resources. Yet it sup-
ports five house brands
in China: Buick, Chevy,
Cadillac, Opel, and Saab.
Does this sound famil-
of J.D. Power & Associates (like Busi- now riding GM’s bumper. iar? The company argues
when the overall car
nessWeek, a unit of The McGraw-Hill Buick also has lost cachet, that the two European
market was up 7%
Companies). “It has no room for error.” Dunne says, because more brands have cachet and
Data: J.D. Power Asia Pacific
For more than a decade, GM was Chinese can afford pres- add to the bottom line.
the automaker to catch in China. Its tigious European makes Even so, producing new
Buick sedans were the car of choice for such as Audi and BMW. It models, marketing them,
mid-level executives and government doesn’t help that GM released few new and supporting dealerships eat up a
officials. Three years ago, GM launched models last year, although President lot of money. Not ideal when Saab and
Chevrolet, which quickly caught on and Chief Operating Officer Frederick Opel sold a combined 5,600 cars in
with the middle class. Even now, to the A. “Fritz” Henderson expresses high all of Asia last year. Given the billions
casual eye, GM’s sales growth in China hopes for the new Buick Regal. at stake—Chinese last month bought
looks pretty robust. That is, until When GM had more of the China more cars than Americans did—GM
FEATURECHINA

you strip out the company’s Wuling market to itself, it didn’t need to worry may have to take a page from its U.S.
commercial truck business. The fast- as much about quality comparisons strategy: Ax some brands and focus on
growing division accounts for 60% of with rivals. Now it has the Japanese to what’s left. ^

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
www.fantamag.com
 EXXON
034

IS WEAKER The king of oil companies

THAN
By Steve LeVine
Photograph
by Benjamin Lowy is sticking to an out-of-date
game plan as its reserves
shrink and its competitors
look to the future

YOU THINK
Like the ever-expanding universe, ExxonMobil seems to know
no bounds. Its $45 billion profit in 2008 was the biggest haul
recorded by a public company in the history of the world. The
runner up? Exxon, in 2007. No. 3? Exxon, in 2006.
Plunging oil prices are sure to devour some of those
earnings this year. But even that presents opportunity, for
Exxon, long the unchallenged exemplar of Big Oil, has an
enormous stockpile of cash and shares with which to buy
rivals. Indeed, it’s difficult to imagine a scenario in which
the company would soon be knocked from its perch. Even
in the sharp recession, Exxon shares have held up, falling
just 15% last year compared with a 22% decline by its rivals
Gheit, a long-time industry analyst for Oppenheimer & Co.
Yet despite its seeming invincibility, Exxon is surprisingly
vulnerable. Interviews with industry analysts, consultants,
and current and former employees cast doubt on its strategy
and growth prospects. Most immediately, Exxon’s oil reserves
and production are shrinking, and it is relying on less valu-
able natural gas to replenish them. Worse, it is getting much
of that gas from a single country—Qatar—that could change
the terms of their deal at any moment.
More broadly, Exxon seems overly wedded to a playbook
drafted decades ago. The company’s aversion to risk, a point
of pride, has caused it to withdraw from lucrative exploration
CORBIS

and 38% for the Standard & Poor’s 500-stock index. “If one projects prematurely. And Exxon’s perceived arrogance, re-
oil company is left standing, it will be Exxon,” says Fadel flected in its dismissal of alternative energy and its strained

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
 IN DEPTH

035

www.fantamag.com
036 EXXON’S GLOBAL FOOTPRINT Although the company’s vast portfolio of investments spans the
planet, its average daily production has been in steady decline

NETHERLANDS
Exxon’s half-
century-old offshore
investment here is
largely a natural gas
play. Given Europe’s
U.S. growing thirst for
Along with Qatar, the natural gas, this
U.S. is Exxon’s larg- appears likely to be a
est profit base. The profit center for Exxon
company produces for another two or
and refines oil and three decades.
natural gas in Alaska,
Colorado, the Gulf of
Mexico, Louisiana, Tex-
as, and elsewhere. It’s
not a growth market,
but it has the highest
demand for fossil fuels
in the world.

relations with foreign governments, has cost it business.
All of Big Oil faces the conundrum of size, but none more
than Exxon. Its very bigness makes it hard to grow—or even
sustain itself. Since the 1999 merger with Mobil, Exxon’s total
reserve base of oil and natural gas has barely budged, while pro-
duction has fallen. Buying another oil company would add to its
cash flow but wouldn’t alter its inability to grow on its own.
A “GRIM” OUTLOOK FOR RESERVES
Exxon’s production numbers represent a failure. In 2001,
former CEO Lee F. Raymond vowed to increase daily oil
production to 5 million barrels by 2005, from 4.25 mil-
lion. Instead, the tally fell. In 2006, with oil prices surging,
daily production averaged 4.23 million barrels, and Exxon
extended its 5 million goal to 2010. In 2007 it pumped just
4.18 million barrels. As prices soared in 2008 before crash-
ing later in the year, production dropped to 3.92 million.
Exxon’s performance raises a question once unimagi-
nable: Has the company effectively reached the limits of its
productive capabilities? Company spokesman Alan Jef-
fers brushes off such notions. He says Exxon never set spe-
cific production targets but rather “estimates of production
capacity growth.” Those estimates, he says, turned out
wrong: “Plans are plans, and actual events may be different.”
Not only is Exxon producing less oil but it’s also having dif-
EXXON’S CAPITAL AND EXPLORATION BUDGET HAS
ANGOLA AND
NIGERIA
Together, the countries
are a substantial piece
in Exxon’s oil and
natural gas puzzle.
Turmoil in Nigeria,
however, makes
that portion of the
company’s Africa
portfolio possibly its
riskiest.
ficulty replacing the oil it pumps from the ground. In 2007 the
company replenished just 76% of the approximately 1.52 billion
barrels it produced that year, according to its Securities & Ex-
change Commission filing. The 2008 numbers, to be reported
this month, seem certain to be worse. That’s because the SEC
considers only those reserves that are economically viable at
the price of oil on the last day of the year. On Dec. 31, 2008, a
barrel of crude sold for $44.60, less than half the 2007 yearend
price of $95.98. The lower the price of oil, the lower the per-
centage of Exxon’s reserves that would clear the hurdle.
This year may not be much better than last. After complaints
by Exxon and other companies that the yearend measure is ar-
bitrary, the SEC will allow the companies to start judging the
commerciality of reserves at the average annual price. In 2008
it was about $100 a barrel, but accord-
ing to most industry analysts the average
will fall to $45 to $60 a barrel in 2009. If
MAP BY RAY VELLA/BW

that proves accurate, Big Oil’s reported

JUMPED BY 50% OVER THE PAST FIVE YEARS, BUT ITS 2009 reserves, Exxon’s included, will
be “grim,” says Chris Ruppel, an analyst
OIL PRODUCTION CONTINUES TO DRIFT DOWNWARD with Connecticut-based brokerage Ex-
ecution. Exxon’s Jeffers says the relevant

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com

QATAR
Exxon’s Qatar
investment is a huge
liquid-natural-gas play
ahead of an expected
explosion in European
and world demand for
natural gas.
reserve numbers are the ones the company calculates itself—
and uses for making investment decisions.
With Exxon’s capital and exploration budget up by 50%
over the last five years, to about $25 billion in 2008, one might
say the company is spending more and more to run in place.
By one important measure, Exxon is actually shrinking. Ac-
cording to analysts, since 2004 it has replaced more than 80%
of the approximately 1.5 billion barrels of oil it sells each year
with natural gas, which in the U.S. is worth barely half the price
of oil. So when Exxon uses gas to replenish its 72-billion-barrel
resource base, it erodes its own value. Oppenheimer & Co. has
determined that Exxon’s “proven reserves,” when one takes into
consideration the lower value of gas, are 17.9 million barrels, or
21% less than the amount the company reported in 2007.
There is nothing illegal or deceptive about replacing oil re-
serves with gas; Exxon’s rivals, such as BP and Royal Dutch
Shell, have done likewise to varying degrees in recent years.
But Exxon has gotten most of its gas from a single country,
Qatar. About 13% of Exxon’s share price is attributable solely
to Qatari natural gas, according to a January report by Deutsche
Bank. Relying on one country is risky. BP, for example, has
lost enormous volumes of reserves in recent years in disputes
with the Russian government and local partners. Exxon’s Jef-
fers disputes the significance of the gas-for-oil issue. What is
important, he says, is “the total value or return that a project
could bring over a range of prices.” Exxon’s Qatari investment
www.fantamag.com
IN DEPTH
037
FORMER SOVIET
UNION
Between Kazakhstan
and Russia, Exxon is
part of three gigantic
oil projects—
Kashagan, Tengiz,
and Sakhalin-I. The
latter two are already
producing.
has such a high value because of a chain of projects starting
with gas and going “through liquefaction, shipping, regasifi-
cation terminals, and gas marketing,” he says.
SWAGGERING SELF-ASSURANCE
Exxon seems unperturbed by its production trends. It is one
of the industry’s most technologically advanced companies
and earns among the highest profits per barrel. Indeed, two
of the main traits at the core of Exxon’s business model are a
swaggering self-assurance and strict adherence to its play-
book regardless of market conditions.
CEO Rex W. Tillerson, who took over in 2006, runs Exxon
much the same way it has always been run. Tillerson is more
polished and politically astute than his predecessor, Ray-
mond, but the differences between the two are more stylistic
than substantive.
Growing up in rural Texas, Tillerson was a second-
generation Eagle Scout. (His father, Bob, even worked for the
Boy Scouts of America.) While earning a degree in civil engi-
neering from the University of Texas at Austin in 1975, Tiller-
son won a coveted position as percussion section leader for
the Longhorn Band, for which he played bass drum. “You have
80,000 people screaming in the stadium, you count on the
base drum to keep the band steady, and Rex was the guy,” says
FE B R UARY 16, 2009 I BUSINESSWEEK
038
Scott Harmon, who was drum major. “He was like a machine.”
Quiet and intense, Tillerson was a perfect fit for Exxon. He
joined the company straight out of college and rose swiftly
through the ranks. During the 1990s, as a senior executive
overseeing Exxon’s business in the former Soviet Union re-
gion, he negotiated the acquisition of a 30% share of Sakha-
lin-I, a giant oil and natural gas field in Russia. Tillerson “had
the kind of personality that the Russians respond to,” says
Eugene Lawson, at the time head of the U.S.-Russia Business
Council. “He had a presence when he walked in. He looked
you in the eye. He wanted to get down to business.”
Today Tillerson manages Exxon from deep inside the com-
pany’s Irving (Tex.) headquarters, a fortress that brings to
mind the Central Intelligence Agency’s command center in
Virginia. Visitors must wait in their vehicles at the entrance
while a tall, heavy metal gate retracts upward from the ground,
then swings open. (By comparison, BP’s glass-fronted head-
quarters sits on the bustling St. James’s Square in London.)
Inside the compound, Exxon employees go through a gruel-
ing, years-long initiation. “Early on, you are taught a way to do
things,” says a company employee who spoke on condition of
anonymity. “For anything I want to do, there is a document to
give me guidance.” The result is that employees “are machine-
like in the way they function,” says another employee. Greg
Lamberson, a Tulsa-based consultant who worked with oil con-
sortia in Chad, Cameroon, Russia, and Alaska, says the Exxon
men stood out: They dressed more neatly than rivals, were more
experienced in the field, and were more assertive. In a 2001
Alaska pipeline study in which Lamberson participated, BP was
the manager, but the Exxon members of the group took charge.
“You throw a bunch of guys together and a leader emerges, and
generally that’s the Exxon folks,” Lamberson says.
“THEY JUST DIDN’T HAVE THE GUTS”
Tillerson frequently touts Exxon’s “discipline” in complet-
ing oil and gas projects on time and on budget. All the Big
Oil companies claim to hew closely to their profit targets,
unswayed by whether the price of oil happens to rise to $130
a barrel (making almost any deal attractive), or fall to $30 a
barrel (killing the taste for a fresh prospect). But analysts say
Exxon is the most ruthless, refusing in good times or bad to
budge from its targets—even at the expense of growth.
Sometimes Exxon is cautious to a fault, walking away from
promising projects that could help the company grow. Con-
sider the story of Blackbeard West, a geological structure 28
miles off the coast of Louisiana in the Gulf of Mexico.
In February 2005, Exxon set out to drill the world’s deep-
est oil well. The project was nervy, a plunge 32,000 feet—six
miles—below the Gulf seabed. It was possibly dangerous be-
cause of the enormous pressure and heat at such depths, which
WHILE THE COMPETITION GEARS UP FOR A GREENER
FUTURE, EXXON “LIVES IN A DIFFERENT WORLD,”
SAYS ALTERNATIVE-FUEL INVESTOR VINOD KHOSLA
BUSINESSWEEK I FE B R UARY 16, 2009
www.fantamag.com
CEO Tillerson
sees a shift
from fossil fuels
coming—but
not for decades
could cause a gusher that would ruin the rig, put lives at risk,
and create an ecological nightmare. Exxon and its partners pro-
ceeded because Blackbeard’s geology resembled that of Gulf
fields producing prolifically just 70 miles away. Data suggest-
ed the field could contain more than 1 billion barrels; if it did,
Blackbeard would validate an entirely new oil frontier for Exxon
and the opportunity-strapped industry as a whole. Some trade
journals called it the world’s most watched oil play.
After 18 months, the rig hands had reached 30,067 feet, just
2,000 feet from the target depth. And that is where Exxon
halted. After spending an estimated $180 million, the com-
pany abandoned the field.
Exxon won’t discuss what happened at Blackbeard, except to
say the pressure rose too high. But analysts and others watch-
ing the project say Exxon became concerned when the pres-
sure came close to the capacity of the equipment and drilling
lubricants. Thomas M. Hamilton, a former Exxon executive and
owner of a firm that was an original investor in Blackbeard, says
he was told the pressure shook the drilling rig.
Just over a year later, drilling resumed under new manage-
ment. James R. Moffett, co-chairman of the small Louisiana-
based company McMoRan Exploration, said Exxon had misread
the pressure equation: Because of a quirk of such deep geol-
ogy, the pressure underneath Blackbeard would drop within a
few more feet of drilling, and thus become less perilous. Mof-
fett went to work on Blackbeard in March 2008. Sure enough,
the pressure eased. Moffett drilled another 2,900 feet, and on
DANIEL SANCHEZ/BLOOMBERG NEWS
Oct. 20—seven months after drilling restarted—declared that
he may have found “between a half-bil-
lion and several billion barrels of oil.”
“We’ll see,” says Exxon spokesman
Kenneth Cohen. “I wish everybody
well.”
Even before Moffett’s announcement,
some analysts were disparaging Exxon.
In this high-risk, high-reward indus-

