Highlights: Makers and Takers: The Rise of Finance and the Fall of American Business, by Rana Foroohar


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(It represents about 7 percent of our economy but takes around 25 percent of all corporate profits, while creating only 4 percent of all jobs.)

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power to shape the thinking and the mind-set of government officials, regulators, CEOs, and even many consumers (who are, of course, brought into the status quo market system via their 401(k) plans) is even more important. This “cognitive capture,” as academics call it, was a crucial reason that the policy decisions taken by the administration post-2008 resulted in large gains for the financial industry but losses for homeowners, small businesses, workers, and consumers.

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The more a company focuses on financial engineering rather than the real kind, the more it ensures it will need to continue to do so. But right now, what Apple does have is cash.

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David Einhorn, the hedge fund manager who’d long been complaining that the company wasn’t sharing enough of its cash hoard, inadvertently put it very well when he said that Apple should apply “the same level of creativity” on its balance sheet as it does to producing revolutionary products.1 To him, and to many others in corporate America today, one kind of creativity is just as good as another.

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Apple’s behavior is no aberration. Stock buybacks and dividend payments of the kind being made by Apple—moves that enrich mainly a firm’s top management and its largest shareholders but often stifle its capacity for innovation, depress job creation, and erode its competitive position over the longer haul—have become commonplace.

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From “activist investors” to investment banks, from management consultants to asset managers, from high-frequency traders to insurance companies, today, financiers dictate terms to American business, rather than the other way around.

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fact, American firms today make more money than ever before by simply moving money around, getting about five times the revenue from purely financial activities, such as trading, hedging, tax optimizing, and selling financial services, than they did in the immediate post–World War II period.

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from the growth in size and scope of finance and financial activity in our economy to the rise of debt-fueled speculation over productive lending, to the ascendancy of shareholder value as a model for corporate governance, to the proliferation of risky, selfish thinking in both our private and public sectors, to the increasing political power of financiers and the CEOs they enrich, to the way in which a “markets know best” ideology remains the status

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the role of the capital markets and the banking sector in funding new investment is decreasing. Most of the money in the system is being used for lending against existing assets,” says Adair Turner, former British banking regulator, financial stability expert, and now chairman of the Institute for New Economic Thinking, whose recent book, Between Debt and the Devil, explains the phenomenon in detail.11 In

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Turner estimates that a mere 15 percent of all financial flows now go into projects in the real economy.

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One of them is a decrease in lending, and another is an increase in trading—particularly the kind of rapid-fire computerized trading that now

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Back in the early 1980s, when financialization began to gain steam, commercial banks in the United States provided almost as much in loans to industrial and commercial enterprises as they did in real estate and consumer loans; that ratio stood at 80 percent. By the end of the 1990s, the ratio fell to 52 percent, and by 2005, it was only 28 percent.25 Lending to small business has fallen particularly sharply,26

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In lobbying for short-term share-boosting management, finance is also largely responsible for the drastic cutback in research and development outlays in corporate America, investments that are the seed corn for the future. Indeed, if you chart the rise in money spent on share buybacks and the fall in corporate spending on productive investments like R&D, the two lines make a perfect X.29 The former has been going up since the 1980s, with S&P 500 firms now spending $1 trillion a year on buybacks and dividends—equal to more than 95 percent of their net earnings—rather than investing that money back in research, product development, or anything that could contribute to long-term company growth.

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All of it erodes growth, not to mention our own livelihoods. And yet, so many Americans now rely on the financial markets for safety in their old age that we fear anything that might have a chilling effect on them, a fear that the financial industry expertly exploits. After all, who would want to puncture the bubble that pays for our retirement? We have made a Faustian bargain, in which we depend on the markets for wealth and thus don’t look too closely at how the sausage gets made.

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According to a Stanford University study, innovation tails off by 40 percent at tech companies after they go public, often because of Wall Street pressure to keep jacking up the stock price, even if it means curbing the entrepreneurial verve that made the company hot in the first place.35 A flat stock price spells doom. It can get CEOs canned and turn companies into acquisition fodder, which dampens public ardor and often leaves once-dynamic firms broken down and sold for parts. Little wonder, then, that business optimism, as well as business creation, is lower than it was thirty years ago.

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But the depth and breadth of correlations between the rise of finance and the growth of inequality, the fall in new businesses, wage stagnation, and political dysfunction strongly suggest that finance is not just pulling ahead, but is also actively depressing the real economy.

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As Stephen Roach, the former chief economist of Morgan Stanley, put it to me in an interview right after the fall of Lehman Brothers, “finance has simply moved too far from its moorings in the real economy.”

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All the money in the world, and all the information about who’s making and taking it, passes through that tiny middle. Financiers sit in what is the most privileged position, extracting whatever rent they like for passage. It’s telling that technology, which usually decreases industries’ operating costs, has failed to deflate the costs of financial intermediation. Indeed, finance has become more costly and less efficient as an industry as it deployed new and more advanced tools over time.

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All the money in the world, and all the information about who’s making and taking it, passes through that tiny middle. Financiers sit in what is the most privileged position, extracting whatever rent they like for passage. It’s telling that technology, which usually decreases industries’ operating costs, has failed to deflate the costs of financial intermediation. Indeed, finance has become more costly and less efficient as an industry as it deployed new and more advanced tools over time.

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All the money in the world, and all the information about who’s making and taking it, passes through that tiny middle. Financiers sit in what is the most privileged position, extracting whatever rent they like for passage. It’s telling that technology, which usually decreases industries’ operating costs, has failed to deflate the costs of financial intermediation. Indeed, finance has become more costly and less efficient as an industry as it deployed new and more advanced tools over time.

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other industries with similar education and skills.17 As Thomas Piketty put it in Capital in the Twenty-First Century, financiers are, in some ways, like the landowners of old. Instead of controlling labor, they regulate access to things even more important in the modern economy: capital and information. As a result, they represent the largest single group of the richest and most powerful people on earth. Even more so than Silicon Valley titans or petro-czars, financiers are truly masters of our capitalist universe.

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Finally, the legislation put limits on the amount of interest that banks could offer savers to attract their money. This measure, known as Regulation Q, was designed in part to prevent banks from competing too vigorously with one another for deposits by offering higher and higher interest rates, which might in turn push them into the sort of risky investments that had precipitated Black Tuesday in 1929. The idea behind all of it was to make banking a safe, boring utility, something that facilitated business rather than disrupted it or competed with it for investment.

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Smith’s core belief—namely, that markets worked better than government planning only when all players enjoyed equal footing and complete price transparency—had already been lost to the “markets know best” and “selfishness is good” simplification of his theories.

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In many ways, the creation of the CD and the secondary market for trading it marked a turning point for banking in the postwar era. The size of the sector began to grow, as did its focus on coming up with ways to game the system to make more money—two trends that fed on each other. Banking was no longer a utility. Just as Wriston had hoped, it was increasingly a high-speed, high-stakes business.

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Pushing the “markets know best” approach, Wriston argued that Wall Street could do this lending much better and more efficiently than government. He convinced Shultz to overturn a law that forbade US commercial institutions to make such loans to risky nations, and banks started lending to countries like Mexico, Brazil, Argentina, Zaire, Turkey, and many others. Within five years, foreign loans to developing countries by private banks had risen from $44 billion to $233 billion.50 Plenty of the deals were dicey, but inflation, which remained high thanks in part to all the complex deal making at a global level, helped keep these risky countries solvent for a while, by making their debt payments less onerous.

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Fed chairman Paul Volcker helped put together a $1.5-billion bailout package for the country, in large part because he feared that Mexico’s default would sink a number of large American banks, in particular Citi, that were holding so much of that bad debt. Volcker, who’d been wary of the growing clout of banking and finance, hated bailouts, but he felt they were necessary to avert a broader recession. In some way, Volcker was the first to declare these institutions Too Big to Fail.

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In 1980, Wriston got his ultimate prize when President Jimmy Carter deregulated interest rates and banks were allowed to offer whatever rates they liked to attract funds. Regulation Q was history. The door was open to a whole new world of variable-rate mortgages, ever more complex securities, derivatives to hedge them all, and the rapidly swelling financial institutions that would make vast fortunes on them, wreaking havoc on the country’s economic stability in the process.

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But high rates turned out to be irresistible bait to foreign investors, who could now get superhigh yields in the United States. The Japanese, and later the Chinese and other emerging-market investors, became huge purchasers of US Treasury bills. This inflow of foreign capital allowed the cycle of financialization to continue, bolstering assets of all kinds and making people eager to engage in more and more speculative ways with the financial markets.

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In 1984, the Nobel Prize–winning economist James Tobin, a former member of Kennedy’s Council of Economic Advisers and mentor to current Fed chair Janet Yellen, gave a talk on the “casino aspect of our financial markets,” in which he lamented both the trend of financialization and the way in which technology was facilitating it, rather than actually strengthening the economy as a whole. “I confess to an uneasy Physiocratic suspicion…that we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity,”

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Through the 1980s, every few years saw the classic stages of boom and bust depicted by Charles Kindleberger in his famous book, Manias, Panics, and Crashes. A novel offering (be it the CD, the adjustable-rate mortgage, or a hot new IPO) would be followed by credit expansion, then speculative mania, distress, and ultimately a meltdown (usually followed by frantic government efforts to stem panic). By the time Volcker’s successor, Alan Greenspan, took over control of the Fed in 1987, the government had gotten into the habit of lowering interest rates to jump-start markets each time they weakened. It was kerosene for finance, adding both reward and

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“What happens when you give a bunch of financiers easy money and zero interest rates is that they go out and try to make more money. That’s what they are wired to do,” says Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management and chief of macroeconomics for the bank. (He is just one of many experts who worry about the market-distorting effects of the Fed’s unprecedented program of asset buying and low interest rates, which reached an apex in the wake of the 2008 crisis.) “Easy money monetary policy is the best reward in the world for Wall Street. After all, it’s mainly the rich who benefit from a rising stock market.”

