Why European Banks Are Sacrificing Growth

Illustration by Topos Graphics

By Anne-Sylvaine Chassany, Kevin Crowley and Charles Penty

Under pressure from regulators to bolster capital, European banks are selling some of their fastest-growing businesses to competitors from outside the region. The sales may leave them better able to withstand financial stress—and less able to boost future profits. Spain’s Banco Santander, which said in October it needs an additional €5.2 billion ($6.9 billion) to meet capital requirements, sold its Colombian unit in December to Chile’s Corpbanca for $1.16 billion. Germany’s Deutsche Bank is weighing options including the sale of most of its asset management unit, while Belgium’s KBC Groep may dispose of businesses in Poland.

Such sales are an unintended consequence of the decision by European regulators to make banks increase capital—a buffer that protects against credit losses—to help them survive the worsening sovereign-debt crisis. The European Banking Authority on Dec. 8 ordered the region’s financial companies to raise €114.7 billion of additional capital by the middle of 2012.

To reduce their reliance on the markets for funding, banks across Europe have pledged to cut assets by more than €950 billion over the next two years, according to data compiled by Bloomberg. About two-thirds of that will come from sales of profitable units and performing loans, says Huw van Steenis, a Morgan Stanley analyst in London. While it may be hard to get premium prices for those businesses in a crisis, other options for raising money are even less appealing. Lenders don’t want to issue additional shares because their stock prices are too low: The Bloomberg Europe Banks and Financial Services Index is down 33.5 percent this year. Selling troubled loans is also problematic. If the banks accept the low prices investors are willing to pay, the lenders would have to record losses on the loans, and those losses would erode their capital. As a result, distressed assets and souring loans will account for just 4 percent of asset reductions over the next two years, according to van Steenis.

That leaves selling entire business units outside of their domestic markets. These are the most profitable parts of their business,” says Azad Zangana, European economist at London-based Schroders, citing Spanish and Portuguese banks selling assets in Latin America. “You begin to become a less profitable organization. Your business model stops working if you’re being forced to lend only to an economy that’s going through a very deep recession.”

By shedding some of their best assets, the sales may make banks less stable. “Lenders are selling more liquid assets so they can get a price that avoids additional capital losses,” says Joseph Swanson, co-head of restructuring at Houlihan Lokey in London. “Unfortunately, this strategy can result in lower asset quality and increased earnings volatility.”

Santander completed the sale of its Brazilian insurance operations to Zurich Financial Services for $1.7 billion in October. The Spanish bank also sold a $958 million stake in Banco Santander Chile, the South American country’s biggest bank by assets. The Chilean bank’s net profit grew 45 percent between 2008 and 2010 and may increase 15 percent this year, to about $970 million, according to analyst estimates compiled by Bloomberg. Santander said it will also sell a stake in its Brazilian banking unit. The Spanish lender’s planned sale of part of its U.S. consumer loan business to a group led by KKR may cut net profit for Santander’s shareholders by €150 million, according to an Oct. 28 estimate by Raoul Leonard, an analyst at Royal Bank of Scotland Group in London. “Assuming multiple asset sales may be in the pipeline, this could lead to a meaningful negative drag” on earnings, Leonard wrote. A spokeswoman for Santander declined to comment.

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You Deserve the Team You Get

By G. Michael Maddock and Raphael Louis Vitón

Whoa.

We have received thousands of comments, scores of e-mails, and a bunch of phone calls in response to our last two columns, Three Kinds of People to Fire Immediately and Three Types of People to Hire Today.

So, what are the takeaways?

The biggest one is this: Whether you are a happy or unhappy worker, a good or bad manager, an enlightened or naïve leader, you deserve the team you get. Said differently, we all play a role in what our teams and companies become. We must choose to take control of the results or risk making ourselves victims of the situation.

Either way, we must live with the results of our choices. For some, this means complaining more; for others, it means leaving for another opportunity, and for others still, it means creating a different reality.

Your authors aspire to be creators and prefer to hire and inspire creators as well. If you’ve built a culture of innovation, we presume you agree and act in kind.

The next biggest insight was this: People want to create new products and services because it is rewarding, but it is one of the hardest things for a culture to do.

And what follows from that insight is this one: You want to make your company a safe place for everyone, because fear is the enemy of invention. To do that requires the right kind of colleagues.

More specifically, you want to hire people who:
1. Challenge themselves and everyone around them to co-create the best ideas. “Good enough” never is.

2. Have an entrepreneurial mindset. No, they don’t need to have started a company in their past or even have had a lemonade stand as a kid. Entrepreneurs—and people who think like them—love solving challenges. The tougher the better. The entrepreneurial mind leads to creation. It reveals opportunities where others see problems. Show us someone with an entrepreneurial bent, and we’ll show you a person who feels completely in control of his or her choices and the outcome.

3. Complement one another. An organization filled with right-brained, divergent people will probably come up with an endless string of new ideas but lack the discipline to carry them to fruition. A left-brain-dominated, convergent culture will execute well, but the quality of the ideas could be lacking. In our experience, the most innovative companies and the most enlightened leaders have found a balance that allows the team to identify and focus on the most important insights, create differentiated ideas to meet them, and execute the ideas with precision. Is your team in balance? How about your leadership style? Does it create imbalance?

And as team captain, you want to make sure you do those three things yourself. We cannot stress that enough.

And now, at the risk of triggering hate mail again, let us underscore whom you simply have to fire if innovation is your charge. When faced with any of the following three types of destructive and consistent behavior—and you have found it impossible to change the chosen mindset that produces it—say goodbye. Quickly.

But first a disclaimer: We hate letting people go. We think you should, too. A termination often indicates that the company has failed the person. So we agree with the many angry readers who have suggested that you must strive to hire only people with the right DNA and then surround them with managers who make them even better. Then and only then, do you fire them if they don’t improve.

Now on with whom you should terminate:

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The Feud at the Top of Morgan Stanley

Kelleher, a gregarious former bond salesman, and Taubman, a reserved merger specialist, don't play well together. The friction between them has led to lost business opportunities for Morgan Stanley, according to former executives. Both are contenders to b Morgan Stanley via Bloomberg

By Michael J. Moore and Max Abelson

Colm Kelleher and Paul J. Taubman, co-presidents of the Institutional Securities Group at Morgan Stanley, work on opposite sides of an ocean, disagree about strategy, and share an enmity that has become the subject of company jokes.

At a meeting of more than 100 managing directors at the Ritz-Carlton Battery Park hotel in New York last year, Robert A. Kindler, the bank’s head of mergers and acquisitions and brother of stand-up comedian Andy Kindler, drew laughs and whistles when he ribbed the men about their relationship, according to two people who attended the session. “So how’s that co-head thing going?” Kindler asked, gesturing at the two men.

Neither Kelleher, 54, a gregarious former fixed-income salesman based in London, nor Taubman, 50, a reserved New York-based banker who has advised media clients on mergers, responded to the taunt, say the people, who asked not to be identified because they weren’t authorized by the bank to speak. Kelleher has been more vocal offstage, insulting Taubman in front of colleagues, according to two former Morgan Stanley executives.

The feud between the men has led to lost business opportunities, in addition to wasting colleagues’ time, according to six former executives. The Institutional Securities unit, which combines investment banking, sales, and trading, is critical: It generated $8.8 billion of revenue and $1.7 billion of profit in the first half, accounting for 79 percent of Morgan Stanley’s total earnings.

President and Chief Executive Officer James P. Gorman, who appointed the men to their posts in December 2009, will tolerate the tension between Kelleher and Taubman so long as their group performs, a current colleague says. This year, Morgan Stanley has maintained a leading position in investment banking and recovered some trading market share lost after the financial crisis. “The fact is, Institutional Securities just produced one of its strongest quarters ever in a very challenging environment, with the firm taking market share across many areas,” says Mark Lake, a company spokesman. Kelleher, Taubman, and Gorman declined to comment.

Kelleher and Taubman share a common ambition: Each sees himself as a potential future head of the company, according to three people who know them. Both are candidates to become president after Gorman, 53, gives up that title when he succeeds John J. Mack, who is retiring as chairman in January. The feud between Kelleher and Taubman may hurt their chances for advancement, four former executives say.

One of nine children who grew up in Ireland’s County Cork, Kelleher, an Oxford graduate, is fond of a daily Cuban cigar and off-color jokes, plays golf, collects modern British art, and drinks with colleagues. A former fixed-income salesman, he was chief financial officer during the 2008 financial crisis, when Morgan Stanley secretly borrowed $107 billion from the Federal Reserve, the most of any bank. He conducted business lying down on his office floor after suffering a back injury in a car accident.

Taubman, the son of an accountant, was born in New York and graduated from the University of Pennsylvania’s Wharton School in 1982, joining Morgan Stanley that year. He helped negotiate a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial in September 2008 that helped the company survive the financial crisis. A former colleague describes him as a good person for a quiet, problem-solving conversation, not a chat over a beer.

Taubman and Kelleher’s relationship was rocky at least as far back as their being named co-heads, say two former executives who worked under them. The statement announcing the appointments described a shared leadership, with Kelleher “overseeing” sales and trading and Taubman “focusing” on banking. The arrangement didn’t last. A year later, Gorman moved Kelleher to London and put him directly in charge of sales and trading while giving Taubman sole responsibility for investment banking.

