Author Archives: Joe Weber

About Joe Weber

Now the Jerry and Karla Huse Professor Emeritus at the University of Nebraska's College of Journalism and Mass Communications, I worked 35 years in magazines and newspapers. I spent most of that time, 22 years, at BUSINESS WEEK Magazine, leaving in August 2009 as chief of correspondents. So far, I have worked in central New Jersey, New York City, Denver, Dallas, Philadelphia, Toronto, Chicago, Beijing, Shanghai and Lincoln, Nebraska. The adventure continues.

There, there, dear: do tears belong in the classroom?

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In “A League of Their Own,” that wonderful 1992 film, a young woman player makes a dunderheaded toss and breaks into tears as coach Jimmy Dugan (Tom Hanks) yells at her. “Are you crying?,” he asks, stunned. “There’s no crying! There’s no crying in baseball!”

Boy, can I feel for Dugan. So far, I’ve had to deal with four incidents of tears in school. One time, I believe, the bad toss was mine. In the other cases, well, I’d point to hormones, undergrads facing job-like pressure for the first time or sheltered young women beginning to discover the world isn’t such a kindly place.

Still, I felt as flummoxed as Dugan did. Making girls cry is something only a true jerk would ever feel good about. This is so, even though a wiser colleague at Nebraska, veteran teacher and hard-boiled journalist Kathy Christensen, tells me tears come automatically with breasts. She shrugs them off.

Just under three semesters into my academic career, I don’t find the waterworks easy to dismiss. But, dear reader, you be the judge. Let me know if I blew it or could have handled these situations better:

Case No. 1 – I encourage an outstanding magazine-writing student to pursue an internship with Bloomberg Businessweek, my old employer. Before Bloomberg bought it, the mag had a tradition of taking on bright young interns, most of whom had no business training but who had lots of smarts. A colleague at the mag looks over her materials and says she’d be a wonderful recruit and he could use her skills in projects on business schools; he recommends her, as do I.

But, in myriad ways big and small, BW has changed. Bloomberg has her take a three-hour online test, parts of which are heavy on business knowledge (of which she has none, as everyone involved knows). She fails badly and folks there tell her she’s not a candidate. She comes into my office, crushed and weeping.

So I feel like a heel. I put her into a bad spot, after all, and she suffers for it. It also doesn’t help my credibility with the new BW regime.

Was I wrong? If students are willing to take a test and do badly, is it my fault? I warned her there would be business material on the test, even reviewed some general things with her. But I didn’t realize how much the game had changed. Seems to me I blew it. Did I?

Case No. 2 – As is my normal practice, I flash a student’s paper on the screen from a classroom projector. As a class, we criticize the work. I point out the positives and negatives of the piece, and suggest ways it could be improved. It’s pretty benign and no different from other critiques. We’ve had many such critiques that day. The class doesn’t say much one way or the other about it.

The student waits a bit after the lights come up, but then mutters to me, “you gave me a terrible grade on the paper, then humiliated me in front of everyone. I’m done. That’s it.” And she storms out, furious and in tears.

Her grade, a C+, was not on the screen, though her name was (regular practice in these editing and review sessions). Also, while rushing out, she informs me she will drop another class with me that she had signed up for the following semester and, later, she tops it all of by giving me a scathing evaluation at the end of the course.

Is it wrong to criticize students’ work publicly? The class involved peer-editing, so students criticized one another’s work in every assignment. And, in journalism don’t we face critics every time a reader opens a paper and curses about something he or she reads? In the end, I don’t fault myself for this one, but the drama did throw me.

Case No. 3 – A student has promised a colleague that she would deliver a finished video about a trip the colleague and I took with eight students to Kazakhstan in May. The students are no longer in our classes; some have even graduated, so we have no real sway over them.

The due-date comes and she hasn’t got the goods, but has several legit-sounding reasons. The colleague and I bemoan the fact that several students are behind – a hassle he has had in prior classes – and he gets a bit hot about the general problem. It’s a big thorn in the side for him.

The student, a smart and delightful videographer, breaks into tears. She then begins to apologize, explaining that it’s the time of the month for her (she really said that), she’s got problems with moving to a new city and she’s been working and traveling nonstop for weeks. My heart, frankly, goes out to her. I say, it’s not you that’s the problem here; it’s the general issue of how we can get students to comply with deadlines. I’m sure you will get your work done (which eventually she does, at least most of her work).

When I complain to my colleague later that we shouldn’t be making girls cry, he says, “They make themselves cry.” It’s not his problem, but theirs, he suggests.

So, was she being manipulative? Were we right to rant? Is a deadline a deadline?

Case No. 4 – A top student interviews with an internship recruiter. She says a couple silly things – including asking whether she needs to tell her soccer league that she can’t referee for a week during the internship – and strikes a tone the recruiter says is arrogant. In fact, he tells me afterward that he’s written “humility?” several times on his notes about her.

She comes by and I tell her I’m going to give her some no-holds-barred criticism about her interview. It won’t help her, I say, if I mince words, so I don’t. I tell her precisely what the interviewer had told me, and advise that appearing arrogant cannot help in such settings. You’ve got to seem humble, even it’s just for appearances. She breaks into tears, denies arrogance and says she was not asking for a week off for soccer. He misunderstood, she says, pleadingly.

This is one where tough-love was warranted, I believe. Still, the waterworks were troublesome. My own self-criticism: do mock interviews with students first from now on, giving them pointers that can spare them from making such mistakes. (By the way, she got the internship).

So dear reader, what say you? Are tears something teachers should slough off? Is it better that our kids shed them before they get into the workplace, where the consequences of mistakes can be far uglier? And how would you advise someone, still mystified by the half-adult psyches of undergrads, to deal with them? I’m thinking maybe I’ll just tell the kids that there is still no crying in baseball.