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Surging assets prices in the 1980s and ’90s were the root of a debt-fueled consumption boom that turned Americans into the “buyer of last resort” for the global economy.60 At the start of the 1980s, personal savings as a percentage of GDP was about 12 percent; by 1999 it had free-fallen to near 2 percent,61 as people took on second mortgages, home equity loans, more credit card debt, and other kinds of personal credit lines to fuel consumption.

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Instead of worrying about labor’s ever-decreasing share of the pie, which began shrinking in the late 1970s (thanks to the same toxic combination of globalization, technology-related job destruction, and financialization), households hoped for market hikes. Over time, they came to rely on the value of their stock portfolios and their homes—which had themselves become financial assets—rather than on salary raises.

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Many of the spliced-and-diced securities were now held off banks’ balance sheets altogether, in quasi-shell entities known as structured investment vehicles, which Citibank had invented two decades earlier to circumvent capital requirement rules.72 The upshot was that in the midst of the crisis, it was difficult for bankers themselves to know where the next tranche of exploding debt would come from.

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In the end, the Chevy Cobalts and other GM vehicles that ultimately resulted in the deaths of at least 124 people, including several who perished after fiery crashes, were being produced as “cost-conscious” vehicles on “slim margins.”6 The company was selling the cars in bulk, with

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In the end, the Chevy Cobalts and other GM vehicles that ultimately resulted in the deaths of at least 124 people, including several who perished after fiery crashes, were being produced

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In the end, the Chevy Cobalts and other GM vehicles that ultimately resulted in the deaths of at least 124 people, including several who perished after fiery crashes, were being produced

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In the end, the Chevy Cobalts and other GM vehicles that ultimately resulted in the deaths of at least 124 people, including several who perished after fiery crashes, were being produced as “cost-conscious” vehicles on “slim margins.”

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Putting finance in charge actually leads inexorably to corporate silos, says Lutz, “because bean counters believe greatly in suboptimization and keeping things small enough to where they can be controlled.” From the point of view of the accountants, siloing is great, since it makes the various parts of a company easier to tally on a balance sheet and thus manage from the top down. “It’s all part of the financial control mentality,” says Lutz. “Anytime they [the bean counters] see a strategy or a philosophy where something risks slipping out of their grasp, they get worried.”

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That made it easier for bean counters to tally cost inputs and outputs from various divisions, but it also created what Barra calls “transactional” thinking, in which everyone colors inside the lines of their own precise job description without thinking more holistically about problems or solutions.

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Between 2000 and 2010, capital investment in things like R&D, equipment, new factories, and so on declined in manufacturing businesses by more than 21 percent. The decrease was particularly steep in certain industries, like motor vehicles—a sector in which investment plummeted by 40 percent.12 But the cuts were made across the board and can be illustrated with stories of decline across nearly every sector. Consider Kodak’s decision not to invest in digital cameras in order to preserve its profit margins on film, or AT&T’s resistance to Internet telephony, or the way in which traditional media companies have been so slow to adapt to the digital age, since they are focused on preserving the profits of their old models.

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These missteps, like GM’s switch crisis, are all part of a very long-term shift in corporate America toward balance-sheet-driven management. This transformation began in the first half of the twentieth century, when a change in thinking about business gave rise to a seminal new idea: if you could measure it, you could manage it. It was a shift that put markets before business, capital before labor, and profits before anything else. And it was a shift that would ultimately undermine real growth and innovation within American business itself.

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The statement summed up a new conventional wisdom about the purpose of business and foreshadowed the banking sector’s ideas about shareholder value, which hold that the chief mission of a corporation is to maximize returns to shareholders and put their interests above those of any other group—be it customers, founders, laborers, or the community at large. It was an idea that had only recently been enshrined in law, in the 1919 Michigan Supreme Court case Dodge v. Ford Motor Co., which established that “a business corporation is organized and carried on primarily for the profit of the stockholders.”

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But Ford wanted to put the money to work building more factories, so that he could sell more cars. “My ambition,” he said, “is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.”

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But Ford wanted to put the money to work building more factories, so that he could sell more cars. “My ambition,” he said, “is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.”

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But Ford wanted to put the money to work building more factories, so that he could sell more cars. “My ambition,” he said, “is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.”

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But Ford wanted to put the money to work building more factories, so that he could sell more cars. “My ambition,” he said, “is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.”

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business and is still a key legal precedent in the area of corporate governance. The ruling enshrined in law the idea that companies had a legal obligation to maximize profits for investors, and that their interests trumped those of anyone else. Indeed, “shareholder

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But the case reverberated throughout American business and is still a key legal precedent in the area of corporate governance. The ruling enshrined in law the idea that companies had a legal obligation to maximize profits for investors, and that their interests trumped those of anyone else.

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Oddly, this growing bureaucracy was something that Taylor, who explicitly favored the transfer of power from workers to management, actually lauded. As he put it, “the most marked outward characteristic of functional management lies in the fact that each workman, instead of coming in direct contact with the management at one point only…receives his daily orders and help from eight different bosses,” including route clerks, instruction card men, cost and time clerks, gang bosses, speed bosses, inspectors, repair bosses, and the shop disciplinarian.

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Moreover, managers themselves were increasingly drawn from the accounting profession, something of which Taylor (who died in 1915) would have heartily approved, since he didn’t think there was much difference in the skills needed to run an auto factory, an oil company, or an advertising firm. If you could measure it, you could manage it—a motto that McKinsey, the global business consulting giant, would eventually pick up and adopt as its unofficial slogan decades later.

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managerial high caste was being born, one separate from owner-entrepreneurs. It was focused mainly on financial metrics and adversarial to labor, which was increasingly being de-skilled, thanks to Taylorist ideas of rigid, limited job descriptions.

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As firms became more financialized, managers became less and less knowledgeable about the actual products their companies were creating, even as they knew more about their financial performance. As control of production got decentralized, financial decision making, the most important power node in the company, was being ever more centralized and crucial to corporate strategy. That fact in and of itself supported greater financialization. As communication between corporate divisions became harder, numbers—and the absolute truth they were perceived to hold—became increasingly important, the only real information that firms could marshal to make decisions.

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responsible for the failure of US strategy in Vietnam. His obsession with systems analysis—in which data about every aspect of the war effort, from bombs to defoliants to fatalities to the number of enemy vehicles disabled per air strike megaton, was collected in order to maximize efficiency—blinded Washington to the overall flaws in its conduct of the war. Since it was impossible to argue with numbers, it was difficult to question McNamara’s thinking, a topic well described in books like David Halberstam’s The Best and the Brightest.

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responsible for the failure of US strategy in Vietnam. His obsession with systems analysis—in which data about every aspect of the war effort, from bombs to defoliants to fatalities to the number of enemy vehicles disabled per air strike megaton, was collected in order to maximize efficiency—blinded Washington to the overall flaws in its conduct of the war. Since it was impossible to argue with numbers, it was difficult to question McNamara’s thinking, a topic well described in books like David Halberstam’s The Best and the Brightest.

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McNamara had always been enamored of numbers. In his youth, he’d studied business administration at Harvard and become a proponent of the sort of decentralized management and financially driven decision making already seen at GM, which would eventually become the gold standard for financialized firms, lauded by the father of management consulting, Peter Drucker, in his management tome Concept of the Corporation. (Both Drucker and McNamara were big fans of Taylor.)24 McNamara, though, wasn’t just interested in numbers; he also sought power and prestige. Following a brief stint on the West Coast at the accounting firm Price Waterhouse, McNamara quickly returned to Cambridge to imbue other impressionable minds with a love

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The Stat Control group, in which McNamara became a star player, squeezed more flying hours out of planes and figured out the most efficient way to move equipment from point to point. But it also recommended cost-cutting maneuvers like getting rid of fighter escorts on bombing missions, based on number crunching that estimated an 80 percent survival rate for pilots without escorts. Never mind the remaining 20 percent doomed by the algorithm, or the intangible, morale-dampening effect of sending pilots into a war zone without wingmen. When General Curtis LeMay, one of the top air force leaders at the time (and later George Wallace’s vice presidential candidate), read the recommendations in that particular Whiz Kid report, he scrawled an expletive across it before throwing it in the trash.27

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Even the RAND Corporation, the shadowy, pseudomilitary institution that actually developed the systems analysis techniques later deployed by McNamara at the War Department, issued a self-critical report in 1950, saying its methods had been too rigid and reactive. This internal report, authored by a RAND engineer, noted that “the great dangers inherent in the systems analysis approach…are that factors which we aren’t yet in a position to treat quantitatively tend to be omitted from serious consideration. Even some factors we can be quantitative about are omitted because of limits on the complexity of structure we have learned to handle. Finally, a system analysis is fairly rigid, so that we have to decide six months in advance what the…problem is we are trying to answer—frequently the question has changed or disappeared by the time the analysis is finished.”

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known goals, it was terrible at helping people figure out what the goals should actually be, especially when there were a lot of sticky variables at play, like human motivations and emotions.