The men speak to each other infrequently and usually don’t coordinate their remarks at internal presentations, the colleagues say. They disagree about how aggressively to push clients for additional business after stock or bond offerings. Investment banks often pitch clients to win derivatives business, such as an interest-rate or currency swap, related to a sale of stocks or bonds. Kelleher favors seeking the additional transactions, which can bring in significant trading revenue. Taubman is more cautious about such deals, because they can place the bank in the awkward position of being on the opposite side of a trade with a client it just advised.

Along with creating obstacles to doing business, such discord is bad for morale as well. “What happens is people spend time politicking, which has some costs,” says Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies corporate governance. “It’s the CEO’s or the board’s job either to try to get them to stop feuding, or you remove one.”

The bottom line: The inability of Taubman and Kelleher to get along may mean that neither man wins the president’s post at Morgan Stanley.

Moore is a reporter for Bloomberg News. Abelson is a reporter for Bloomberg News.

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Myths About China and India's Africa Race

By Anil K. Gupta and Haiyan Wang

More countries in Africa are joining the global economy. Over the last decade, the continent’s GDP expanded at an average annual rate of 5.1 percent, low compared with emerging giants like China and India but still well above the global growth rate of 2.9 percent. During this period, Africa also became far more globally integrated and saw its merchandise trade grow at an annual rate of 12.9 percent, vs. a global growth rate of 8.9 percent.

Africa’s economic ties with China and India have grown at a particularly rapid pace. This development—when put in the context of Asia’s ongoing march toward becoming the world’s economic center—has led many to believe that China and India have taken over from the West as the new economic powers in Africa. That conclusion, however, hinges on some common misconceptions about China and India’s engagement with Africa.

Myth No. 1: China and India dominate the race for Africa.

During 2000-2010, Africa’s merchandise trade with China grew at an annual rate of 29 percent (from $9 billion to $119 billion) and with India at an annual rate of 18 percent (from $7 billion to $35 billion). While these growth rates are very robust, they are building on a very low base. So far, Africa’s economic partnership with Europe dominates that with China or India. In 2010, Europe received 36 percent of Africa’s exports, compared with 13 percent for China and 4 percent for India. Over 37 percent of Africa’s total imports came from Europe, vs. 12 percent from China and 3 percent from India. In 2010, even the U.S. was ahead of China in terms of total merchandise trade with Africa.

To date, China and India also have played only a small, albeit growing, role in terms of capital investment in Africa. Each accounts for less than 5 percent of the total inbound foreign direct investment (FDI) stock in Africa, a tiny fraction of that from Europe and the U.S.

In short, as newly active players, China and India are making rapid headway in Africa. However, appearances notwithstanding, they are still far behind the developed economies—especially Europe—in terms of economic engagement with Africa.

Myth No. 2: China and India’s engagement with Africa is all about natural resources.

Many Indian companies are looking at opportunities to sell in African markets. In 2010, Indian mobile operator Bharti Airtel paid $9 billion for the African telecom operations of Kuwait-headquartered Zain. Tata Motors, India’s largest automaker, has opened an assembly operation in South Africa. Mumbai-based Essar Group is investing in the African steel sector and Godrej, another Indian conglomerate from Mumbai, is very active in Africa’s consumer goods market. Karuturi Global, the Bangalore company that is the world’s largest rose producer, has become one of Africa’s largest players in commercial agriculture and leases 1,200 square miles of land in Ethiopia. Indian companies are also very active in Africa’s emerging IT services market.

Chinese companies are also not just focused on Africa’s natural resources. China has taken a growing interest in helping build Africa’s infrastructure such as roads, railways, bridges, ports, and power stations. At the 2009 China-Africa Summit, China pledged to build 100 clean energy projects in Africa covering solar, biogas, and hydropower. It also announced the phasing in of zero import tariffs for 95 percent of products from the least developed African countries.

Both China and India are beginning to see Africa not just as a resource supplier but also as a market and as a target for capital investment in many sectors of the economy.

Myth No. 3: China and India are the new neocolonialists in Africa.

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New Delhi’s Housing Boom Hits a Snag

Taking to the streets to drum up business for suburban developments Vishwanathan/Bloomberg

By Pooja Thakur and Abhay Singh

B.N. Mishra aspired to become a suburbanite. In 2009 the New Delhi resident plunked down 2.2 million rupees ($45,800) for a three-bedroom unit in a new residential complex going up in Greater Noida, a bedroom community east of the Indian capital. Three years later, Mishra, 36, who runs a software business, is close to giving up hope that his family will ever move in. The development he bought into is caught in a legal dispute that pits builders against the villagers who once owned the land. “It has been a huge roller coaster ride,” says the first-time home buyer. “If there is no solution, I’ll have to continue with renting or buy a house that is ready.”

Elsewhere in India, protests by villagers who have been forced to sell their land to the government—usually at below-market rates—have stalled billions of dollars worth of projects, including steel mills, auto assembly plants, and highways. “The issue is a critical component of the overall investment climate,” says Dharmakirti Joshi, an economist at Crisil, the local unit of Standard & Poor’s. “I believe it will get sorted out, but if it doesn’t it will have repercussions.”

A four-story height restriction in most parts of New Delhi has made land for new residential projects scarce and expensive, driving members of India’s burgeoning middle class to more affordable areas to the south and east of the capital. In the suburbs of Greater Noida, Noida, and Gurgaon, developers are expected to deliver 439 million square feet of new housing stock over the next three years, enough for 340,000 families, according to real estate research firm P.E. Analytics. Prices for these new homes range from about $20,000 to $4 million, according to Jones Lang LaSalle India. In contrast, colonial-style bungalows along central Delhi’s tree-lined avenues can cost more than $10 million.

In Greater Noida, farmers claim they were swindled by officials in Uttar Pradesh state, who expropriated their land for industrial purposes and promised them jobs. Instead, the government sold the acreage to residential developers. In July, India’s highest court ruled that the land should be returned to the villagers. Local authorities hope to reach a compromise with the farmers that safeguards some $10 billion worth of investments.

The controversy has “shaken the developer community, because if you don’t get good title land from the government, who do you go to?” says Getamber Anand, vice-president of the Confederation of Real Estate Developers’ Associations of India and managing director of Noida-based developer ATS Infrastructure.

To tamp down resentment in the countryside, the government of Prime Minister Manmohan Singh has drafted legislation to revamp a century-old land acquisition law. Parliament is expected to vote on the bill, which defines protections for those facing government expropriation, before year-end.

Real estate broker Rohit Saxena used to spend weekends on a hot dusty road, darting between cars to distribute brochures for residential developments in Noida. Saxena says that in his best month last year he earned 1.05 million rupees, or 29 times India’s per-capita annual national income. These days, Saxena is having to make do largely on his monthly salary of 30,000 rupees, as the deals have petered out. Says Samir Jasuja, chief executive officer of P.E. Analytics: “Sales have come to a standstill because the customer doesn’t know what he is buying, whether the land belongs to the developer or not.”

The bottom line: The development of housing for 340,000 families has been slowed by disputes over land in the suburbs of New Delhi.

Thakur is a reporter for Bloomberg News. Singh is an editor for Bloomberg News.

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Oracle Eyes Industry-Specific Software Buys

By Aaron Ricadela

(Bloomberg) — Oracle Corp., facing mounting competition from smaller, “boutique” rivals, may make more deals to purchase industry-specific software companies, co-President Mark Hurd said.

Oracle is focused on so-called vertical markets, such as financial-services customers, and acquisitions could be a part of that strategy, Hurd said today in his first interview with a business publication since joining the company. Still, Redwood City, California-based Oracle doesn’t feel pressure to tap its $31.7 billion in cash to make a deal, he said.

“There’s a lot of value in these industry verticals we’ve invested in over the years,” said Hurd, referring to software for the banking, telecommunications and retailing industries. “It’s hard to beat the returns the company gets.”

Oracle, the world’s largest maker of database software, also is seeking to spur sales by appealing to budget-minded businesses. The company’s hardware and software can boost efficiency, letting customers reduce the number of servers and databases they ran, Hurd said. Oracle plans to unveil new computer systems packaged with database software and other programs at its OpenWorld conference next week in San Francisco.

The company also will release new software applications in its Fusion line at OpenWorld, stepping up competition with boutique companies that focus on specialized software applications, Hurd said. The company aims to repeat the success it’s had with last year’s crop of new products, he said.

“If you went back a year ago and looked at the amount of technology released at Oracle OpenWorld, you’d have to say it’s a tremendous yield,” Hurd said. “Next week we’ll announce even more.”

Oracle rose 81¢, or 2.8 percent, to $29.71 at 4 p.m. New York time on the Nasdaq Stock Market. The shares have climbed 10 percent during the past 12 months.

Chief Executive Officer Larry Ellison has spent more than $40 billion on acquisitions since 2005, including last year’s $7.4 billion acquisition of computer maker Sun Microsystems Inc. The takeover spree has also added programs that let companies manage human resources, operations and other complicated computing tasks.

Ellison also introduced a new computer system, the Sparc Supercluster, at an event at the company’s headquarters today. The product includes a Sparc T4 processor that can run Oracle’s database and a user’s applications faster than older Sun machines, Ellison said at the event.

“We think lots and lots of people are going to upgrade from their current Sparc systems,” Ellison said. “This is a really fast computer.”

Hurd joined Oracle last September, a month after he was ousted as Hewlett-Packard Co.’s CEO. Hurd was replaced at Hewlett-Packard by Léo Apotheker, who was forced out himself last week and replaced by former EBay Inc. CEO Meg Whitman. Hurd declined to discuss Hewlett-Packard in today’s interview.