Luddites revisited — attacking high-frequency traders, speculators and assorted other market “vipers”

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Andrew Jackson, the country’s seventh president, was famous for railing against the financiers of the early 1800s. They speculated on “the breadstuffs of the country,” he warned. “Should I let you go on, you will ruin 50,000 families and that will be my sin! You are a den of vipers and thieves. I intend to rout you out and by the eternal God, I will rout you out.”

The quote, a favorite of bloggers who fret about plots to establish a new world order and such, would be at home today in the superheated arguments over high-frequency trading. The latest diatribe, I’m sad to say, comes from a dear friend and former colleague at Bloomberg Businessweek. Peter Coy writes, “The bigger the financial sector, the more dangerous it becomes.” He bemoans the flood of smart people going into the business, noting that a quarter of Harvard’s brainiacs in the early 2000s were drawn into investment banking and like fields. And he complains about banks “cranking up their trading operations in a way that imperils the financial system once again.”

His indictment, based on the May 6 flash crash, is headlined “What’s the Rush?” And his subhed warns “The American financial system is erratic and voracious, and keeps score in milliseconds. Here’s how to rein in the beast.” Among his prescriptions: a transactions tax of a few cents per $100 to “throw sand into the gears of high-frequency trading,” higher margin and collateral requirements, and steps such as new taxes to reduce corporate debt (on the idea that we’re being assailed by waves of “debt-fueled speculation.”)

Oh, come now, Peter. Let’s dial it down a bit. First, while the Great Recession was in part the fault of Wall Street, it was not a high-frequency phenomenon. Rather, we can blame bad securitization practices, flawed housing policies in Washington, poor market oversight and a raft of other well-documented problems. Superfast trading may have helped stocks crater, but it was not the force that drove them down.

Yes, one must admit that May 6 was not a good day for the high-frequency set. No matter how short-lived, the $800 billion plunge in the value of U.S. stocks that day was worrisome. Stocks such as Accenture slipped to a penny from $40 (before bouncing back) in trading patches as short as eight seconds. Clearly, something was amiss in the superfast computers at the likes of Getco.

But let’s keep a few things in perspective. First, after going haywire the market did correct itself. Prices came back, in most cases rapidly. The Dow lost 1,138.69 points from its high in crazed intraday trading on May 6, but closed just 341.9 points down, and regained all that and then some by May 10. Erratic? No doubt. Voracious. Okay, but when have traders been anything but?

Let’s concede that there’s something bizarre about high-frequency trading. Its relationship to real value in stocks is remote at best. So, too, is its connection to fundamentals such as corporate strategy, earnings power, savvy management. All that good stuff that financial journalists, MBAs and CEOs – and maybe even the odd stockbroker — prize is a few solar systems away from the zippy stock-swapping at Hard Eight Futures, Quantlab Financial and such. Those guys, snapping to the beat of their own algorithms, don’t give a hoot about such things. It’s all numbers, bro.

Let’s concede, too, that the liquidity the HFT pack supposedly brings is an illusion. It is most likely gone when most needed. The simile Peter uses – “like a swimming pool that dries up just as you jump off the high dive” – is apt (hat’s off to his wordsmithing). It’s hard to see just what value the high-freqs bring to anyone but themselves.

But, so what? Speculators, those oft-reviled folks who put the zing in stock markets, have always been in the game for the gamble. They see Wall Street as a massive roulette wheel and believe that any way they can tilt the spin to their favor – legally – is fair play. In an odd way, they are cousins to technical analysts who have long played markets free of the burden of fundamentals. Are we to ban the technical folk because their charts are more like astrology than investment? They, too, are an odd subculture of market players whose powers over stock movements one could decry.

Surely, there needs to be policing to make sure high-freqs don’t misuse the power they have to move markets. They do swap millions of shares in ridiculously short periods of times, all but blind to fundamental values. At times, they account for disturbingly high amounts of volume. If they intentionally – or through glitches – knock stocks down to absurd levels to profiteer in some market-cornering way, they need to be rapped hard for that. Fines, perhaps, or suspensions of trading privileges could be used to rein them in.

But imposing transactions taxes or worse seems like overkill. Such steps would penalize all players for the perfidy of a few. Let’s use the scalpel instead of the meat-axe and target the bad boys, not just the folks looking for an edge of a few milliseconds on the next guy.

By the way, it’s passably ironic that Peter’s employer, Bloomberg, as well as Dow Jones and other data-providers are tripping over themselves to serve up market data ever more quickly to the high-freq bunch. Some go so far as to rent space to traders — at premium prices — so they can house their computers cheek-by-jowl with providers’ machines and save milliseconds of transmission time. What these providers know, just as traders do, is that timely information is still everything in this game.

Every technological advance that changes the playing field makes folks nervous. Luddism is a natural reaction. Moreover, the markets have long been the playground of innovators and, as a consequence, the targets of critics. In 1887 the head of the Chicago Board of Trade forcibly removed telegraph gear from the floor of the CBOT because he couldn’t abide the electronic links to notorious Chicago bucket shops, as recounted by Rutgers historian David Hochfelder. One NYSE broker in 1889 complained that the “indiscriminate distribution of stock quotations to every liquor-saloon and other places has done much to interfere with business.”

We may not like the high-speed folks. We may deride them as little more than turbocharged gamblers, as Rain Man-like idiot savants unfairly using their powers to enrich themselves while adding nothing to the game. But they will be players so long as there’s money to be made. We can take the profit out if they don’t play by the rules (and, by the way, maybe some of those smart Harvard types in finance can cook up better rules to keep market ripples from becoming tsunamis). Let’s not, however, make life onerous for everyone in the process.

Labor Day: Celebrate Wall Street!