try, giant reservoirs go to those willing to gamble.
“Exxon could have finished the well. They would
have done fine,” says oil analyst George Froley.
“They just didn’t have the guts.”
Or perhaps the hunger. Exxon seems almost
blasé about the future of energy. It is particularly
out of step with its peers on the
issue of alternative energy. Til-
lerson allows that a shift from
fossil fuels is coming, but not
for decades. Exxon forecasts
that oil and gas will continue
to supply 60% of the world’s
energy needs through 2030,
and that a “game-changing”
shift to alternatives will begin
only after 2050.
On the other side of the de-
bate are the other companies The rig that
that comprise Big Oil, along succeeded at
with global carmakers, Silicon Blackbeard, a
Gulf field Exxon
Valley, and most experts, who
abandoned
speak of a major transforma-
tion coming much sooner.
With fewer giant oil fields around the world, proj-
ect costs are rising significantly for the same vol-
ume of oil. Add to that climate change, which has
created demand for cleaner energy, and you have a
formula for an industry in turmoil.
ALTERNATIVE-ENERGY HOLDOUT
Exxon’s rivals are girding for what comes next. France’s Total
says it’s evolving into a “power company,” touting expertise in
building nuclear power plants. Chevron is investing in algae.
BP has plopped down $500 million to endow a biofuels-de-
velopment center in California.
In contrast, Tillerson told reporters in January that Exxon
isn’t investing in existing alternative energy technology be-
cause “we think these technologies are old. If there is going to
be a fundamental shift” away from fossil fuels, the technology
“hasn’t been discovered.” The company is financing basic re-
search, he said. It will spend $125 million over 10 years at the
Global Climate & Energy Project, a Stanford University facility
also funded by General Electric, Toyota, and Schlumberger.
Apart from that, Exxon is not a recognized player among the
alternative-energy labs in and around Silicon Valley. Vinod
Khosla, one of the world’s most aggressive investors in alter-
native fuels, says he regularly meets representatives of Big Oil,
though not Exxon, which “still lives in a different world.” Jay D.
Keasling, a professor at the University of California at Berkeley
whose alternative-energy ideas have attracted about $1 billion
in private investment, including $500 million from BP, says he
has spoken to Exxon, but that “I think they are going to play a
waiting game to see what the other companies do.”
Exxon is also behind the times in its dealings with foreign
governments. For years, Big Oil had been shut out of large parts
of the world by a growing petro-nationalism among countries
such as Russia, Brazil, and Venezuela. That is starting to change.
www.fantamag.com
IN DEPTH
039
BP has attempted—so far unsuccessfully—to form a global part-
nership with Russia’s Gazprom, while Italy’s Eni has established
friendships with national oil companies around the world. Ven-
ezuela, battered by the plunge in oil prices, has invited oil com-
panies to increase their investment in the Orinoco Basin.
The invitation so far appears not to extend to Exxon, which
is suing Venezuela. The dispute dates from
2007, when President Hugo Chávez told
foreign oil companies they had to sell back a
big slice of their holdings to the state. Chev-
ron, BP, Total, and Norway’s StatoilHydro
went along with Chávez; later, Eni struck
a separate, $10 billion investment deal in
Orinoco. Exxon, along with ConocoPhil-
lips, refused, losing 40,000 to 50,000
barrels a day of production. A Venezuela
deal would be a rare opportunity to get new
oil onto Exxon’s books. Merrill Lynch pre-
dicted in a January note to investors that
the two sides would make up. Others con-
sider that unlikely. “We worked hard to stay
in Venezuela,” says Exxon’s Cohen. “When
the terms became unreasonable, we were,
in effect, expropriated.”
With reserves and production flat and oil prices falling,
Exxon indeed seems poised to make a major acquisition. In
an October meeting with reporters in Chicago, Tillerson ad-
dressed the issue. Ever the disciplinarian, he suggested that
potential sellers need to experience a bit more pain before
they’ll accept the kind of price he’d be willing to pay.
Sure, a major acquisition would make Exxon larger. But
“bigger isn’t necessarily better,” says J. Robinson West, CEO
of PFC Energy, a Washington consultancy. “You have to run
faster and faster to stay in place.” That is Exxon’s big gamble:
that running in place will be good enough. ^
BUSINESSWEEK.COM You’ll find Executive Editor John A. Byrne’s
podcast interview with Washington
Correspondent Steve LeVine at businessweek.com/go/09/exxon
Business Exchange
Read, save, and add content on
BW’s new Web 2.0 topic network
Back on Top
ExxonMobil has recouped the title of the most valuable
energy company in the world, which it ceded to PetroChina
last year, according to a ranking by Washington (D.C.)-
based consultancy PFC Energy. Cheaper oil and plung-
ing share prices wiped out a combined $2.4 trillion in
capitalization for the top 50 companies. Nonetheless,
Exxon held up better than PetroChina: It experienced a
15% decline in share price, vs. 64% for its Chinese peer.
To view the PFC 50 report, go to http://bx.businessweek.
com/exxonmobil/reference/
FE B R UARY 16, 2009 I BUSINESSWEEK
www.fantamag.com
www.fantamag.com
042
HOUSING: GUESS
WHO’S PLAYING
WATCHDOG
By Chad Terhune Some of the same subprime players who
Illustration by
Brian Stauffer helped inflate the bubble are now in charge of
protecting against pumped-up home values

THE
Home appraisers played one of the less well-known roles in pumping up independent fashion,”
FINANCIAL home values and contributing to the current financial crisis. Retained by Haslam says.
RESCUE lenders or brokers, they frequently colluded—explicitly or tacitly—in over- But Bill Garber, direc-
estimating the worth of houses to justify large mortgages and the lucrative tor of government affairs
fees each member of the real estate food chain received at closing. ¶ Faced with investi- at the Appraisal Insti-
gations and lawsuits, the home-finance industry has agreed to a government-approved tute, a nonprofit trade
code of conduct for appraisals that takes effect on May 1. The new rules promote the use of group in Washington,
middlemen between the nation’s 60,000 freelance appraisers and the lenders and brokers. isn’t reassured. He wor-
The middlemen, known as appraisal management companies, or AMCs, are supposed to ries that subprime foxes
prevent lenders and brokers from pressuring appraisers to exaggerate assessments. But have been invited into
among those joining the swelling ranks of this formerly niche business are some of the the appraisal henhouse.
same subprime players that helped inflate the real estate bubble in the first place. The new industrywide
rules “have transferred
Take NovaStar Financial in Kansas City, Mo. A large subprime the [improper influence] problem to these appraisal man-
lender during the housing boom, NovaStar was disciplined by agement companies, which are not regulated by anybody,”
three states—Massachusetts, Nevada, and Washington—for Garber warns.
such infractions as employing unlicensed brokers and charg- The new rules grew out of an investigation by New York
ing unlawful fees. Without admitting wrongdoing, the com- Attorney General Andrew M. Cuomo. His probe found that
pany paid $5.1 million in 2007 to settle similar allegations in a one of the biggest companies in the appraisal business, First
class action brought on behalf of borrowers. After its mortgage American in Santa Ana, Calif., allowed the huge savings and
business collapsed, NovaStar morphed into an AMC last year loan Washington Mutual to exert pressure for higher valua-
by acquiring another company and renaming it StreetLinks tions. Cuomo sued First American’s eAppraiseIT unit in No-
National Appraisal Services. vember 2007 for fraudulent and deceptive practices. The suit,
Steve Haslam, NovaStar’s former chief of retail lending, is which is pending in New York state court, spurred the drafting
now CEO of StreetLinks. He defends NovaStar’s past lending of the Home Valuation Code of Conduct. Mortgage finance
as legitimate, noting that the company avoided bankruptcy giants Fannie Mae and Freddie Mac, now controlled by the
proceedings, unlike many of its rivals. “We have gone through federal government, helped negotiate the code with others in
the fire and come out better for it,” he says. His 100-employ- the industry and have said they won’t buy loans after May 1
ee AMC will contract with independent appraisers, Haslam that don’t adhere to it. Fannie and Freddie have wide influ-
says, paying them generous fees, and will issue a “Certificate ence because they purchase a large share of all U.S. mortgages,
of Noninfluence” with every appraisal. “This assures Wall providing fresh cash to lenders.
Street and lenders that this appraisal was conducted in an The new code bans mortgage brokers and loan officers

BUSINESSWEEK I FE B R UARY 16, 2009

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 IN DEPTH

043

www.fantamag.com
044 WaMu wasn’t named as a defendant
from directly ordering appraisals, which has been the com-
mon practice. Instead, it encourages the involvement of in the New York suit. A spokesman for JP-
AMCs, which are supposed to impose discipline on freelance Morgan Chase, which acquired the failed
appraisers and minimize the sway of brokers, agents, and thrift last year, declined to comment since
lenders. the alleged impropriety occurred before
Some housing experts and state regulators express skep- the takeover. A First American spokes-
ticism that AMCs are the answer. For one thing, Bank of woman declined to comment. In a press
America, Wells Fargo, and several other major banks operate release, the company previously said its
their own appraisal-management companies, so the incen- e-mails “have been taken out of context”
tive to inflate home values hasn’t been eliminated in those and that Cuomo’s allegations “belie our
cases. Another concern is the lack of oversight for AMCs, record of compliance with applicable law.”
particularly those started by former subprime lenders and Former appraiser Pamela Crowley in
appraisers who ran afoul of state rules. Palm Bay, Fla., says the new code has un-
“[The marketplace is] still vulner- wisely given “a free pass to the AMCs” to
able to appraiser pressure because the expand their market share. Disillusioned
incentives are still there to get deals with her profession, she has become an
done and collect the fees,” says Susan online gadfly advocating for consumers’
M. Wachter, professor of real estate interests. In June 2007, eAppraiseIT went
at the University of Pennsylvania’s to court to try to stop her criticism of the
Wharton School. Appraisers helped company on her Web site. But a county
inflate mortgage values by $135 billion judge in Florida wouldn’t issue an injunction to prevent her
in 2006 alone, she estimates. “Getting from posting skeptical material about eAppraiseIT.
this issue right is critical for the hous- E-mail and other correspondence between appraisers and
Haslam headed ing market to recover.” AMCs reviewed by BusinessWeek show that at least some
retail lending The federal housing officials who AMCs do press appraisers to reconsider their valuations at
at a subprime
player that was
helped craft the code say they will hold the behest of lenders. In one appraisal ordered last year by
disciplined by AMCs accountable. “The code doesn’t WaMu for a refinancing near Los Angeles, an AMC called
three states. Now do away with appraisal management Lender’s Service told the appraiser her figure was too low.
he runs an AMC companies, which some people may The fax read: “Please correct the following issues and resend
have wanted,” says James B. Lockhart, appraisal within two hours.” The problem? “Appraised value
director of the Federal Housing Finance is less than the borrower estimated value.” The fax listed the
Agency, which oversees Fannie and Freddie. “If [AMCs] are borrower’s estimate as $171,000. The appraiser’s judgment
applying undue pressure, that would be a violation of Fan- was $150,000. (Borrowers and lenders sometimes favor a
nie and Freddie rules, and we would take action.” Lockhart higher appraisal to support a larger loan.)
says Fannie and Freddie can force lenders to buy back loans In other recent exchanges with appraisers, Lender’s Ser-
tainted by inflated appraisals. “If an appraisal management vice, the country’s largest AMC, passed on complaints from
company does not live up to the borrowers, their real estate agents, or
standards, that will be extremely bad lenders, and suggested that apprais-
for their business,” he adds. ASSESSING VALUE ers find comparable home sales that
The Cuomo suit alleges that eAp- would boost the estimated property
praiseIT, the First American unit, A new industry code of conduct makes value. In an e-mail earlier this year to
allowed WaMu loan officers to appraisal management companies an appraiser in southern California,
“handpick” appraisers who submit- (AMCs) central to the home-buying a Lender’s Service staff member said
ted high valuations. Bank employ- process. Here’s how it works: “the borrower is disputing the value
ees allegedly pressured appraisers of this report…[and] would like the
to boost low initial estimates. In
one instance, New York investi- 1 Borrower applies for a mortgage
or refinancing
appraiser to search for another com-
parable to support a higher value.”
gators said eAppraiseIT lifted the The appraisers who submitted these
(LEFT) MIKE SINCLAIR; (RIGHT) BEN VAN HOOK

estimate of a property to $2.3 mil-

lion from $1.6 million after WaMu
told the company the loan would
close only at the higher figure.
The suit disclosed a Feb. 22, 2007,
e-mail from eAppraiseIT’s then-
president, Anthony R. Merlo Jr.,
who wrote that the company would
“roll over” and submit to WaMu’s
demands.
2 Lender sends order to appraisal
management company
3 AMC sends a local appraiser to
assess the property
4 After reviewing appraisal, AMC may
seek changes on behalf of lender
5 Borrower pays a $300-$400 appraisal
fee; AMC pockets up to half
reports declined to comment for fear
of being blacklisted.
Lender’s Service President Ronald
L. Frazier says his company’s hall-
mark is integrity. “We are a complete-
ly independent third party, separate
from the transaction, and we main-
tain those firewalls during the loan-
funding process,” he adds. Frazier
does note that “the code of conduct