Ricadela is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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Practical Pointers in an Anxious Age

The problems facing the world are substantial. Europe is cracking up. American manufacturing is on its heels. And it can be very hard to find a stylish navy blue suit, especially if you’re looking for details like a Savile Row-style waistband buckle. It would be easy to panic, but remain calm, not because we know the answers, but because we called people who do. We found folks with pretty good ideas about how to fix Europe (Christine Lagarde, managing director of the International Monetary Fund), save manufacturing (Dan Akerson, who runs General Motors), and find a suit (Thomas Mahon, who learned his trade on Savile Row, cutting cloth for gents such as Bryan Ferry and the Prince of Wales). We didn’t stop there. Life is far more complicated than a few crumbling continents. We also wanted to know how to network, how to run a meeting, how to spot talent, how to decant wine, and how to hack any website. And we’re particularly happy that we learned how to play basketball with the President. Hint: Do not knock him unconscious.

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Ten Things Only Bad Managers Say

By Liz Ryan

We know the kinds of things good managers say: They say “Attaboy” or “Attagirl,” “Let me know if you run into any roadblocks, and I’ll try to get rid of them for you,” and “You’ve been killing yourself—why don’t you take off at noon on Friday?”

Bad managers don’t say these things. Helpful, encouraging, and trust-based words and phrases don’t occur to them.

Crappy bosses say completely different things. For your enjoyment, we’ve gathered together 10 of the most heinous, bad-manager warhorse sayings. Do any of them sound like something a manager in your company might say (or might have said this week)?

If you don’t want this job, I’ll find someone who does.
Great leaders understand that the transaction defining the employer-employee relationship—the fact that an employer pays you in cash while you cough up your value in sweat and brainwork—is the least important part of your professional relationship. Good managers realize that to get and keep great people, they have to move past the dollars-and-cents transaction and let people own their jobs. Good leaders give people latitude and let them know that their contributions have value. Lousy managers, on the other hand, love to remind employees that it’s all about the transaction: “You work for me.” They never fail to remind team members that someone else would take the job if you ever got sick of it or let the lousy manager down in some way.

I don’t pay you to think.
This is what a bad manager says when an employee offers an idea he doesn’t like. Maybe the idea threatens the inept manager’s power. Maybe it would require the lousy manager to expend a few brain cells or some political capital within the organization. Either way, “I don’t pay you to think” is the mantra of people who have no business managing teams. It screams, “Do what I tell you to do, and nothing else.” Life is way too short to spend another minute working for someone who could speak these words.

I won’t have you on eBay/ESPN/Facebook/etc. while you’re on the clock.
Decent managers have figured out that there is no clock, not for white-collar knowledge workers, anyway. Knowledge workers live, sleep, and eat their jobs. Their e-mail inboxes fill up just as fast after 5:00 p.m. as they do before. Their work is never done, and it’s never going to be done. That’s O.K. Employees get together in the office during the daytime hours to do a lot of the work together, and then they go home and try to live their lives in the small spaces of time remaining. If they need a mental break during the day, they can go on PeopleofWalmart.com or Failblog.org without fear of managerial reprisal. We are not robots. We need to stop and shake off the corporate cobwebs every now and then. If a person is sitting in the corner staring up at the ceiling, you could be watching him daydream—or watching him come up with your next million-dollar product idea. (Or doing both things at once.)

I’ll take it under advisement.
There are certain words that we never use in real life—only in business and only in ways that let us know that the speaker is shining us on, bigtime. “I’ll take it under advisement” means “Go away and die, and don’t speak to me again unless I ask you to.” It means “I am not going to do whatever you just suggested that I do, and I want you to know that I value your opinions less than I can tell you.”

Who gave you permission to do that?
My brother worked at a huge tech company, and one day he and his team of Software Quality Assurance folks were meeting at the office before heading to the airport. They gathered at 6 a.m. in a conference room to talk about their plan once they hit the ground in the destination city. The door opened and a manager walked into the conference room. “Who called this meeting?” he asked. “Only a grade level E5 can call a meeting.” My brother left that job a few months later. People who obsess about hierarchy and permission and grade levels and the like are people you’d be better off avoiding, especially in relationships that give them power over your life and career.

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Where the Pentagon May Cut—or Spend

Illustration by Kelsey Dake

By Roxana Tiron

CUT
Light Tactical Vehicles
U.S. Army and Marine Corps plans to buy a fleet of new armored trucks could be at risk. The Joint Light Tactical Vehicle program is estimated to cost between $10 billion and $30 billion, according to the Congressional Research Service. Without it, the Army and Marines would depend on armor-fortified versions of Cold War-era Humvees made by AM General.
Body Armor, Rifles, Backpacks
Spending on contracts for body armor, night-vision equipment, backpacks, and small arms may decline $2.44 billion over the next couple of years as U.S. troops withdraw from Iraq and Afghanistan, according to a Bloomberg Government study by Sopen Shah. Savings should increase with the conclusion of those wars and cuts in the number of service members stationed elsewhere overseas.
Personnel
Former Defense Secretary Robert Gates said in January that Army uniformed personnel will be reduced by 27,000 starting in 2015, and the Marines may cut 20,000. For every reduction of 10,000 nondeployed military personnel, the U.S. could save as much as $1 billion annually, according to Gordon Adams, associate director at the Office of Management and Budget under President Bill Clinton.
Advanced Fighter Jets
Lockheed Martin’s $382 billion F-35 Joint Strike Fighter is the only advanced jet in development. Congressional scrutiny may trigger cuts in the proposed purchase of 2,443 F-35 planes for the U.S. Air Force, Navy, and Marine Corps. If the already delayed vertical-take-off-and-landing version of the F-35 were dropped, Lockheed could lose as much as $33.2 billion in revenue, according to a Bloomberg Government study.
Carrier Strike Group
The U.S. Navy is reviewing its plans to maintain 11 aircraft carriers and may mothball at least one of the giant warships built by Huntington Ingalls Industries. That would mean related cuts to the vast support structure in the carrier’s strike group, which includes cruisers, destroyers, and other escort vessels, warplanes, and about 7,500 sailors. The potential savings: about $2.6 billion a year.
BOOST
Helicopters
The U.S. military is expected to keep buying variants of the Black Hawk helicopter made by Sikorsky, a unit of United Technologies, along with Boeing’s Chinooks. The Army’s helicopter procurement budget should still rise to about $4.7 billion in 2016 from $4.4 billion in 2012, according to data compiled by Bloomberg Government.
Radars and Sensors
The electronics market will grow cumulatively to a total of about $45 billion by 2020, from $37 billion this year, according to Teal Group analyst David Rockwell. The Pentagon is buying electronic jamming devices and cloud-penetrating radar systems as well as sensors, networks, and computers, the central nervous system for military platforms.
Unmanned Aircraft
The global market for drones is set almost to double over the next decade, to $11.3 billion, according to Teal Group’s Philip Finnegan. The analyst expects U.S. spending on research and development and procurement for unmanned aircraft to increase from $4.3 billion to $7.8 billion. The Pentagon plans to more than triple its inventory of strike and surveillance drones provided by such manufacturers as General Atomics Aeronautical Systems and Northrop Grumman.
Smartphones and Tablets
The U.S. military plans to expand its use of smartphones and tablets. Each branch has tested products such as Apple’s iPad and iPhone and HTC’s Touch Pro2. So far, General Dynamics’ Sectéra Edge and L-3 Communications’ Guardian are the only smartphones accredited for use on the Defense Dept.’s classified networks. Next-generation devices may erode the Pentagon’s dependence on Research In Motion’s BlackBerry.
Cybersecurity
Defense Secretary Leon Panetta told Congress that America’s next “Pearl Harbor” could be an attack on its computer networks. The Pentagon’s spending on cybersecurity is forecast to grow by 9.5 percent annually from the current level of $4.5 billion, according to John Slye, an analyst at Input, a market research firm in Reston, Va.

With Kevin Brancato

Tiron is a reporter for Bloomberg News.

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'Job-Killing' Tax Hikes May Not Be So Lethal

The rich may spend part of a tax windfall, but put some into savings and investments. The middle class spend more of any extra cash they get Bloomberg

By Mike Dorning

Barack Obama had barely finished announcing his deficit-reduction plan this week before John Boehner, the Republican House Speaker, dismissed the President’s proposed tax increases on wealthy Americans as a blow to “job creators.” That phrase has been coming up a lot lately in Washington. The notion that the rich drive job creation and that taxing upper incomes is a “job killer” is a powerful line and difficult to refute between commercial breaks. But like a lot of political memes, it suffers from one shortcoming: It’s not at all clear that it’s true.

“There’s very limited evidence to support the claim that increased personal income tax rates on higher-income people would reduce hiring,” says Joel Slemrod, who served as senior tax economist for President Ronald Reagan’s Council of Economic Advisers. Cutting taxes on upper incomes may have economic benefits, but it’s not an especially powerful way to create a lot of jobs quickly.

The big difference between the rich and everyone else is that they are more likely to save money from a tax cut since they already have enough to live on, says Alan Viard, an economist at the conservative American Enterprise Institute. They may buy a yacht, but plenty is left over for their portfolio. In the long run, all the money the rich save as a result of lower tax rates means there is more available to be invested in business through banks or the stock market. That should eventually lead to higher standards of living—and, yes, more jobs. But it takes time for that to be felt.