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Desperate for daylight at the end of a seemingly endless tunnel, investors took heart from the latest jobs report. The Dow climbed nearly 128 points on the Sept. 3 news that hiring seems to be getting back in style, at least in parts of the economy. But banks, hedge funds and other financial players on and off Wall Street seem not to have gotten the word. They’re still stumbling in the dark when it comes to adding staff.

Even while scattered reports of modest additions pop up in the daily press, there’s little evidence that the sun will shine soon on the financial sector. Nationally, the number of people working in financial services barely budged in August, according to the Bureau of Labor Statistics. Counting both finance and insurance, the tally has skittered to some 5.64 million people, the lowest monthly count since February 1999 and a sorry shadow of the nearly 6.18 million who toiled in the sector in the go-go days of late 2006.

What’s the problem? Blame economic sluggishness, Washington demagoguery and, most of all, rampant uncertainty. Financiers, like lots of other folks, don’t know whether a much-trumpeted double-dip recession is in the offing. They still don’t know what exactly the folks in D.C. will loose on them in the way of financial reform. And, more immediately, they don’t know whether those customers they’ve been currying favor with for months will ever get off the dime.

Just look at the paralysis in the new-issues market. Over 170 companies have filed for initial public offerings this year, the most since 2007. But now fears abound that the lackluster markets could keep many of those IPOs in the wings. Worse, while aged titans such as GM garner the attention, experts quoted by USA Today warn that lots of innovative little guys seem to staying on the sidelines. It’s those up-and-comers that have driven past market rebounds and created the fee-generating business Wall Street counts on.

The FUD factor seems to be keeping plenty of would-be bankers out of pinstripes, at least for the time being. Fear, uncertainty and doubt have long been enshrined on Wall Street, of course, though folks did seem to forget that in the first half of the opening decade of the 2000s. The last half of the decade, of course, restored FUD in all its ugly glory, cutting short plenty of budding investment-banking careers.

Sadly, the bloodletting has not stopped. Look at New York alone. A modest number of private-sector jobs (29,000) helped keep the statewide unemployment rate at 8.2% in July, the latest period measured by the New York State Department of Labor. But the job count in financial activities is down 7,200 from July 2009.

Eventually, the numbers in lower Manhattan and nationally will turn around. Finance is too important to keep shrinking. Companies will need capital and they’ll have to look to Wall Street to rustle it up. Investors, too, will rediscover value in those beaten-down stocks. It may be, in fact, that the market just got ahead of itself and needed the bracing slap it got in recent months.

But that doesn’t mean the capital markets couldn’t use some help from Washington. Certainly, money won’t be on the table – plenty was already spent and demagogues have made it all but impossible for more stimulus money to go to Wall Street, at least directly. What’s more, tax relief for big-money investors seems hardly likely.

What Washington could do, however, is clarify the rules. Chip away at that uncertainty by making it clear what sorts of risk-taking will be tolerated and what won’t be. Make sure that big banks have the ability to take prudent risks – certainly not the foolhardy ones that pushed a few erstwhile titans over the cliff a few years ago, but smart and necessary gambles, nonetheless. If animal spirits are suppressed, no real recovery is possible. If bankers fear more Congressional perp walks, how can they back the next Apple or Microsoft?

And another thing Washington could do is put an end to Wall Street-bashing. The next round of elections, sadly, will likely spawn a fresh wave of attacks on fatcats, bankers and assorted financial miscreants. The targets are all too easy to hit and pillorying them plays well in the hard-pressed corners of America where finance is a four-letter word. Look for the rhetoric to ratchet up.

Today’s financiers, of course, can shake off the attacks – so long as there’s no legislation attached to them. But if the best and brightest of the post-recession generation listen to the Populist set and shun the vilified sector, who will fill those jobs eventually? If we are to keep yet another national industrial champion – Wall Street — from losing out to foreign rivals, our most talented hands will be needed. Our leaders ought to be making them feel good about it, not ashamed. And our bankers ought to be taking a few more chances and hiring them.

Economic Slowdown: Ideology at Work

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To the Obama-haters at the Wall Street Journal, the stubborn economic slowdown reflects business’ fear of looming tax hikes. The Administration-friendly folks at the New York Times, by contrast, blame the lackluster economy on political stalemate in Washington. Meantime, over at Bloomberg Businessweek, they tell us it’s all a matter of us having our cake and eating it, too — loving both the Bush-era low taxes and Obama-era high spending and failing to choose between the two.

The inability of our economy to surge back consistently from the Great Recession has become a Rorschach test for pundits. They look at the ugly blot and discern a pattern, one that – not surprisingly – reflects their biases. Love small government and Bush-era tax cuts? Obama’s overreaching is to blame for our woes. Never met a problem that more money from Washington couldn’t solve? It’s the shortfall in such largesse that is making that blot so skinny. And if they can’t make up their minds, they blame both Bush-era “wisdom and folly” – whatever that fence-straddling phrase means.

For my money, the reality is more a matter of the Depression-era notion of pushing on a string. Our policymakers can’t find the levers that will kickstart the economy, that will ignite the animal spirits of our business leaders, and that will drive down the pathologically high unemployment rate. Nothing seems to work, though the folks at the Fed aim to keep pushing whatever buttons they can. Their newest tack, revealed on Aug. 10: buying up more Treasury debt to keep interest rates low.

In the end, the problem may be that the hole we put ourselves into in the Great Recession is just depressingly deep. It took years to dig. And it could take years, sadly, for us to find our way out. To take just one measure, U.S. employment plunged by more than six percent in the recession that began in 2007, the steepest fall of any of the 11 recessions we’ve suffered through since World War II. To take another measure, these downturns lasted from six to 16 months, and our latest slide – believed to have ended in 2009, though the National Bureau of Economic Research has yet to date it – will almost certainly prove to be longer than any of them. (For policy wonks, the Minneapolis Fed puts all these comparisons into perspective here.)