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com

has provided our company with some business opportunities.”
He says he’s not familiar with any of the cases Business-
Week brought to his attention, though he didn’t dispute the
authenticity of the communications with individual ap-
praisers. He insists these episodes do not cast doubt on the
company’s commitment to appraiser independence. “We
would never demand dropping [comparable sale figures]
or eliminating comps,” he says. Lender’s Service is a unit of
Lender Processing Services in Jacksonville, Fla.
DUBIOUS INDEPENDENCE
AMCs wield immense power over freelance appraisers. To
earn a living, many appraisers conclude that they have to
seek inclusion on an AMC’s panel of preferred appraisers
and abide by its dictates. Lenders generally have a few ap-
praisers on staff, but the bulk of the work is done by outside
contractors. At closing, borrowers will typically see a $300
or $400 appraisal charge. AMCs generally pocket up to half
of that fee. The AMCs say they earn the money by managing
orders and assuring accuracy.
The expansion of the AMC business ought to cause con-
cern because of the backgrounds of some of the people
jumping in. Catherine Lally, CEO of FHA Choice Appraisal
Manager, says she launched the Clearwater (Fla.) company
about six months ago after working as a loan underwriter for
Premier Mortgage Funding, a large subprime lender now in
bankruptcy proceedings. Lally has recruited about 600 ap-
praisers so far from across the country. She uses craigslist
ads and mass e-mails that promise to “double or even triple
your appraisal business.” She’s also advertising to mortgage
brokers, real estate agents, and others who previously or-
dered appraisals directly but will be barred from doing so
under the new rules.
Lally’s firm promotes itself as allowing appraisers to
continue working with specific brokers and lenders—a
seeming contradiction of the aim of the new industry
code. “All [clients] have to do is put your name in the com-
ment box when ordering an appraisal and I will send the
www.fantamag.com
IN DEPTH
045
order to you,” Lally said in a mass
e-mail to appraisers in December. “I
will diligently try to keep the same
business practices and standards they
have with you. The only difference is
they will not be able to speak with you
directly.”
In an interview, Lally acknowledges
she is offering to help appraisers main-
tain their previous ties to brokers,
agents, and lenders. “I help them keep
their relationship if I really feel there is
An AMC sued no contact going on,” she says.
appraiser-turned- Larry Holzer surrendered his Flori-
gadfly Crowley to da appraisal license in April 2007 after
try to muzzle her
online criticism
regulators there found he had made
of the company. numerous misstatements in an ap-
She won praisal report for a $250,000 home. In
a letter to Florida regulators, Holzer
agreed there were some “data discrep-
ancies in the body of the report.” He said he was distracted at
the time by personal issues.
Now Holzer is back in business, running an AMC in Clear-
water called Global Appraisal Solutions. The company prom-
ises same-day inspections and delivery of a report within 24
hours. In an e-mail, he defended his credentials: “Appraisers
and former appraisers are among the more qualified people
in appraisal management,” he wrote. “When or if such time
should come where appraisal management companies are
regulated, I can assure you that Global Appraisal Solutions
shall be compliant.”
Joni Herndon, chairwoman of the Florida Real Estate Ap-
praisal Board, which handled the Holzer investigation, says a
revolving door is allowing dubious characters into the AMC
market. Speaking generally, she says: “It is not serving the
public to revoke their license for dishonest conduct and then
allow them to have an appraisal management company. We
need to close that loophole.” ^
Business Exchange
Read, save, and add content on
BW’s new Web 2.0 topic network
Guaranteed Mortgages?
Housing finance activists Orson Aguilar and Faith Bautista
argued in a Jan. 7 opinion piece in American Banker that
to solve the foreclosure crisis, the Obama Administration
should guarantee 30- to 50-year fixed mortgages for all
families earning up to 120% of the median national
income. These loans would have rates of no more than
4.5%. The authors claim as inspiration for their proposal a
similar one made by Glenn Hubbard, President George
W. Bush’s chief economic adviser.
For more on this proposal go to bx.businessweek.com/
housing-market/reference/
FE B R UARY 16, 2009 I BUSINESSWEEK
046 050 Clearwire’s WiMAX woes
052 Recession and office crooks
054 Green Biz: Fuel from trash
056 Accounting’s new global liability?
WHAT’S NEXT

THE INTERNET

Will Work
For Praise
Businesses like ThisNext are finding that for lots of
people, recognition is as strong a motivator as cash

By Stephen Baker Here’s how it works: Entrepreneurs

It’s dawn at a Los Angeles apartment
overlooking the Hollywood Hills.
Laura Sweet, an advertising creative
director in her early 40s, begins to
surf the Net. She searches intently,
unearthing such bizarre treasures for
sale as necklaces for trees and tattoo-
covered pigs. As usual, she posts them
on ThisNext, a social network where
people exchange shopping leads. Why
does she spend so many hours each
week working for free? “It’s sort of a
cool feeling that you’re influencing
people,” she says.
A half-hour’s drive to the west, a se-
rial entrepreneur named Gordon Gould
strolls into the Santa Monica offices
of ThisNext. Gould has managed to
entice an army of volunteers, including
Sweet, to labor on his site without pay.
Traffic on ThisNext is soaring, with
unique visits nearly tripling in a year,
to 3.5 million monthly. Revenue comes
from advertisers, who pay to display
their wares amid so many shoppers.
What’s in it for the volunteer workers?
like Gould build meeting places that
provide visitors with tools to express
themselves, mingle with friends and
strangers, and establish their personal
“brands.” The result, when all goes
well, is an outpouring of creativ-
ity. These bottom-up efforts have
produced not only ThisNext but also
YouTube and even American Idol.
RECESSION CREATIVITY
Does the crashing economy affect the
market for free labor? Gould says no.
In fact, he’s betting that people will
continue to invest in their personal
brands during hard times. Between
investor visits during a recent trip
to New York, he sips a soy latte and
speculates. Amid the downturn, he
says, firings are sapping loyalty to
companies and steering people toward
goals of self-sufficiency. In other
words, Gould says acerbically, “the
only person I can rely on not to screw
me—hopefully—is
myself.” Sweet (left) and
CREDIT HERE

Gould: Her shop-

“They can build their brands,” Gould Beyond brand- ping tips, offered
says. “In their niches, they can become hungry strivers, gratis, draw
mini-Oprahs.” masses of free visitors to his site

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com

laborers—from coders building Linux
open-source software to editors fine-
tuning an entry on Wikipedia—con-
tinue to toil without ever seeing a
payday, or even angling for one. Many
find compensation in currencies that
predate the market economy. These
include praise from peers, a respected
place within a community, victories in
online contests, and satisfaction from
helping others.
The challenge for managers all
across the economy is to harness as
much of this free labor and brainpower
as possible to their own enterprises.
From universities to the computer
labs of Internet giants, researchers are
working to decode motivations and
perfect the art of enlisting volunteers.
Prabhakar Raghavan, chief of Yahoo!
Research, estimates that 4% to 6% of
Yahoo’s users are drawn to contribute
their energies for free, whether it’s re-
viewing films or handling questions at
Yahoo! Answers. If his team could de-
vise incentives to draw in an additional
5%, it would enhance Yahoo’s pages,
bringing more traffic and advertisers to
the site. Incentives might range from
contests to thank-you notes.
Raghavan has hired microecono-
mists and sociologists from Harvard
and Columbia to match differ-
ent personalities with appropriate
rewards. Researchers elsewhere are
There’s built-in tension between free-labor
entrepreneurs and their volunteers—and
possibly a time limit on workers’ largesse
trying out novel approaches. Luis von
Ahn, a professor at Carnegie Mellon,
has come up with online games that
lead people to do tasks computers
can’t handle, such as identifying the
subjects of photos on Web sites. “For
some jobs, you need their brainpower
for only five or 10 seconds,” he says.
Recruiting volunteers for money-
making ventures, however, can create
problems. For centuries humans
have learned to distinguish between
CREDIT HERE
two economies: the social and the
market. Dinner guests, for example,
satisfy social obligations by offering
www.fantamag.com
WHAT’S NEXT
047
their hosts a bottle of wine. But, says
Dan Ariely, professor of behavioral
economics at Duke University’s Fuqua
School of Business and author of Pre-
dictably Irrational: The Hidden Forces
That Shape Our Decisions, it would
be a jolting intrusion of the market
economy if guests instead handed
their hosts a check.
“A VERY DELICATE LINE”
Managers working in the free-labor
economy must keep these two worlds
in mind. If they recruit workers by ap-
pealing to their social side, calling on
their generosity or community spirit,
and then proceed to make money from
them, they can spark a backlash. That
can sully their reputations in the time
it takes an angry volunteer to update
her blog. “It’s a very delicate line,”
Ariely says, “and the modern work-
place is right in the middle.”
Bo Peabody, co-founder of Tripod,
one of the earliest networking sites,
and now a venture capitalist at
Village Ventures in New York, points
to a constant tension between free-
labor entrepreneurs and their vol-
unteer workers. Initially, users are
“driven by a desire to express them-
selves,” he says. “But there’s a limit to
how much they’ll do for free.” Devising
ways to reward free workers “is a very
difficult jump,” Peabody says. “This
is a theme running through our entire
portfolio.”
In the summer of 2006, Gordon
Gould didn’t spend much time wor-
rying about how to split ThisNext’s
revenues, which Gould says are now in
the low millions, with volunteer
workers. Far more pressing was the
need to lure thousands of volunteers
to his new site. Like most free-labor
entrepreneurs, he faced a chicken-
and-egg dilemma: how to entice peo-
ple to perform for a crowd that doesn’t
yet exist? His solution was to create
one. He and his team interviewed a
few hundred people, including fashion
designers, athletes, and other celebs,
and then seeded ThisNext with their
thoughts and recommendations.
“When the first visitors came, there
BLAKE LITTLE
was a there there,” Gould explains.
Laura Sweet was an ideal volunteer
candidate. Long before discovering
FE B R UARY 16, 2009 I BUSINESSWEEK
 600

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050 TELECOM
WiMAX:
The Signal Flickers
Clearwire, a provider of the superfast wireless service,
needs to raise billions in capital to continue expanding
By Spencer E. Ante
Last May some of the biggest names
in the technology and media business,
including Intel, Google, Sprint, and
Comcast, teamed up to invest $3.2 bil-
lion in the startup Clearwire. The
Kirkland (Wash.) company founded
by entrepreneur Craig McCaw had
high hopes of shaking up the wireless
industry. The idea was that Clearwire
would offer an alternative to the two
big incumbent U.S. operators, AT&T
and Verizon Wireless, by rolling out a
technology called WiMAX that could
provide superfast Internet service for
cell phones, laptops, and other devices.
Today, Clearwire is just trying to
keep its head above water. Although
sales are on track to rise 50% this year,
to $230 million, analysts expect the
company will lose $715 million. Bil-
lions more in losses are projected for
the coming years as Clearwire invests
heavily to roll out its network. Clear-
wire needs to raise billions in additional
REVERSAL OF FORTUNE
DOLLARS
32
CLEARWIRE’S
STOCK PRICE
24
16
8
0
MAR. 8, '07 FEB. 4, '09
Data: Bloomberg
BUSINESSWEEK I FE B R UARY 16, 2009
McCaw had
high hopes of
shaking up the
industry
capital in the midst of the worst eco-
nomic downturn in decades or it will be
forced to slow the pace of its rollout and
give AT&T and Verizon a chance to gain
ground in the race to build next-gen-
eration wireless networks.
Clearwire’s stock has plummeted
90% since its peak in mid-2007.
The sharp fall has prompted back-
ers to announce write-offs on their
investments, including a $950 million
charge by Intel, a $355 million charge
by Google, and a $350 million charge
by Time Warner Cable. Comcast is
expected to follow suit.
“A LOT MORE RISK”
In the months ahead, the credit
crunch could crimp Clearwire’s ambi-
tions. The company needs to raise
$2 billion to $2.3 billion to reach its
target of offering wireless broadband
service in most of the top 100 U.S.
markets by the end of 2010. “For com-
www.fantamag.com
WHAT’S NEXT
panies that need financing to get their
business model up and running, you
have a lot more risk,” says Jonathan
A. Schildkraut, managing director of
investment bank Jefferies & Co.
Clearwire CEO Ben Wolff is con-
fident he can raise the money. “The
question is when and on what terms,”
he says. One potential backer might
be the federal government, which is
putting together a multibillion-dollar
program of grants and tax credits in the
stimulus package for companies mak-
ing broadband investments in the U.S.
President Barack Obama has pledged
to make broadband
service available to
all Americans, and
Clearwire’s WiMax
network could be
a cost-effective
option. Its wire-
less technology can
reach up to 30 miles
from radio tower to
customer, making it
a relatively inex-
pensive way to offer
broadband service in
rural areas.
Wolff says govern-
ment support would
mean a quicker
build-out, “but it’s
not something we are banking on.”
Clearwire also could try going back to
Intel, Google, and its other investors.
But the big losses those investors have
suffered may make them leery of put-
ting up more money. “I cannot tell you
we would support it forever,” says Intel
Capital Vice-President Sriram Viswa-
nathan. “It all depends on how well the
business does.”
Backers such as Sprint remain
supportive. Todd Rowley, a vice-
president at Sprint, which owns 51%
of Clearwire, maintains that the com-
pany “has a tremendous opportunity.”
But if Clearwire has to slow its rollout,
CHIP CHIPMAN/BLOOMBERG NEWS
that may limit its potential. Nation-
wide coverage would help it lure more
high-paying business consumers. So
far, it’s offering WiMAX in two cities,
Baltimore and Portland, Ore., with
Atlanta and Las Vegas on deck for
later this year. ~
–With Arik Hesseldahl in New York
www.fantamag.com