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“Bob McNamara was behind the effort to install profit centers throughout the corporation so they could take the pulse of each operation. The men went beyond the traditional control of manufacturing costs, to include control over everything, from marketing to purchasing,” writes Byrne.31

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This transition—which can be called the Whiz Kidding of the American auto industry—underscored in his view a larger corporate malaise taking hold in the country, one in which finance was coming to dominate business. Accountants were replacing tradesmen, and making money was slowly but surely replacing the goal of making great products. In short, financialization loomed. “The Whiz Kids were the forerunner of the new class in American business,” Halberstam wrote. “Their knowledge was not concrete, about a product, but abstract, about systems—systems that could, if used properly, govern any company. Their approach was largely theoretical, their language closer to

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democratization of capitalism. Up until then, stockholding among the masses wasn’t common; people held their wealth largely in bonds and property. But everyone knew who Ford was, and what Ford made, and everyone wanted a piece of this company, which more than any other seemed to represent the American dream of freedom and entrepreneurial possibility. The offering was a huge success, and the stock price soared well beyond what was expected, like the hot technology offerings of today. So it was that the Ford family got 300,000 new corporate owners from Main Street. And by taking the firm public rather than cashing out their stake privately, they got to avoid $300 million in inheritance taxes while also keeping control of the company.38

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There, companies like Daimler had adopted a “codetermination” style of management in which labor actually sat on the corporate board and helped make decisions about how the firm was run and how cars were made—a model that ultimately proved more productive and globally competitive. But in the United States, the traditionally Taylorist approach meant management was inclined not to collaborate with labor but to pacify

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Adversarial is perhaps the best word to describe relations between management and labor in America, not only at GM but also in most of the auto industry and, indeed, in US corporations as a whole. One of the many reasons that American auto manufacturers are still struggling to implement the sort of collaborative approaches to production that have made some Asian and European companies so successful is that doing so requires a profound mental reset. For example, back in the 1980s and ’90s—when GM and other firms tried to put into place a Japanese-style “andon cord” system that would allow any worker to stop the line if something went wrong—American workers would regularly be yelled at by bosses for actually pulling the cord. They were, some managers thought, just trying to get themselves a free work break.40 The idea that they might take pride in their products and want them to be top-notch seemed an imaginative leap too far.

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He announced plans to close twenty-one plants and cut 74,000 workers—moves that boosted the company’s stock price but cost it trust with labor, which was of course subsequently less interested in negotiating compromises in compensation in exchange for control over the production process. While there has been some incremental improvement, the basic lack of trust in these relationships, which has been largely broken by financialization, persists to this day.

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“The Ford Motor Company was becoming a stagnant place at which to work,” writes Halberstam in The Reckoning.41 “The impulse of product, to make the best and most modern cars possible, was giving way to the impulse of profit, to maximize the margins and drive both the profit and the stock up. It did not happen overnight. It had begun with McNamara and his systems.”

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Yet to the Whiz Kids, customer satisfaction was ultimately less important than the corporate balance sheet and the company share price. In their minds, the priority of an auto executive—or any kind of executive—wasn’t to be passionate about your product. It was to make money, just like GM’s Alfred Sloan had admonished years earlier. McNamara and his team had “contrived not to improve but in the most subtle way to weaken each car model, year by year,” explains Halberstam in The Reckoning.

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Wall Street, of course, loved the idea, and there was little to no thought about how it might erode the manufacturing knowledge base in America and thus undermine longer-term growth.

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those liners—$137 million—far exceeded Ford’s original estimate of what it would cost to compensate customers for burn-related injuries and deaths: $49.5 million. “Since the price of avoiding burn accidents…was nearly triple the benefit of doing so,” Gabor says, “the company never authorized the change.”

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The system of top-down decision making in which only number-toting managers had power would not only lose the war in Vietnam; it would also cost American automakers their preeminent place in the industry that they had invented.

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A famous Harvard Business Review article by Robert H. Hayes and William J. Abernathy, published in 1980, looked at the problem not only in the auto business, but throughout American industry.47 It found that US firms’ research and development spending had been falling since the mid-1960s, even as the percentage of company leaders coming out of finance, relative to any other area, had been increasing. Money spent on mergers amounted to nearly two-thirds of the entire amount of R&D spending by American industry. Companies were hoarding cash rather than investing, and executives spent the majority of their time on “sophisticated and exotic techniques used for managing their cash hoard,” treating “technological matters simply as if they were adjuncts to finance or marketing decisions.” The article, which was entitled “Managing Our Way to Economic Decline,” could have been written today; the only difference would be that the numbers supporting its thesis would be more striking. No wonder it was re-released in 2007 to popular acclaim.

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In the auto industry itself, GM perhaps more than any other company has embodied the bitter legacy of Taylor, McNamara, and the triumph of bean counters over car guys. While both Ford and Chrysler have been successfully made over in recent years by product-oriented leaders who took the reins from the finance department, GM is only now starting to make those much-needed corrections, as Mary Barra, a career engineer, tries to revamp the once-iconic firm.

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“During that conversation, I asked what I thought was an innocent question,” says Lo. “What influence does your source of financing have, if any, on your scientific agenda?” The two executives looked at each other and laughed ruefully. Then the CSO turned back to him and gave an answer that left him speechless: “Influence? Finance drives our research agenda.”

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Lo found that answer outrageous. “What do stock market volatility, interest rates, and Fed policy have to do with whether you can cure cancer by angiogenesis or immunotherapy?” he asks. “Nothing. But it drove their agenda. And this was a successful company, not a struggling one.”

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Opportunity was increasing, in other words, but so were complexity and risk—both of which were things that business programs teach corporate leaders to studiously avoid. A typical CFO, for example, looks at a new drug investment and sees that there’s only a 5 percent chance it will become a blockbuster—so he chooses to invest in something already in development, or to sit on the cash altogether. The result? “The really innovative stuff doesn’t get funded,” says Lo.1

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Naturally, it’s a tendency that Wall Street has wholeheartedly supported. One resonant 2010 Morgan Stanley report called for the pharmaceutical industry to “exit research [meaning the search for new drugs] and create value,” by throwing cash back to shareholders or buying up companies that could create short-term revenue streams, if not longer-term profits.

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have MBAs from the top business schools in the country. And they are doing exactly what Finance 101 classes at such schools tell them to do—which is to minimize the amount of cash at risk and increase shareholder value, at all costs. That meant cutting nearly 150,000 jobs across the pharma sector, most of which were in R&D, between 2008 and 2013.

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also meant outsourcing more research and turning formerly great pharmaceutical innovators into entities that look suspiciously like portfolio management companies—a group of disparate firms operating separately and trying to make as much money as quickly as possible, with little thought to the long-term impact of their decisions. Even as the pharmaceutical industry was getting less and less funding, drug firms themselves were starting to look more and more like giant financial institutions that sucked out value but created little in return.

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Despite the financial crisis of 2008, most top MBA programs in the United States still teach standard “markets know best” efficiency theory and preach that share price is the best representation of a firm’s underlying value, glossing over the fact that the markets tend to brutalize firms for long-term investment and reward them for short-term paybacks to investors. (Consider that the year Apple debuted the iPod, its stock price fell roughly 25 percent, yet it rises every time the company hands cash back to shareholders.)

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Business schools by and large teach an extremely limited notion of “value,” and of who corporate stakeholders are. Many courses offer a pretense of data-driven knowledge without a rigorous understanding and analysis of on-the-ground facts (one of Andrew Lo’s pet peeves, as we will see).

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devalued. As Nitin Nohria, dean of the Harvard Business School, admits, “anyone can teach you how to read a P&L [profit-and-loss statement] or value a derivative; those kinds of things have become commoditized.”12 The bigger challenge is to teach America’s future business leaders how to be curious, humane, and moral; how to think outside the box about problems like funding the research for a new blockbuster drug. And how to be strong enough to stand up to Wall Street when it demands the opposite.

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Financial risk modeling, one of the basic concepts taught in business schools, is an inexact science at best; many people feel it’s more like rune reading. After all, it involves throwing thousands of variables about all the bad things that could happen into a black box, shaking them up with the millions of positions taken daily by banks, and extrapolating it all into a simple, easy-to-understand number about how much is likely to be lost if things go belly-up.

Location 1686-1689

“The premise of financial theory [taught in MBA programs] is bogus,” says Robert Johnson, an economist and former quantitative trader for George Soros’s Quantum fund who now heads the Institute for New Economic Thinking, an influential group that, among other things, is trying to broaden the nature of economics and business education. “That’s why we end up living with very thin margins of safety—because of the pretense of knowledge and precision about the future which does not exist.”

Location 1696-1697

Instead, students are taught that what matters most is maximizing profits and bolstering a company’s share price. It’s something they carry straight with them to corporate America.

Location 1698-1700

particular the business of finance, is where the money is. A full quarter of American graduate students earn a master’s degree in business, more than the combined share of master’s degrees sought in the legal, health, and computer science fields (business is also far and away the most popular undergraduate degree).

Location 1706-1710

“It’s not peer pressure, but there’s definitely a social element to feeling like you want to revert back to mainstream [areas of employment] with job security.”19 She, like most of her peers, is planning to work for a consulting firm, an investment bank, or a private equity shop upon graduation. Given the six-figure cost of an MBA education, that’s not so much a choice for many students as it is a financial necessity.

Location 1713-1720

The problem with business education, according to him, is that students are taught not what happens in real business—which tends to be unpredictable and messy—but a series of techniques and questions that should take them to the right answers, no matter what the problem is. “The techniques, if you read the Harvard Business School cases, they are all about finding efficiencies, cost optimization, reducing your [product] assortment, buying out competitors, improving logistics, getting rid of too many warehouses, or putting in more warehouses. It’s all words, and then there’s a sea of numbers, and you read it all and analyze your way through this batch of charts and numbers, and then you figure out the silver bullet: the problem is X. And you’re then considered brilliant.” The real problem, says Lutz, is that the case studies are static—they don’t reflect the messy, emotional, dynamic world of business as it is. “In these studies, annual sales are never in question. I’ve never seen a Harvard Business School case study that says, ‘Hey, our sales are going down and we don’t know why. Now what?’ ”

Location 1723-1725

Many of America’s iconic business leaders believe an MBA degree makes you less equipped to run a business well for the long term, particularly in high-growth, innovation-driven industries like pharmaceuticals or technology, which depend on leaders who are willing to invest in the future.