If history proves anything, however, it’s that economies do claw their way back. Sometimes, they do so with the help of Washington. Sometimes, they move on despite government meddling, however well-intentioned. Even today, economists don’t agree on whether D.C. pulled us out of the Depression or prolonged it – making that bout of global misery our first and biggest political and economic Rorschach test.

It’s no comfort to people who have been out of work for months or even years at this point. It’s also small comfort to investors or people considering whether to deploy capital, especially since they are still sussing out Washington’s new regulatory reach. And, if this downturn proves at all similar to earlier ones, whole industries will emerge reshaped as a result of it (think Detroit), not to mention companies (think GM). We will come out of this as a far different economy with areas like Internet-related industries taking a dominant place over the manufacturing icons of the past. (How is it that people still have enough money for iPads?)

Following every twist and turn in this uneven recovery is enough to generate serious palpitations. For players in the capital markets – or anyone, for that matter — it’s healthier to set aside the dire headlines of the moment and keep your eyes on the horizon, however distant it seems. Bet on a long slow ride up, with lots of dips. Keynes famously said that in the long run, we are all dead. But at the moment, the promise of the long run is the only thing we have to hang onto.

Treason? WikiLeaks and the press

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Should some secrets stay secret? And is it treasonous for news operations to report on leaks of war documents when their countries are at war?

These questions arise, of course, because of the release of 92,000 documents about the Afghanistan war by WikiLeaks, in coordination with London’s Guardian, the New York Times and Der Spiegel. The ugly affair raises still further questions about what constitutes patriotism, how the Net makes high-quality journalism tougher to practice, and what governments will now do to try to bury their secrets even deeper.

First off, did the papers act properly? At first blush, it appears that at least two of the organizations — the Times and Der Spiegel — were maneuvered into this joint release. The instigator, it seems, was The Guardian, which had learned that WikiLeaks leader Julian Assange intended to release the papers unfiltered on his Swedish-based Web site. The editors at the Guardian suggested the joint release, apparently persuading Assange that he would make a bigger splash that way. This, at least, is the account given to PBS.

The papers then faced some tough choices: first, do they release the documents, along with their own independent reporting and analysis, and, second, do they share the information with the White House, giving the government a chance to react? On the first count, it seems that the papers really had no choice. After all, the documents would be out on the site no matter what the papers did, and, most likely, they would appear in print (since none of the three competing papers could trust the others to hold back). In short, WikiLeaks held the cards in this high-stakes poker game and it played the papers against one another.

Then the question was, what should the editors do with the information? The New York Times contacted the White House and got its reaction – its take that there was nothing really new in the documents. The White House also did not ask that the Times hold back on publishing the papers (probably realizing the move would be futile). Instead, it got a chance to put its spin on the news, likely hoping to quash the whole matter by offering the “nothing new” take. Certainly, the troops wouldn’t be surprised (see Ed Stein’s cartoon above).

Bill Keller, the executive editor of the Times, laid out the issue nicely in a sidenote to the stories. He noted that the paper had a month to report out the story and that it sought to eliminate any references that could endanger the lives of Allied forces or Afghan supporters. He also suggested that the WikiLeaks folks had the mainstream media over a barrel, arguing “To say that it is an independent organization is a monumental understatement. The decision to post this secret military archive on a Web site accessible to the public was WikiLeaks’, not ours. WikiLeaks was going to post the material even if The Times decided to ignore it.”

Since then, of course, split opinion has emerged on just how problematic the release has been. Former CIA Director Michael Hayden told the folks at Politico that “We’re going to get people killed because of this.” And Rep. Jane Harman, a California Democrat who chairs an intelligence subcommittee, said the documents give the Taliban a hunting list: “There are names of State Department officials, U.S. military officials, Afghans and the cities in which they live in the materials.” By posting them online, she said, “we’ve just served up a target list and an enemies list to the Taliban. … Real people die when sources and methods are revealed.”

For his part, WikiLeaks’ founder Assange said on MSNBC that about 15,000 reports were withheld because they could have revealed the identities of Afghans who have aided U.S. forces and exposed them to “the risk of retributive action” from warlords or the Taliban. For a better sense of who Assange is and what drives him, check out an interview he gave to the folks at TED, the conference organization on the West Coast.

Seems to me there’s no doubt that the leak of the papers in the first place was treasonous. If proved to be the source, Pfc. Bradley Manning will likely spend the rest of his life in jail. The Army intelligence analyst, also suspected of leaking a video a few months ago of a couple Reuters photographers being killed in Baghdad, will be lucky – in other times, he’d be shot. Now, one would guess, the Obama Administration won’t risk making Manning, an impossibly baby-faced twenty-something in his AP photo, into a martyr. Some of Manning’s friends, too, may be implicated, and one wonders whether they had a duty to inform on him before his alleged leaks.

As for WikiLeaks, the legal situation will be tricky but it seems the U.S. can do little against it. Even if Swedish authorities try to muzzle the site, some there, such as Sweden’s Pirate Party, are already offering help. Of course, Assange might never again be able to travel to the U.S. or perhaps to his Australian homeland, since he could be picked up for various violations. Australia is part of the coalition fighting in Afghanistan. Indeed, one has to wonder just where he can go in the West without being pursued.

Some folks are saluting the leaks, praising the media outlets for publicizing the documents, and ignoring or rebutting questions of treason. “I’m more concerned about the troop threat caused by our nation’s involvement in a war that lacks the backing of the Afghan people or fiscal accountability for the $330 billion we have pumped into the longest war in U.S. history,” argues a colleague at Nebraska, Assoc. Prof. Bernard McCoy. “What do we have to show for this? With corrupt Afghan political leaders and insurgents who, according to our own intelligence reports, are as strong as ever, our troops remain at great risk.”