If politicians are looking to create jobs right away, they’d be better off concentrating their efforts lower down on the income ladder. The poor and middle class are more apt to spend extra money, maybe on groceries or a new refrigerator, helping to spur the economy immediately. The No. 1 reason small business owners say they’re not hiring is poor sales. A Congressional Budget Office report looking at economic multipliers found tax cuts for low- and middle-income families are more than twice as powerful in stimulating immediate demand as tax cuts for the wealthy. “The short-run/long-run is the critical thing,” Viard says. “If the goal is to have more jobs 6 months, 12 months from now, you want to increase aggregate demand. If the goal is to have a high standard of living 10, 20 years from now, you want to increase national savings.”

Even that long run picture is not so clear. Under Bill Clinton, taxes on higher-income families were high compared to now, at 39.6 percent. Yet almost 23 million jobs were added vs. net job growth of 1.1 million during George W. Bush’s lower-tax years. In the 1950s, a Golden Age of growth, the top marginal tax rate was as high as 91 percent. There were many other economic forces at work in each of these periods, making direct comparisons difficult. Still, says Slemrod, now a professor at the University of Michigan, “it disproves the idea tax increases are the kiss of death.”

The benefits of the tax cuts are muddied further if there’s a budget deficit. “Despite all the rhetoric that tax cuts promote economic growth, that is not the case when the tax cuts are not paid for,” says Martin Sullivan, a former tax economist for the U.S. Treasury Dept. and now an analyst for the nonpartisan publication Tax Notes. As Viard puts it, “Anyone who tells you they have conclusive results, you should be wary of.”

The bottom line: In the 1950s, a time of rapid economic growth in the U.S., the top marginal income tax rate was as high as 91 percent.

Dorning is a reporter for Bloomberg News.

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Which Is America's Best City?

By Venessa Wong

(This story has been corrected. A reference to a former pedestrian mall has been removed. )

Ask most people which city they would most want to live in and usually their answers would be shaped by such realities as proximity to their jobs and what they can afford. But suppose you could choose to live anywhere you wanted regardless of cost? What if you could live in a city that offered a wealth of culture, entertainment, good schools, low crime, and plenty of green space? Many people might opt for obvious choices such as New York or San Francisco, but great as they are, data reveal other cities are even better.

Businessweek.com spent months working with data that would help us to identify the best cities in the U.S. We looked at a range of positive metrics around quality of life, counted up restaurants, evaluated school scores, and considered the number of colleges and pro sports teams. All these factors and more add up to a city that would seem to offer it all. When we began the process we had no idea which cities would come out on top. The winner? Raleigh, N.C.

To most residents of Raleigh, it may not come as a surprise that their city earned the title of America’s Best City. Raleigh shows the cultural graces that go along with anchoring the so-called Research Triangle, home to North Carolina State University, Duke University, and the University of North Carolina at Chapel Hill. Among its many attributes the city sports 867 restaurants, 110 bars, and 51 museums, according to Onboard Informatics, as well as a thriving social scene, good schools, and 12,512 park acres, equal to several times the green space per capita in cities like New York and Los Angeles, according to the Trust for Public Land. It also offers a great deal on nights and weekends—from concerts and opera, to the NHL’s Carolina Hurricanes and college sports, to the 30,000-square-foot State Farmers Market.

Raleigh may have a population of only about 400,000 and span about 144 square miles, yet data show it still offers a lot, if only in a smaller package. True, Raleigh may not be the center of the tech universe like San Francisco, a hub of higher education on the same scale as Boston, or a vibrant 24-hour metropolis like New York, but all those cities also offered higher unemployment, a dearth of parks, worse public education, and other negative factors that weighed against them.

“We’ve always said, you can find about every amenity that you want, even in a city of our size,” says James Sauls, director of Raleigh Economic Development, a partnership between the City of Raleigh and the Greater Raleigh Chamber of Commerce.

The city has been home to an array of celebs including Olympic champion Kristi Yamaguchi, Dexter star Michael C. Hall, and singer Clay Aiken (whose dog was even named Raleigh).

With help from Bloomberg Rankings, Businessweek.com evaluated 100 of the country’s largest cities based on 16 criteria including: the number of restaurants, bars, and museums per capita; the number of colleges, libraries, and professional sports teams; the income, poverty, unemployment, crime, and foreclosure rates; percentage of population with bachelor’s degrees or higher; public school performance; park acres per 1,000 residents; and air quality. Greater weighting was placed on recreational amenities such as parks, bars, restaurants, and museums per capita, educational attainment, school performance, poverty, and air quality. As living in great cities can be expensive, affordability was not taken into account.

The data for this ranking came from the U.S. Census Bureau, U.S. Bureau of Labor Statistics, Sperling’s BestPlaces, GreatSchools, Onboard Informatics, RealtyTrac, Bloomberg, and the Trust for Public Land.

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Berkshire Prepares for Life After Buffett

Buffett has said he was searching for a fund manager "genetically programmed" to avoid big risks Scott Eells/Bloomberg

By Andrew Frye, Kelly Bit and Noah Buhayar

Ted Weschler is an ace stock picker, a value-investing enthusiast, and a pretty accomplished, middle-aged marathon runner. (He finished the 2007 New York City Marathon in 3:30:02.) Those qualities and a solid track record delivering returns as founder and managing partner at Charlottesville (Va.)-based Peninsula Capital Advisors convinced billionaire investor Warren E. Buffett, 81, that Weschler should be part of the new generation of leaders who will run Berkshire Hathaway in the post-Oracle era.

Buffett’s recruitment of Weschler, 50, as an investment manager overseeing a portion of Berkshire’s equity holdings follows the arrival of Todd Combs, who joined late last year from Castle Point Capital Management, a Greenwich (Conn.) hedge fund. When Buffett eventually steps down as chief executive officer, Weschler and Combs, and possibly a third money pro, will oversee the company’s entire $100 billion equity and debt portfolio, according to its Sept. 12 statement announcing Weschler’s hiring.

Weschler won big when he bought 2 million shares of Bank of America in the first quarter of 2009 as the financial crisis hammered bank stocks. The shares had more than doubled to $16.23 on a quarterly average basis by the time he sold them a year later. Buffett, who accumulated the biggest shareholdings in Coca-Cola and Wells Fargo, invested $5 billion last month in Bank of America’s preferred stock.

Weschler is winding down his $2 billion Peninsula fund and will start his new job early next year. “This is a brilliant move for Berkshire,” Michael Bills, founder and chief investment officer at Charlottesville-based Bluestem Asset Management, said in an e-mail. Under Weschler, Peninsula also held positions in Cincinnati Bell, Cogent Communications, and DirecTV. It was the biggest investor in bankrupt chemicals company W.R. Grace, with 10.8 million shares. Peninsula disclosed a stake of more than 10 percent of the company in 2001, and the shares have surged more than 20-fold since then. Weschler worked at Columbia (Md.)-based Grace from 1983 to 1989.

Buffett is clearly a fan, and the admiration is mutual. And pricey. Weschler twice won the privilege of sharing a meal with Buffett in charity auctions in 2010 and 2011 at a cost of $5.3 million. Buffett has said he was searching for money managers who are “genetically programmed” to avoid big risks. Both Weschler and Buffett are fanatical about rigorous bottom-up financial analysis, and Weschler has long been a student of Buffett’s annual letters on the state of Berkshire’s holdings and the financial markets.

In 2005, Peninsula helped finance and recruit investors for the merger of US Airways and America West, according to Derek Kerr, finance chief at US Airways. “He impressed us as a good long-term-oriented investor,” says Kerr. “You could tell, from the people that came in and asked questions after he had committed, that he knew a lot of people and was well connected in the investment community.”

The bottom line: Fund manager Weschler, summoned to join Berkshire Hathaway, made a big score when shares of Bank of America more than doubled.

Frye is a reporter for Bloomberg News. Bit is a reporter for Bloomberg News. Buhayar is a reporter for Bloomberg News.

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Attack of the Superweed

Justin Cariker is battling a pigweed invasion on his Dundee (Miss.) farm Maude Clay for Bloomberg Businessweek

By Jack Kaskey

Justin Cariker grabs a 7-foot-tall Palmer pigweed at his farm, bending the wrist-thick stem to reveal how it has overwhelmed the cotton plant beneath it. This is no ordinary weed: Over time it has developed resistance to Monsanto’s best-selling herbicide, Roundup. Hundreds of such “superweeds” are rising defiantly across this corner of the Mississippi Delta. “We’re not winning the battle,” Cariker, owner of Maud Farms in Dundee, Miss., says as he looks at weeds that tower over his infested cotton field like spindly green scarecrows.

Cariker’s superweeds represent a growing problem for Monsanto, whose $11 billion of annual sales are anchored in crops genetically engineered to tolerate Roundup, the world’s best-selling weedkiller. The use of Roundup Ready seeds has transformed farming in the 15 years since their debut, allowing growers to easily dispatch hundreds of types of weeds with a single herbicide while leaving crops unscathed. “When the Roundup system first came out, to a farmer this was the best thing that ever happened,” says Cariker, who used the labor-saving technology to double his planted acreage, to 5,000. “Farmers thought we had died and gone to heaven.”