Location 1729-1732

Indeed, the top-down, hierarchical, financially driven management style typically taught in business schools is useless in flat, nimble start-up companies that create the majority of jobs in the country. Moreover, when that style is imposed on Silicon Valley firms, they typically falter (think of John Sculley, the Wharton MBA who made the ill-fated decision to oust Steve Jobs after his first tenure at Apple, or the reign of Carly Fiorina at HP, during which that company’s stock lost half its value).

Location 1732-1735

scariest trends in business these days is the increased movement of MBAs and finance types into the technology industry. They now are bringing their focus on financial engineering and balance sheet manipulation to firms such as Google, Apple, Facebook, Yahoo, and Snapchat—a shift that, if history is any indicator, doesn’t bode well for the future of such firms.

Location 1737-1740

It’s about an academic inferiority complex that propelled business educators to try to emulate hard sciences like physics rather than take lessons from biology or the humanities. It dovetails with the growth of computing power that enabled complex financial modeling. The bottom line, though, is that far from empowering business, MBA education has fostered the sort of short-term, balance-sheet-oriented thinking that is threatening the economic competitiveness of the country as a whole.

Location 1741-1744

shareholders as their main priority or treat skilled labor as a cost rather than an asset—or why 80 percent of CEOs surveyed in one study said they’d pass up making an investment that would fuel a decade’s worth of innovation if it meant they’d miss a quarter of earnings results22—it’s because that’s exactly what they are being educated to do.

Location 1752-1757

Just as business is still taught in places like Germany or France today, there was a focus on industry-specific expertise and the practical problems of real firms in the real world. Students had to understand each sector from the ground up, and there was substantial focus on areas like labor relations, government relations, and engineering. Classes on ethics flourished. Joseph Wharton, the Philadelphia industrialist and devout Quaker who founded his namesake school, felt that commerce had a crucial role to play in solving the social problems of the day, namely growing inequality, job disruption, and urbanization. “No country,” he argued, “can afford to have this inherited wealth and capacity wasted for want of that fundamental knowledge which would enable the possessors to employ them with advantage to themselves and to the community.”

Location 1766-1769

All of it was facilitated by the rise of a more mathematically focused economics, powered by giant new computers. The machines tallied reams of data from which practitioners of business education could spin strategies that, whether or not they worked in the real world, would certainly sound convincing to the public at large. (RAND itself funded a number of fellowships for graduate students interested in using their methodology at institutions

Location 1779-1780

One of the watershed moments for this new school of thought was the publication in 1947 of economist Paul Samuelson’s Foundations of Economic Analysis, which laid out the case for a new approach to economic thinking—one that resembled the abstract, hyperrational field of physics

Location 1787-1793

business schools using the same operational research methodology employed by the Defense Department would make management “scientific” and churn out the cadres of corporate followers so famously captured by William H. Whyte in his 1956 book The Organization Man. These managers were loyal and hardworking but learned to never rock the boat or question those above them. Some experts were concerned that business schools were simply producing a bunch of capitalist sheep. The management guru Peter Drucker, in particular, worried that “business schools no longer see themselves as social instruments. They want to be ‘respectable,’ as say mathematics departments are respectable. But this is wrong. Professional schools are not intellectual institutions but social institutions. Old-timers at the business schools had one great strength; they knew what they were talking about.”

Location 1787-1793

business schools using the same operational research methodology employed by the Defense Department would make management “scientific” and churn out the cadres of corporate followers so famously captured by William H. Whyte in his 1956 book The Organization Man. These managers were loyal and hardworking but learned to never rock the boat or question those above them. Some experts were concerned that business schools were simply producing a bunch of capitalist sheep. The management guru Peter Drucker, in particular, worried that “business schools no longer see themselves as social instruments. They want to be ‘respectable,’ as say mathematics departments are respectable. But this is wrong. Professional schools are not intellectual institutions but social institutions. Old-timers at the business schools had one great strength; they knew what they were talking about.”

Location 1810-1814

The result was a very finance-driven approach to business education, in which the central questions were no longer about companies, but about markets—a way of thinking that one recent account describes as “free-market-oriented and interested only in the predictive power of theory, irrespective of the realism of assumptions.”32 This new approach may have been more theoretical than practical, but it was quickly embraced and became de rigueur for anyone who wanted a career in corporate America or the finance industry.

Location 1816-1818

The key assumption of the Chicago School, one that Milton Friedman himself upheld devoutly, was that the purpose of the corporation was to maximize financial value. As Friedman famously said back in 1970, “the social responsibility of business is to increase its profits.”

Location 1819-1821

which was that the share price of a firm always perfectly reflected all known information, and thus stock prices were the best overall measure of corporate value. This idea, known as the “efficient-market hypothesis,” eventually won its creator, another Friedman disciple and Chicago academic, Eugene Fama, the Nobel Prize.

Location 1826-1829

Business schools continue to teach it, and probably will keep doing so until the current generation of academics is eclipsed by a younger one (as the physicist Max Planck so aptly put it, “science progresses funeral by funeral”). Yet new research shows just how much of what happens in our economy and society is irrational, unpredictable, and better thought of in terms of fluid human experience than rigid mathematical modeling.

Location 1831-1834

He points out that while behavioral economics is often thought of as “soft” science, in comparison to classical thinking, it’s behaviorists who actually go out into the field and collect real data about what’s happening on Main Street. Despite all the complex financial modeling done by neoliberal economists, “a lot of [economics and business school professors] don’t collect and plot real data from the real world and look at it as part of their research,” says Shiller. “They consider it a bit beneath them.”

Location 1841-1843

Its ascension eventually led another pair of Chicago-educated academics, Michael Jensen and William Meckling, to develop a management framework that would further reshape both business education and the corporate landscape: agency theory, or the notion that managers should be treated like owners, and paid in stock, to boost corporate performance.

Location 1854-1860

There was a particular concern that large, complex, and diversified organizations had given rise to a divergence of interests between managers and shareholders; indeed, many economists considered that gap to be the root of America’s declining competitiveness. While the former, who were basically trained to be pliant company men, could take it easy and be guaranteed lifetime employment in large corporate bureaucracies, the latter were losing ground as profits and shares fell. The solution: align the incentives of the two better by rating managers on a very specific set of financial metrics, and pay a greater percentage of their salaries in stock options. Boards would watch over the managers, making sure they did whatever was designed to boost share price. Never mind that these theories were cooked up in college classrooms and on computers rather than in real businesses.

Location 1863-1866

Boone Pickens. Like many takeover titans, Pickens thought CEOs were mostly lazy, self-interested, and insulated. “US executives…look at takeovers as a threat to their salaries and their perks,” said Pickens at the time. “And the reason they perceive it this way is that they generally own very little stock in their own companies. They don’t relate to the shareholders’ interests, because they aren’t substantial shareholders themselves.”38 Indeed,

Location 1874-1874

That’s often true, but the real reason that corporate governance

Location 1876-1878

called the “principal-agent problem” in academic circles. The collusion isn’t so much between the CEO and his golf buddies as it is between corporate executives and financiers. CEOs today have every reason to bolster short-term share price value, as the Street wants them to, because it will also result in higher compensation for them, since most executives receive the bulk of their compensation in stock options.

Location 1879-1881

(Never mind that McKinsey data shows that between 70 and 90 percent of the real value of any corporation tends to be tied to revenues three years or more out.)40

Location 1882-1884

“This is one reason why, when finance is wrecking the performance of corporate America, it doesn’t lead to a rebellion at the US Chamber of Commerce,” says Johnson of the Institute for New Economic Thinking.

Location 1882-1884

“This is one reason why, when finance is wrecking the performance of corporate America, it doesn’t lead to a rebellion at the US Chamber of Commerce,” says Johnson of the Institute for New Economic Thinking.

Location 1887-1891

“This is one of the things that constantly hits me when I travel in Asia,” says McKinsey head Dominic Barton, who has written on the topic of short-termism in American business for the Harvard Business Review. “[Foreign firms] are just working with timeframes of a totally different order. They simply don’t have the same short-term pressure that many American businesses do.”42 Indeed, emerging-market firms, particularly in Asia, often think in terms of decades rather than quarters.

Location 1891-1895

companies should be explicitly managed for the benefit of shareholders, and shareholders alone, to the exclusion of anyone or anything else, is an odd system in the global context. Most firms in Germany, China, France, and Scandinavia, along with many others in countries like India and Brazil, aren’t primarily managed this way. Indeed, it took quite a while for American business leaders to buy into the idea, despite the fact that it was being pushed vigorously in both business schools and the markets.

Location 1896-1899

“the directors’ responsibility to carefully weigh the interests of all stakeholders as part of their responsibility to the corporation or to the long-term interests of its shareholders.” Seven years later, though, the group had finally caved, rewriting the statement to say that “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders.”

Location 1896-1899

“the directors’ responsibility to carefully weigh the interests of all stakeholders as part of their responsibility to the corporation or to the long-term interests of its shareholders.” Seven years later, though, the group had finally caved, rewriting the statement to say that “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders.”

Location 1901-1902

Indeed, the only leaders who can openly question this notion and get away with it tend to be high-profile founder-owners who have a certain cult of personality (Alibaba’s Jack Ma and Starbucks’s Howard Schultz are two who regularly accomplish that feat).

Location 1905-1908

that people are guided by rational self-interest to make the best economic decisions; that the purpose of business is to make money and provide value to investors; and that a firm’s share price, rather than its underlying technologies, innovative capacity, human resources, or social benefit, is the measure of its success. Bolstering it by whatever means necessary,

Location 1914-1920

called “customer mode,” believing that corporations should be run for the benefit of a large group of stakeholders, from workers to customers to society as a whole. By the end of their second semester, however, students shifted to “business manager mode,” placing more emphasis than before on maximizing shareholder returns and less on producing high-quality goods and services—a change that, the survey said, reflected “the powerful place shareholders occupy in the first-year curriculum.” Business schools teach, quite literally, that greed is good, and that rational self-interest is economically and socially beneficial. But if there is anything that the last few years of economic crisis, recession, and slow painful rebound have taught us, it’s that the conventional economic wisdom doesn’t always work.