And comparisons to the Pentagon Papers abound. That secret history of the Vietnam war, detailing a wealth of information not revealed to the public and quite embarrassing to the politicians of the day, was published first by the New York Times and then the Washington Post, both in mid-1971. The papers were an official Defense Department study of U.S. activities in Vietnam from 1945-67. A former colleague at BUSINESS WEEK, Mark Ivey, says of the current leak, “Viet Nam, relived.”

But the new documents, including raw intelligence memos, were nowhere as well-researched or vetted as the Pentagon Papers were. The Afghan War documents may be rife with errors and could prove useful in the end only to vengeful Taliban. Joshua Foust, a contributor to Current Intelligence, argues, “If I were a Taliban operative with access to a computer — and lots of them have access to computers — I’d start searching the WikiLeaks data for incident reports near my area of operation to see if I recognized anyone. And then I’d kill whomever I could identify. Those deaths would be directly attributable to WikiLeaks.”

For my part, it seems clear that the leaks could not be stopped once insiders in the military or elsewhere in the intelligence establishment made up their minds to release the papers. If it hadn’t been for WikiLeaks, someone else in the anything-goes Net universe would likely have found a way to help them surface. At that point, the news organizations acted well in doing what savvy reporters do – they put the documents into context and fleshed them out.

Yes, the newspapers were played by Assange. But they gave the public a far richer and more useful account than he would have by releasing the documents alone. In the case of the New York Times at least, the U.S. government also had a chance to frame the discussion and attempt to minimize the damage.

Will anything change now? It seems some Afghans will be in danger. Pakistan’s intelligence service is likely embarrassed and angry. And the U.S. intelligence agencies will now seek stronger means to keep secrets under lock and key. But, unlike the Pentagon Papers, revelations seem few and there’s little in the papers even to strengthen the case of the antiwar folks.

President Obama’s war in Afghanistan has been messy from the start. Too few forces to begin with. A publicly revealed deadline for drawdown. A military leadership that was anything but politic. Unless his plans for military victory start paying off soon – with real gains against the Taliban and Al Qaeda — the WikiLeaks affair will go down as another troubling turn — probably a small one — in a painful, prolonged and maybe doomed battle against Islamist terrorism. This ethical contretemps pales before that ugly reality.

McGraw-Hill: Time for a Deal?

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It’s only business. But that was a hard and personal lesson for many staffers at BUSINESS WEEK Magazine. It may yet become a tough lesson for the leaders of McGraw-Hill Cos.

When McGraw-Hill, my employer of 22 years, cut BW loose by selling it to Bloomberg last year, plenty of BW folks felt betrayed. They had committed their careers to the magazine and bought the argument of leaders there that the eighty-year commitment the McGraw family had to the weekly was a forever thing. So long as a McGraw was in charge, McGraw-Hill (MHP) would never sell it, the leaders counseled.

Well, they were wrong, of course. BW, viewed at McGraw-Hill as just another money-losing Internet victim, was quickly snapped up by the business wire. And soon, despite assurances from the Bloomberg camp that the deal was more about buying talent than a big brand name, most of the 200-plus BW vets were let go. It was a harsh dose of the business world’s version of realpolitik, the kind of thing BW folks had reported on but that few of them had experienced. With its formidable global reporting force, Bloomberg just didn’t need all that pricey BW talent.

Now, pundits are vaunting the idea that McGraw-Hill could – or should – be in someone’s sights. Pearson PLC, the $9 billion-a-year British publishing company, is one of the names floated as the perfect acquirer. Textbooks, synergies, global footprint, etc. Such takeover talk, which has long dogged $6 billion-a-year McGraw-Hill, seems as rational and predictable as Bloomberg’s interest in BW. The 101-year-old MHP has been struggling lately with single-digit declines in both net income (down 8.6% last year) and revenue (down 6.3%).

It is perhaps sad, but former BW folks are likely salivating at the prospect of MHP’s demise as an independent company. Turnabout is fair play, as the British say. Even more than that, however, many BW vets have stock options that have been underwater for a few years now [full disclosure: as former chief of correspondents for the magazine, I’m among them. I took a modest number of options with me when I left last year before Bloomberg appeared on the scene]. MHP’s shares traded as high as $72 in mid-2007. They now struggle around $30, after dipping below $24 last fall. In purely stock-market terms, the company seems like a flatliner whose glory days are long behind it.

McGraw-Hill’s challenges loom as high as BW’s once did (and still do). Uncertain prospects cloud the future for MHP’s once high-flying Standard & Poor’s ratings machine, given the vagaries of government regulation, general litigiousness and the tarring the ratings agencies have taken in the recent recession. The recently passed financial reform could cut its margins and expose it to more lawsuits, as S&P president Deven Sharma himself has recently warned (and S&P also warned about rival Moody’s in cutting the rating on the other rating agency giant, a peculiar irony). Prospects are also questionable for MHP’s storied textbook operation, given hard-pressed state education budgets and the march of the Net in the text realm. Flat stock prices? Who should be surprised?

The big question, of course, is whether Pearson or someone else would see as much value in McGraw-Hill as Bloomberg did in BW. The jury is out on whether Bloomberg’s move was a smart one – so far, its main value seem to be putting the Bloomberg name regularly in front of 4.5 million sets of eyeballs at a bargain price. Pearson could likely eliminate a lot of duplication by folding MHP’s textbook operation into its line. As for S&P, that odd beast could be of use to Pearson (which owns the Financial Times along with the world’s biggest textbook publishing operation) or, perhaps, to a Reuters or other financial information service. Certainly, rating agencies are needed and, even without the crazy-days growth of the past and the threat of a litigious future, S&P seems valuable. Slicing and dicing MHP among a few acquirers might make sense.