Not exactly: It turns out the widespread use of Roundup has led to the evolution of far-tougher-to-eradicate strains of weeds. As a result, rivals such as Dow Chemical, DuPont, Syngenta, and Bayer see an opportunity. They hope to revive sales of older herbicides still able to kill many Roundup-resistant weeds, allowing them to challenge Monsanto’s dominance in genetically modified crops. Still, the substitutes could eventually create weeds that survive multiple chemicals, just as increased use of antibiotics in pigs and chickens has led to the evolution of bacteria that resist multiple drugs, says Charles Benbrook, chief scientist at the Organic Center in Troy, Ore. “It’s akin to putting gasoline on a fire to put it out,” he says. “It’s a very high-risk gamble for the U.S. biotechnology and pesticide industry to go down this road.”

Crops created to survive Roundup or generic glyphosate (its active ingredient) now comprise 94 percent of soybeans, 73 percent of cotton, and 72 percent of corn grown in the U.S. Glyphosate is applied at seven times the rate of all other herbicides combined in U.S. soybean fields and 1.6 times the rate of all others in cotton fields, according to agriculture consultant Cropnosis.

Dow Chemical, DuPont, Syngenta, and Bayer are engineering crops to withstand alternative herbicides that can kill the weeds Roundup no longer can. Dow expects to begin collecting $1.5 billion in additional profit in 2013 by selling seeds for crops that tolerate a reformulated version of 2,4-D, a herbicide the U.S. first registered for sale in 1948 and one of the chemicals used in the Vietnam War-era defoliant Agent Orange.

Unrelenting Roundup use has caused 11 weed species to evolve glyphosate resistance in 26 U.S. states, with Palmer pigweed and horseweed the most widespread, according to the International Survey of Herbicide Resistant Weeds. They have invaded 14 million U.S. acres of cotton, soybean, and corn, and that will double by 2015, says Chuck Foresman, Syngenta’s head of corn crop protection. A Dow study this year found as many as 20 million acres of corn and soybeans may already be infested.

Monsanto Chief Executive Officer Hugh Grant says competitors’ efforts to develop their own herbicide-tolerant crops isn’t a threat to the company’s flagship business. Seed companies will cross-license each others’ genetics to create crops able to withstand multiple weedkillers, he says, and spraying fields with a mix of herbicides will kill the superweeds and give Roundup Ready crops new life. Monsanto itself is adding resistance to dicamba, an older weedkiller, to Roundup Ready crops for sale by 2015. “The cavalry is coming,” Grant says.

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The Russians Are Buying—and Buying

The Russians have bid for the cargo business of Poland's state railway Kahnert/Caro

By Zoltan Simon

Flush with profits, Russian companies are now zoning in on a new target: Eastern Europe. The real surprise is that the region’s governments, saddled with debt and deficits, are helping them do so.

Russian companies were shut out of Eastern European markets after the fall of the Iron Curtain in 1989. Bitter feelings toward the former occupiers lingered, and Russia’s battered corporations were in no shape to acquire. Besides, German, Austrian, and other Western European companies were eager to invest in the newly liberated East.

That’s changed. The value of Russian acquisitions in Eastern Europe over the past three years totaled $2.8 billion, compared with $2.4 billion in the previous 17 years, says the United Nations. Sberbank, Russia’s biggest bank, agreed to buy nine Eastern European units of Austria’s Oesterreichische Volksbanken in July for as much as €645 million ($881 million) in the Moscow-based lender’s first foray outside the former Soviet Union. Russian Railways, the operator of the world’s longest train network, has bid for a controlling stake in the cargo unit of Poland’s state railway. In late August, Russian Railways also expressed interest in the cargo business of Slovakia’s railway. VTB Group, Russia’s second-largest bank, bought a majority stake in Bulgaria’s state tobacco company for €100 million on Aug. 29.

The hunger for capital is changing attitudes in Poland, which has resisted Russian investments since breaking from communist rule in 1989. In the port of Gdansk, birthplace of the anti-Soviet Solidarity movement, the Grupa Lotos refinery’s majority stake has been put up for sale by the government. TNK-BP, the Russian oil venture half owned by BP, is among the bidders and is one of four to be short-listed, Polish news service PAP reported. The sale is part of Poland’s plan to raise 15 billion zloty ($5.3 billion) to finance its deficit. “The most important thing for us is for Polish refineries to be more competitive,” says Jerzy Borowczak, who fought alongside former President Lech Walesa in Solidarity. “Historical grudges mean nothing to me.”

The share of Russian acquisitions in Poland, the EU’s largest eastern economy, may rise in part because of the changing attitude of politicians. There should be “no ideological reasons” to reject Russian investments even as a “certain amount of caution and restraint” is warranted, Polish Prime Minister Donald Tusk said last spring. Some of Tusk’s opponents remain firmly anti-Russian, however. Dawid Jackiewicz, a member of Law & Justice, the largest opposition party, said he would make Treasury Minister Aleksander Grad stand trial if the Russians buy Lotos, according to Dziennik Gazeta Prawna, a local paper, in April.

One concern Eastern Europeans have about the Russian presence is that they are already almost totally dependent on Russian gas for their energy needs. Hungary in May spent part of its recent International Monetary Fund bailout loan to buy a 21 percent stake in MOL Nyrt., the nation’s largest refiner, from Surgutneftegas, a Russian oil producer. “A country can’t be strong if it’s completely dependent for its energy needs,” Prime Minister Viktor Orbán, an anticommunist student leader in the 1980s, said in a TV address.

Despite the opposition, the Russians’ fat checkbooks are proving powerful. VTB and Sberbank reported record net income last quarter as lending expanded and the share of overdue loans shrank. TNK-BP said in July that it expected record annual profits. Russia’s combined corporate profits, excluding financial companies and small businesses, surged 43 percent in the first half of 2011 from a year earlier, to 4.1 trillion rubles ($136 billion), the Federal State Statistics Service said on Aug. 26.

The Russians’ purchases may eventually bolster ties between Russia and Eastern Europe, says Simon Quijano-Evans, chief economist for Europe, Middle East, and Africa at ING in London. “The more cross-border activity you have in the region, the lower the political noise is going to be,” he says.

The bottom line: Russian companies made $136 billion in the first half of 2011. That money is helping bankroll a string of deals in Eastern Europe.

Simon is Budapest bureau chief for Bloomberg News.

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Has John Paulson Lost His Touch?

By Kelly Bit

Illustration by Andy Friedman

John Paulson is famous for betting against subprime mortgages at a time when most Americans thought real estate was a sure thing. He made billions. Lately, his contrarian streak hasn’t served him as well. Since 2009, he’s placed bets on a U.S. recovery, and his recent results are as dismal as the economy itself. Paulson’s largest hedge fund, Advantage Plus, lost 34 percent this year through August, according to two people familiar with the firm, who asked not to be identified because the fund is private.

A good chunk of that decline came in August, when the fund fell 15 percent, these people say. Standard & Poor’s 500-stock index fell 5.7 percent in August, ending the month down 3.1 percent for the year. “John Paulson is considered one of the top hedge fund managers in the industry—a 30 percent drawdown will cause a number of investors to watch his performance very closely going forward,” says Donald A. Steinbrugge, managing partner of Agecroft Partners, a Richmond (Va.)-based firm that advises hedge funds and investors.

Paulson, 55, had positioned his Advantage and Recovery funds to benefit from a U.S. economic upturn, in part by buying big stakes in banks and other financial-services companies. “We’re in the middle of a sustained recovery in the U.S.,” he said at a conference in London in June 2010. “The risk of a double dip is less than 10 percent.” He cited the housing market as a sign of good news to come. “It’s the best time to buy a house in America,” he said. “California has been a leading indicator of the housing market, and it turned positive seven months ago. I think we’re about to turn a corner.” Since then, home prices have dropped 4.5 percent according to the S&P/Case Shiller 20-city index, and economic growth slipped to 1 percent in the last quarter.

Paulson, who manages $35 billion through New York-based Paulson & Co., has scaled back some of his bets. In the second quarter he cut his stake in Bank of America by more than half and sliced about 19 percent from his holdings in Citigroup. He also sold shares in SunTrust Banks, Hartford Financial Services Group, JPMorgan Chase, and asset manager BlackRock, according to his most recent regulatory filing.

Paulson suffered losses this year on a Chinese timber company that became the target of short-sellers. Sino-Forest has plunged about 74 percent from its closing price on June 1, the day before Muddy Waters Research, an investment firm run by Carson Block, issued a report accusing the Hong Kong- and Ontario-based company of overstating timberland holdings and production in Yunnan province. Paulson told clients in June that his fund lost $489 million that month on the investment, which it sold off as of June 17. Armel Leslie, a spokesman for Paulson & Co., declined to comment on the firm’s returns.

Making matters more stark: Some of Paulson’s hedge fun peers are having great years. Bridgewater Associates, the $122 billion firm run by Ray Dalio, posted a 7.4 percent gain in its largest fund, Pure Alpha II, in August, according to a person with knowledge of the matter. The fund has risen 25.3 percent in 2011. Brevan Howard’s $25 billion Master Fund rose 6.2 percent last month and is up 11 percent for the year, according to an investor.

Investors may see Paulson’s losses this year as a sign he’s strayed from what he knows best, according to Larry Chiarello, a former Paulson & Co. investor and partner at SkyView Investment Advisors, which places money with hedge funds. “He was successful at betting on the subprime mortgage situation, and now he’s buying specific stocks—is he still in his best area of expertise?” asks Chiarello, who adds that some investors “have said he wasn’t equipped to handle the Sino-Forest deal.”