Location 1923-1926

That’s exactly the concern voiced by Harvard Business School professor Rakesh Khurana, whose book From Higher Aims to Hired Hands tracks the evolution of business education in America over the last century. Khurana makes a powerful case that the paradigm of business education must become more inclusive, broad-based, and socially responsible if we are to avoid Thomas Piketty’s predictions of growing inequality, political dysfunction, and social instability.

Location 1927-1931

Chicago School thinking and teaching on American business education is that it detached the latter from its roots in morality and social responsibility, the very Calvinist foundations on which it was built in the late nineteenth century. The Whiz Kids’ Cold War–era approach to management may have been too ideological, but agency theory and common assumptions about the ingrained efficiency of markets left business leaders with no moral basis on which to operate at all. In fact, the theories basically espoused a selfish view of the world, in which everyone was out to get what they could, and nobody could be trusted.

Location 1933-1936

As Harold Leavitt, the late Stanford management psychologist, once put it, “the new professional MBA-type manager” has begun “to look more and more like the professional mercenary soldier—ready and willing to fight any war and to do so coolly and systematically, but without ever asking the tough pathfinding questions: Is this war worth fighting? Is it the right war? Is the cause just? Do I believe in it?”

Location 1933-1936

As Harold Leavitt, the late Stanford management psychologist, once put it, “the new professional MBA-type manager” has begun “to look more and more like the professional mercenary soldier—ready and willing to fight any war and to do so coolly and systematically, but without ever asking the tough pathfinding questions: Is this war worth fighting? Is it the right war? Is the cause just? Do I believe in it?”

Location 1941-1943

While there was a hope after the 2008 meltdown that business schools might lead the charge toward a new and more sustainable kind of capitalism, academic leaders in the field have been largely silent, their efforts focused mostly on more marginal issues like promoting more corporate social responsibility or diversity within boardrooms.

Location 1957-1959

The MBA degree has become less a source of valuable education than an exclusive club and passport to wealth for a privileged few. The selfishness inherent in that threatens not only how business is run, says Khurana, but also the academic degree itself, which many believe has become an overpriced commodity.

Location 1984-1988

There is little talk of a mission, or the type of education that students might receive from such programs, but there is plenty of “market signaling” about how students can get rich quick if they come to one school or the other. As Khurana lays out, these schools have advertising campaigns to rival the Fortune 500 clients they serve. “Want a hard-working investment?” boomed one advertisement for an MBA program in an in-flight magazine, before boasting of pre- and post-degree salary comparisons. “We don’t just teach you how to make and manage solid investments,

Location 1996-2002

These business schools also spurred the growth of the “portfolio society” in which everything—from stocks and bonds to hospital beds and even human lifespans—has a market price. The key early player in this area was Harry Markowitz, another Chicago student who had worked for RAND in the 1950s and did his PhD under Friedman. Markowitz’s quantitative finance methodology won him the Nobel Prize and became the basis of the first computerized arbitrage-trading program, which would eventually take over the markets. Today 70–80 percent of all trading is done by computers, much of it using flash programs designed to trade on fractional price changes over split-second time intervals, reducing the average holding period of a stock from about eight years in the 1960s to just four months by 2012.

Location 2005-2009

Indeed, in 2012, he published a mea culpa for his own work in the twentieth-anniversary issue of the Journal of Derivatives. “Models of all kinds, ethical and quantitative too, have been behaving very badly,” he wrote. The problem, he believes, is that practitioners of quantitative finance have come to believe that it can in fact have the predictive power of physics, when in reality financial modeling will always be fallible, because it’s a discipline based on human behavior. “To confuse a model with the world of humans is a form of idolatry—and dangerous.”56

Location 2017-2025

Before the 1980s, banking was boring and not nearly as lucrative. But now PhDs who might once have crafted new engines at Boeing or come up with new polymers for Dow can make four to five times those former starting salaries at a hedge fund, where they can busy themselves creating twelve-dimensional computerized trading models. Eleven percent of the undergraduate class at MIT, for example, now goes to Wall Street, and despite the 2008 crisis, financial engineering is the fastest-growing field at many of the country’s best engineering schools.58 “Not only are these people not making scientific progress,” says Greg Smith, the former Goldman Sachs quantitative trader who famously published his resignation letter in the New York Times, “but the complex derivatives products they create are being sold to unsuspecting public pension funds and investors [who don’t know any better]. So there is actually an argument to be made that diverting our smartest PhDs to finance is a waste, at best, and detrimental to [overall economic growth] at worst.”

Location 2028-2031

only thing that’s changed, says Derman, “is that students today aren’t content to be just traders at a bank; they want to be principals [meaning, heads of their own hedge funds].” Indeed, he says that self-tracking for a career of this kind now begins even earlier than was the case before the crisis. “It used to be that people would come here after a physics or math degree, but now they are coming straight from economics-focused math programs [at the undergraduate level]. It’s become a trajectory.”

Location 2036-2039

It’s telling that about 80 percent of Derman’s students are now Asian, many of them Chinese, who are bringing the game of financial speculation to their own economies. Much of the latest volatility in commodities trading markets has come from Chinese hedge funds like Shanghai Chaos, which in 2015 helped trigger and exploit a plunge in copper, and Chinese shadow banks responsible for things like the distortion of the global soybean markets.60

Location 2042-2046

“Business schools are still teaching that you should run your company the way people did decades ago: marshal your capital, and treat labor like an expendable cost,” says Mark Bertolini, the CEO of the health insurance giant Aetna. “But the world has completely changed. We’re awash in capital, but there’s a shortage of skilled labor out there. Business schools are still using the same old teaching models,” despite the fact that we’re now “in a world that’s so complex, it can’t be

Location 2060-2065

He knows that the health industry, along with nearly every other business, will be using more complex technology in the future and will need to become a more direct-to-consumer business, requiring higher-level skills and superior thinking from employees, even those at entry levels. Increasingly, companies would be in competition for the best workers, and Bertolini wanted to be ready for that with attractive wages and an upward path for his employees. His firm had plenty of cash on hand. What he couldn’t find so easily was the kind of worker who could help his business succeed in a more and more complex world. “The day it all went public in the Wall Street Journal,” says Bertolini, “we began getting lots of calls from

Location 2073-2076

“Capital is the resource that we often manage well, but in my opinion, the scarce resource is a talented and engaged workforce.” Creating that requires thinking bigger, looking at people as assets, not just costs on a balance sheet, and knowing how to think beyond the quarter. “One of my goals as CEO is to help reestablish the credibility of corporate America,” says Bertolini. “That means leaning into the recovering economy and working to bring everyone along, not just a

Location 2081-2083

Lo believes that markets are less like rule-based physics and more like messy biological systems. In fact, he’s come up with an entirely new way of teaching finance—it’s called the adaptive-markets hypothesis. In Lo’s world, market participants aren’t coldly rational creatures but squirmy, evolving species interacting with one another in a primordial sludge of money.

Location 2101-2101

he could find a way to help spread that risk, he might be able to encourage more early-stage research and development.

Location 2103-2109

Lo has come up with a proposal for how to bolster funds for drug development by pooling the resources of individual investors just as mutual funds do, to spread risk by funding not one drug at a time, but 150 drugs. With this level of funding, rather than a 5 percent probability of success, the odds of finding a successful drug among the many being trialed go up exponentially. Lo recently finished working with researchers at the National Institutes of Health, running his model on the portfolio of drugs for rare and neglected diseases that they are currently researching. He found that with an investment of just a few hundred million dollars, private investors (including not only institutions but mom-and-pop types putting in a few thousand dollars) would get a 21.6 percent rate of return on their contributions—and the additional funding would push drug development timelines ahead by many years.

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clever rebranding of those who used to be known as corporate raiders back in the 1980s. In addition to Icahn, who was around from the start, today’s prominent activists include people like Bill Ackman, Daniel Loeb, David Einhorn, and Nelson Peltz. They all have different styles and somewhat different methods for goosing share prices of the companies they get involved with. But the common thread is that they are taking on some of America’s most high-profile firms. In addition to Apple, in the past few years, these activists have targeted such large and successful companies as Dell, Yahoo, Dow, JCPenney, GM, DuPont, Sears, and Hewlett-Packard. It’s no accident that as the activists have become more and more active, buybacks

Location 2147-2151

in many ways, it acts just like one. The most profitable company in history has, over the last few years, engaged in quite a few banklike activities, including lending money to other firms via the corporate bond market and implicitly backing new debt offerings with the power of its cash hoard, just like an investment bank.3 Interestingly, though, it’s not regulated like a bank—which means that in some ways there’s even less transparency when Apple does such deals, especially if they are done

Location 2178-2180

Historically, when buybacks peak, they are followed by slower growth, a warning sign for today’s economy. But buyback wizardry also underscores one of the great ironies of American business today: the country’s biggest, richest companies have more contact with investors and capital markets than ever before, yet they don’t actually need any capital.

Location 2182-2189

to do with our permanently slow-growth economy. “The Icahn/Apple situation is a great example of how financial markets are no longer about raising money for investment, but for arbitrage,” the Nobel Prize–winning economist Joseph Stiglitz told me.9 Money is stuck in all the wrong places and flowing to all the wrong people and things. Corporate winners like Apple accumulate vast amounts of cash, yet rather than paying their taxes or giving workers a pay hike (which would also bolster our consumption-oriented economy), they simply turn over cash to investors, who are unlikely to spend it in a way that creates real growth. There are only so many pairs of designer jeans and luxury handbags that the 1 percent can buy, after all. Stock markets go up as a result of these payouts, but the real economy stagnates. It’s an issue

Location 2183-2184

“The Icahn/Apple situation is a great example of how financial markets are no longer about raising money for investment, but for arbitrage,” the Nobel Prize–winning economist Joseph Stiglitz told me.