052 MANAGING
To Catch a
Corporate Thief
Bad times bring out dishonesty in some employees.
But new technology is snagging more internal crooks
By Michelle Conlin
There’s no polite way of saying this: In
bleak times, people are more likely to
rip off their employers. According to a
Deloitte survey, two-thirds of execu-
tives expect insider crime
to rise in the next two years.
Corporate grifters seem to On average,
be getting nervier. Recently, insider fraud
is equal to
a Maryland man swiped 32
7%
laptops from his nonprofit
health-care employer and
put them on eBay. A chief
financial officer changed the
color of the type on some of revenues
spreadsheet data from black Data: Association
to white so as to render the of Certified Fraud
Examiners
fake numbers invisible while
juicing the totals—and his
bonus. One regional vice-
president for sales billed his corporate
card $4,000 for Victoria’s Secret linge-
rie—and not for his wife, either.
That these schemers are getting
caught is a testament to the strides
made by the corporate fraud police.
Sleuthing technologies are light-years
beyond where they were in the last
recession, of 2001. And with most
companies looking to cut costs, man-
agers are eager to crack down on insider
malfeasance, which on average equals
7% of revenues, says the Association
of Certified Fraud Examiners. “You can
think of us as the electronic cop looking
for good and bad behavior,” says Ralph
Baxter, CEO of ClusterSeven, which
sells monitoring software to the likes of
Dresdner Kleinwort and Mitsubishi.
After the September 11 attacks, com-
panies stepped up physical security.
The Sarbanes-Oxley Act then forced
BUSINESSWEEK I FE B R UARY 16, 2009
them to increase internal controls,
which translated into continuous
monitoring and surveillance of elec-
tronic records. “Every time someone
sends a file, whether over e-mail or a
Web site, or transfers data
onto a cell phone or a thumb
drive, it can be monitored,”
says Gunter Ollmann, IBM’s
Internet security czar.
Increasingly, information
is the fraudster’s currency.
Just before Christmas,
a prized employee at a
www.fantamag.com
WHAT’S NEXT
software company resigned, citing
family problems. When he turned in his
documents and cell phone, he reported
his laptop stolen. Something didn’t sit
right. So the boss asked the IT guys to
trace the employee’s laptop. Using the
Web, they tracked it to the man’s house.
“He’d been poached by one of our com-
petitors and was using our methodol-
ogy, system design, and technology to
cement him in his new role,” says the
company boss.
T&E ABUSES
Technology is helping companies
fight theft right down to the rank
and file. The restaurant industry has
long battled such scourges as buddy
punching (clocking in for a friend) and
lollygagging (doing anything but work).
At Valenti Management, which owns
and runs 117 Wendy’s and 17 Chili’s
franchises, IT chief Pachy Torresola
was looking for “as foolproof a method
as we could find” to tie all actions at the
cash register to individuals. The an-
swer: installing fingerprinting scanners
on Chili’s cash registers. Torresola says
workers would say things like, “Umm,
gee, that wasn’t me.” But he says the
company hasn’t heard such
excuses since getting the scan-
ners. Valenti will soon install
them at its Wendy’s operations.
Fudging travel and entertain-
ment is not new. But in times
like these some employees
figure: “I could get laid off
anyway, so I might as well dip
while the getting’s good.” In
recent months, Nakia Wil-
liams, an accounts payable boss
at Carl Zeiss Vision, has been
extra zealous about this kind of
abuse. Like many companies,
Carl Zeiss uses Concur Tech-
nologies’ expense report soft-
ware. It can scour T&Es for fishy
activity: rounded-up numbers,
unauthorized travel upgrades,
the same meal expensed by two
colleagues. Recently, Williams
nailed employees who were
amping up car mileage, inflating
tips, and submitting duplicate
reports. Says Williams: “Em-
DAN PAGE
ployees didn’t know we were
checking their reports.” ^
www.fantamag.com
 WHAT’S NEXT

054 GREEN BIZ

EDITED BY ADAM ASTON

AUTOS INFRASTRUCTURE
Bucks for Roads: A Part-
Gas Guzzlers Concrete Solution
The land yacht parked in your Under a bill Humble asphalt keeps the
in Congress,
garage soon may be worth vouchers would
U.S. economy rolling—but
more at the junkyard than you be issued for not when it sinks into dis-
guessed because of a new bill junking gas hogs repair. In recent years state
with bipartisan support in both deficits have squeezed trans-
houses of Congress. Its aim is portation department bud-
to get the most inefficient vehi- CAFE target for the same vehicle category. The gets just as costly oil caused
cles off U.S. roads as quickly as credits also could be used for transit fares. asphalt prices to more than
possible. To qualify, cars, SUVs, The bill is similar to “cash for clunkers,” the double. As a result, thousands
and trucks must be registered, catchphrase for laws passed in California, Texas, of miles of
be drivable, and have been and Canada that paid drivers to junk smoky older asphalt roads
rated at 18 miles per gallon or vehicles. By its fourth year, the cash-for-guzzlers in the U.S. are
less when new. Drive over to plan would save up to 80,000 barrels of gas per disintegrat-
an authorized junkyard or auto day, estimates Therese Langer, transportation pro- ing. PolyCon
dealer, and they’ll hand you a gram director at the nonpartisan American Coun- Manufacturing
voucher worth up to $4,500 cil for an Energy-Efficient Economy. Automakers in Madison,
and then have your guzzler largely support the bill, formally the Accelerated Miss., says
crushed for scrap. The coupon Retirement of Inefficient Vehicles Act, which may it has a less
could be redeemed for a new or be folded into the stimulus bill. The bill does have costly but
used vehicle with fuel economy its critics: mostly collectors of classic cars who fear durable road- E-Krete is
at least 25% better than today’s shortages of spare parts. resurfacing easier on the
environment
material that
than asphalt
is also gentle
ENERGY on the environment. It’s a
hybrid called E-Krete that’s
Dumpster Diving part concrete and part flexible
polymer. It can be applied as
For Fuel a thin liquid coating on top
of aging blacktop. Experts
There’s gold in those giant trash bins behind who assessed E-Krete at the
Pellets made
sports stadiums and office buildings. In January, of compressed
National Center for Asphalt
IST Energy of Waltham, Mass., rolled out a mobile trash can be Technology at Auburn Uni-
system that turns regular trash into energy. Each turned to gas versity say the smooth surface
(TOP) BRAD CORNELIUS; (BOTTOM) COTO ELIZONDO/GETTY IMAGES
$850,000 Dumpster-sized unit will pay for itself left behind when the material
in as little as three years, says IST, thanks to to flammable gas that can run an flows over asphalt, filling in
energy generated from the garbage and reduced on-site generator. The machine cracks and holes, can extend
waste-disposal fees. ingests up to three tons of trash the life of a road or runway by
Claims of this sort have been daily, unleashing enough power 10 years or more. The cover-

90%
Weight reduction
of trash when con-
made before, but analysts say
IST has brought some unique
features to bear—most of all,
mobility. It delivers its rigs right
to the lot or loading bay near the
and heat to run a 200,000-
square-foot building for a day.
The process isn’t waste-free:
A ton of trash yields about 100
pounds of ash. Burning the gas
ing appeals to green-building
gurus, too, because it comes
in pale hues that reflect sun-
light rather than absorb its
heat. No more “heat islands”
trash source. Bags of garbage releases carbon dioxide, too. On in outdoor parking lots,
verted to energy by
are fed into a hopper at one end. the other hand, there’s no need to which get so hot they drive
IST’s system
Inside, the rubbish is squeezed burn fuel schlepping garbage to up air-conditioning bills in
into pellets, which are converted the dump. – Heather Green nearby buildings.

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
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www.fantamag.com
www.fantamag.com
 059 PERSONAL
060 How to play it: Betting on banks
061 Investing: An exciting new 401(k)
067 Bartiromo talks to
Al Michaels, investor
068 Inside Wall Street
BUSINESS
MONEY REPORT A Roche
packaging facility

BIOTECH
in Switzerland

BONANZA
In the wake of a Pfizer/Wyeth hookup, Roche’s bid for Genentech went hostile
on Jan. 30 when the pharma giant offered to pay $86.50 a share for the 44%
of the company it didn’t already own. With many blockbuster drugs coming
off patent in the next few years, Big Pharma needs replacements fast, notes Bill
Tanner, analyst with Leerink Swann, a health-care-focused investment bank.
And it needs the manufacturing knowhow of big biotechs to bring new biophar- SHIPPING
maceuticals to market. That’s bad news for small biotechs hoping to be gobbled
MAIL DROP
up. Already, the smallest in the Nasdaq Biotechnology Index are down 84% from Is the Postal Service’s
their 52-week high, vs. 21% for the largest. Shares of large biotechs like Amgen proposal to cut mail
service from six days
and Biogen Idec could benefit from takeover speculation. –Ben Levisohn to five, a bombshell
the Postmaster
General dropped in
GOING PUBLIC 140% in the first three years of trading. The six congressional
IPOs worldwide that raised at least $100 million testimony on Jan. 28,
IPOs FOR TOUGH TIMES in 2008’s last quarter are up an average 17%. good for FedEx and
Three initial public offerings are set to venture This year “will be the start of an IPO recovery, United Parcel
into the market the week of Feb. 9: Changing albeit a slow one, that may be very profitable for Service? Jesup &
Lamont analyst
World Technologies, which makes biofuel and those who have not been scared off,” says the
Helene Becker says it
fertilizer from livestock feed waste; O’Gara Renaissance study. –Aaron Pressman “wouldn’t be enough
Group, a security and defense contractor; and to move the needle.” It
Mead Johnson Nutrition, an infant formula Mead Johnson could hurt companies
maker spun out of Bristol-Myers Squibb. Nutrition, a that rely almost solely
Several intriguing companies purchased in lev- formula maker, on U.S. mail, though,
is hitting the
eraged transactions in the past few years could like movie rental
IPO market
also return to the public markets, including company Netflix. To
Dunkin’ Donuts. With the economy in turmoil, retain more custom-
there won’t be an outpouring of deals anytime ers, Netflix has added
shipping on Saturday.
soon, but that makes it a good time to hunt for
Fewer delivery days
IPOs, says research and money management could hurt that effort,
firm Renaissance Capital. says Mark Argento,
(BOTTOM) CORBIS

Stocks that go public in lean times tend to be senior equity analyst

proven performers that subsequently outper- at Craig-Hallum
form the market. Those that went public in the Capital Group.
last major drought, 1975 to 1979, rose an average –Dean Foust

FE B R UARY 16, 2009 I BUSINESSWEEK

www.fantamag.com
HEADLINE HERE 2 LINES 17
PT SOLID DOL0R IPSUM
060 HOW TO PLAY IT BETTING ON BANKS

HEALTHY BANKS
SNL Financial ran a screen to find banks
that are still profitable and have a low ratio
(FROM PAGE 030)
of nonperforming loans. These are the 10
largest, by assets, that made the cut:
By Aaron Pressman
ONE-YEAR SHARE
BANK/TICKER PRICE CHANGE*