The atmosphere also seems right. Conditions are much different than 1979, when then-CEO Harold McGraw Jr. repelled a takeover bid by American Express. The popular CEO could rally his family and other loyalists and beat back the challenge. Given the recent anemic stock performance and dubious prospects at the company, current CEO Harold W. (Terry) McGraw III, son of the now-deceased Harold, might find fewer sentimental supporters nowadays. What’s more, the current CEO might do his family and friends a huge favor by putting his company into a global powerhouse that can do something with is still-valuable assets.

Business has precious little room for sentiment, of course. McGraw-Hill taught that lesson to former BW lifers in painful fashion. If a smart acquirer could do more with the bits and pieces of McGraw-Hill, so be it. Certainly, that would be a better fate than watching the company wither into irrelevance. And for stockholders, the premium should at least take the price close to its long-gone high. A deal might be the business world’s version of justice.

Double-dipping?

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Gentle reader,

Here is an excerpted take on the question of a double-dip recession, from the people at CalculatedRisk, a blog I dip into now and again. Echoes a post here a couple days ago, but with some more detail. Call us a pair of Pollyannas, but maybe we’re onto something.

Personally, I get nervous when conventional wisdom all moves in one direction — as the sliding markets lately seem to suggest. I’ll stick with the contrarians.

Tuesday, June 29, 2010
2nd Half: Slowdown or Double-Dip?

by CalculatedRisk on 6/29/2010 04:00:00 PM

No one has a crystal ball, but it appears the U.S. economy will slow in the 2nd half of 2010.

For the unemployed and marginally employed, and for many other Americans suffering with too much debt or stagnant real incomes, there is little difference between slower growth and a double-dip recession. What matters to them is jobs and income growth.

In both cases (slowdown or double-dip), the unemployment rate will probably increase and wages will be under pressure. It is just a matter of degrees.

The arguments for a slowdown and double-dip recession are basically the same: less stimulus spending, state and local government cutbacks, more household saving impacting consumption, another downturn in housing, and a slowdown and financial issues in Europe and a slowdown in China. It is only a question of magnitude of the impact.

My general view has been that the recovery would be sluggish and choppy and I think this slowdown is part of the expected “choppiness”. I still think the U.S. will avoid a technical “double-dip” recession.

Usually the deeper the recession, the more robust the recovery. That didn’t happen this time (no “V-shaped” recovery), and it is probably worth reviewing why this period is different than an ordinary recession-recovery cycle.

# First, this recession was preceded by the bursting of the credit bubble (especially housing) leading to a financial crisis. And there is research showing recoveries following financial crisis are typically more sluggish than following other recessions. See Carmen Reinhart and Kenneth Rogoff: “The Aftermath of Financial Crises”

An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. … Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.

# Second, most recessions have followed interest rate increases from the Fed to fight inflation, and after the recession starts, the Fed lowers interest rates. There is research suggesting the Fed would have to push the Fed funds rate negative to achieve the same monetary stimulus as following previous recessions. See San Francisco Fed Letter by Glenn Rudebusch The Fed’s Exit Strategy for Monetary Policy.

The graph from Rudebusch’s shows a modified Taylor rule. According to Rudebusch’s estimate, the Fed Funds rate should be around minus 5% right now if we ignore unconventional policy (obviously there is a lower bound) and probably close to minus 3% if we include unconventional policy. Obviously the Fed can’t lower rates using conventional policy, although it is possible for more unconventional policy.

# Third, usually the engines of recovery are investment in housing (not existing home sales) and consumer spending. Both are still under severe pressure with the large overhang of housing inventory, and the need for households to repair their balance sheet (the saving rate will probably rise – slowing consumption growth).

On this third point, I put together a table of housing supply metrics last weekend to help track the housing market. It is hard to have a robust economic recovery without a recovery in residential investment – and there will be no strong recovery in residential investment until the excess housing supply is reduced substantially.

During previous recoveries, housing played a critical role in job creation and consumer spending. But not this time. Residential investment is mostly moving sideways.

It isn’t the size of the sector (currently only about 2.5% of GDP), but the contribution during the recovery that matters – and housing is usually the largest contributor to economic growth and employment early in a recovery.

Two somewhat positive points: 1) builders will deliver a record low number of housing units in 2010, and that will help reduce the excess supply (see: Housing Stock and Flow), and 2) usually a recession (or double-dip) is preceded by a sharp decline in Residential Investment (housing is the best leading indicator for the business cycle), and it hard for RI to fall much further!

So I’m sticking with a slowdown in growth.

Wall Street’s Jitters — Just a Summer Chill

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Wall Street’s jitters about the durability of the economic recovery are beginning to get worrisome – at least to investors. The question is, however, are all those flashing yellow lights really portending another economic plunge, a so-called “double-dip?”

My answer: nope. It seems more likely that the market’s enthusiasm for the recovery just got ahead of itself. Call it another dose of irrational exuberance or, more likely, just excessive exuberance. I suggest that the latest reversals are nothing more than a predictable correction, not an ugly omen. Indeed, I’m reminded of economist’s Paul Samuelson’s hoary trope, hailing from a Newsweek column in 1966, that “Wall Street indexes predicted nine out of the last five recessions.”

Let’s look at the numbers. The S&P 500 index, which closed at 1,095.31 on June 22, has slipped 11.1% from its April 23 peak. On its face, of course, that drop seems big enough to rattle cages from Manhattan to Manchuria. Northern Trust economist Asha Bangalore, who has argued that the S&P 500 index is a “leading indicator par excellence,” pointed to a smaller decline in the index – less than 7% — in early 2008 to suggest that a “rough ride” was in store that year.