Location 2183-2184

“The Icahn/Apple situation is a great example of how financial markets are no longer about raising money for investment, but for arbitrage,” the Nobel Prize–winning economist Joseph Stiglitz told me.

Location 2196-2198

Then there’s the fact that buybacks get preferential tax treatment, and that they often happen at exactly the wrong time—at the top of the market rather than at the bottom—a terrible waste of corporate funds that could go to more productive uses.

Location 2199-2201

wealth represented by buybacks stays within a closed loop of the financial markets and the asset portfolios of the richest Americans. In other words, buybacks don’t facilitate a sharing of America’s broadly created business wealth; they promote a hoarding of corporate value within the financial system itself. Buybacks are in most cases the very definition of financialization.

Location 2212-2214

The biggest economic conundrum of our age—why American companies aren’t investing the $2 trillion in cash they have sitting on their balance sheets (most of which is held overseas) in factories, workers, and wages—turns out to have an easy answer: they are using it to bolster markets and enrich the 1 percent instead.

Location 2217-2220

trickle down into the sort of new investments—in businesses, factories, and jobs—that create real economic growth. That’s not the way financial markets were supposed to work. They were supposed to funnel money to new assets and ventures. The great irony of financialization is that it produces bad finance.

Location 2232-2233

All that changed in the Reagan era. “Since the mid-1980s, in aggregate, corporations have funded the stock market rather than vice versa,” says William Lazonick, a University of Massachusetts Lowell professor who has done extensive research on buybacks.

Location 2239-2242

That purchase was a megadeal done with megadebt—the sort that came to epitomize the era. Icahn was a major figure on that scene, embarking on hostile takeovers of firms like the aging air carrier Trans World Airlines (whose assets he sold off piecemeal to pay for the deal) and demanding asset sales in exchange for billions’ worth of dividend payments and share buybacks at Texaco, where he owned a major stake.

Location 2243-2245

firm E. F. Hutton, John Shad, was appointed to head the SEC. He was among the first Wall Street executives to back Reagan for president and had led his fundraising campaign in New York. Not since Joseph P. Kennedy became chair of the SEC in 1934 had a Wall Street type headed the agency.

Location 2245-2247

buy back their own shares, something that had previously been considered market manipulation, were dramatically loosened. On November 10, 1982, the SEC sanctioned massive open-market repurchases, up to 25 percent of a company’s previous four weeks’ average daily trading volume,

Location 2256-2260

“new economy” tech firms began lobbying against efforts to introduce new accounting standards that would have forced companies to mark down the value of stock options on their books. One of the reasons that buybacks have burgeoned is that firms have been letting C-suite executives “buy company stock at below-market prices—and then pretending that nothing of value had changed hands,” as Stiglitz once pointedly remarked. It’s a mark of how strong the financial and tech lobbies are that their efforts were supported by key Democrats, such as California senators Barbara Boxer and Dianne Feinstein, as well as most conservatives.

Location 2268-2271

“When they pushed through the tax exemption for performance pay,” which opened the door to higher bonuses delivered as stock options, he says, “they made no effort to ensure that the increase in stock prices was in any way related to performance. The favorable treatment was granted whether the increase in stock prices was a result of the efforts of the manager or the result of a lowering of interest rates or a change in oil prices.”

Location 2272-2275

The tax provision gives firms more incentives to manipulate their share prices with buybacks. Such policies hugely benefited people like Rubin, who made $115 million in cash and even more in stock as a Citigroup executive after leaving public service. Not surprisingly, while at Treasury, Rubin had refused to get behind proposals for greater transparency in options pay.

Location 2294-2296

Lazonick says that the move from a “retain-and-reinvest” corporate model to a “downsize-and-distribute” one is in large part responsible for a “national economy characterized by income inequity, employment instability, and diminished innovative capability.”

Location 2304-2309

Proponents of the buyback trend will cite gurus like Warren Buffett, who has said that he doesn’t mind buybacks as a tactic, as long as they are done when a firm has ample cash to take care of the rest of its business needs, and when the firm’s stock is selling at a discount. (Apple, for example, would meet the first criteria, but the second is up for grabs depending on your view of the company’s future.) Yet statistics show that those conditions are rarely met. In fact, the bulk of buybacks since 2001 were done during market peaks, belying the notion that such purchases represent firms’ own belief in a rising share price.

Location 2306-2309

needs, and when the firm’s stock is selling at a discount. (Apple, for example, would meet the first criteria, but the second is up for grabs depending on your view of the company’s future.) Yet statistics show that those conditions are rarely met. In fact, the bulk of buybacks since 2001 were done during market peaks, belying the notion that such purchases represent firms’ own belief in a rising share price.25

Location 2310-2312

Many experts believe it’s because buybacks are done at the end of a true growth cycle or, in the case of the most recent boom, at the end of a cycle of easy monetary policy—when the good times are about to end, and buybacks are a way of keeping the party going just a little bit longer.

Location 2314-2320

percent to 82 percent of their compensation in stock between 2006 and 2012.26 “It is surely difficult to praise buybacks as being good for shareholders when they are made at such disadvantageous times,” says Andrew Smithers, a British economist and financial consultant. (His book The Road to Recovery makes a convincing case that buybacks and the bonus culture are responsible for slow growth not just in the United States but in many rich countries, because they encourage executives to pay themselves, rather than investing in things that will actually make their companies more profitable.) “Buying overpriced shares is a way of destroying value and spending more money when the market is most overpriced is particularly egregious.”27

Location 2328-2331

means that far from funding the economy that you and I live and work in, stock markets now basically fund payouts to the wealthy. This “shareholder revolution,” based on the Chicago School notion that maximizing shareholder value is the purpose of corporate America (as covered in chapter 3), is the single most important reason why high corporate profits and unprecedented cash hoards have failed to translate into jobs, wage growth, and innovation.

Location 2349-2351

Former vice chairman of General Motors Bob Lutz, who used to be the CEO of Exide, a large battery maker, cites East Penn Manufacturing, a privately held battery firm, as a key example of the way in which private firms are able to shrug off the concerns of Wall Street and focus on their long-term growth.

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Cook’s strategy has been very much of the downsize-and-distribute kind, in which profits are handed out to investors to allay concerns over the company’s lagging stock price. It’s no coincidence that under him (at the time of writing) there hasn’t been any truly game-changing new technology (the iPhone 6 is an incremental upgrade and the iWatch more a luxury toy than a new technology).

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For example, Starbucks was one of the first retailers in the country to offer affordable, comprehensive healthcare to full-time and eligible part-time employees and their families. The company has also made big investments in areas like workforce training, hiring and training of returning veterans (Starbucks has pledged to employ 10,000 of them), and helping its workers go to college and repay student debt. In 2015, Starbucks promised to help pay for employees to get bachelor’s degrees, a program that will likely cost the firm tens of millions of dollars. Schultz got a lot of pushback from investors on those costs. “It’s the same kind of pushback we got twenty years ago when we provided comprehensive healthcare,” he says. “Everyone thinks it’s dilutive. But it’s not dilutive.”

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America has become a nation of both latte drinkers and latte purveyors, and Schultz says that if US businesses want to thrive, they must focus on the former—which means serving a broader economic constituency than just shareholders. “I think the private sector simply has to take a larger role [in supporting Main Street economic growth] than they have in the past. Our responsibility goes beyond the P&L and our stock price. We have to take care of people in the communities that we serve. If half the country or at least a third of the country doesn’t have the same opportunities as the rest going forward, then the country won’t survive. That’s not socialism,” says Schultz. To him, it’s practical reality.

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America has become a nation of both latte drinkers and latte purveyors, and Schultz says that if US businesses want to thrive, they must focus on the former—which means serving a broader economic constituency than just shareholders. “I think the private sector simply has to take a larger role [in supporting Main Street economic growth] than they have in the past. Our responsibility goes beyond the P&L and our stock price. We have to take care of people in the communities that we serve. If half the country or at least a third of the country doesn’t have the same opportunities as the rest going forward, then the country won’t survive. That’s not socialism,” says Schultz. To him, it’s practical reality.

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Since then, though, IBM has come under renewed pressure from the markets to “disgorge” its cash. Altogether, it has shelled out some $138 billion on share buybacks and dividend payments from 2000 to 2014, while spending only $59 billion on its own capital expenditures (along with $32 billion on acquisitions).36

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In this new economic milieu, there’s every reason in the world for tech firms to pour every penny into blue-sky research and invest in workers at all levels—as well as pay their fair share of taxes to the federal government, whose investments in basic science and technology are arguably what created most of Silicon Valley’s growth potential to begin with.

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corporate pension funds that they don’t advocate more vigorously for smarter corporate governance. Their clients and their investments are often one and the same, which creates conflicts of interest and blunts their ability to prod companies in a direction that might not please management. “The growth of fund managers and the entire 401(k) system has really pushed short-term thinking within markets, and hindered growth-producing innovation, because the fund firms are caught between their clients and the markets,” says Andrew Smithers.