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Bailout Rebellion in Germany Heats Up

For the first time ever, a clear majority (60%) of Germans no longer sees any benefits to being part of the Eurozone, given all the risks, according to a poll published September 16 (FAZ, article in German). In the age group 45 to 54, it jumps to 67%. And 66% reject aiding Greece and other heavily indebted countries. Ominously for Chancellor Angela Merkel, 82% believe that her government's crisis management is bad, and 83% complain that they're kept in the dark about the politics of the euro crisis.

"There cannot be any prohibition to think" just so that the euro can be stabilized, wrote Philipp Rösler, Minister of Economics and Technology, in a commentary published on September 9 (Welt, article in German). "And the orderly default of Greece is part of that," he added. Instantly, all hell broke loose, and Denkverbot (prohibition to think) became a rallying cry against the onslaught of criticism that his remarks engendered.

Even Timothy Geithner, who attended the meeting of European finance ministers in Poland, fired off a broadside in Rösler's direction. In the same breath, he proposed the expansion—through leverage, of all things—of the European bailout mechanism, the EFSF. According to Austrian Finance Minister, Maria Fekter, who witnessed the scene, he warned of "catastrophic" economic risks due to the disputes among the countries of the Eurozone and due to the conflicts between these countries and the ECB. Then he demanded in dramatic terms, she said, that "we grab money with our hands to stabilize the banks and expand the EFSF unconditionally."

The smack-down was immediate. German Finance Minister, Wolfgang Schäuble, took Geithner to task and explained to him in no uncertain terms, according to Fekter, that it was not possible to burden the taxpayers to that extent, particularly not if only the taxpayers of Triple-A countries were to be burdened. A bailout "with tax money alone in the quantity that the USA imagines will not be feasible," Schäuble said. (Wiener Zeitung, article in German).

Vocal support for Rösler came today from a group of 16 prominent German economists. If the government in its efforts to stabilize the euro didn't consider the insolvency of a member country, they warned, Germany would become subject to endless extortion (FAZ, article in German). And to impose a Denkverbot concerning it would be a step back into "top-down state thinking." They further lamented that these policies would turn the Eurozone into a transfer union. If the government wanted to establish a transfer union, it should discuss that with the German voters, they demanded, because it would be a fundamental change in the E.U. constitution and should be legitimized by vote. Otherwise, Germany would be "threatened by a populist movement to exit the E.U."

Meanwhile, on his visit to Rome, Rösler had to face down Italian Finance Minister, Giulio Tremonti, who'd "vehemently" demanded the creation of Eurobonds, sources of the German delegation said (Zeit, article in German). President of the European Commission, José Manuel Barroso, supported Tremonti's demands. But Rösler, like Merkel and others, rejected the idea. Transferring liabilities to other countries would remove pressure from debtor nations to reform, he said, differences in yields being a market-driven incentive to get the budget in order. Eurobonds are also legally impossible, he added, based on a recent decision by the German Federal Constitutional Court.

Eurozone must be honest: Big haircuts for bond holders, debt limits for all, says Die Zeit (article in German). The drama of saving European banks that hold Greek debt, and the debt of other tottering Eurozone nations, has been going on for a year and a half. Each effort to keep Greece on track follows the familiar script. Politicians promise spending cuts. Greeks demonstrate. E.U. inspectors check things out and leave angry. Germans declare that Greece will not get any relief until it fixes its problems. Then Greece notices that it needs yet more money and threatens to default. Germany nods. And the next installment gets paid.

By now, all hope for a happy ending has dissipated. Greece is suffering from a multitude of problems that defy quick fixes, among them a huge pile of debt, an inept and corrupt fiscal system where taxes are simply not collected, dysfunctional institutions, and a government-dominated economy. Even unlimited amounts of money can only defer the end game.

But there are already victims. The most recent one: The concept of an independent, apolitical central bank whose primary purpose is guarding the value of the currency, rather than monetizing the debt of countries that have spent beyond their means.

To see how it all started, read my first post on the Bailout Rebellion in Germany
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Marx to Market

By Peter Coy

Illustration by Andy Martin

Society generally moves on from its mistakes. Doctors no longer drain blood from patients. Aviators don’t try to fly by strapping wings to their arms. Nobody still thinks that slavery is a good idea. Karl Marx, though, appears to be an exception to the rule of live and learn. Marx’s most famous predictions failed; there has been no dictatorship of the proletariat, nor has the state withered away. His followers included some of the 20th century’s worst mass murderers: Lenin, Stalin, Mao, Pol Pot. Yet the gloomy, combative philosopher seems to find adherents in each new generation of tyrants and dreamers.

You might even say the Bearded One has rarely looked better. The current global financial crisis has given rise to a new contingent of unlikely admirers. In 2009 the Vatican’s official newspaper, L’Osservatore Romano, published an article praising Marx’s diagnosis of income inequality, which is quite an endorsement considering that Marx declared religion to be “the opium of the people.” In Shanghai, the turbo-capitalist hub of Communist-in-name-alone China, audiences flocked to a 2010 musical based on Capital, Marx’s most famous work. In Japan, Capital is now out in a manga version. Brazilians elected a former Marxist guerrilla, Dilma Rousseff, as President last year.

The vogue for Marx should be expected at a time when European banks stand on the precipice of collapse and poverty levels in the U.S. have reached levels not seen in nearly two decades. Politicians know they can score points with their constituents by kicking job-creating capitalists like mangy curs.

Here’s the surprising thing, though: You don’t have to sleep in a Che Guevara T-shirt or throw rocks at McDonald’s to acknowledge that Marx’s thought is worth studying, grappling with, and possibly even applying to our current challenges. Many of the great capitalist thinkers did so, after all. Joseph Schumpeter, the guru of “creative destruction” who is a hero to many free-marketeers, devoted the first four chapters of his 1942 book, Capitalism, Socialism and Democracy, to explorations of Marx the Prophet, Marx the Sociologist, Marx the Economist, and Marx the Teacher. He went on to say Marx was wrong, but he couldn’t ignore the man.

As misguided as Marx was about many things, and as pernicious as his influence was in places like the U.S.S.R. and China, there are pieces of his (voluminous) writings that are shockingly perceptive. One of Marx’s most important contentions was that capitalism was inherently unstable. One only has to look at the headlines out of Europe—which is haunted by the specter of a possible Greek default, a banking disaster, and the collapse of the single-currency euro zone—to see that he was right. Marx diagnosed capitalism’s instability at a time when his contemporaries and predecessors, such as Adam Smith and John Stuart Mill, were mostly enthralled by its ability to serve human wants.

Marx has gotten an attentive reading recently from the likes of New York University economist Nouriel Roubini and George Magnus, the London-based senior economic adviser to UBS Investment Bank. Magnus’s employer, Switzerland-based UBS, is a pillar of the financial establishment, with offices in more than 50 countries and over $2 trillion in assets. Yet in an Aug. 28 essay for Bloomberg View, Magnus wrote that “today’s global economy bears some uncanny resemblances” to what Marx foresaw. (Personal opinion only, he noted.)

Consider the particulars. As Magnus notes, Marx predicted that companies would need fewer workers as they improved productivity, creating an “industrial reserve army” of the unemployed whose existence would keep downward pressure on wages for the employed. It’s hard to argue with that these days, given that the U.S. unemployment rate is still more than 9 percent. On Sept. 13 the U.S. Census Bureau released data showing that median income fell from 1973 through 2010 for full-time, year-round male workers aged 15 and up, adjusted for inflation. The condition of blue-collar workers in the U.S. is still a far cry from the subsistence wage and “accumulation of misery” that Marx conjured. But it’s not morning in America, either.

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Can Brian Moynihan Save Bank of America?

By Paul M. Barrett and Dawn Kopecki

Brendan Hoffman/Bloomberg

On the afternoon of Aug. 23, Gary G. Lynch, the global chief of legal, compliance, and regulatory relations for Bank of America, was attending a meeting in Washington when the floor heaved. Although Lynch, a lanky 61-year-old attorney with swept-back white hair, had never experienced an earthquake, he possessed the good sense to get beneath a sturdy conference table, along with several other people. “If the ceiling came down,” he recalls, “I thought we were dead.”

The ceiling held, despite the magnitude 5.8 quake rippling from its epicenter in Virginia. Minutes later, Lynch pulled out his BlackBerry and discovered another startling development: a rumor rattling Wall Street that Bank of America might get swept into an involuntary, government-orchestrated rescue by its smaller rival JPMorgan Chase. “This is really getting nuts,” he thought.

Lynch, who as the head of enforcement at the Securities and Exchange Commission in the late 1980s brought Ivan Boesky and Michael Milken to heel, knew he’d come under heavy fire when he parachuted into BofA this July. His assignment: Defend against a seemingly endless barrage of multibillion-dollar lawsuits and government investigations concerning defective mortgage-backed bonds manufactured at the height of the real estate bubble. No sooner did one liability bomb explode than it was followed by another. Now Lynch was doing duck-and-cover for real, while the bank’s share price was pounded to within a whisker of $6, down more than 50 percent since Jan. 1. The wild speculation about a forced merger combined ominously with financial analyst chatter that the mortgage onslaught would drain BofA’s capital, requiring it to sell more stock in desperation. Would Bank of America, which just weeks earlier had reported a record second-quarter loss of $8.8 billion, go the way of Bear Stearns or Lehman Brothers?