Chase Bank USA,

As the Obama Administration plans a renewed effort to fix National Assn./JPM -47.8%
the banking system, bank stocks are on a wild ride. On Wells Fargo Bank NW,
Jan. 28, rumors of a government program to isolate toxic National Assn./WFC -42.9
assets in a “bad bank” sent Citigroup shares up 19%. Over Bank of Hawaii/BOH
-28.9
the next two days the gain was lost. Instead of betting that
megabanks will recover soon, mutual fund pros are hunting Silicon Valley Bank/SIVB
-59.3
for smaller ones with strong enough balance sheets to
Burke & Herbert Bank & Trust/
survive the credit crunch and recession. The BHRB 5.8
pool of banks to consider is small, says research-
Suffolk Country National Bank
er SNL Financial. Of the 2,756 U.S. banks SNL Schutz:
Conservative
of Riverhead/SUBK 3.4
tracks that have assets of at least $200 million,
banks “are
only 352 had a return on assets of at least 1.5%—a Wright Express Financial
basic measure of profitability in banking—in
alive and well”
Services/WXS -62.4
2008, through the third quarter. Limiting the
First Financial Bank,
list to banks with minimal losses (nonperform- National Assn./FFIN 21.0
ing loans less than 0.5% of total loans) leaves 155
survivors; just 29 have publicly traded shares. World Financial Network
Some pros favor community banks. Anton National Bank/ADS -23.3
Schutz, manager of top-performing Burnham
National Bank of Blacksburg/
Financial Services fund, says those with con- NKSH -9.1
servative standards “are alive and well.” He says
Data: SNL Financial, Capital IQ *price change as of Feb. 2
TFS Financial in Cleveland has a strong ratio
of capital to assets and the funds to make more
loans. And People’s United Financial in Bridge-
port, Conn., with more than $2 billion of capital A few selections from the Burnham
above the required regulatory amount, wants to
BANKING PICKS Financial Services Fund
buy rivals on the cheap, he says.
One way to bet on a banking revival is via TFS FINANCIAL PEOPLE’S UNITED REDWOOD TRUST
real estate investment trusts that own mort- The parent of Ohio’s FINANCIAL This real estate invest-
gage-backed securities (MBS). If a new federal Third Federal Savings The parent of seven ment trust, which
program buys such battered securities from the & Loan stayed out of banking chains across mainly buys real estate
banks, that would stabilize the MBS market and trouble by avoiding New England, People’s loans and mortgage-
making subprime loans. also avoided shaky backed securities,
boost the value of the REIT’s portfolios. Schutz Its CEO, whose parents is building up cash
lending practices. Its
bought shares of Redwood Trust, down 69% founded the bank in CEO says the bank to purchase securi-
over the past year. ^ 1938, rejected TARP is hoping to acquire ties at discounts. The
money, saying he didn’t some weakened peers 69% drop in its stock
BUSINESSWEEK.COM To comment on How to Play want to use his custom- at ultra-cheap prices over the past year has
It stories and see the related ers’ tax dollars to run his soon. pushed its dividend
video interviews, go to businessweek.com/go/09/playit business. yield over 21%.

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
 PERSONAL BUSINESS

061

INVESTING

CAN THIS NEW 401(k)

SAVE RETIREMENT?
By Amy Feldman

With Social Security on shaky ground and pension plans disappearing, more
retirees will have to rely on their 401(k)s to support them in old age. That’s
not very reassuring to anyone who has dared to tear open a recent statement and
peek inside. ¶ The market meltdown is the chief culprit. But even if the economy
were rock-solid, 401(k) plans would still be a problem. For years, most investors
haven’t saved enough, allocated their assets wisely, or figured out how to draw
down those assets in ways that would make bine annuities—essentially, insurance contracts
them last a lifetime. that provide periodic income payments—with
If you’re approaching retirement right now, an investment portfolio. The hybrids won’t
there’s no easy fix for your portfolio. But if you protect investors from violent market swings.
are in midcareer, you may soon have a chance But they’ll guarantee a certain amount of
to structure your 401(k) in a much different monthly income for the rest of your life.
way. A dozen or so asset managers and insur- Among all the competitors, San Francisco-
ers, including AllianceBernstein, AXA, Barclays based Barclays Global Investors (BGI), one of
Global Investors, John Hancock, MetLife, and the most successful units of Britain’s troubled
Prudential, are designing a new breed of retire- Barclays, is regarded as a trailblazer. BGI is the
RONALD J. CALA II

ment instrument that combines elements of world’s largest asset manager, with about
pensions and 401(k)s. These products—call $1.9 trillion under its control. It’s a research-
them hybrid 401(k)s—have begun slowly rolling oriented shop that invented such now-familiar
out. And while they differ in structure, all com- retirement products as index investment strat-

FE B R UARY 16, 2009 I BUSINESSWEEK

www.fantamag.com
062 INVESTING
egies and target-date funds, which shift their
asset allocations as the owner approaches re-
tirement. Its latest idea is to make 401(k)s more
like pensions so participants receive income for
their entire retirement. The result is Sponsor-
Match, a product that combines a target-date
fund and an annuity.
Employees in SponsorMatch will end up with
roughly half their assets in annuities by the time
they reach retirement age. That’s a potential
lifesaver—and, of course, it helps BGI. The
firm’s business in 401(k)s and other defined-
Meant to take advantage of one tax loophole,
401(k)s were never intended to provide a
secure nest egg for most Americans
contribution plans has about $250 billion in
assets. Not a puny sum, but it’s a mere footnote
to the company’s massive pension operations
at a time when 401(k)s have been growing and
pensions shrinking. “This is a business op-
portunity, but it goes beyond that, to almost a
moral calling,” says BGI Chief Executive Blake
Grossman.
The timing for this new hybrid product has
proved tricky, however. With trauma spread-
ing in the financial markets and corporate plan
sponsors preoccupied, BGI has yet to find its
first institutional client among the large corpo-
rate 401(k) plans it has targeted. Some of BGI’s
rivals have nabbed early adopters for their own
hybrid products, but all have struggled. “We
are in the same stage of development with these
retirement products as we were with electronics plan sponsors could put employees who didn’t
20 years ago. We are going to find out what the
public likes,” says Don Ezra, global director of
investment strategy at Russell Investments and
author of the forthcoming book, The Retirement with their 401(k)s. But the plans still leave it up
Plan Solution. “Twenty years from now, there
will be a clear winner.”
Whichever product wins, retirement experts
believe hybrids are the future. Consulting giant
McKinsey figures defined-contribution plans
will swell from $3.3 trillion today to $7.5 trillion in Chip Castille, who had previously helped
or more between 2015 and 2020. At that point,
McKinsey predicts, 401(k)s and other such
plans will have roughly three times the assets
THOMAS BROENING
of corporate pension plans and will be trans-
formed from investment vehicles into platforms shown that retirees need
for providing lifetime retirement income. “This
is the pensionization of the 401(k),” says J. Mark annuities make sense in
BUSINESSWEEK I FE B R UARY 16, 2009
www.fantamag.com
Iwry, a nonresident scholar at the Brookings
Institution and an expert in retirement security.
Retirement planning is “no longer just about
waiting for the end of the line and thinking
about the benefit as a lump sum,” he says.
BGI’s efforts to launch its hybrid 401(k) form
a saga of stumbles and false starts. In the sum-
mer of 2006, as Congress was debating new
retirement regulations, Matthew Scanlan, BGI’s
institutional chief, started thinking about the
problems of 401(k)s. These retirement sav-
ings vehicles we’ve all come to accept as core
benefits were designed to take
advantage of a particular snip-
pet of the tax code. They were
never meant to be the primary way
Americans paid for their retire-
ment, and participants haven’t
exploited them intelligently. Faced
with higher fees and their own
poor investment choices, investors in 401(k)s
have historically underperformed institutional
investors by at least 2% a year. “It is a national
emergency,” says Scanlan.
The Pension Protection Act, passed in August
2006, was a call to action for Scanlan and Kristi
Mitchem, whom he had just named as head
of defined contribution. The legislation, the
most significant retirement law in more than
30 years, closed loopholes on the underfund-
ing of pension plans and encouraged increased
participation in 401(k)s by offering legal protec-
tions for companies that provided automatic
enrollment to their workers. Regulations that
followed the new pension law identified certain
investments, including target-date funds, as
qualified default investments. That meant
make specific choices into default options and
not worry about liability. Those changes are
important because, let’s face it, people are lazy
to participants to estimate how long they might
live and how much money they’ll need over
a 20-odd year period. “It’s too much to ask,”
Scanlan says. “Individuals just can’t process it.”
In early 2007, Scanlan and Mitchem brought
develop BGI’s target-date funds, as head of de-
fined-contribution research. His team quickly
encountered a conundrum.
Academic research has long Mitchem and
CREDIT HERE
Castille are
behind BGI’s
monthly income and that push to fix
troubled 401(k)s
 PERSONAL BUSINESS

063

theory, but people don’t like them—often for

good reason. Many retail annuities sold to retir-
ees are too complicated, too expensive, and too
restrictive. The researchers wondered if they
could design a product from scratch combining
a target-date fund and an annuity.
This was a good starting point, given BGI’s
history with target-date funds, and since
these were now qualified default investments.
McKinsey estimates that target-date funds and
other asset-allocation funds will make up more
than one-third of all defined-contribution
assets by 2015, up from 3% in 2006. “In six
weeks of research, we knew we were onto
something,” says Peter Hand, lead researcher
on the BGI team.
To build a computer model representing the
retirement-planning concept in his head, Hand
started with something called a happiness
model. It calculates how to deliver the optimal
level of happiness for the greatest number of
people in retirement. People are much less
happy if they have to cut their spending by 25%,
but only somewhat more happy if they get to in-
crease it by 25%, he argues. That simple behav-
ioral insight shaped everything that followed.
“I started seeing what the academics see,” Hand
says. That is, how important it is to know your
spending won’t have to drop below a certain
level regardless of how long you live. “Equities
are a bit of a longevity hedge, but annuities are
the real longevity hedge.”
But how to create that annuity? Hand
plugged in certain scenarios and let the com-
puter calculate whether they would make more
people happy or fewer. For example, while most
annuities don’t include cost-of-living increas-
es, Hand’s model showed that one
was needed and that 2.5% per year

1
was the best level. If there’s no cost-

$ of-living increase and there’s a very

bad market, you’ll see a large “tail”
of people who are outliers because
they live very long or because they

trillion retired at a point of market decline.

These are the ones who end up with
miserable retirements. Add the
Decline in value
of equities in
cost-of-living adjustment, and you
401(k)s and lose a little upside, but you mitigate
IRAs due to the horrific results for the tail. If you
the market upped the cost-of-living increase to
meltdown 3% a year or lowered it to 2%, Hand
CREDIT HERE

Data: Center for says, fewer people would be happy.

Retirement Research at
Boston College
“There are hundreds of tweaks like
that, and they all interact with each

FE B R UARY 16, 2009 I BUSINESSWEEK

www.fantamag.com

064 INVESTING
“Annuities
are the real
longevity
hedge,”
says Hand
other. It’s all about managing the tail.”
The structure BGI’s finance wonks came up
with embeds fixed deferred-income annui-
ties (which provide a set amount of monthly
income in retirement) into a target-date fund.
A 401(k) participant who chooses Sponsor-
Match—or whose employer uses it for the
matching contributions—would have part of
each contributed dollar invested in the annui-
ties and part in the investment portfolio. Es-
sentially, the annuities replace the bonds that
would normally be in your portfolio. If you’re
in your twenties or thirties, you’d have only a
small portion in annuities; but as you age, that
portion increases. As with a regular target-date
fund, BGI would make those changes for you.
Your investment portfolio, comprised of index-
based investments, would also be automati-
cally managed for you based on your age. You
would simply pick SponsorMatch and sit back.
When you received your 401(k) statement,
you’d see two pieces: the amount of monthly
income you’d have in retirement and the value
of your investment portfolio. Says Mitchem:
“People are not so good at converting asset
numbers into a stream of income, so what we
are doing is turning the 401(k) into something
people can understand.”
LOW FEES
This structure yielded certain advantages
that were geeky but important. For one, the
annuities would actually be held by the fund,
rather than the individual, as annuities typi-
cally are. This meant the insurer didn’t need
to keep track of each person’s details, which
helped slash costs to a very low fee of 50 basis
points, including both the cost of the annuity
BUSINESSWEEK I FE B R UARY 16, 2009
www.fantamag.com
PERSONAL BUSINESS
and the asset-management fee. Participants
could also cash out of SponsorMatch without
paying any fees until they turned 65; that’s in
sharp contrast to typical retail annuities, which
charge surrender fees of between 4% and 10%.
One more benefit: BGI buys annuities over
time, which is an advantage because they’re
more expensive when interest rates are low, and
cheaper when rates are high.
At first BGI had hoped to avoid working with
an insurer. The researchers spent six months
experimenting with something called a syn-
thetic annuity, which would allow the company
to do everything in-house. But the costs were
prohibitive. Says Castille: “That was a dark
period in the development of the product.”
In the summer of 2007, Castille phoned
MetLife, which had developed a hybrid 401(k)
concept with Merrill Lynch. MetLife was inter-
ested in developing other partnerships to gain
a bigger foothold in what it saw as a massive,
expanding market. “It was like a meeting of the
minds within minutes,” says Jody Strakosch,
MetLife’s national director of institutional
strategic alliances. “We’ve been focused on
retirement income for quite some time, and it is
going to be a really big topic in 2009.”
On Sept. 21, 2007, Mitchem, Castille, and
Hand appeared before BGI’s global investment
committee. Chief Executive Grossman was
there, as was the firm’s head of research, and
every business division head and regional chief
investment officer. For more than an hour, the
401(k) team made its pitch and fielded
questions. What was the optimal mix between
the investments and annuities over time?
What might happen to someone who lived to
HOW BGI’S HYBRID 401(k) WORKS
BGI’s SponsorMatch product adds annuities to a target-date fund.
When you’re young it favors investments; as you get older, it moves
toward the annuities. Say you invest 5% a year beginning at age 22, your
salary starts at $42,500, and it grows at 2.9%, including inflation:
MONTHLY INCOME MARKET VALUE OF MARKET VALUE
AGE AT AGE 65 LIFETIME INCOME OF INVESTMENTS
25 $16 $400 $7,100
35 130 5,000 45,100
45 358 23,000 116,400
JAMIE KRIPKE
55 824 87,000 224,600
65 1,879 327,000 289,800
Data: BGI Simulations Note: assumes 7% return on investments
They said I only had
$100,000 in my account,
and passed me off to
some junior guy.
Since when is $100,000
preceded by “only”?