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Bogle, who testified before the Senate Finance Committee on the topic in 2014, says today’s stock market itself is not unlike a Ponzi scheme. In fact, he estimates that our bloated financial system might be sucking up some 60 percent of the returns that ordinary retirement savers could otherwise earn on their money. “Individual investors who rely on the historical stock market returns presented by mutual fund marketers will be shocked at the paltry amounts they’ve accumulated in their retirement accounts. Corporations too will face the same shock as shortfalls in pension plan accumulations will have profoundly negative implications for their financial statements,” says Bogle.38

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with $80 can buy a share of IEP, Icahn’s public company, and invest with Carl. “The fact that these funds have done so well over the last few years is creating a chicken-and-egg cycle—more institutional money flows in, activists take more actions, and returns go up,” says Donna Dabney, former executive director of the Conference Board Governance Center.

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tougher to make decisions that work only for Wall Street. This kind of “localnomics” may have resulted in an undervalued share price but it certainly boosted the fortunes of hometown Canton, Ohio, as a whole. After all, US government data shows that a dollar of manufacturing growth at a firm like Timken can translate into an additional $1.37 of spending elsewhere in the community.

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the Fed cut interest rates to historic lows and carried out a massive bond and mortgage-backed securities buying program. In purchasing these assets en masse, the idea was to push other investors into riskier areas of the market—like stocks and corporate bonds—which would eventually bolster asset prices and make Americans feel wealthier. So far, so good; the value of stocks and mutual funds owned by US households did increase by

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The rich keep their money in banks or in the secondary markets, buying stocks and bonds that already exist, rather than, say, starting new businesses or purchasing new things. The money stays in the financial sector, in other words, instead of being invested in the real economy that we live in. The Fed had hoped that rising asset prices would lead to growing consumer confidence, which would spur business investment in the real economy, boost the demand for labor, and eventually get that virtuous cycle of job creation started. But it didn’t work that way. While quantitative easing has helped lift the job market somewhat at the lower end of the socioeconomic spectrum (one big reason that companies like Walmart have raised their wages by a dollar or two per hour), it has done almost nothing for the middle class.

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The result is that cash-rich investors, many of them in the shadow banking sector, now dominate the housing market, as I’ll explore in chapter 7. People

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But as a 2015 report from the Office of Financial Research (OFR, the government body set up to monitor the market in the wake of the 2008 crisis) shows, that fact obscures a more troubling truth. Companies have higher profit margins—and thus higher stock prices—not because the economy is booming and they are selling more stuff, but because they have cut costs, kept salaries flat, and avoided investing in new factories and R&D. Basically, American firms are acting like low-wage companies in a high-wage economy, which gives them a temporary boost but ultimately results in a tragedy of the commons—once everyone runs a low-wage company, no one will make much money at all. As the OFR report puts it, “Although this financial

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Columbia University Law School belies some of the data on broader hedge fund returns, showing that companies shaken up by activist investors usually don’t outperform over the long haul.53 Indeed, in the midst of the biggest spate of activism in history, corporate earnings as a whole have been decreasing at faster and faster rates. One Citi report found that 57 percent of the activist campaigns waged against S&P 1500 companies in 2013 targeted firms whose share prices were already outperforming those of their peers.

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of co-determination, in which labor

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Another model is that of co-determination, in which labor representatives sit on the board of major companies, a system practiced quite successfully in many German firms. In fact, many of Germany’s big companies have works councils in which management, workers, and even civic leaders collaborate on determining schedules, furloughs, pay, expansion plans, and even the products that a factory might make. The idea is for management and labor to

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Buybacks themselves aren’t tax deductible, but related practices, such as taking on debt to make such purchases, offer companies tax advantages (because the interest on this debt is tax deductible), as do stock options awarded to top executives, as laid out above. Shifting to a tax code that doesn’t give debt such preferential treatment would be a great way to shift the buyback dynamic, and this is a topic I will cover in much more depth in chapter 9.

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Similarly, taxing capital gains on a sliding scale, with higher rates for shorter holding periods and lower rates for longer ones, could discourage the seekers of quick gains from distorting the markets.

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experiment with.) Some advocates are also calling on the SEC to put a complete end to open-market buybacks, rein in stock-based pay, and allow not only labor but also taxpayers to have representation on corporate boards.

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Under Welch, GE came to rely on financial wizardry rather than new technological breakthroughs to satisfy investors. GE Capital, a major profit center of the business, was focused not on making but on taking, across every possible area of finance, from equipment leasing to leveraged buyouts and even subprime mortgages.

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GE, in other words, would try to do what the United States as a whole needed to do: rebalance its economy and get back to basics. As CFO Jeff Bornstein summed it up to me in late 2014, “we had to decide whether we wanted to be a tech company that solves the world’s big problems or a finance company that makes a few things.”

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Over the last few decades, Sears, GM, Ford, and many other large firms focused on retail and consumer products have created stand-alone lending units. These units “were originally intended to support consumer purchases of their products by offering installment financing but [they] eventually became financial behemoths that overshadowed the manufacturing or retailing activities of the parent firm,” says University of Michigan academic Greta Krippner, whose book Capitalizing on Crisis provides the best quantitative analysis of the shift.

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Today’s firms represent the apex of this trend. Corporate borrowing is at an all-time high, as are share buybacks, dividend payments, outsourcing, and tax optimizing—all factors that increase the share of financial activities in companies’ revenues. And of course, firms’ investment into jobs, factories, and innovation is near record lows, a decline that has run concurrently to the rise of financial activity within all American businesses.

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And airlines commonly make more money from hedging on oil prices than on selling airfare, although this strategy can also unexpectedly backfire.10 Indeed, with the 50 percent plunge in oil prices

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(Both of these fundamental trends played an important role, Sharma says, but they were longer-term phenomena and so don’t explain why the collapse was so abrupt.) What triggered that plunge was the financialization of the oil market, particularly the growing role played by speculators such as hedge funds and large banks.13 As the Federal Reserve pumped money into the economy after the financial crisis, speculators funneled much of it into commodities. Predictably, the hot money quickly got out of those markets when the Fed decided to pull back from that program, and oil prices began to drop—a sure sign that much of their value has been moving on trading dynamics rather than on basic supply and demand.

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(Both of these fundamental trends played an important role, Sharma says, but they were longer-term phenomena and so don’t explain why the collapse was so abrupt.) What triggered that plunge was the financialization of the oil market, particularly the growing role played by speculators such as hedge funds and large banks.13 As the Federal Reserve pumped money into the economy after the financial crisis, speculators funneled much of it into commodities. Predictably, the hot money quickly got out of those markets when the Fed decided to pull back from that program, and oil prices began to drop—a sure sign that much of their value has been moving on trading dynamics rather than on basic supply and demand.

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It’s a perfect example not only of the rise of financial activities as a percentage of business, but also of the perverse effect that financialization can have on corporate culture. A focus on trading can lead to excessive risk taking, and an overemphasis on short-term profit can undermine a company’s financial future. BP first got into the trading business years ago under Lord John Browne, the erudite CEO who was the first in the industry to acknowledge climate change, creating a Teflon-like veneer around the firm, in contrast to rivals like Exxon.

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Houston-based traders for BP America had used company resources to purchase a large quantity of propane gas, which they later sold to other market players for inflated prices, costing consumers $53 million in overcharges. BP eventually had to pay back that amount, as

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“Everyone knew that BP’s short-term focus on the bottom line and lack of investment was a safety issue,” said one industry veteran who worked as a consultant investigating the Prudhoe Bay spill. “If you were going to be in the foxhole with someone, you didn’t want it to be those guys.”16

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To many experts, the disconnect between what’s truly at stake in the real economy and the staggering volume of trading that takes place in the markets signifies the point at which trading begins to lose social value and undermine market stability. BP, for example, now gets at least 20 percent of its income from dealing in swaps, futures, and other financial instruments, up from 10 percent in 2005, the last time it disclosed profitability figures for its trading division.

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Financial thinking, especially the use of leverage and hedging to offload risk onto weaker market players, is now a key part of the global technology business. As more and more Wall Street refugees make their way to Silicon Valley, there’s growing concern that America’s largest tech firms will soon look more like banks, and less like the rare American innovation and job hubs that they’ve been over the last several decades.

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happen? In part it’s because companies began to focus on higher-profit areas of the economy. Services, with their lower overhead and potentially higher demand, are much easier to make money on than manufacturing. And finance, as we’ve already discovered, is the easiest place of all in which to turn a profit. You don’t need much in the way of investment; you mainly need a few very clever people and a lot of superfast computers.

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Indeed, the manufacturing sector, that traditional generator of middle-class jobs and sustainable economic growth, turned toward finance faster than any other part of the economy. In fact, manufacturing has led that charge since the 1970s—not only because the profits and stock valuations promised by the switch were so much higher, but also because (ironically) the volatility introduced into the economy by the growth of finance made it more difficult to plan future investment in things like plants and equipment.

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Finally free to turn money into more money—to spin straw, as it were, into gold—CFOs would frequently nix investments in real, tangible products in favor of new financial products like money-market mutual funds, “stripped” Treasuries, offshore dollar accounts, foreign currency hedges, and the most high-risk, high-return asset of all: futures contracts and other sorts of derivatives.

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Westinghouse, a once-great manufacturing company that was a leader of the Pittsburgh economy for decades after its founding in 1886, was, from the 1980s onward, sold off in bits, on the advice of management consultants, to bolster stock valuations. (Service sector businesses typically command

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another vicious cycle, expectations of those kinds of returns, combined with now common multimillion-dollar executive pay packages (which resembled Wall Street bankers’ pay more than the comfortable corporate salaries of the time), all but necessitated a move to financial activities. That, after all, was the only way to generate such profits in such a short amount of time.