Of course, she was right. But, as with any economic question, it would all seem to boil down to timing and perspective. If we pull back the camera to take in a broader picture, the S&P 500 has been on a tear for nearly a year. Between the middle of last August and its late April high, the index climbed 24%. True, the 1,217.28 point peak in April was a long way from the nosebleed pre-recession October 2007 1,565.15 point. Still, that 24% rise over just nine months would seem to make a correction all but inevitable. Indeed, Bangalore herself has noted that the S&P 500 has given off “false signals.”

Pointing to the dazzling climb of recent months, some analysts have marshaled data to show, in fact, that the stock market has been wildly overvalued. The folks at Smithers & Co. contend the overvaluation tops 50%.

Out in the real economy, the rebound from recession certainly has come nowhere near the market’s lofty expectations. After plunging 6.4% in early 2009, the U.S.’s gross domestic product eked out a 0.7% annualized gain last spring, a 2.2% summertime rise and then leapt 5.6% in the winter quarter. Since then, GDP growth has slowed, notching a 3% rise in the first quarter of this year. Does this justify a 24% gain? A cooling, reflected in the market’s latest slide, seemed baked in the cake.

The big question, of course, is whether the cooling is likely to turn frigid this summer. Possible, but it seems unlikely. For one thing, policymakers seem committed to keeping the growth on course, with the folks at the Fed signaling zero interest in raising interest rates. For another, the pressure continues to grow on bankers from President Obama on down to ramp up their still-anemic lending – and the economy managed in the last year to grow even without all the help that looser lending might bring. Sure, Washington’s tap may be dry, but the bankers’ isn’t.

Just as the economy’s slide was anything but orderly, the recovery seems likely to be a stop-and-start sort of thing. One step back for every two forward, as the cliché goes. Lately, we’ve had a step back, for sure. Indeed, the outfit that fixes dates on recession and recovery – the National Bureau of Economic Research – still isn’t confident enough to say that recovery has been under way, despite the year’s worth of positive GDP performances.

But investors who look at the latest gloom on the Street and see darker clouds ahead could be missing the bigger picture. Summertime storms, maybe. And it may yet be a long time before recovery is so strong that it makes a dent in the painfully high unemployment rate. But, if history is any guide at all, the blasts will pass.

(This ran first on the Tabb Forum site).

A mentor’s passing

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Chris Welles, a longtime editor at BUSINESS WEEK and former teacher of mine, died the other day. Chris Roush, who edits the blog Talking Biz News, ran the piece below.

I suspect it is one of many tributes to come about Welles, a major figure in business journalism.  I had occasion to write about Welles myself a few weeks ago. He and another former BW editor, Ron Krieger, introduced me to the foreign world of business journalism in 1980 at the Columbia J School. It’s not too great a stretch to say the pair changed my life.

Welles asked tough questions of business people, making for penetrating journalism. He had a hand in much of the best work BW published. Only time will tell, but I believe that BW peaked during Welles’ time there.

Some profound thoughts here by a former editor for us all at BW:

Ex-BusinessWeek editor Shepard fondly remembers Welles  — 2010.06.21

Talking Biz News asked Steve Shepard, the editor of BusinessWeek from 1985 to 2005, for some thoughts about business journalist Chris Welles, who worked at BusinessWeek for 13 years and died this weekend.

Here is what Shepard, now the dean at the CUNY Graduate School of Journalism, had to say:

“Chris Welles was a genuinely good guy with a journalistic soul. He very much believed that it was the job of the press to hold people in power accountable for their actions and to ferret out wrongdoing. He spent his career doing that, first as a writer, then as a senior editor at Business Week. From the late 1960s to the early 1980s, Chris was probably the premier business writer around, the guy who did the tough stories.

“In his early years, Chris was one of the regulator writers for Institutional Investor, an innovative magazine about Wall Street in the 1970s. He specialized in narrative accounts of shennaigans, abuses, and downfalls. He was also a very successful freelancer, contributing to New York magazine, among others. From 1977 to 1985, he headed the Walter Bagehot Fellowship Program in Business and Economics Journalism at Columbia University. I had served as the first director (1975-76) and Soma Golden the second (1976-77). The program ran into financial difficulties during Chris’s tenure, but he fought to continue it and eventually weathered the storm. Now called the Knight-Bagehot Fellowship Program in Business and Economics Journalism, it has just finished its 35th year as a mid-career opportunity for business journalists.

“When I was editor-in-chief of Business Week, I jumped at the chance to hire Chris in the mid 1980s as a senior writer specializing in investigative and narrative pieces. Though he was soft-spoken and always polite, he was a tenacious reporter with a passion to get the bad guys. I eventually promoted him to senior editor in the finance department because I figured his impact would be felt more by having him work with writers every week rather than write a piece himself every couple of months. And I wanted him to teach the next generation of upcoming reporters. Chris took to editing like a fish to water, passing along a lot of knowledge about finance, a lot of wisdom about reporting complex stories. He was respected and liked by his colleagues.

“Like Lou Gehrig in 1939, Chris started losing some of his skills, and nobody knew why. He was eventually diagnosed with early onset Alzheimer’s disease and retired from Business Week. It was a tragedy for him and his wife Nancy, and a terrible loss for all of us. He took business journalism to a new level, setting the bar ever higher for the rest of us. He has left a legacy for all of us to honor.”

Baby Steppes: Memories of Kazakhstan

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I’ve not yet seen Paris, but how many seasoned travelers can boast of spending time in cafes in Almaty, Astana and Karaganda? Clearly, I’ve got a leg up on veteran globetrotters.