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www.fantamag.com

066 INVESTING
110? “It’s like defending a dissertation,” laughs
Scanlan. “You come out bruised and battered.”
The product got unanimous approval.
BGI and MetLife announced their partner-
ship in March 2008. Their deal is currently
exclusive, but BGI eventually will be permitted
to bring in other insurers—possibly holding
auctions when it needs to purchase annuities.
SponsorMatch was formally launched
last October, and over several months, BGI’s
salespeople held a total of 180 meetings with
plan sponsors. With everyone fixated on the
financial crisis and pensions sinking deeper
into the red, nobody wanted to be the first to
sign up. Management, however, is taking the
setbacks in stride. “We knew that this was
going to be missionary work,” Mitchem says.
Adds Al Goduti, managing director of BGI’s
institutional business: “Even people who
aren’t making changes in their plans still
want to talk.” BGI now hopes to have a client
These new plans will be highly lucrative
for companies that come up with the right
blueprints. But the battle won’t be won soon
BUSINESSWEEK I FE B R UARY 16, 2009
www.fantamag.com
PERSONAL BUSINESS
on board by the end of the first quarter.
Greg Williamson, chief investment of-
ficer and director of trust investments at BP
America, says he was intrigued when BGI
briefed him on the new product. BP itself has
a strong pension and isn’t looking to make a
change. Still, says Williamson, who runs BP’s
$7 billion 401(k), “For those looking at guar-
anteed income in retirement, this is one of the
simpler and easier ways to do that.”
As to why many plan sponsors are hanging
back, William A. Schneider, a principal at pen-
sion consultants DiMeo Schneider & Associ-
ates in Chicago, blames a short-term view.
“They’ve had other issues with the markets
cratering and their in-house counsels saying,
‘Maybe we don’t want to roll out new things at
this moment,’ ” Schneider says.
Other companies experimenting with hybrid
401(k)s have encountered obstacles. Players
such as Prudential and MetLife-Merrill jumped
in early and attracted a few clients. None of
their products has gained a big following, but
the instruments continue to evolve. Alliance-
Bernstein, for example, plans to launch its own
hybrid product with a target-date structure and
multiple insurers offering guarantees.
It’s too early to say who will win this lucra-
tive competition, but the momentum behind
hybrids is building. “This is the next battle-
ground,” says Onur Erzan, a McKinsey consul-
tant and co-author of its report on the topic. “I
think there’s going to be a lot of demand.”
When pensions and Social Security provided
a safety net for retirees, 401(k)s made sense as
add-ons. But with that safety net frayed, it’s
clear 401(k)s in their current state can’t provide
a secure retirement for most Americans. For
plan sponsors looking to freeze pensions; for
asset managers and insurers looking for the next
new thing; and especially for employees wor-
ried about how they’ll pay for their nonworking
years, adding guaranteed lifetime income to a
THOMAS BROENING
401(k) is one answer. Says Moshe Milevsky, a Retirement
woes are
professor at York University in Toronto: “This “a national
is the very beginning of a new way to approach emergency,”
retirement financing.” ^ says Scanlan

INVESTING
PERSONAL PORTFOLIOS
SUPER BOWL
INVESTOR
Al Michaels is one of the best-known sports announcers
in America, but he is also an avid and active investor. The
day after he and John Madden called Super Bowl XLIII on
NBC, Maria Bartiromo talked with Michaels.
What’s your strategy for the recession?
I’ve always been a contrarian. When people
oversell a stock—tell you you have to get in and
it’s already had, like, 1,000% appreciation—I’m
the first guy to short it. And I have done that in
years past with stocks like Krispy Kreme and
Crocs shoes. Now it’s a different time. There’s
value out there on the long side. Instead of
looking at individual stocks, I’m trying to find
industries that will begin to turn around, and I
buy the ETFs [exchange-traded funds] in those
industries. If I really feel strongly, I try to buy
the leveraged ETFs, which are exchange-traded
ILLUSTRATION BY PATRICK ARRASMITH; BASED ON PHOTOGRAPH BY JOHN SPELLMAN/RETNA LTD.
funds on steroids.
Which industries, specifically?
It wasn’t that long ago that oil was trading at
about $150 a barrel, and you had all of these
analysts and experts—and I’m using the term
experts in quotation marks—telling you: “Oh,
my God, oil is going to go to $200.” Now, oil has
taken such a humongous hit that I don’t think
there’s a lot of downside there.
Before the economy soured, what did your
portfolio look like?
Before it began to sour, I was a little conserva-
tive. I had made some money in shorting, and
I kind of ratcheted back a bit. I thought when
the Dow got all the way up to 14,000, that was
a little pricey. So I became more conserva-
tive. I have some of my staples that I’ve had
through the years—IBM, GE, Microsoft. IBM
has done fairly well through the storm, GE has
not done well. Microsoft over a 10- or 12-year
www.fantamag.com
PERSONAL BUSINESS
067
period has been a total bust. I’ve kind of given
up on Microsoft. The biggest difference to me
in investing now opposed to a number of years
ago is that I don’t know what a blue chip is
anymore. I’ve told my kids through the years,
try to construct a balanced portfolio. And now,
I’ve got younger people asking: “What kind of
blue-chip stocks can I get into?’” And I say:
“When you find a blue chip, call me collect.”
Do you know anybody who got burned in
the Madoff scandal?
I know a number of people who did. To me, it’s
tragic, it’s insidious. It just makes you wonder
who in the world can you trust. The one bit of
advice I’ve given my kids is: Don’t give money
to anybody who is just going to send you a
statement. You want to see what the trades are.
What’s your riskiest investment right now?
I don’t have significant money at risk in
anything. I dabble a little bit and do some day
trading. You know, living on the West Coast,
you get up and watch Squawk Box, and then the
opening bell rings at 6:30 in the morning. It’s
like shooting craps in your pajamas. But at this
particular point, I’ve worked too hard to take a
lot of risk. It’s good to take some risk, but you
have to understand where you are in life.
Give me your take on the market. Buying
opportunity?
It’s a day-to-day deal. As we speak, the
market is under 8000. To me, the upside is
far greater than the downside at this point.
Again, being the contrarian that I am, when
everybody is saying, “Oh, my God, gloom
and doom, look out below,” I’m
saying, “‘Look out below’ already
happened. Where were you a year
and a half ago?”
Say you’re an investor who has
fallen way behind, as so many
of us have. What’s the Hail
Mary pass?
I don’t think there is one. You can’t
chase money. You
kind of lick your
wounds. If you
really want a Hail
Mary pass, go down
to your grocery
store and buy a
lottery ticket. ^
BUSINESSWEEK
 PERSONAL BUSINESS

068 INSIDE WALL STREET GENE MARCIAL

IBM: FIRST trading at 92.83 a share,

IBM has skidded from a
52-week high of 130.93
SET TO CLIMB
AT VARIAN MEDICAL

OUT OF THE GATE?

STOCK PRICE (DOLLARS)
last July 24. Tanaka figures 70

the stock is worth at least 60

117, based on 12 times his 50

projected 2010 earnings 40

of $9.75 a share. On top of 30
that, IBM pays a dividend
Technology stocks, pummeled as badly as the 0
yield of 2.2%, he notes. JULY 28, '08 FEB. 4, '09

rest of the crowd, may be one of the first sectors “IBM is a safe haven during Data: Bloomberg

to come streaking back when the market turns. the global recession and
So say some large institutional investors. “Tech-
will be an early participant
in the recovery,” he says.
Varian Is a Force
nology is one of the most attractive sectors,” says IBM forecasts earnings Against Cancer
Robert Sharps, who manages growth stock port- of $9.20 a share in 2009, up With the recession forc-
from $8.93 in 2008. What ing hospitals to cut back on
folios for institutional clients at T. Rowe Price, has greatly enhanced IBM’s spending, analysts expected
a major asset manager. performance is its increased disappointing December-
IBM AFTER Many technology companies focus on its software quarter news from Varian
A STEEP DROP are flush with cash, he notes, systems and services, with Medical Systems (VAR),
STOCK PRICE (DOLLARS) and their free cash flow less emphasis on hardware. the leading global supplier
135
yields are higher than they Software accounts for some of equipment and software
120
have been in a long time. 44% of profits, services used in cancer treatment,
105
Tech stocks don’t always make up 36%, and hard- including X-ray tubes and
90
outperform coming out of ware/technology 17%. IBM imaging systems. Instead,
75
a downturn, but when they has been boosting margins Varian posted better-than-
0
JULY 28, '08 FEB. 4, '09
do, it’s by a wide margin. through increased cost cut- expected operating earnings
Data: Bloomberg “I think this is one of those ting, including labor cut- of 56¢ a share, up from 46¢
times,” says Sharps. backs, and share buybacks. a year ago.
So how do you play the Peter Misek of Canaccord Cindy Axelrod of Glen-
next tech upswing? “Don’t look any further than IBM,” as- Capital says IBM remains mede Investment Manage-
serts Graham Tanaka, president of Tanaka Capital Man- “one of our favorite large- ment, which owns shares,
agement and manager of the Tanaka Growth Fund. One cap defensive tech names” says hospitals aren’t likely
of the world’s largest technology companies, IBM (IBM) based on its track record to to cut back on buying Varian
provides computer hardware, application and systems date, balance sheet, cash products since oncology is
software, and related services. “Look at it this way: IBM is flow, and global footprint. one of the most profitable
the only tech company I know that beat analysts’ fourth- Amitabh Goel of re- units in many hospitals. She
quarter profit expectations, even as revenues declined, and search outfit First Global, rates Varian, now at 37.12 a
BRAD TRENT; CHARTS BY DAVID FOSTER

then issued a 2009 earnings forecast higher than what the who rates IBM “moderate share, a buy. It’s up from its
Street was projecting,” says Tanaka. “In the current dismal outperform,” says IBM has 52-week low of 30 on Jan. 8.
environment, IBM has been phenomenal,” he says. Now been focusing on boost- Dalton Chandler of
ing margins to counter the investment firm Needham
BUSINESSWEEK.COM Inside Wall Street is posted at businessweek. decline in revenues and also tags Varian (a client)
com/investor at 5 p.m. EST on Thursdays. deliver tidy profits. As a a buy. He sees it at 65 in a
result, IBM appears to be a year, based on his estimate
Unless otherwise noted, neither the sources cited in Inside Wall Street nor
their firms hold positions in the stocks under discussion. Similarly, they “safe bet” amid the global of $2.60 a share in 2009 and
have no investment banking or other financial relationships with them. uncertainty, says Goel. $2.96 in 2010. ^

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
 069 OPINION
071 Outside Shot
072 Tech & You
073 Media Centric
074 Books
076 Feedback
078 The Welch Way

OUTSIDE SHOT GARRY KASPAROV

Why the World Shouldn’t Bail Out Putin

Letting market forces do their job would bring much needed political change in Russia

Last June, when Russian Prime

Minister Vladimir V. Putin was
invited to open this year’s World
Economic Forum confab of
business and political leaders
in Davos, he surely expected to
be speaking from a position of
strength. Seven months later oil
prices have plunged, the Russian
stock market has collapsed, and
the ruble is in free fall. Instead of
reasoned discourse, what the au-
dience got on Jan. 28 was bluster,
blame, and a cry for help.
But the world should not help
Vladimir Putin. For too long, too many
myths have surrounded him and his
dictatorial regime. “At least Russians
are better off than during the days of
the Soviet Union” was the frequent
refrain of Western leaders afraid to
confront Putin over his domestic
crackdown. When he discarded the last
(FROM TOP) BENOIT TESSIER/REUTERS; WEF/POLARIS

pretense of Russian democracy during

the 2008 presidential transition, the
chorus shifted to: “Even though Rus-
sians aren’t free, even though elections
are rigged and the media controlled by
the state, at least the economy is doing
well and investors are happy.”
Now the myth of the strong economy
In Davos, has crumbled. Make no mistake: This
Putin outlined
an agenda for
is not just a sudden reversal of fortune.
debt write-offs The fall in energy prices and the global
financial crisis have only revealed what