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The focus on accounting tricks, spreadsheets, and shareholder primacy was like laying dynamite in secret places throughout corporations, where it could blow up in unexpected ways. In the effort to achieve efficiency and maximize profits for investors, many firms set the stage for their own reputational demise. It’s happening now, with the subprime auto loan problems of the automotive majors. It happened with the telecom and Web companies of the late 1990s, many of which commanded huge valuations on the basis of fictional profits (Enron and WorldCom are prime examples).29

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Its creative accounting and triple-A rating had allowed GE to borrow money more cheaply than competitors did, many of them large banks. GE was so leveraged in the run-up to the financial crisis that it couldn’t make

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One report released by Reagan’s Commission on Industrial Competitiveness in 1985 sounds, amazingly enough, like something that could have been written by President Obama’s Council on Jobs and Competitiveness today: “In the 1960s, the real rates of return earned by manufacturing assets were substantially above those available on financial assets. Today, the situation is reversed. Passive investment in financial assets has pretax returns higher than the rates of return on manufacturing assets….As a result, the relative attractiveness of investing in our vital manufacturing core has been compromised.”

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The team found that foreign firms based in Japan, France, Germany, and other developed countries enjoyed a wide spectrum of advantages that allowed them to trounce US companies: government assistance, generous subsidies, R&D initiatives, industrial intelligence gathering, and unofficial non-tariff barriers. The project’s mission was to then map out a strategy of industrial and technological development that would allow the United States to close the gap.40 The effort was shut down under the Bush administration,

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The team found that foreign firms based in Japan, France, Germany, and other developed countries enjoyed a wide spectrum of advantages that allowed them to trounce US companies: government assistance, generous subsidies, R&D initiatives, industrial intelligence gathering, and unofficial non-tariff barriers. The project’s mission was to then map out a strategy of industrial and technological development that would allow the United States to close the gap.

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as for other such communities around the country. The official figure for US manufacturing employment, 9 percent, belies the true importance of the sector. Manufacturing represents a whopping 69 percent of private-sector R&D spending as well as 30 percent of the country’s productivity growth.

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as for other such communities around the country. The official figure for US manufacturing employment, 9 percent, belies the true importance of the sector. Manufacturing represents a whopping 69 percent of private-sector R&D spending as well as 30 percent of the country’s productivity growth.

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“The ability to make things is fundamental to the ability to innovate things over the long term,” says Willy Shih, a Harvard Business School professor and coauthor of Producing Prosperity: Why America Needs a Manufacturing Renaissance.

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designers who are well paid to develop the software for that kind of industrial Internet—otherwise known as the Internet of things. GE plans to hire thousands more such employees within the next half-decade.

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It’s an amazing tale that provides a window into the complex and costly shenanigans that can result when banks move too far out of their traditional purview of simple lending and financial intermediation and into other types of business. While the Goldman aluminum-hoarding scandal has less human significance than the food and fuel bubbles of 2008 and 2010, it has received significant legal attention and documentation. It thus provides a sharp lens through which to understand the confluence of events that created the dysfunctional system in which financial institutions are allowed to both make the market and be the market.

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definitive picture of who did what, or when, or how. The sheer complexity of the situation, as well as many others like it, and the fact that no single regulatory body can get a handle on it, is a huge problem. But the core issue, that of banks using their superior assets and information to become sharp competitors to industries they are supposed to support, results in a market distortion that is taking an untallied but

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it also turned back centuries of common law that said it was fine to trade such instruments, but the government wouldn’t necessarily enforce the contracts unless the parties involved could prove that they were used for real hedging of real assets. Now the CFMA made OTC derivatives speculation legally enforceable even if traders couldn’t prove it was being done for anything but pure speculation.37 There was no longer any reason not to engage in as much speculation as possible, which helps explain why the OTC derivatives

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“Basically, that law made pure bets, for the first time in Anglo-Saxon legal history, enforceable in court,” says Cornell law professor and securities expert Lynn Stout, who has written extensively about the issue. “I always joke that if Congress decided to legalize murder, they’d call the legislation the Homicide Modernization Act.”

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Back in 2008, their notional value was $67 trillion, while the market value of all the outstanding bonds issued by US companies underlying that market was only $15 trillion. When the value of what’s being traded is more than four times the underlying asset that actually exists in the real world, it’s safe to say that a good chunk of what’s happening in the market is purely speculative.

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principles of another decades-old piece of legislation, the Bank Holding Company Act of 1956, which separated banking and commerce. The idea behind that law was that banks were supposed to lend to businesses, not compete with them. It’s a fundamental assumption at the heart of most banking regulation.

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But the truth is that financiers are usually just trying to make as much money as the law allows them to. It’s the particular rules of our market system that are more often the problem, because they are set up in such a way that the largest financial institutions are able to exploit huge advantages in pretty much every industry, often with federal subsidies that other players don’t enjoy and with little, if any, responsibility for the collateral damage to the underlying economy. “Investment banks are at the center of the marketplace of money and risk,” says Gary Gensler. “At the center of all that information, it’s possible to profit from it. It’s sometimes said on Wall Street that ‘volatility is our friend.’ That is not something you’d generally hear at an airline, or at General Mills, or probably at a community bank.”54 But for the Too Big to

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enables them to employ their potent combination of massive amounts of capital, up-to-the-minute knowledge of developments in the financial markets, and ownership and information about raw materials, to make money at the expense of other players,

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“The same financial institutions that were making the commodities markets more volatile were also the ones that were providing risk management services to our companies, or investing their pension plans, or owning the pipelines that our assets ran through,” Collura says. It was a situation that was at best distorted and at worst ripe for manipulation.

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it healthy to have a system in which banks compete directly with their customers, using superior information and resources to best the very businesses they were set up to serve? Is that really what we want our financial system to do?

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do that, you have to increase transparency about what’s happening in the first place. In the commodities arena, former CFTC chairman Gary Gensler fought the good fight for stricter regulation of derivatives, bringing a large chunk of the swaps market out of the shadowy darkness and into central clearinghouses where it can be more easily regulated. In the United States most commodities-linked OTC derivatives are now subject to central clearing. The CFTC has also made big progress on real-time reporting and registration of brokers, so that people actually know who’s doing the trading.

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Why do we have a system that allows finance to be a hindrance to commerce rather than a lubricant to it? How is it that banks could create a bottleneck in raw materials and then profit from it at the expense of their customers? How might we reshape things in a systemic way so that can’t happen? Instead, regulators have so far focused on tweaking the administrative aspects of existing laws while maintaining the silos that make the system so hard to police. They might have good intentions, but they are failing at fixing the problem.

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Unfortunately, says Omarova, “regulators are taking on these relatively low-stakes technical questions about additional capital and insurance, but they aren’t asking the big questions—is it a good policy to allow big banks to accumulate so much power, not only over finances, but also over our food, fuel, and other raw materials? What kind of a society will we have if a handful of banking giants end up controlling the country’s energy, metals, and agricultural supply chains?” It’s quite telling that the law gives the Federal Reserve the power to determine what a “complementary” activity is, and whether conducting it would pose “a substantial risk to the safety or soundness of depository institutions of the financial system generally.” But it doesn’t say anything about what impact such activities might have on businesses, consumers, and American families.

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GDP a year. And if you look at the 36 countries with the highest burden of malnutrition, that’s 260 billion lost from a productive economy every year. Well, the World Bank estimates it would take about 10.3 billion dollars to address malnutrition in those countries. You look at the cost-benefit analysis, and my dream is to take this issue, not just from the compassion argument, but to the finance ministers of the world, and say we cannot afford to not invest in the access to adequate, affordable nutrition for all of humanity.”

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There’s already a model that provides many of these things and could be easily copied: the Thrift Savings Plan used by federal workers, which is large, cheap, and effective. If Congress has a problem replicating its own successful savings model for the broader public, then voters should ask who, exactly, their elected officials are serving—Wall Street or Main Street?

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from the returns earned by our business enterprises,” says Bogle.47 Indeed, most mutual fund managers are essentially takers, not makers. But if more

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“Money management, by definition, extracts value from the returns earned by our business enterprises,” says Bogle.47 Indeed, most mutual fund managers are essentially takers, not makers. But if more of them use their power to buy and hold shares of firms that practice good corporate governance and follow business strategies that support the real economy, then finance could potentially become not an impediment to growth but in fact a true supporter of

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David Swensen, the chief investment officer at Yale University, who’s run its endowment since 1985 with stellar results, put it succinctly: “The fundamental market failure in the mutual fund industry involves the interaction between sophisticated, profit-seeking providers of financial services and naïve, return-seeking consumers of investment products. The drive for profits by Wall Street and the mutual fund industry overwhelms the concept of fiduciary responsibility, leading to an all too predictable outcome: …the powerful financial services industry exploits vulnerable individual investors.”

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short-termism that were discussed in chapter 4. A financial transaction tax—akin to a proposed Tobin tax—could likewise help in this respect, by forcing banks to pay a small fee for each trade in bonds, stocks, and derivatives that they do, many of which (as this book has explored)

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vice chairman and bank reform advocate Thomas Hoenig is for that, too, and he says the common Wall Street argument that limiting leverage will keep banks from lending more to real businesses is bunk. If higher leverage boosts lending, he wrote in a Financial Times op-ed, then “it does so at the taxpayer’s expense, by making large banks—and the real economy—more vulnerable to shocks.”6 Indeed, there’s evidence that banks with more capital are better able to maintain lending through cycles of boom and bust.

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Nobel laureate Robert Shiller has suggested making all financial contracts, and debt contracts in particular, more flexible. One of the big problems with debt is that it penalizes borrowers much more than lenders for any change in the risk environment. Shiller suggests a number of ways to spread that burden more evenly between lenders and borrowers. Government debt service contracts, for example, might allow payments to fall temporarily if GDP declined

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Many other countries, including most European ones, have a broader definition of corporate stakeholders, which include not only investors but also labor (whose representatives typically sit on the board in highly productive and globally competitive countries like Germany) and even civic leaders and nonprofit groups.13 Many private, family-owned companies in the United States work this way, too—which may be one reason that they tend to invest twice as much in the US economy as public companies of similar size do, creating more sustainable, broadly shared growth.