It was starting to smell like 2008. Hotshot BofA investment bankers gaped at $14 restricted stock units, granted in 2010 and early 2011, which on paper had lost half of their value. They began thumbing smartphones for contact info of potential alternative employers. Managers interrupted vacations to rush into the office and calm valuable dealmakers.

Calm of a temporary sort returned two days later, thanks to a theatrical Buffett-ex-machina intervention. Three years ago, Bear was sold for scrap, while Lehman was allowed to collapse into bankruptcy, setting off a global financial crisis and recession. Announced on Aug. 25, Buffett’s purchase of $5 billion in BofA preferred stock—on typical only-for-Warren terms, including a $300 million annual dividend—allowed the bank to edge back from the abyss, much as Buffett’s $5 billion vote of confidence arrested a run on Goldman Sachs stock in 2008. On Sept. 6, only hours after he sat for an exclusive interview with Bloomberg Businessweek, BofA Chief Executive Officer Brian T. Moynihan grabbed attention again by reshuffling his management ranks, elevating a pair of new co-chief operating officers and ousting Sallie Krawcheck, the high-profile head of wealth management. After all the excitement, the bank’s shares were up 19 percent from their nadir.

For now, Bank of America will not go the way of Lehman or Bear. It has $400 billion in cash and liquid investments and, more important, with $2.3 trillion in assets, it exemplifies the sorry concept of “too big to fail.” No matter what anyone says to the contrary, the U.S. government cannot afford to allow a financial institution of that size to go down and drag the rest of the country with it. BofA’s difficulties are too complex, however, to be solved by Buffett swashbuckling, executive replacements, or the retention of a really sharp lawyer. America’s biggest bank is inextricably intertwined with a still-debilitated U.S. housing market and an unemployment rate stuck painfully above 9 percent.

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From Arab Spring To Greek Autumn To European Winter

Yesterday in Tunis:

Today in Greece - A man pours a flammable liquid on his body to set himself on fire outside a Piraeus bank branch in Thessaloniki in northern Greece September 16, 2011. The 55-year old man had entered the bank and asked for a renegotiation of his overdue loan payments on his home and business, according to police, which he could not pay, but was refused by the bank (Reuters).

Tomorrow in Europe:

              ?

h/t Lizzie363

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Here Comes Apple's Real TV

By Ben Kunz

(Corrects 10th paragraph to show the Wii is from Nintendo, not Sony.)

Get ready, America, because by Christmas 2012 you will have an Apple TV in your living room. I don’t mean the cute little box now called “Apple TV” that plugs into your set to stream Netflix, but the real deal—a flat-panel Apple television set tied to the company’s online ecosystem and designed as only Apple can do it.

There’s a $14 billion rationale for this prediction but first, let’s explore the rumors. This summer Piper Jaffray analyst Gene Munster dug through component suppliers and found evidence that Apple is gearing up to produce a real TV set by late 2012. Venture capitalist Stewart Alsop, a former board member at TiVo, has published rumors that Apple has a television coming. And Steve Jobs himself hinted last year that Apple might build a real television unit.

“The television industry … pretty much undermines innovation in the sector,” Jobs said at the All Things Digital Conference in July 2010. “The only way this is going to change is if you start from scratch, tear up the box, redesign, and get it to the consumer in a way that they want to buy it.”

Jobs’s quote is good advice for his successor as chief executive officer, Tim Cook, who needs a hit. The TV industry is changing more than at any time in the past 50 years, and billions of dollars are going into play for the winners. As Apple crests in the phone and tablet markets, its investors will want a new frontier.

TV is the future because it remains king of all media. While handsets get hyped, the typical U.S. consumer watches 5 hours and 9 minutes of TV a day, according to Nielsen, and even younger adults 18 to 24 years old—the supposed digital generation—view 3 hours and 30 minutes on televisions daily, vs. only 49 minutes on the Web and 20 minutes on mobile. We all love to lean back. With so much of the consumer’s time, TV has become bloated with waste. The average U.S. home receives 130 cable channels but “tunes to”—or punches in the exact channel number on the remote—just 18 channels a year. Channel surfing has died. A whopping 86% of available channels are never used by an individual viewer.

Consumers pay a lot for all this video waste and they don’t like it. The average cable bill is $75 per month, which means that each year 83 million households pay $74 billion to the top eight TV-subscription services. This is why so-called “cord cutting,” by which consumers drop cable to watch videos on Roku, Hulu, or the Xbox 360 from Microsoft is accelerating; Comcast, the leading U.S. cable system, lost 238,000 subscribers in the second quarter. If Apple were to offer a better service, people might pay up for it.

A second lure for Apple is TV advertising. Unlike U.S. mobile-ad spending, which EMarketer says will barely break $1 billion in 2010 despite years of hype, the TV ad spend in the U.S. totaled $70 billion in 2010 and is forecast by Forrester Research to reach $84 billion by 2015. If Apple could gain just 10% of the $74 billion in current video subscription fees and $70 billion in television ad media, it would take in more than $14 billion in additional annual, recurring revenue.

Apple faces plenty of hurdles. For one thing, TV sets are an infrequent purchase. Apple likes to sell products with built-in obsolescence that you “need” to replace every 18 months—iPhone 5, anyone?—and a flashy TV set doesn’t call for an aluminum upgrade next year. Apple also has struggled to get content providers to embrace its current Apple TV box. In August, Apple stopped renting TV shows for 99¢ on the gadget, claiming that consumers overwhelmingly prefer to buy TV shows. But it could be that Apple’s media partners considered 99¢ far too cheap. With billions of dollars at stake, media producers and cable giants will fiercely defend their video-distribution modes.

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FINRA Drowning In Complaints About Market Manipulation

Whether it is due to the general investing public finally realizing that the market is neither fair nor efficient, that the scales are tipped against the common man from the moment the 'Buy' (or, more rarely, 'Short') button is pressed, or that as the past two years have shown the market is dominated by insider trading, "expert networks" and big legacy investors surviving only due to the government's intervention on their behalf at critical times, is unknown, but Finra is now officially and finally drowning in a barrage of complaints about market manipulation. And to be sure such glaring reminders as 30 year-old UBS traders being singlehandedly responsible (of course, nobody noticed anything over the months and months of creeping illegal trades) for massive cumulative losses that amount to more than the entire net income for the bank (an odd and convenient scapegoat that), will surely not make Finra's life any easier. As Reuters reports: "A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks' internal controls over their traders. FINRA has received complaints this year about banks' audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers. "These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it's really spiked up," DeMaio, senior vice president in FINRA's market regulation unit, told a FIA options industry conference." That's great: so US investors can sleep soundly knowing full well fiascoes such as UBS' Delta One implosion will be confined to the UK (where, incidentally, the director of market at the local regulator, FSA, just resigned - it is unclear if he will follow a recent previous FSA departure straight into the willing clutches of such a non-market manipulative entity as JP Morgan), and that manipulation is being rooted out in the US at its core at a brisk pace.

Right? Maybe not:

The UBS rogue trading case could intensify pressure on regulators to ferret out wrongdoing. In the United States, it will also put more pressure on rulemakers to craft tough regulations as they implement the Volcker rule, a part of the 2010 Dodd Frank financial oversight law that limits banks from betting their own money in financial markets.

FINRA has made stopping manipulation a priority the last couple of years. The regulator, funded by the financial services industry, monitors trading and reports to the U.S. Securities and Exchange Commission.

"We're seeing a large number of order misrepresentations, we're seeing problems with our audit trail," DeMaio said, adding some brokerages have identified orders as customer orders when in fact they originated from the firm itself.

FINRA has asked firms if they have seen some of the problems internally, and whether they've taken steps to address them, DeMaio added.

And while, rhetoric aside, everyone knows that Finra is completely incapable and actively dissuaded from handling anything that could potentially harm any of the real market "manipulators", because after all Finra is a self-regulating organization which in a market that depends on manipulation means it can't really do much if anything, concerns about record plunge in market confidence are pushing regulators to extend the Volcker Rule to overseas banks with US operations to make sure the Kweku Adoboli incident does not spread to the US courtesy of lax internal risk controls such as that exhibited by UBS, and present the optics they are doing at least something:

Regulators writing a rule limiting proprietary trading by U.S. banks are considering extending the restrictions to overseas firms with operations in the country, according to four people familiar with the proposal.

“There is no question that we would lose jobs,” said Wayne Abernathy, vice president of the American Bankers Association in Washington. “A lot of what the banks have been doing in recent years to diversify their services are activities that can easily be done by foreign competitors.”

The rule, named for the former Federal Reserve Chairman Paul Volcker, includes exemptions for government-guaranteed investments, hedging, market-making and insurance-company transactions. It also exempts proprietary trading conducted “solely” outside of the U.S.

The language of the bill is subject to interpretation by regulators at agencies including the Federal Reserve and the Federal Deposit Insurance Corp. Dodd-Frank, signed into law by President Barack Obama last year, requires regulators to adopt rules to carry out the provision by Oct. 18.

Regulators are considering how to define operations conducted “solely” outside of the country. Trading managed in the U.S. or involving U.S.-based advisers may be subject to the rule even if it takes place overseas and has no U.S. investors, the people said.

Well, courtesy of the staged UBS scandal, that will not be the case any longer.

What also won't be the case, is the plan to promote Delta One in replacing and recycling the correlation-cum-prop trading revenue generator that was implicitly eliminated with the Volcker Rule, but was merely morphed over to a new form of correlation desk trade only this time with a fancier name.