Our three-week stay in Kazakhstan, for an eight-student photojournalism trip, was nerve-wracking at times. Reservations and credit cards were foreign ideas in some hotels and cold-water walkup flats in crumbling Soviet apartment blocks were the norm. Being unable to read street signs or tell taxi drivers where you want to go (my Kazakh is as good as my Russian) was also unsettling. And long, dusty bus rides and rickety train rides through the barren steppe gave us far too much time for reading.

But then there was the magic of the place. There were, for instance, Almaty’s “random taxis,” where you stick out your hand and, voila, some guy happening by in an old Lada or somesuch with an invariably cracked windshield stops to whisk you away (with the help of hand-signals and mumbled Russian). There was the city’s Green Market, an immense bazaar where you can buy just about anything. There was Panfilov Park, a gorgeous island of green that commemorates 28 Almaty soldiers who died fighting Nazis (immense memorials, including an eternal flame that brides and grooms pose near on weekends).

Almaty, the financial center and biggest city in the country, is a pedestrian-friendly place of tony shops, nice parks and rising new apartment towers. A leafy, cool place that stretches downward from the snow-covered Tian Shan mountains, the city was great for a morning run. It’s a busy town. It is home to the Kazakhstan Stock Exchange (KASE), the most visible sign of the nascent capitalism that could – if managed well – turn the country into a substantial regional force.

Almaty’s financiers could help enrich a population that, despite the rise of a middle class, is still relatively poor by western standards. At $1,322 yearly, Kazakhstan’s per capita income ranks it 94th globally, just below Tonga but well ahead of China, according to NationMaster.com. By contrast, each resident of No. 1-ranked Luxembourg boasts an income of $37,500. Some 1.26 million people live in Almaty and, income issues aside, it felt like most of them were shopping in the Green Market when we were.

Astana, for its part, is an enormous World’s Fair. The new capital city, which officially became the seat of Kazakhstan’s federal government in 1998, is much more of a car place (fancy cars predominate, too, for the status-minded Kazakhstanis). Giant buildings with stunning architecture are great to look at, but challenging to get to. It’s pretty, glitzy and new. In an odd way, it has a Washington-like feel, with monumental buildings and a feeling of power, but nowhere near as intimate as Almaty. If Almaty — population over 700,000 — were New York, Astana would be D.C.

Still, Astana has huge promise. From its spanking-new Eurasian National University, where we met with journalism instructors facing many of the same issues we do at UNL, to the wonderful new U.S. embassy, the place seems fresh and new. That freshness could help sweep away the old Soviet apartment blocks over time. Some of those five-story apartment blocks, with their steel doors, security locks, overgrown common areas and sewer smells, made South Bronx highrises seem palatial. One hopes most such places will disappear in Almaty and Karaganda, as well.

In some ways, Astana is a bold, optimistic statement. Just think about the religious nature of the place. A gleaming mosque, a stunning synagogue, Roman Catholic and Russian churches coexist, with representatives sometimes meeting in a huge glass pyramid built to celebrate the world’s religions. It all reflects the ebullient attitude of the country’s founding president, Nursultan Nazarbayev, who has kept power since Kazakhstan emerged from the Soviet Union in 1991. His long reign has been helped by the nation’s vast oil and mineral riches (despite sometimes questionable elections, he seems popular and the big question mark over Kazakhstan’s future is who will come next once the 70-year-old leader steps aside).

Then there’s Karaganda, the regional center where we spent our final week. There’s something tragic about the place, probably because it was shaped by the KarLag system, part of Russia’s Gulag internal-exile system. Many people in Karaganda, it seemed, had ancestors connected in some way to the KarlLag, as prisoners, exiles or guards. And folks there, even the Russians, still seem suspicious of Russian things – most notably, blaming rockets launched from the Baikonur space base for headaches, high blood pressure, joint pain and weather changes.

Outside of Karaganda, we visited the village of Dolinka, where barracks and other buildings from the KarLag remain. The place seemed desperately poor to Western eyes, but residents don’t seem to feel that way (and there were plenty of satellite dishes on ramshackle houses). Indeed, I’ll never forget the young Russian college student who was appalled at my suggestion that it was a poor town. Her friend lived there, she said, and didn’t think it poor at all. Poverty, it seems, is relative (though running water, heat and the chance to get an education would seem to be handy universal barometers).

Karaganda is a place where Peace Corps folks and missionaries are reaching out in earnest to the local population. Saving souls or helping people think well of America is certainly not a bad thing. Already, the public seems enamored of things American, as reflected by the constant stream of music videos in cafes and restaurants, as well shop names (U.S. Polo Assn. has an outlet there). College students in an English club, which is helped along by U.S. aid, were fascinated to hear us talk about the U.S. Western cultural elements dominate: I’ll never forget the boy in Dolinka, about 10, who strummed his crude homemade guitar and talked about Pink Floyd.

Perhaps my favorite memory of Karaganda will be the city’s sprawling downtown park. There’s a delightful amusement park, where we challenged our nerve on a rickety old Ferris Wheel that looked like it hadn’t been oiled since the fall of the Soviet Union. And one of the students, Megan Plouzek, and I got to run an impromptu marathon around the park (14 circuits approximated 26.2 miles, and I managed five while Megan logged about eight, covering more than 15 miles). The marathon was the brainchild of a local American former college athlete now working for a missionary group, and drew about 15 competitors.

Kazakhstan seems very much a country still emerging. Its economic system, dependent on natural resources, needs to diversify. Its educational system, despite such dubious features as college students occasionally paying teachers for grades, offers a way up for the people. Its government-funded foreign-study programs, which pay full-freight for students who qualify in exchange for five years work back in the country, represent a smart bet on the government’s part.

But I believe the country will make a mark globally over time. Already a regional powerhouse in Central Asia, it could ride its oil wealth and strategic location between China and Russia to great things. I suspect Americans will hear much more about the place in coming years, and it makes me feel like we got a ground-floor view. Paris can wait.