FE B R UARY 16, 2009 I BUSINESSWEEK

www.fantamag.com
070 OUTSIDE SHOT

outlet, many more Russians may take

was going on behind the scenes all
along. Putin and his government have
hollowed out the economy by fail-
ing to invest in sectors other than the
energy export business. More than half
of state investment goes to oil and gas
production, says think tank Carnegie
Moscow Center. Meanwhile, in the last
six months, industrial production has
plunged 20%. Steel output is down
more than 45% since early 2008. Sky-
rocketing oil prices gave Putin enough
cash to keep the macroeconomic sce-
nario rosy. The charade is over.
In 2000, Putin inherited an economy
ready to boom after years of painful
liberalization. That year, with oil at $20
a barrel, gross domestic product grew
10%. The federal budget was out of the
red for the first time since the dissolu-
tion of the Soviet Union. Nine years
later, despite a stretch of phenomenal
luck and oil prices that peaked close to
$150, Russia is again in crisis. Oil has
now fallen to $40. Even if it rises to
around $50, Finance Minister Alexei
L. Kudrin forecasts a budget deficit of
5% of GDP, or $60 billion in 2009—a
number many experts call optimistic.
Where did the money go? Where is
it still going? Cash reserves are no sub-
stitute for the economic pillars of in-
A Russian police
officer tussles
with a protester
from Kasparov’s
party in Moscow
devoted considerable efforts to keeping
his grip on power. And he has culti-
vated a long list of allies in the political
and business worlds, including former
German Chancellor Gerhard Schröder.
Putin’s speech in Davos was his signal
that it was time for them to come to
his rescue by backing his agenda for
corporate debt write-offs around the
globe. Russian companies are burdened
with close to $500 billion in debt, with
at least $100 billion due in 2009.
Putin was vague on how such a
program would work. But any sup-
port for his regime must be denied. As
long as he remains in charge, hardships
for Russians will only worsen. The
state-controlled media will continue to
blame “irresponsible Americans” for
everything from rising food prices to
the ruble’s collapse. With no political
Business Exchange
Read, save, and add content on BW’s new Web 2.0 topic network
Putin at Davos
In his keynote address at the World Economic Forum, Russian Prime Minister
Vladimir V. Putin acknowledged that the global financial crisis had laid bare some
weaknesses in the Russian economy, in particular “an excessive emphasis on raw
to the streets—as they did while Putin
was in Davos.
Many leaders at Davos spoke about
improving the world’s poisoned eco-
nomic climate. A leap in this direction
can be taken by letting the Putin regime
fall. It knows that time is running out.
Now that the Putin economy is being
exposed as a fraud, the West must let
market forces unleash the invisible
hand of political change to push Putin
from power. (President Dimitry Med-
vedev is in Putin’s shadow even though
Medvedev could fire Putin with the
stroke of a pen.)
By rejecting Putin’s agenda, the
world can send a clear signal to Rus-
sia’s elites not to bet on the old regime.
That would improve the chances for a
peaceful transition. “We must rely on
the moral values that have ensured the
progress of our civilization,” Putin said
in Davos. I could not agree more. The
downfall of a regime that has trampled
on those values for a decade is an ex-
cellent place to begin. ~
Kasparov is chairman of the opposition
group United Civil Front and co-leader
of the pro-democracy coalition The
Other Russia (theotherrussia.org).
MISHA JAPARIDZE/AP PHOTO

materials.” To address these shortcomings, he said, Russia’s leadership is working to

dustry, agriculture, infrastructure, and
education. Those have been allowed
to decay while the elite’s pockets have
swelled from sales of natural resources.
While Putin has failed to invest in
the foundations of the economy, he has
leverage the country’s edge in areas such as food production, space exploration,
nuclear energy, and aviation. “Our country must emerge from the crisis renewed,
stronger, and more competitive,” said Putin.
To read a transcript of Putin’s speech, go to http://bx.businessweek.com/russian-
economy/reference/

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
 OPINION

OUTSIDE SHOT JOHN DE FIGUEIREDO 071

Nip Those Earmarks in the Bud

The U.S. needs a commission of nonpartisan experts to allocate the recovery money

without political interference—is the

same. It’s the idea, too, behind a provi-
sion in the current stimulus bill that
would create a Transparency Board to
protect against fraud.
The Investment Commission I envi-
sion would include 12 experts from a va-
riety of fields—prominent people who
have never held elective office. (There
are roughly 12 areas of appropriation.)
On the bill’s passage, the House and
Senate would each appoint three panel-
ists by consensus of the two parties.
The President would name six, two in
consultation with the Republicans.
The appointees could include
academics, professionals in govern-
ment, and people from nonprofits or
business—all experts, not partisans.
Once impaneled, they would start
reviewing potential projects submitted
by Congress or the President. Within,
say, 75 days, they’d select economically
stimulative ventures that would meet
President Obama couldn’t have put it more plainly: “We’re not hav- real national needs.
ing earmarks in the recovery package, period,” he told reporters two The commission’s green-light list
would go in its entirety to Congress
weeks before he was sworn in. Some senators—including Republican for a single yes-or-no vote, which the
John McCain of Arizona and Democrat Kent Conrad of North Da- President could accept or reject. As
kota, the Senate Budget Committee chairman—have been with the base-closing commission, or
in the case of fast-track authority for
speaking out against pork in the pro- the basis of influence or favoritism trade treaties, no item on the list could
posed stimulus programs. isn’t just disheartening to contem- be saved or slashed. No earmarks.
Time for a reality check. The plate. It will likely be detrimental to The process could take even less
$819 billion American Recovery & our efforts at economic recovery. time than the 120 days the bill allows.
Reinvestment Act of 2009 making its How, then, can we avoid earmarking (Some 92%, or $325 billion, of the pro-
way through Congress is already an our way through that $350 billion? posed stimulus funds are slated to be
earmarker’s dream, with much of the I propose the creation of an Invest- spent in fiscal-year 2010 or later.)
bargaining aimed at getting projects ment Commission, a nonpartisan The American people are calling on
funded. While most of that money is panel of experts that will transpar- government to put aside partisan bick-
allocated to tax cuts and extending ently and publicly recommend specific ering and pork-barrel politics to act for
ILLUSTRATION BY MATT DORFMAN

programs such as unemployment in-
surance, $350 billion is meant for pub-
lic works projects. That’s more than
20 times the $16.5 billion in earmarks
appropriated by Congress in fiscal
2008. Yesterday’s earmark is today’s
“shovel-ready” stimulus project.
Disbursing such a huge amount on
allocations. The idea takes its inspi-
ration from the nonpartisan Base
Realignment and Closure commission,
which has the job of shutting excess
military installations. That panel is in
the business of ending things rather
than starting them, of course. But the
principle—experts making judgments
the good of the country. An Investment
Commission could help engender
confidence in the political process and
help create a stronger recovery. ~
John de Figueiredo is an associate
professor at UCLA’s Anderson School of
Management and its School of Law.

FE B R UARY 16, 2009 I BUSINESSWEEK

www.fantamag.com
 OPINION

072 TECH & YOU STEPHEN H. WILDSTROM

All Your Home Content Under One Roof

New systems that manage music, video, and photos are also ideal for small businesses

Home networks are getting a lot more complicated. Not long ago also search all of your computers for
most homes made do with a single shared computer. Now there’s music, videos, and photos and add
them to its collection. When you later
likely to be a desktop and a laptop or two—perhaps a combination of save new content to a computer, it, too,
Windows PCs and Macs. There may also be an Xbox, a PlayStation 3, is automatically added to the server
collection. This can be a major con-
and/or an Apple TV box, any of which can send video or photos
venience if your collections
stored on a computer to a big-screen are stored in bits and pieces
TV. Consumers who have accumulated on different computers
such devices are learning that they around the house.
need help managing the network. Storage on the Media-
I looked at a couple of new products Smart server, as on most
that can serve as central repositories products of its type, is
for all of a household’s entertainment effectively unlimited. It
content. In the process, they simplify has room for four internal
the sharing of files among computers, 1-terabyte drives, and if
provide data backup for all of them, that’s not enough, there are
and even enable remote access to ports to add external disks.
the network through the Web. While For those on a tighter
pitched mainly to consumers, these budget, Cisco offers a less
devices are also ideal for small busi- expensive alternative to
nesses that aren’t ready for the cost the HP server: the Linksys
and complexity of Microsoft’s Win- Media Hub. Prices start at
dows Small Business Server. $350 for a model with one
The makers of these content- 500-gigabyte drive and
management systems haven’t quite room for another. It offers
figured out what to call them. Micro- many of the same features
soft offers a software platform called as MediaSmart, but you’ll
Windows Home Server. (To its credit,tive if you have Windows machines have to work harder to use them. For
the company has also published a self-
and Macs under one roof. It’s the only example, the included NTI Shadow
mocking comic book called Mommy, network storage system other than backup software is scaled down from a
Why Is There a Server in the House?)Apple’s Time Capsule that backs up service designed for large enterprises.
Using this software, Hewlett-Pack- your data using OS X’s Time Machine It’s reliable but far from user-friendly.
ard has just released the MediaSmartprogram. On Windows, the backup Home networks are evolving quickly,
Server, an improved second edition software is nearly as easy to set up and with more machines in the mix, some
of a computer system it introduced in
use as Time Machine—a rarity in the of which travel back and forth between
late 2007. With a starting price of $599
Windows world. After you install the home and office or school. Media
for a 750-gigabyte model, it’s far more
MediaSmart software on each comput- player programs on your machines also
costly than the mostly Linux-based er you want to connect to the server, it connect to the same networks. Keeping
ILLUSTRATION BY PETER ARKLE; BRAD TRENT

competition, but the extra money buys

quietly and invisibly moves copies of
both usefulness and simplicity. your data to the server. And for folks
MediaSmart is especially attrac- who want both belt and suspenders,
MediaSmart makes
it easy to deposit yet
Once you install MediaSmart software another copy of your
on each of your computers, it moves content on Amazon.
com’s Simple Storage
copies of all data to the HP server Service.
MediaSmart can
everything working together and all of
your valuable content safe is a grow-
ing challenge that these new servers,
whatever you call them, go a long way
toward meeting. ^
BUSINESSWEEK.COM
For past columns and online-only
reviews, go to businessweek.com/go/techmaven

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
 OPINION

MEDIA CENTRIC JON FINE 073

Sports Teams: The End of the Affair

Media’s infatuation has turned sour, but at least the teams are assets buyers still want

In earlier and more expansive times for media—and very good doing so in sports. It has a different
times they were—the industry’s moguls fantasized about hitherto talent ecosystem, with built-in scarcity
stoked by the blunt measuring tool of
unforeseen advantages to be squeezed from all manner of assets. So the won-lost record. Do you want your
many snapped up sports teams. News Corp. bought the Los Angeles most hated rival to sign the guy who can
singlehandedly crush your offense, or
Dodgers. Disney grabbed the Anaheim Angels and hockey’s Mighty
do you offer more? It’s not just winning
Ducks (unquestionably the only team valuable form of content. It was easy and losing, you see. It’s what the latter
to pinch its moniker from an Emilio to find blithe blue-sky quotes like this does to the bottom line. A franchise’s
Estevez film). Cablevision bought New one, from Chicago White Sox Vice- wild ups and downs do not mesh pret-
York’s Knicks and Rangers. I could go Chairman Eddie Einhorn, who in 1998 tily with a public company’s demands.
on. The argument advanced was a vari- said: “What are we in baseball if not You can find top media executives still
ation on the (now wholly discredited) programming and software for media in the team business who privately con-
“synergy” theme then taking root: Take companies?” cede that it’s not worth the trouble.
your programming. Run it through your But a team is not a content busi- All this was obscured in simpler
distribution. Get richer faster. ness. It’s more like a concert business. times. The more refined version of
This was the thesis, even if sports “Substantially,” says Leo Hindery, the Ted Turner model was that of the
ownership often hinges on the retro- managing director of InterMedia Part- regional sports network: Owning the
grade, high school-ish desire to hang right teams and their pro-
with the jocks. (For any real or wannabe gramming rights could make
tycoon, owning the team is even better establishing a regional sports
than owning the newspaper.) Today, cable channel (forgive me) a
the only moves media companies slam dunk. But as the realities
make in sports happen when they bail. of team ownership sank in, and
Tribune is finalizing a deal to sell the once that network had been
Chicago Cubs. New York Times Co. established, why not just get the
seeks to unload its stake in the Boston programming rights without
Red Sox’ parent company. Those are the hassle of owning the team?
distress sales, and it helps that you can (So went News Corp.’s think-
almost always find a greater fool when ing when it sold the Dodgers in
selling your team. But reality has long 2004, after buying it less than
shown that the psychic income of team six years earlier.)
ownership doesn’t overcome what These days, media compa-
makes it lousy business. nies will get smaller, not bigger,
One cannot overstate the ego aspects and stick closely to what they
of this. Ted Turner, back in his buc- Cablevision ners (and pal of Tom know, not take flyers on glamorous new
caneering days, wasn’t satisfied with CEO James Dolan Daschle), whose bid ventures. Especially at the vertiginous
watching his
owning the Atlanta Braves. He wanted for the Cubs failed, price tags teams command today. In
company’s New
to manage them, too. (Turner set an- York Knicks “it’s a butts-in-seats 1976, Turner bought the Braves for
other bad example. Starting in the late business.” And teams about $10 million. Tribune is selling the
Seventies, when the economic models come with a host of ungovernables. Cubs for $900 million. The math is now
were much more forgiving, he did what Being in a league makes you but one simple: Teams are one of the few assets
no one else could replicate: Program- voice of many in determining business media companies have that someone
ANTHONY J. CAUSI/ICON SMI

ming provided by his Atlanta teams
helped establish his TBS cable network
nationally.) As with much that moguls
most desire, a business justification
doesn’t lag far behind. Thus, sports
teams were—yes!—a particularly
rules and conditions—a big problem
for those who like control. Your stars
go crazy off the field, but nowhere near
as crazy as the salaries they command.
Media companies might—might—scale
back movie star pay, but good luck
else will still spend big for. ^
BUSINESSWEEK.COM
For Jon Fine’s blog on media and advertising, go
to businessweek.com/innovate/FineOnMedia.