The WSJ reports on the imminent demise of yet another form of pseudo-hedged prop trading:

Delta trading has gained momentum in a markets environment in which the mortgage-bond trading business is on the skids and global regulations require banks to set aside expensive capital for loans.

Wall Street is counting on trading large volumes of stocks and derivatives to bolster revenue.

There is nothing inherently improper about such Delta trading. And many large financial institutions employ this strategy, including Société Générale SA, BNP Paribas SA and Goldman Sachs Group Inc. in Europe and Goldman and Morgan Stanley in the U.S., according to a J.P. Morgan Chase & Co. report.

The trading requires state-of-the-art technology systems and can produce as much as $1 billion in annual revenue at top banks, J.P. Morgan said, which noted, "Delta One products in one area of growth in our view, with strong growth in client volumes, resilient margins and untapped potential in emerging markets."

But it earlier gained notoriety in 2008, when French bank Société Générale said that Jérôme Kerviel had worked on a Delta One desk while trying to hide $7.2 billion in losses in another rogue trading scandal. Last year, Mr. Kerviel was sentenced to three years in prison.

It is safe to say that in an attempt to scapegoat their stupidity and to cover up for internal bank risk control lapses, regulators will once again lash out at banks (which they themselves saved and in doing so encouraged them to take any and all risk knowing too well they can never fail again), making "Delta One" a thing of the past. In the meantime, we are confident that Wall Street is already hatching plans of "financial innovation" for the next big "revenue" thing: probably called Vega 100 or Gamma 69. In the same time, we also expect the following chart showing the relentless outflows from US domestic equity mutual funds - the truest indication of what the US investor thinks about the stock market - to continue bleeding mutual funds dry until there is nothing left.

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Guest post: Inner Freedom Comes First

From Brandon Smith of Alt-Market

Inner Freedom Comes First

Is freedom a place, or an idea? A state of society, or a state of mind? Does it begin around us, or within us? In today’s world of the all-you-can-eat sensory buffet, where every facet of life is a bit and a byte and a radio wave and a laser beam, most of humanity looks for all of its answers to such questions in the grand ether of the tumbling data stream. We see changes in the tapestry of cultural interaction as the final measure of national progression, or regression. We confuse forward sounding language with forward moving political transformation. We are mesmerized by the illusion of environmental appearance, and forget that the indelible root of all things outward is nurtured by that which lay within.

In America, in the midst of economic crisis and government driven moral hazard, millions of people are scrambling for “solutions”. The term is used rather haphazardly and often without proper context. There are, indeed, very evil men out there in the dark precipices of global infrastructure, and, these men often instigate very bad events. However, “doing away with them” is NOT a solution. It is NOT a plan. It is merely a goal. A solution requires more than an end result; it also involves the steps necessary to achieve said result. The Liberty Movement, as it is commonly called, tends to run into so much frustration and angst, I believe, because it consistently attempts to skip to the end of the story without traveling the rest of the very necessary journey.

End the Fed! Sue the Fed! March on Washington! Vote the bums out! Take up arms! These are not actions, but reactions triggered by the confusion of the moment. Not only are they single minded responses that lack the strategy and logistics inherent in a successful counter-offensive, but such cries ignore the other devious culprit responsible for our national heartache; ourselves.

Yes, the world must change, and soon, if our principles are to survive. But, for this to happen, we must change first. Instead of looking up, down, and all around us for some magical all encompassing answer, we have to question our very assumptions and world views. No weapon of steel or of law will ever undo the tragedy we live in day to day while we lack the conviction to confront our own biases and failings. We have always been the greatest obstacle to a truly freedom based society, not the elites, who are nothing but parasites feeding off our willfully perpetuated inadequacies.

Working methodologies for combating globalization and centralization do exist. State nullification, for instance, is a significant tool for defusing obtrusive federal authority, but without the organizational willpower and perseverance to take back the now thoroughly corrupt election process county by county, state by state, while producing viable liberty minded candidates and grassroots activist groups, nullification is impossible. Survival preparation is essential for anyone who wishes to decouple from the collapsing mainstream system, but without the determination to make prepping a reality, we are left with nothing but a bunch of hungry, desperate nobodies huddled on the sidelines of the war for truth. Barter networking and alternative markets require extensive patience and unerring dedication, along with constant self education on the processes of sound money and private trade. Safe Haven and Free State Projects push us even harder, requiring us to uproot from everything we have been conditioned to accept as normal and comfortable, and travel, perhaps long distances, to begin anew in a place likely unfamiliar. All of these things involve an internal finality of purpose, a clear and unwavering path unhindered by regret. Those who undertake the above initiatives do so not because they were “told to”, but because they know, above all else, that what they are doing is right. They no longer stand in their own way, and thus, the possibilities become infinite.

For others, the endless circular battle between action and apathy continues. Below, are some of the most frequent excuses uttered by those aware of the burgeoning dangers of a disintegrating culture but who are incapable of taking the first steps of inward freedom needed to do anything about their predicament…

1) I know things are getting bad in this country, but I only have time to focus on my own problems right now…

Your immediate problems are certainly yours to solve, but they are also very likely an aftereffect of the wider problems of the world around you. Ironically, only by taking personal responsibility for the problems of the world can we alleviate the incredible pressures of our microcosmic existence. That is to say, by taking action against the trespasses of global economic and socio-political despotism, you are doing yourself and your private life a big favor.

2) I believe that a collapse (social and economic) is possible, but just can’t imagine things ever going that far…

What you can’t “imagine” is generally pretty irrelevant when considering the FACTS of any given situation. Educating one’s self on the history of modern economic and political instability is a step that many seem to overlook before drawing conclusions on the state of America today. Without a point of reference to refer to, these people are left completely in the mire as to the very real threats that lay ahead. Many of them actually avoid learning the background details of similar crises like those in Weimar Germany, Soviet Russia, Argentina, Zimbabwe, etc., because doing so would mean room for denial would disappear. Yes, our country will see darker days ahead, perhaps pitch black. Refusing to prepare for the worst will not stop the worst from happening. Never, ever, assume a disaster will “blow over”.

3) I just don’t have the money to get into survival prepping right now. Maybe I will start when I get some savings in order…

In some cases (very few) this excuse is acceptable. But, in many others it is complete nonsense. I can’t tell you how many people I’ve run into that make this claim while continuing to spend money on non-essential luxuries. Do you still have cable T.V.? Get rid of it! It stinks anyway. Do you buy a new computer every six months? Well stop! The gigs and ram you have now are probably more than adequate. Do you pour money into personal vices like drugs, cigarettes, or beer? Quit! There will be no room for them post collapse anyway. There is always money for prepping, even if it’s a little every month. The obstacle is not funding. The obstacle is your unwillingness to sacrifice certain comforts for more important investments.

4) I would delve into sound money, but it all seems too complicated…

I’ll make this simple; buying gold and silver is NOT complicated. In fact, it is very easy. If something feels “complicated”, then simply uncomplicated it by educating yourself using the numerous resources still available on the internet or your local library. Knowledge is (at this time) everyone’s prerogative. Liberty starts not with the words in an article or a book, but the decision to actually sit down and read that article or book with an open mind. Make that decision now!

5) I feel isolated, and would like to move to a safe haven with more like-minded people, but am afraid of not finding work, or leaving behind that which is familiar…

Safe Haven relocation is not for everyone, but many can at least admit that they probably live in an unstable and violence prone environment sensitive to economic unrest. Many can also admit that they do not have the support network required to survive such an event. This choice ultimately comes down to priorities. When the survival of yourself and your family is on the line, does it really matter if you are “familiar” (i.e. comfortable) with your current location? In a crumbling marketplace, is it better to take your chances with a job that you know will soon no longer exist, or to take your chances in an alternative market with increasing growth? Is it better to wait until doom is ringing the doorbell? Or, is it more practical to take measures now to insulate yourself from the storm? Learning to prioritize means learning to set aside what we want in the face of what we need.

6) I would like to become more of an activist, but isn’t it better to “keep a low profile”, and avoid retribution from the power elite…?

Fear is the most repressive internal obstacle of all. Tyrants do not conquer countries; fear conquers countries. As I have said before, when the Founding Fathers signed the Declaration of Independence, they did not sign it “Anonymous”. It is every free man’s duty to stand behind his own convictions. Holding them quietly in the corner of the room gets us nowhere. This is not to say that all our thoughts and activities should be made public, but if you can’t build up the gumption to speak the truth in the wake of a lie then you aren’t of much use to anyone, especially yourself. There is nothing illegal about organizing against corruption, and even if there was, it wouldn’t matter. Fighting for freedom means being audacious, and sometimes unconcerned about the supposed “consequences”. While we speak often of safety and preparedness, these things at bottom are also only important so far as they support our ability to put ourselves on the line for the future of our ideals. There is no room for apprehension here…

The purpose of the above is not to “shame” those in the movement who remain inactive, but to clear the fog that tends to surround any new and powerful movement against the rush of the totalitarian wildfire. We continue to look for white-knight leaders, short cut slapdash solutions, and even miracles to somehow save us from doing what we dread most; facing the fact that we are the greatest prognosticators of our own fates. We are the ones who choose freedom, or slavery. In the soft light of fading glory, only those who blaze their own trails will see the road ahead. To each man awaits a multitude of perils and rewards, all of which depend upon his inner resolve; a quality which stands upon the summit of the soul, against the wind, and the unrelenting cold.

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