FE B R UARY 16, 2009 I BUSINESSWEEK

www.fantamag.com
 OPINION

074 BOOKS MICHAEL ARNDT

McNuggets of Wisdom
McDonald’s management philosophy is as simple as its menu. But don’t underestimate its effectiveness

It would be so easy to snark about Everything I Know About Business and not yet 30, and Kroc was escort-
I Learned at McDonald’s: The 7 Leadership Principles that Drive Break ing him and a colleague to dinner at
the 21 Club in Manhattan. As they got
Out Success. For starters, there’s the cut-and-paste title. (I thought we into the limousine, Facella moved to
learned everything in kindergarten.) The seven habits—er, principles— take one of the backward-facing fold-
down seats, assuming Kroc would
hardly seem fresh, either. Chapter headings include honesty and
rightfully take the plush back seat.
Facella notes—accurately, I should
integrity, standards, and courage. Then Kroc stopped him. “You are my guest
add, as someone who has reported
there’s the thesis itself: McDonald’s, tonight,” he said. “You sit in the com-
a fast-food chain dedicated to mass-
on Big Mac for years—that much of fortable seat.” Facella writes: “That
produced sameness, is the fountain-
the McDonald’s way can be traced to pretty much blew me away. It was a
head of business insights. Who knew?
company founder Ray Kroc and to Fred mindset I hoped I could incorporate
But that wouldn’t be fair. There really
Turner, a crew person at as my own.”
is something special about a company
the company’s first drive- Facella begins the
that, generation after generation and
in, outside Chicago, who book’s final chapter, on
all over the world, turns high school
quickly became Kroc’s the subject of employee
kitchen help into both millionaire fran-
right-hand man and recognition, with a quote
chisees and corporate executives. And
eventually succeeded him from Kroc: “I like to get
author Paul Facella has the firsthand
as chairman and CEO. people fired up, fill them
experience to know how it’s done. He
Kroc and Turner demand- with zeal for McDonald’s,
started at McDonald’s as a 16-year-old
ed a lot from employees. and watch their results
crew member and retired 34 years later
Unlike many bosses, in their work.” If Mc-
as a regional vice-president. though, they never Donald’s does anything
Facella, who now runs a manage-considered themselves better, it may be how
ment consultancy, interviewed every
too important to perform well and often it rewards
McDonald’s chief executive still alive,
even the lowest task, such workers. The best crew
as well as seemingly everyone else in
as picking up trash. members are
top management over the past couple Others followed their example, Everything I Know singled out every
of decades. He uses their recollections
including Don Horowitz, a former About Business month as out-
I Learned at
and his own to show how a corporation
chief legal counsel. In his chapter on McDonald’s: The
standing employ-
with some 1.5 million employees in 118
standards, Facella writes that Horowitz 7 Leadership ees. Managers
countries is able to pass along bedrock
laughingly recalled a time when he and Principles that Drive might also give an
beliefs and behavior. His writing is as
his wife stopped en route to a formal Break Out Success on-the-spot raise.
by Paul Facella;
simple as the McDonald’s menu. He reception to pick up litter outside a The hardest-
McGraw-Hill; 223
flags each new point with a subheadMcDonald’s they happened to pass. “I pp.; $24.95 working manag-
and ends each chapter with a checklist
can’t imagine any officer going into a ers, in turn, might
of “key learnings.” Even a brand-new
restaurant and seeing a piece of pa- win a vacation and, more important, a
trainee couldn’t miss the moral of these
per and hesitating to pick it up,” Paul shot at owning their own McDonald’s.
stories. Naturally, the book (published
Schrage, a retired chief marketing officer, And the very top performers world-
by McGraw-Hill , which like Business-
told Facella. “No questions—it was just wide are feted once a year with their
Week, is a unit of The McGraw-Hillsomething that was ingrained in you.” spouses at the President’s Award gala
Companies) is a quick read. Facella remembers how Kroc taught in Chicago—and given a passel of
him another lesson stock options. At McDonald’s, praise
when they first met is always given in public and, as I’ve
The author uses the recollections of past in 1978. Facella witnessed myself, is always heartfelt.
McDonald’s CEOs to show how the was then opera- This is all kindergarten stuff, really:
tions director for Work hard, play fair, and you’ll suc-
company passes along its bedrock culture McDonald’s outlets ceed. But then again, a burger and fries
in metro New York is simple fare, too.^

BUSINESSWEEK I FE B R UARY 16, 2009

www.fantamag.com
www.fantamag.com

076 FEEDBACK
How to reach BusinessWeek
LETTERS FOR FEEDBACK
We prefer to receive letters via
e-mail, without attachments. Writers
should disclose any connection or
FOREIGN WORKERS
STATIC OVER H-1B VISAS
Readers reacted heatedly to “Microsoft: Layoffs for Some, Visas for Others”
(BusinessWeek.com, Feb. 1), about Microsoft’s lobbying Congress for an ex-
panded H-1B visa program even amid U.S. tech layoffs. Some said the program
for skilled immigrant workers should be suspended until joblessness eases at
home. Others said if there were no H-1B workers, companies would just out-
source more jobs.—Moira Herbst
The time has come to
suspend the H-1B program
until the economy recovers.
I’m a qualified IT worker,
and can’t understand why
I have to compete with a for-
eigner for an American job.
Screen name:
Unemployed US Citizen
I understand the frustration,
but I’m a product manager
and we must make tough de-
cisions to get the best qual-
ity at the lowest cost. The
alternative is outsourcing.
While H-1B isn’t perfect, it
keeps wages in the U.S.
Screen name: daghan
Sure, the H-1B program
needs to be reformed, but
for now the government
has enough to worry about.
The cap [on the number of
skilled immigrants allowed
in] is a small number com-
pared with the job losses
we’ve had.
Screen name: Mark
These big companies will
take advantage of this
downturn to fire workers
BUSINESSWEEK I FE B R UARY 16, 2009
relationship with the subject of their
comments. All letters must include
an address and daytime and eve-
ning phone numbers. We reserve
the right to edit letters for clarity
and space and to use them in all
who are getting paid well in
order to replace them with
H-1Bs at a lower salary.
Screen name: G Rod
Embracing “flat world”
[capitalism] when we want
to sell and not when we have
to compete is hypocrisy.
Screen name: jdenver
CORPORATE BOARDS
OVERSIGHT
SHOULD BE JOB NO. 1
“Of Boards and Blame”
(The Welch Way, Jan.
26/Feb. 2) defends boards
that fail to rein in the chief
executives at their compa-
nies, opining that corporate
boards are just there to
“hire and fire CEOs.”
If so, they are the high-
est-paid human resource
managers in the world,
most of them receiving
more than $100,000 per
year for their “one or two
days” of work every month.
These are the people
charged with auditing the
activities of a company to
protect its shareholders. If
www.fantamag.com
electronic and print editions. E-mail:
bwreader@businessweek.com
Fax: (212) 512-6458
BUSINESSWEEK.COM
The full texts of BusinessWeek and
there is no oversight, why
have a board of directors?
Thomas Baranski
MEMPHIS
TECHNOLOGY
GREAT IDEAS ARE BORN
AT SMALL OUTFITS
“Is Silicon Valley Losing
Its Magic?” (Cover Story,
Jan. 12) rightly points out a
number of conditions that
need to change to boost
innovation—funding for
advanced computer science
and electrical engineering
research, for instance. But
there’s another prerequi-
site. Game-changing ideas
have often come from small
companies—think Apple or
Google in their early days.
So to continue as a global
leader in innovation, the
U.S. must ensure that the
technology industry oper-
ates in a fair and competitive
marketplace through the
enforcement of antitrust
measures.
Hector Ruiz, Executive Chairman
Advanced Micro Devices
SUNNYVALE, CALIF.
OPINION
BusinessWeek Top News, as well
as BusinessWeek archives starting
in 1991, are available on the
World Wide Web at: businessweek.
com and on America Online at
keyword: BW
MARKETING
WHAT A BRAND NAME
COMMUNICATES
I think it’s a bad idea for
FedEx Kinko’s to drop the
Kinko’s name (“What FedEx
Isn’t Delivering,” What’s
Next, Dec. 29/Jan. 5).
Despite the belief of CEO
Brian Philips that FedEx
is an “elastic brand,” most
people still associate the
FedEx name with deliver-
ies, not office services. In an
economic downturn, people
gravitate to the familiar.
Factor in the cost of all
that new signage, and I say
keep the Kinko’s moniker.
Karen Ann DeLuca
ALEXANDRIA, VA.
LAYOFFS
HOW ABOUT ‘MORE TIME
WITH THE FAMILY’?
The euphemisms for be-
ing fired vary not only by
country but also by one’s
rank. (“Rosy Words For
Pink Slips,” BTW, Dec. 22).
Executive officers leave to
“pursue other interests”;
peons are often laid off to
“reduce expenses.” Manage-
ment has its privileges, even
when you’re fired.
Nelson Marans
SILVER SPRING, MD.
CORRECTIONS &
CLARIFICATIONS
“Youth Will Be Served” (BTW,
Jan. 26) misspelled the name
of a retail research firm com-
menting on the success of
apparel chain The Buckle. It is
Maritz Research.

 


 


















































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www.fantamag.com
 OPINION

078 THE WELCHWAY JACK & SUZY WELCH

For a Fast-Acting Stimulus Plan...

...Washington needs to face three facts—about banks, pork, and revenge

Is the economy beyond saving?
Srini Mahadan
RICHMOND, VA.
We don’t blame you for asking. To
say times feel tough doesn’t cover it. to fall, and the government lacks an
They feel unprecedented, even for the
one of us who managed through the
recessions of 1973-75, ’80-’82, and
’90-’91. In each of those downturns,
on any given February day, even as
the economy sputtered, you could
still predict your April
sales to within a couple of
percentage points. Today
it’s as if a blanket of fog
has dropped over com-
merce; visibility is near
zero. No wonder managers
are in a frenzy of institu-
tional preservation, doing
everything to unload costs.
But is the economy
beyond saving? Of course
not. Too many smart,
dedicated people are on the case. The
real unknowns are how soon a recov-
ery can start and how fast it will take impact.
hold once it does. And that lag time,
we believe, hinges on policymakers
facing up to three contentious but
inexorable facts.
‰First: Focusing on the details of the offer. Count us among those hoping
stimulus package before fixing the
TARP and other early initiatives ap-
pear to have stabilized the markets, but
more needs to be done, as unpalatable
as that may sound to bailout-weary
Main Street. Housing prices continue
aggressive program to get foreclosures
under control. It also needs to get toxic
assets off banks’ still-contaminated
books. In 1989, Resolution Trust Corp.’s
“good bank, bad bank” approach
worked well, but the recent Citigroup
rescue suggests that gov-
ernment asset guarantees
are also a potential option.
Our purpose, though, is
not to dwell in the details.
It’s to make the point that
policymakers will be wast-
ing their political capital
fighting over the stimulus
if they don’t invest their
energies in saving the
financial system first.
‰Second: The stimulus
package is turning into a big, opaque
mess with questionable job-creation
The stimulus package flew through
the House last week, but that doesn’t
mean people trust it or think it’s the
best set of ideas our government can
that the Senate debate will move the bill
those hurt by the economic collapse.
And the third should contain all the
measures that are in the stimulus plan
because…well, because they’re pork
and partisan payback.
That third bucket is unfortunate, of
course, but it’s part of politics. It would
be naive to deny its existence. But it
would be worse still for policymakers
to keep discussing the stimulus as if
it was just one big mass of initiatives.
The package will restore much-needed
confidence and ultimately be more ef-
fective if its debate concerns what really
matters, creating jobs and providing
support to those who’ve lost them.
‰Third and finally: Revenge may be
tempting, but it’s a losing strategy.
The list of people who could have
prevented or mitigated this crisis is
long, and news of the billions paid in
bonuses to Merrill Lynch bankers has
only exacerbated feelings that someone
has to pay for capitalism-run-amok.
But policymakers need to accept that
we are all investors now—we, mean-
ing taxpayers—in the companies being
helped by the government. Within
limits, we must let these companies do
what it takes to thrive in the global mar-
ketplace, even including, yes, paying for
performance and courting customers
with sales events. If we don’t, we will all
soon be investors—in carcasses.

PHOTOGRAPHS BY AGE FOTOSTOCK, MASTERFILE, GETTY IMAGES

banking system is backwards. toward transparency and good sense.
Healthy banks are to economies But that will only happen, we
as healthy hearts are to people: They believe, if policymakers start treating
keep them alive with the “lifeblood” of the stimulus in terms of three dis-
credit. Right now, however, the patient tinct “buckets” of proposals. The first
is in cardiac arrest—and policymakers should contain all the plans intended
are talking about how much to spend to spur employment, with each expen-
on his next pair of shoes. diture linked to projections of how
many jobs, and
of what kind,
The dangers: continued weakness in our will result. The
second bucket
banks, stimulus spending that doesn’t create
should contain
jobs, and shackles on companies we’re saving all the proposals
designed to help
We don’t mean to minimize the chal-
BRAD TRENT; PHOTOILLUSTRATION BY RICHARD MICHIEL/BW;
lenge ahead; your question correctly
suggests its magnitude. But guided by
a shared understanding of the bank-
ing system’s priority status, the real
contents of the stimulus package, and
the self-destructive cost of revenge,
together we’ll find a way out. ^
BUSINESSWEEK.COM
Jack and Suzy look forward to your questions.
You can e-mail them and view their new Web site
at welchway.com. For their PODCAST, go to
businessweek.com/search/podcasting.htm

BUSINESSWEEK I FEBRUARY 16, 2009

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